ppt_ch04

Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis

Slides prepared by Kaye Watson

Copyright 2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney

Slides prepared by Anthony Stanger1

Chapter 4The Share Market

and the Corporation

Websites:www.asic.gov.auwww.asx.com.auwww.nyse.com





Learning Objectives• Understand the nature of corporations

and their use of equity as a financing tool

• Describe the role of the stock market





4.1 Introduction• Share market

– A formal exchange facilitating the issue, buying and selling of equity securities

• Publicly listed corporation– A company whose shares are quoted and

traded on a formal stock exchange (SX)





4.1 Introduction (cont.)• Ordinary share

– The principal form of equity issued by a corporation which bestows a claim to residual cash flows and ownership and voting rights





4.2 The Nature of the Corporation• The corporation differs from other

business forms– Ownership claims are widespread and

easily transferable– Owners (shareholders) do not affect the

day-to-day affairs of the company– Shareholder’s liability is limited to the

uncalled amount of the shares





4.2 The Nature of the Corporation (cont.)• Advantages of the corporate form

– Can obtain large amounts of finance for a relatively cheap cost

– The liquidity of securities facilitates investor diversification and encourages investment in corporate securities

– Specialised management can be chosen (due to separation of ownership and control)





4.2 The Nature of the Corporation (cont.)• Advantages of the corporate form

(cont.)– ‘Perpetual succession’—the corporate

form is unaffected by changes in management or ownership

– The corporate form is suited to large-scale operations





4.2 The Nature of the Corporation (cont.)• Disadvantages of the corporate form

– The primary disadvantage arises due to the separation of ownership and control

Conflict of interest between owners (shareholders) and mangers (agents) known as agency theory





4.2 The Nature of the Corporation (cont.)• Disadvantages (cont.)

– Management may not have strong incentive to act in the interests of the owners (shareholders) i.e. maximise shareholder value (share price)

Moderating influences include• Investors’ ability to sell shares in a corporation• Dismissal from the board at AGM by

shareholders• Threat of takeover and loss of employment• Use of performance incentives like share options





4.3 The Stock Exchange (SX)• Primary role• Secondary role• Derivative market role• Interest rate role• Trading and settlement role• Information role• Regulatory role





Primary role

• The SX facilitates the efficient and orderly sale of new financial securities– New floats/initial public offerings (IPOs)

Initial listing of a corporation on the SX

– Rights issue Issue of additional shares to existing

shareholders on a pro-rata basis

– Placements Issue of new shares to selected institutional

investors





Primary role (cont.)





Secondary role

• The SX facilitates trading in existing shares– No new funds are raised by the issuing

company– An active, liquid, well organised

secondary market increases the appeal of buying new shares in the primary market





Secondary role (cont.)





Derivative market role

• The SX provides a market for trading equity-related derivative products– A derivative is a financial security that

derives its price from an underlying commodity (gold) or financial instrument (Fosters shares)

– Derivative products can be Exchange-traded (standardised) Over-the-counter contracts (unstandardised)





Interest rate role

• The listing, quotation and trading of debt securities on the SX, e.g.– corporate bonds, floating rate notes

(FRNs), convertible notes, preference shares





Interest rate role (cont.)

• This role adds value to to a debt issue due to– Transparency– Ease of entry– Liquidity





Information role

• Investor confidence in the Stock Exchange (SX) relies on informational efficiency– i.e. the current share prices should reflect

all information available in the market

• The SX has a critical role in facilitating the flow of information to the market





Information role (cont.)

• Listing rules are SX rules with which a listed entity must comply

• Examples of information disclosures required by SX listing rules– A change in forecasted profitability– Appointment of a liquidator– Declaration of a dividend– Notice of a takeover bid– Disclosure of directors’ interests





Regulatory role

• The aim of regulation is to ensure market participants have confidence in the integrity of market operations





Regulatory role (cont.)

• SX– Ensures listed companies meet specified

limited levels of performance and standards of information disclosure so investors can make informed decisions

Continuous disclosure

– Prescribes appropriate behaviour of broker participants on the exchange

Penalties include discipline, penalties, loss of licence

ppt_ch04

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