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Learn about the differences between civil law and common law systems, the types of securities in the financial market, and the importance of stock markets as a source of capital for businesses in Finland.
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Corporate Governance Law, finance and governance Week 2 Session 3
Starting a Business in Finland – contracts • https://www.expat-finland.com/entrepreneurship/establishing.html
Civil law Roman-influenced University-taught, professor-inspired Formed across continental Europe Downgrading of judicial power Character laws provide general principles and guidelines which are applied in each case most widespread system, based on Roman Law (French, German Scandinavian) Common law Local customs (some Roman) Judicial / bar Centralized government (royal courts) Elevated status for judges Character does not provide general principles, but court rulings developed in England in the 11th century – UK, Ireland, USA (except Louisiana), Canada (except Quebec), Australia, India, Hong Kong Compare common law /civil law
Comparison of Civil-Law and Common-Law Systems (III) • Manner of legal reasoning - Civil-Law → Deductive - Common-Law → Inductive • Structure of Courts - Civil-Law → Integrated Court system - Common-Law → Specialty Court system • Trial process - Civil-Law → Extended process - Common-Law → Single-event trial
Primary and Secondary financial markets and IPO underpricing
Types of Securities: Debt securities • Debt Securities: Firms borrow money by selling debt securities in the debt market. • If the debt has a maturity of less than one year, it is typically called notes, and is traded in the money market. • If the debt has a maturity of more than one year, it is called bond and is traded in the capital market. • Most bonds pay a fixed interest rate on the face or par value of bond. • Example: A bond with a face value of $1,000 and semi-annual coupon rate of 9% will pay an interest of $45 every 6 months or $90 per year, which is 9% of $1,000. When the bond matures, the owner of the bond will receive $1,000.
Types of Securities: Equity securities • Equity securities represent ownership of the corporation. • Common stock is a security that represents equity ownership in a corporation, provides voting rights, and entitles the holder to a share of the company’s success in the form of dividends and any capital appreciation in the value of the security. • Common stockholders are residual owners of the firm. They earn a return only after all other security holder claims (debt and preferred equity) have been satisfied in full. • Dividend on common stock are neither fixed nor guaranteed. Thus, a company can choose to reinvest all of the profits in a new project and pay no dividends. • Preferred stock is an equity security. However, preferred stockholders have preference with regard to: • Dividends: They are paid before the common stockholders. • Claim on assets: They are paid before common stockholders if the firm goes bankrupt and sells or liquidates its assets.
So…….there are 2 questions: • 1: where (location) do we raise finance? • 2: what type of finance do we use?
Firms almost always exhaust internal sources of capital first before considering external sources – why? • Answer: Internal sources draw on ”Internal Capital Market” within firm and it’s network (network in case of business groups or family firms)
Normally after internal sources bank finance/lending is preferable to external capital markets – why? • One answer is ”informational” i.e. • For a firm to issue bonds to external investors there are huge costs in terms of auditing, accounting transparency, issuing prospectuses etc • This is in order to provide investors with confidence through firm incurring ”bonding costs” as in bonding with investors • Alternative is bank lending – with relationship with bank mitigating informational costs
Bank lending is also a useful indicator to investors • i.e. if banks continue to supply credit to firm then given their close relationship – this is a good sign of credit-worthiness of firm • The presence of banking relationships thus impacts positively on value of firm’s equity and debt (bonds)
Now………. Where do firm’s raise finance: • This has everything to do with costs of debt and costs of equity
Stock Markets • A stock market is a public market in which the stocks of companies is traded. • Stock markets are classified as either organized security exchanges or over-the-counter (OTC) market. • Organized security exchanges are tangible entities; that is, they physically occupy space and financial instruments are traded on their premises. For example, the New York Stock Exchange (NYSE) is located at 11 Wall Street in Manhattan, NY. The total value of stocks listed on the NYSE fell from $18 trillion in 2007 to just over $10 trillion at the beginning of 2009. • The over-the-counter markets include all security market except the organized exchanges. NASDAQ (National Association of Securities Dealers Automated Quotations) is an over-the-counter market and describes itself as a “screen-based, floorless market”. In 2009, nearly 3,900 companies were listed on NASDAQ, including Starbucks, Google, Intel.
Initial Offering Initial Public Offering (IPO) - First offering of stock to the general public. Underwriter - Firm that buys an issue of securities from a company and resells it to the public. Spread - Difference between public offer price and price paid by underwriter. Prospectus - Formal summary that provides information on an issue of securities. Underpricing - Issuing securities at an offering price set below the true value of the security.
Motives For An IPO Percent of CFOs who strongly agree with the reason for an IPO
