Chapter 4

1. Copyright ? 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson Chapter 4 The Share Market and the Corporation Websites: www.asic.gov.au www.asx.com.au www.nyse.com

2. Copyright ? 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson

3. Copyright ? 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 4.1 Introduction Share market A formal exchange facilitating the issue, buying and selling of equity securities Publicly listed corporation A company whose shares are quoted and traded on a formal stock exchange (SX)

4. Copyright ? 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 4.1 Introduction (cont.) Ordinary share The principal form of equity issued by a corporation which bestows a claim to residual cash flows and ownership and voting rights

5. Copyright ? 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 4.2 The Nature of the Corporation The corporation differs from other business forms Ownership claims are widespread and easily transferable Owners (shareholders) do not affect the day-to-day affairs of the company Shareholder’s liability is limited to the uncalled amount of the shares

6. Copyright ? 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 4.2 The Nature of the Corporation (cont.) Advantages of the corporate form Can obtain large amounts of finance for a relatively cheap cost The liquidity of securities facilitates investor diversification and encourages investment in corporate securities Specialised management can be chosen (due to separation of ownership and control)

7. Copyright ? 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 4.2 The Nature of the Corporation (cont.) Advantages of the corporate form (cont.) ‘Perpetual succession’—the corporate form is unaffected by changes in management or ownership The corporate form is suited to large-scale operations

8. Copyright ? 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 4.2 The Nature of the Corporation (cont.) Disadvantages of the corporate form The primary disadvantage arises due to the separation of ownership and control Conflict of interest between owners (shareholders) and mangers (agents) known as agency theory

9. Copyright ? 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 4.2 The Nature of the Corporation (cont.) Disadvantages (cont.) Management may not have strong incentive to act in the interests of the owners (shareholders) i.e. maximise shareholder value (share price) Moderating influences include Investors’ ability to sell shares in a corporation Dismissal from the board at AGM by shareholders Threat of takeover and loss of employment Use of performance incentives like share options

10. Copyright ? 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 4.3 The Stock Exchange (SX) Primary role Secondary role Derivative market role Interest rate role Trading and settlement role Information role Regulatory role

11. Copyright ? 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson Primary role The SX facilitates the efficient and orderly sale of new financial securities New floats/initial public offerings (IPOs) Initial listing of a corporation on the SX Rights issue Issue of additional shares to existing shareholders on a pro-rata basis Placements Issue of new shares to selected institutional investors

12. Copyright ? 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson Primary role (cont.)

13. Copyright ? 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson Secondary role The SX facilitates trading in existing shares No new funds are raised by the issuing company An active, liquid, well organised secondary market increases the appeal of buying new shares in the primary market

14. Copyright ? 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson Secondary role (cont.)

15. Copyright ? 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson Derivative market role The SX provides a market for trading equity-related derivative products A derivative is a financial security that derives its price from an underlying commodity (gold) or financial instrument (Fosters shares) Derivative products can be Exchange-traded (standardised) Over-the-counter contracts (unstandardised)

16. Copyright ? 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson Interest rate role The listing, quotation and trading of debt securities on the SX, e.g. corporate bonds, floating rate notes (FRNs), convertible notes, preference shares

17. Copyright ? 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson Interest rate role (cont.) This role adds value to to a debt issue due to Transparency Ease of entry Liquidity

18. Copyright ? 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson Information role Investor confidence in the Stock Exchange (SX) relies on informational efficiency i.e. the current share prices should reflect all information available in the market The SX has a critical role in facilitating the flow of information to the market

19. Copyright ? 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson Information role (cont.) Listing rules are SX rules with which a listed entity must comply Examples of information disclosures required by SX listing rules A change in forecasted profitability Appointment of a liquidator Declaration of a dividend Notice of a takeover bid Disclosure of directors’ interests

20. Copyright ? 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson Regulatory role The aim of regulation is to ensure market participants have confidence in the integrity of market operations

21. Copyright ? 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson Regulatory role (cont.) SX Ensures listed companies meet specified limited levels of performance and standards of information disclosure so investors can make informed decisions Continuous disclosure Prescribes appropriate behaviour of broker participants on the exchange Penalties include discipline, penalties, loss of licence