Introduction to Corporate Finance

PART 4: CAPITAL STRUCTURE AND PAYOUT POLICY

12-1d THE EXPANDING ROLE OF SECURITIES MARKETS IN

CORPORATE FINANCE

No trend in modern finance is as clear or as transforming as the worldwide shift toward corporate reliance

on securities markets rather than intermediaries for external financing. Important observations related to

external financing and the shift toward securities financing include:

1 Primary issues, the initial sale of a security by a firm to raise capital, have increased by a factor of more

than 15 over the last 20 years.

2 Secondary offerings, the sale of previously issued securities, which are typically held in large blocks by

one or more investors, raise no additional funds for the initial issuer.

3 The increase in security market financing reflects a trend toward securitisation, which involves the

repackaging of loans and other traditional bank-based credit products into securities that can be sold

to public investors.

4 Initial public offerings (IPOs), which are the first public sales of a company’s ordinary equity to outside investors,

generally represent less than one-third of all ordinary equity sold in a given year. The remaining ordinary

equity sales are seasoned equity offerings (SEOs), which are new issues of ordinary equity by companies that

have previously conducted an IPO, and therefore have existing shares trading in the market.

5 The credit crisis that began in 2008 caused the volume of almost every type of security issued to fall

sharply. Issuances have rebounded somewhat since then.

6 Certain securities, most notably Eurobonds, cannot be offered in the United States, but can be

sold to international investors. A Eurobond issue is a single-currency bond that is sold in several

countries simultaneously. An example is a dollar-denominated bond issued by a US corporation and

sold to European investors. Non-Australian dollar-denominated bonds issued outside Australia by an

primary issues
Initial sale of securities by a
firm to raise capital

secondary offerings
The sale of previously issued
securities, which are typically
held in large blocks by one or
more investors, and raises no
additional funds for the initial
issuer

securitisation
The repackaging of loans and
other traditional bank-based
credit products into securities
that can be sold to public
investors

initial public offering
(IPO)
The first public sale of a
company’s ordinary equity to
outside investors

seasoned equity offerings
(SEOs)
Ordinary equity sales by
companies whose shares
already trade in the market

Eurobond
A bond issued by an
international borrower and
sold to investors in countries
with currencies other than
that in which the bond is
denominated

FIGURE 12.2 GLOBAL EQUITY CAPITAL MARKET (ECM) ACTIVITY, 2009–2013

0 200 400 600 800 1000

NYSE

Hong Kong Exchanges

London Stock Exchange

ASX

NASDAQ

Japan Exchanges

TSX & TSX-V

Shanghai Exchange

BM&FBOVESPA

Shenzhen Exchange

Singapore Exchange

$US bn

$886

$333

$291

$241

$241

$200

$178

$178

$157

$147

$54

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