PART 4: CAPITAL STRUCTURE AND PAYOUT POLICY
4 What patterns have been observed in the types of firms going public in the United States? Why do
you think that certain industries become popular with investors at different times?5 In what ways are non-US (private-sector) initial public offerings similar to US IPOs, and in what ways
are they different?6 What are American depositary receipts (ADRs), and how are these created? Why do you think ADRs
have proven to be so popular with US investors? Why do you think these have proved popular with
Australian companies?7 In what key ways do share issue privatisations (SIPs) differ from private-sector share offerings? Why
do you think governments deliberately underprice SIPs?8 What are the principal benefits of going public? What are the key drawbacks?9 Distinguish between an equity carve-out and a spin-off. How might a spin-off create value for
shareholders?10 To what does the term underpricing refer? If the average IPO is underpriced by about 15%, how
might an unsophisticated investor who regularly invests in IPOs earn an average return of less than
15%?11 How does underpricing add to the cost of going public?CONCEPT REVIEW QUESTIONS 12-3
12- 4 SEASONED EQUITY OFFERINGS
Seasoned equity offerings (SEOs) are surprisingly rare for both US and non-US companies, including
those in Australia. In fact, the typical large US company will not sell new ordinary equity even once
per decade, though when an SEO is launched it tends to be much larger than the typical IPO. So what
factors do managers feel are most important to consider when issuing seasoned equity? The results of
a recent survey aimed at identifying these factors are shown in Figure 12.6. The figure shows that
nearly two-thirds (64%) of the respondents expressed concern that a SEO will dilute earnings per share,
and half of responding managers were concerned about diluting specific large shareholders. Over 60%
of respondents voiced concerns regarding the size of a new issue and the likely negative effect that the
announcement of such an offering would have on the current price of outstanding shares. Further, about
50% stated they were considering a new equity issue to provide shares for employee share option programs
and to maintain the firm’s debt-to-equity ratio near the targeted level. Far fewer managers believed that
recent firm profits would be insufficient to fund company activities, that the firm should issue equity
to move toward an industry-standard leverage ratio, or that investors would prefer the company to issue
shares rather than bonds.LO 12.5