Corporate Finance Theory and Practice, Third Edition

Chapter 41

INITIAL PUBLIC OFFERINGS (IPOS)

Welcome to the wonderful world of listed companies!

Theoretically, the principles of financial management that we have developed throughout this book find their full expression in the share price of the company. They apply to unlisted companies as well, but for a listed company, market approval or disapproval, expressed through the share price, is immediate. Today, a stock exchange listing offers distinct benefits for large groups: it enables financial managers to access capital markets and have a direct understanding of the market value of their companies.

When you see that several billion euros can change hands on financial markets in the course of a few hours (when the financial markets are not in crisis!), you understand that markets constitute a very efficient way of exchanging shares compared to the complex negotiations necessary to obtain private financing.

“Paper”, i.e. financial securities, can be placed on financial markets so quickly because:

• financial analysts periodically publish studies reviewing company fundamentals, reinforcing the market's efficiency;
• listing on an organised market enables financial managers to “sell” the company in the form of securities that are bought and sold solely as a function of profitability and risk. Poor management is punished by poor share price performance or worse – from management's point of view – by a takeover offer;
• listed companies must publish up-to-date financial information and file ...