Week 6 – Equity Markets
1. Background to Listed Companies
– A corporation is a legal entity established under the corporation’s law of a
nation-state
– The shares of a publicly listed corporation are listed on a stock exchange and the
main source of equity funding, the ordinary share, is quoted on the share market
– In Australia, shares are listed on the Australian Securities Exchange (ASX)
Features of a publicly listed corporation
– Ownership is generally widely dispersed among a number of shareholders and
share trading does not affect the continuing existence of the business
– The objectives and policies of the corporation are determined by a board of
directors, the members of which are elected at a general meeting of
shareholders. The board then appoint a management team which run the firm
on a day to day basis
– The liability of shareholders for the debts of the business is limited to the issue
price of the share
Advantages of a publicly listed company
– In a deep and liquid share market, large amounts of money can normally be
raised through a wide range of investors
– Shareholders can reduce the risk of share ownership by holding a diversified
portfolio of share investments and being able to trade their shares in the market.
This enables corporations to raise capital on more favourable terms.
– Separation of ownership (shareholders) and control (managers) means the
corporation can appoint specialised and skilled personnel to run a business
– The corporation as a legal entity allows for the continuation of the business. This
legal right is known as the right of perpetual succession
– The corporate form is almost essential for large-scale undertakings
– Separation of ownership and control allows the planning and implementation of
strategic decisions to be more effective over both the short-term and longer-
term planning periods
Disadvantages of a publicly listed company
– Separation of ownership and control also creates a potential disadvantage as
managers may not have a strong incentive to act in the best interests of the
shareholders. This conflict of interest between owners (principals) and managers
(agents) is known as the agency problem
Remedies exist to persuade management act in the best interest of shareholders.
These include the Corporations aw, audited financial statements, annual general
meetings, remuneration packages for management, effective corporate
governance policies and the threat of a takeover offer
– Greater scrutiny of activities
2. Initial Public Offerings (IPO’s)
– The initial offering of shares by a new publicly listed corporation is an initial
public offering (IPO). An IPO is described as the floatation of a business
The method, terms, conditions and timing of an IPO are usually decided after
consultation between the business seeking the floatation, known as the
promoter, and its financial advisers. The advisers may include stockbrokers,
investments banks and other specialist advisors with the required financial,
technical and legal expertise
Advisers also assist with the preparation of the prospectus (the public offer
document) and its lodgement with the corporate regulator
IPO Advisors
– Advisers also ensure the business meets the stock exchange’s listing
requirements. The preparation of the prospectus is a critical component of the
listing process
– A prospectus provides the detailed information on the past and forecasted
performances of the organisation, and includes reports from the board of
directors and specialist experts, as well as financial statements
IPO Underwriters
– Underwriters agree to take up any shares not subscribed to and may provide
advice on the structure, pricing, timing and marketing of the issue and allocation
of securities
3. Ordinary shares
– Ordinary shares represent a residual ownership claim on the assets of the firm
– Ordinary shares are the principal source of equity funding
– Shareholders are entitled to some control over management by exercising the
voting rights attached to their shares at annual general meetings or
extraordinary general meetings
Two main types of corporate structure in Australia:
