Initial Public Offering (IPO) Finance Theory

p Initial Public Offering (IPO ) Finance Theory (2006

INTRODUCTION

As most companies expand in their operation amidst success , they tend to go public by inviting the public to be a partaker in the organization 's equity . Also when a young firm decides to go public , this process of having an organization 's shares being quoted for the first in a stock market is referred to as Initial Public Offerings (IPO . An Initial Public Offering (IPO ) occurs when a security is sold out to the general public for the first time , with the

expectation that a liquid market will develop .An IPO can be of any debt or equity security (Ritter , 1998 . When a company 's stock is publicly traded , it means it can raise capital on the offering of its shares to be subscribed by diversified investors . And this process is regarded as more cost effective than when the company operates as a privately held organization where capital can be raised from restricted few investors To buttress this point , Ritter (1998 ) has it that , enhanced liquidity allows the company to raise capital on more favourable terms than if it had to compensate investors for the lack of liquidity associated with a privately- held company existing shareholders have the opportunity of reselling the shares in open- market transactions

A young firm trying to adopt IPO may be faced with certain hindrances such as being subjected to the whims of the market which makes the IPO process one that is highly stress in the period of its implementation for the organization . The advantages associated with an organization engaging in an IPO includes : there is the avenue to raise new capital ability to raise secondary equity offerings as means for future capital derivation the avenue of cashing out shares as a way of diversifying the business operation increased image pro for the company operating as a public firm other than a private firm there is a way of compensating employees through allocating them shares by right offers The disadvantages associated with operating in IPO include : loss of confidentiality as a result of a mandatory publication of the companies statement of finance profit sharing with outsiders reporting and fiduciary responsibilities , loss of control , where outsider can take over the alms of affair and fire the entrepreneur if need arises for that the cost of IPO , direct cost (acquiring officials such as lawyers under , insurers , accountants during the process ) and indirect cost (Management time , disruption of busi9ness ) all these are expenses the organization would incur (IPO page , 2000

Prasad , et al (1995 , list 3 types of stock offerings

Pure Primary Offerings : where only the company offers shares to the public . Here funds are raised by the firm through the issue of new shares to outside investors

Pure Secondary Offerings : where only some of the existing shareholders are exiting the firm and offer some or all of their shares to outside investors in the public offering

Simultaneous Primary and Secondary Offerings : where both new shares of the...