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Investment Banking and the Capital Acquisition Process

In: Business and Management

Submitted By rseedat
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Pages 13
Investment Banking and the Capital Acquisition Process
Smith (1986)

1. Introduction
This paper reviews the various methods firms use to raise capital and the effect these methods have on security prices. Firms can raise external capital by selling several securities which they market in different ways. In terms of the theory of corporate finance, capital markets play a vital role in a firm’s investment policies. Therefore, it is critical to have an understanding of the various contractual procedures in the process of raising capital. To provide us with this understanding, this paper will look at the theory and evidence related to stock price reactions around announcements of differing security offerings, the contractual arrangements associated with the marketing of corporate securities and incentives for under-pricing in initial public equity offerings. 2. On the corporation’s choice of security to offer
When contemplating the type of security to issue, the corporation must consider the reaction of the market to its announcement.
Four generalisations are made when looking at the two-day common stock price reactions to the announcement of industrial and utility firms raising capital with various securities – * average abnormal returns are non-positive; * abnormal returns around the time of the announcements of common stock sales are negative and larger in absolute value than those observed with preferred stock or debt; * abnormal returns around announcements of convertibles are negative and larger in absolute value than those for comparable non-convertible securities; and * abnormal returns related to security issues by industrials are negative and larger in absolute value than those for utilities
The author looks at several hypotheses for this pattern of relative stock price effects. While they are not mutually...

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