Complete Guide To Corporate Finance


Raising Capital - Cost Of Issuing Securities

Going public may raise money, but it also has a number of costs, both implicit and explicit.

Once a company goes public, its finances and almost everything about it - including its business operations - are open to government and public scrutiny. Periodic audits are conducted; quarterly reports and annual reports are required. Company finances and other business data are available to the public, which can sometimes work against company interests. A careful reading of these reports can accurately determine a company's cash flow and credit-worthiness, which may not always be perceived as positive.

A public company is subject to SEC oversight and regulations, including strict disclosure requirements. Among the required disclosures is information about senior management personnel - particularly compensation - which is often criticized by stakeholders.

A public company is subject to shareholder suits, whether warranted or not. Lawsuits may be based on allegations of self-trading or insider trading. They may challenge executive compensation, or they may oppose or question major management decisions. Sometimes a single, disgruntled shareholder may bring suit and cause expensive and time-consuming trouble for a publicly traded firm.

Preparation for the IPO is expensive, complex and time consuming. Lawyers, investment bankers and accountants are required, and often outside consultants must be hired. As much as a year or more may be required to prepare for an IPO. During this period, business and market conditions can change radically, and it may not be a propitious time for an IPO, thus rendering the preparation work and expense ineffective.

The pressure for profitability each quarter is a difficult challenge for the senior management team. Failure to meet target numbers or forecasts often eventuates in a decline in the stock price. Falling stock prices, moreover, stimulate additional dumping, further eroding the value of the equities. Before buyers and original holders of the IPO stock may liquidate their positions, a no-sell period is often enforced to prevent immediate selloffs. During this period the price of the stock may decline, resulting in a loss. And again, business and market conditions may change during this period to the detriment of the stock price.

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