Corporate Finance, 4th Edition

Chapter 25Selling securities

Get 'em while they're hot!

Now that we have studied the properties of the various financial securities, let's see how companies sell them to investors. Bank finance was beautiful in its simplicity – whenever a company needed funds, it turned to its bank. Now that direct financing has become more common, companies can raise funds from a great many investors whom it does not necessarily know. That means they have to market their financing!

Section 25.1 General principles in the sale of securities

1/ The purpose of offerings

The company's main goal in selling its securities to investors is to obtain the highest possible price.

For the sale to be successful, the company must offer investors a return or a potential capital gain. Otherwise, it will be harder to gain access to the market in the future.

The offering must be in line with this objective. The price of a security is equal to its present value, as long as all publicly available information has been priced in. This is the very basis of market efficiency. Conversely, asymmetric information is the main factor that can keep a company from selling an asset at its fair value.

Investors must therefore be given the information they need to make an investment decision. The company issuing securities and the bank(s) handling the offerings must provide investors with information. Depending on the type of offering, this can be in the form of:

• a mandatory legal written document called a prospectus;