Study On The Essence Of Initial Public Offering Finance Essay - Free Essay Example

Sample details Pages: 24 Words: 7101 Downloads: 3 Date added: 2017/06/26 Category Finance Essay Type Research paper Did you like this example? The essence of an initial public offering (IPOs) is simple it is the first public sale of the shares of a company aimed at raising capital. Three main participants in the IPO process are (1) the issuing firm, (2) the investment bank underwriting the offering, (3) and the investors. Most companies have found a certain window of opportunity to take their shares public. Don’t waste time! Our writers will create an original "Study On The Essence Of Initial Public Offering Finance Essay" essay for you Create order This means that the market conditions and the anticipated valuation of the company are favorable at the time to take the stock to the public equity market. It is critical to prepare for that window, and understand how the IPO process works. Underwriting is the process through which investment banks raise capital from investors on behalf of the corporations that are issuing securities. This is a way of selling securities and bonds to investors. A syndicate of banks take on the risk of distributing these securities. This paper investigates the initial public offering process and underwriting process with examples of two Estonian IPOs Arco Vara AS and Olympic Entertainment Group AS. The analysis tries to get an answer to the question of why these IPOs turned out to be so different from each other. 2. IPO Process 2.1. Directives and Regulations in EU In European Economic area the financial market is regulated by four directives which are published by European Parliament and Council. These directives are: the Markets in Financial Instruments Directive (MiFID) the Prospectus Directive the Market Abuse Directive the Transparency Directive. The European law states that a Directive has to be transposed into national law. MiFID is considered to be the cornerstone of European Commissions Financial Services Action Plan. It covers almost all tradable financial products with the exception of certain foreign exchange derivatives and commodity, freight, climate, and carbon derivatives. The companies are authorized and regulated in the country where they have their registered office or head office. Once a firm has been authorized, it can use the MiFID passport to provide services to customers in other EU states. In addition, the firm must categorize clients as professional clients and retail clients, as retail clients h ave an increased level of protection. The categorization must be based on clear procedures. The companies must publish the prices, volumes and timing of all trades in listed shares, even if executed outside of a regulated market. The company is also responsible for taking all reasonable steps to provide the best execution for orders. The best possible result is not limited to execution price, but also includes cost, speed, likelihood of execution and settlement. The Prospectus Directive regulates access to the market by prescribing the principles for drafting a prospectus covering any offer of securities to the public. A single passport enables companies making an offer to use one prospectus throughout the entire European Union. Its made easier by the requirement of translating the prospectus to English. The Market Abuse Directive is ment to ensure the integrity of financial markets of Europe and to enhance investor confidence. It contains the general framework principles rela ting to market manipulation and insider dealing. It defines and prohibits both forms of market abuse and provides for a number of preventive measures such as the prompt disclosure of inside information, management transactions and safeguards regarding the impartiality of investment research. The Transparency Directive is meant to harmonize the provisions of national laws on periodic and ongoing requirements of information for issuers of securities to ensure a higher level of protection to investors throughout the European Union. The Transparency Directive requires listed companies to issue annual and half-yearly reports and quarterly management reports for only the first and third quarters. The persons responsible for these reports have to be noted in these. 2.2. Reasons for Going Public A few reasons for why companies go public are (1) to rise capital to expand operations, (2) to increase liquidity of the company, (3) to increase stock capital, which can be used to make acquisitions, and also to compensate management and employees whether through higher salaries or in the form of stock options. The first reason is to raise capital for expansion into new territories or markets. Being public is associated with and demands credibility and accountability. The second reason would be the sale of the shares of the company as founders and the existing shareholders want to trade their shares for cash or other traded stocks (also referred to as exit strategy). The third possible reason could be the expansion of the company either by merger or acquisition. Getting more money into the company allows the company to finance takeovers or mergers with other companies. Also being public allows the company to merge with others who want to become public without going throug h an IPO process (referred to as reverse merger). 2.2.1. Issues in Going Public There are a number of issues that the issuers management must cope with. One of the issues that may arise from an IPO is a conflict between management and current shareholders who may be wary of having their participations diluted and allowing new investors to acquire enough shares to gain power over the board of directors. In the case of single-tiered corporate governance structures, this refers to the board, while in two-tiered corporate governance structures this refers to the supervisory board. A second possible conflict may arise due to shareholders perception that management and other insiders want to cash in their stock options as they have inside information that the IPO is overpriced or that the owner-managers of the entity want to embark on an exit strategy. 2.3. IPO Timeline The actual IPO process takes about three to five months starting from the day the company decides to go public until it receives the proceeds from the offering. Financial consultants help with reporting issues and accounting throughout that period. They also keep the company from getting into trouble. For example, the financial statements must be prepared in accordance with generally accepted rules. This financial consultant or investment bank is also the one that is underwriting the offering, alongside with the other investment banks that form a syndicate. An example timetable of the processes of taking a company public can be seen in Appendix 1. 2.3.1. Preparation Phase In preparation phase the lead manager analyses the companys strategy and business plan, after which the shares positioning is fixed i.e. the reason why an investor would be interested in buying shares. The most labor consuming part of this stage is the legal, financial and business audit in the company. The public offering prospectus is drawn up on the basis of the audits. In the preparation phase, the lead manager also arranges a preliminary share evaluation, using discounted cash flow analysis, comparative ratio and other valuation methods. During the quiet period There are certain things that the companys management can and can not say or publish. During this time, management is strictly bound to the information contained in the prospectus. Anything, including speeches, press releases, brochures, advertisements, talking to your neighbors about the offering, just about anything could be construed as releasing inappropriate information. After the quiet period, the potential interest among institutional investors is ascertained. Possible problems related to the companys share positioning are pinned down in the course of the preliminary presentation. Possible share price ranges becomes clear from the feedback from professional investors. Meanwhile, in co-operation with the Financial Supervision Authority, which is responsible for supervising public offering registration a dialogue is established with the stock exchange. A marketing campaign is also prepared. Usually the duration of the preparation phase is two to four months, but it may take longer. 2.3.1.1. Registration Process A carefully crafted Registration Statement is required to be prepared by accountants and lawyers. This requires detailed information about: Business product/service/markets; Risk Factors; Company Information; Officers and Directors; Audited financials; Proceeds Use (How are you going to use the money); Identification of your principal shareholders; Related party transactions. After the registration is made, it is submitted to the Securities and Exchange Commission and various other regulatory agencies for their detailed review. If this process is completed, the management presents a road show to the companys stock broker, who sells the stock to public investors. Then the proceeds should be invested wisely to enhance the value of the stock. 2.3.2. Offering The public offering is registered with the Financial Supervision Authority and the offering is announced. There is usually no public discussion about the offering before the offering announcement, as there is no certainty that the offering will take place. This is followed by the subscription period, which usually lasts for 2 weeks. At the same time, the managing body of the company carries out a road-show, introducing the companys strategy, financial situation, competitive advantages etc. At the end of the subscription period, the lead manager collects the interests shown by retail investors interests and the buy orders made by professional investors during the course of the directed offering in order to determine aggregate demand. Based on the full volume of demand and the prices offered by institutional investors, the company decides between a public and direct offering (in case this is not predetermined) and fixes the price. The issuer, selling shareholders and transactio n lead manager sign an underwriting agreement, according to which the lead manager is obligated to guarantee cash to be received for the securities, if any investor should withdraw their interest to buy. The decision to use overallotment options is also taken. This is an agreement between the lead manager, selling shareholders and the issuer, whereby the lead manager is entitled to deliver more shares in the offering than originally planned (usually 10-15% of the planned transaction volume). The overallotment option is used in case the offering is oversubscribed. Within the following 3-5 days, the shares are transferred to investors accounts and the share is listed on the securities exchange market and trading begins. 2.3.3. Price Formation By the moment the public offering is announced the issuer together with the lead manager have decided on the range of the final price. According to the book-building method, price is based on indications from professional investors, i.e. what price the professional investors are ready to pay and how much they are ready to buy. Estimating the given information (both price and amount) of aggregate demand of the offering and the number of investors participating in the demand (investing prospect and integrity), the company together with the lead manager determines an equilibrium price, for which all investors can buy the securities. Internationally, the book-spread method is the most widely used, because it takes investors opinions on share price into consideration, helping to reduce price fluctuations on the direct secondary market. Alternatively one could use auction-based price formation, according to which the highest price at the auction determines the price. Such price for mations have not been used in Estonia. 2.4. Underwriting Underwriting was first practiced in the seventeenth century in connection with the shipping ventures. The leading ship merchants of London were used to get together in Lloyds Coffee House to make their mutual business. In time, the custom to share the risk of venturesome voyages among various merchants was rising. Each of them agreed to stand for a fixed share of the loss or to obtain proportionate share of the profits. The agreement was passed around to each merchant, and who agreed wrote his name under the contract. That is where the term underwriting comes from. As is known, the term was primarily associated with the distribution of insurance risks, although when applied to the bond and securities issues, it also distributes the risk of failure. Therefore the essential idea is the same. 2.4.1. Importance of Underwriting Importance to the Corporation The advantages of this agreement to a company are well worth a large sum of money. After the issue has been underwritten, the issue is a sure success to the corporation. They may proceed to finance whatever project from the freshly raised capital. There is no annoying and costly waiting time when the securities are being sold. It is in a nature of many new businesses that time is an important factor for making them successful. For example, if a new factory being built in order to deal with certain contracts, or if efforts have been made in order to prevent competition, it can be fatal to the project when it was set up later after all the stock or bonds are sold. Second very important advantage is that the underwriter ensures success in raising the total amount of capital demanded. Frequently any amount less than the total amount would be a burden rather than strength to the corporation. Therefore it is the underwriters concern to raise the capital and if they fail to do that the n they have to pay up the difference from their own capital. Underwriting agreement carries with it the advantages that go into all the other arrangements, under which the banking house agrees to market the companys securities. The company will benefit from the specialized experience of the bank, and thus the risk of a serious error in the form or the price of new security is minimized. Importance to the Investor Not only does the company benefit from the underwriting agreement, but also the buyer has its advantages. First, the fact that the syndicate has been formed in first-class banking houses is essentially a guarantee that security is sound. Another advantage is the greater security of insurance against the buyer of the same events, which could harm the company because it must be remembered that at the time the buyer becomes the owner of a bond or a stockholder of the company, she begins to share his good or bad luck. If a corporation, therefore, has been damaged by dragging out the sale of a new security issue over a long period of time, or by bringing out the security issue, which ultimately is not completely disposed of, the buyer is one of the sufferers. It is, therefore, in his preference that the issue should be underwritten, and therefore ensured its success. 2.4.2. The Underwriting Syndicate Originally the idea of underwriting consisted of risk sharing among several merchants. This remains the same for todays underwriting. It is true that the word is often implemented by agreement between the company and a bank, where the bank is willing to take over a block of securities at a fixed price. This type of transaction may be better to be called a sale or a contract of sale not the underwriting contracts. But such an arrangement where only one bank is involved, it is virtually unknown except to cover small size issues. Usually, however, the initial contract has been made between the company and one banking houses, and later the lead manager distributes the proportions of risk and profit between other banking houses. All of these houses, working together, thus form a syndicate. Most major banks and financial houses make these practices work in harmony with each other. There are two reasons that make it preferable for a lead manager to join a significant number of syn dicates rather than put out a smaller number of transactions in which it would take all the risks and all the profits themselves. The first and obvious reason is to minimize risk. Wrong step in a syndicate will not be disastrous, but given the failure of good size issue if only one house was concerned, it might not only tie up enough capital to wreck the house, but it can also wreck your reputation, which might be an even greater asset to the banking house. Another motive to participation in a syndicate is that it allows the bonds and brokerage firms to offer their clients a well-diversified list of securities. General retail security merchant should be able to provide to the customer any securities that the customer may want. 2.4.2.1. Syndicate Agreements There are four different types of agreements between the underwriting syndicate and the company. Possible other variations of these basic types could be found. The first is when the company can sell the issue themselves and the syndicate may simply be to ensure that the entire issue is sold in a certain period of time at a minimum price. For example, the company is to sell an issue of $1  000  000 6% bonds. Syndicates may agree that it would the bonds left unsold at the end of the year with a special price of $90. The underwriting syndicate receives a commission of 2-5% for making this agreement. If the issue can be successfully sold, the syndicate would collect and share their commission. If the issue was unsuccessful, the syndicate has to take over the unsold balance with the agreed price and dispose of it. This type of arrangement is now uncommon except in cases where the company has given its shareholders subscription privilege, but fearful that the offer is no t taken away entirely. Second is where the banking house may enter into an agreement with the company to sell a block of securities and is allowed later to transfer them to other banking houses to share the risk and profit, by forming a syndicate. The Corporation, however, does not have dealings with a syndicate, as such, but only the original underwriter becomes the lead manager of a syndicate. The third type is when the syndicate may be formed before signing a definitive agreement with the company and the agreement may be directly between the company and the syndicate, although the management of the entire transaction and the actual sale of securities may be in the hands of one banking house, which has taken the initiative. This banking house carries out the sale of securities and does not distribute to the other members unless the sale is wholly or partially unsuccessful. The fourth type of agreement is between the underwriting syndicate and the issuing company. The secu rities are distributed to all of the members at the same time in proportion to their participation. Each banking house is expected to operate independently in selling of their proportion of the issue. This is probably the most common agreement type, and the most useful for handling large issues. It is clear from the above brief description that the term underwriting is used in different ways. This is in fact often difficult to see the difference between the actual underwriting of securities and just buying a block of securities. Even if the entire security issue is taken over by one bank and the agreed price is paid for this issue, it is still mostly referred to as underwriting. Whatever the type of syndicate is, there is always a common feature: the leading management role is always in the hands of the banking house that organized the syndicate. 2.4.3. Community of Interest Among Underwriting Houses When one of the investment banks gets a good agreement with an excellent opportunity of profit, others will usually be invited to be the members of the syndicate agreement. In this way, they are all more or less taking part in all significant underwritings. There are, of course, no formal agreement on this, but it is implicitly understood that if one allows another banking house to join a profitable issue, the benefit must be returned as soon as possible. This arrangement is well understood in many cases at least in the Wall Street district, and probably also in other centers. The banking house which has made an agreement with a company will just distribute the shares as it considers best and shall notify each participant to create a syndicate. An important result of this community of interest arrangement is that it removes the time one of the leading banking houses in keen competition. This is a relatively small matter whether one house or another company has negotiated with a syndicate and becomes the active control, because in any case essential to take part in a syndicate of houses and a fair share of the profits. This community of interest arrangement has an impact to the competition. It removes the keen competition among the leading banking houses. Therefore it is not that important whether one or another banking house carries through the negotiations with the issuing corporation and becomes the lead manager of the syndicate, because in any case each of the important houses will participate in the syndicate and get a fair share of the profits. 2.5. Underpricing Underpricing can be the positive average abnormal return from an IPO from buying stocks in the IPO and after they start trading in the secondary market selling them right away. Underpricing is the difference between the offer price and the first days closing market price. It has been observed that underpricing is an almost universal feature of the IPO market. In the study by Loughran, Ritter, and Rydqvist (1994), the authors show that underpricing appears in almost all IPO markets in the world. 2.5.1. Why Underpricing? There are a couple of reasons given why underwriters underprice IPOs. Generally, these reasons are not mutually exclusive. Underpricing two dominant theories are asymmetric information theory and signaling theory. Rock [1984], a pioneer in asymmetric information theory, suggests that the asymmetry in the IPO process itself causes underpricing. Famously coined as the winners curse Rock proves that in order to gather interest of uninformed investors, the firm must offer a discount to the price of shares. Signaling theory proposed by Allen and Faulhaber [1989], implies that high quality firms underprice their shares raise the quality of their company. This theory reasons that the companies are optimistic about the future and want to leave a good taste in the mouth for investors so if they decide to do a secondary offering the investors will act through their good memories from the first offering. This theory was confirmed experimentally by Jagadeesh, Weinstein and Welch [1993] when they showed a positive link between the cost of the IPO and secondary offerings. Therefore means that in order to ensure a successful future deals, companies and underwriters underprice the IPO. 3. Analysis 3.1. Definitions 3.1.1. Liquidity Analysis The Current Ratio, defined as current assets divided by current liabilities, has been used as measure of liquidity. Many analysts acknowledge that, if the ratio value remains below 1, it may indicate that the company has or will have liquidity problems in the upcoming periods. 3.1.2. Leverage Analysis The Equity Ratio is an indicator of the degree of financial leveraging i.e. the relationship between equity and assets. If the equity to asset ratio is 60%, then the liabilities to equity will equal 40%. 3.1.3. Profitability Analysis Return on assets (ROA) is a measurement that shows the relationship between average assets and profits. Return on equity (Equasion 3.1) shows the amount of net income returned as a percentage of shareholders equity. The increase in equity ratio is expected to produce good results for shareholders of the company as long as the company earns a rate of return on assets that is higher than the interest rate paid to creditors. Equasion 3.1: Return on Equity (ROE) Gross Profit Margin shows the relationship between cost of goods sold and net sales revenue. A high gross profit margin indicates that a business can make a reasonable profit on sales, as long as it keeps overhead costs in control. Net Profit Margin shows how much profit a company makes after financing costs and taxes. 3.2. Overview of Tallinn Stock Exchange The only regulated securities market in Estonia is the NASDAQ OMX Tallinn. A common electronic trading system allows the listed companies to gain access to a host of capital resources and also exchanges members, mediating securities transactions of the investors. INET and SAXESS trading systems of OMX Nordic Exchange are used in NASDAQ OMX Tallinn. As of May 2005, these systems are also used in Latvia, Lithuania, Finland, Sweden, Denmark, and in Norway. The electronic Estonian central securities register and pension fund register is administered by the Estonian CSD. They concern with the payment of dividends and interest, arranging of shareholders general meetings and provides various services related to securities. The Estonian CSD also keeps the register of all public limited liability companies operating in Estonia, numerous private limited companies, funds and companies debt obligations. The register includes all Estonian private and legal persons securities accounts. 3.2.1. Economic Situation The factor that had the most influence on the financial results of NASDAQ OMX Tallinn Group on the year 2008 was the slow-down in trading activities and falling share prices, caused by the downturn in the international financial markets. The operating revenue of the NASDAQ OMX Tallinn Group (together with the Estonian CSD) decreased by 7.8% to EEK 65 million in 2008 (in 2007, EEK 70.5 million), while the operating revenue of the NASDAQ OMX Tallinn Stock Exchange amounted to EEK 22.3 million (in 2007, EEK 27.4 million). The equity capital of the Group was EEK 83 million at the end of the period (in 2007, EEK 85 million) and the consolidated net profit for 2008 amounted to EEK 20.4 million (in 2007, EEK 28.9 million). (NASDAQ OMX Tallinn Group, 2009) As seen from Appendix 2, the OMX Tallinn index has been falling since the fourth quarter of year 2007. At the end of 2008 the index had fallen about 70% from the end of 2007 and is moving closer to the value level it had in the beg inning of 2000s. 3.3. Overview of Companies 3.3.1. Arco Vara AS Arco Vara group is a real estate developer and agent in Baltic countries. It is undergoing a CEE (Central and Eastern Europe) expansion and is already present in Bulgaria, Romania and Ukraine. Their main activities are property development, consulting, investment management, civil and environmental engineering. For the first time the company sold their shares to the public on 21 June in 2007. The company was founded in 1992 as a real estate agency. In 1996, the first development project was launched in Tallinn and next year they expanded into Latvia. Currently, Arco Vara group is based in five countries with 20 offices in Estonia, Latvia, Lithuania, Bulgaria and Ukraine. The Group employs over 400 people. Their revenues and change of revenues can be seen from Figure 1. Arco Vara groups activities can be divided into three divisions: construction division; development division; services division. Services Division of Arco Vara group is located in all countries they operate in. Services offered include brokerage of real estate, appraisal services, real estate consultancy, property management and comprehensive real estate consulting services. In addition, the services division is engaged in the management of the two real estate portfolio. Development Division of Arco Vara group is experienced in the development of residential and commercial areas. Projects include apartment buildings, semi-detached houses, private houses, land and multi-functional commercial spaces. Development process involves many areas and their core competence lies in the ability to manage the whole property development process from beginning to end. Construction Division of Arco Vara Group is engaged in general contracting, construction and environmental construction. Over 40 years experience in the field, the main objective is to achieve a state of division with the highest quality and most environmentally friendly company, offering integrated solutions in consultation with the planning and design for both commercial and residential customers. Figure 1: Revenue, Revenue growth and Net Profit for Arco Vara AS Source: Annual reports, calculations based on annual reports 3.3.2. Olympic Entertainment Group AS Olympic Entertainment Group is the largest casino entertainment company in the Baltic States and one of the most rapidly developing companies in Eastern Europe. Olympic Entertainment Group AS is the ultimate holding company of the group, through what the strategic management and financing is being done. Local casinos are operated by local entities, including the Olympic Casino Estonia AS in Estonia, Olympic Casino Latvia SIA in Baltic Gaming AS Latvia, and the Olympic Casino Group Baltija UAB in Lithuania, Olympic Casino Ukraine TOB in Ukraine, and Olympic Casino Bel IP in Belarus. In Estonia, Latvia and Lithuania, the non-core operations, such as bars are separated from casinos operations and are managed by specialized entities. The company sold their shares to the public for the first time on 23 October in 2006. The Organizations work in Estonia, Latvia and Lithuania are certified according to ISO 9001 international quality requirements. The Revenues of Olympic Entertainment Grou p can be seen from Figure 2. Figure 2: Revenue, Revenue growth and Net Profit for OEG AS Source: Annual reports, calculations based on annual reports 3.4. Analysis of Public Offerings 3.4.1. Arco Vara AS Lead manager for the IPO of Arco Vara was Skandinaviska Enskilda Banken ABs London Branch and AS SEB Enskilda was jointly the manager. According to the Emission Prospectus, Arco Varas IPO size was 34  450  000 ordinary shares, net proceeds from were expected to be approximately EEK 1  372 million, and the total cost of listing was approximately EEK 66 million. Arco Vara was planning to invest the net proceeds from the IPO in new real estate projects and development mostly in Bulgaria, Romania, and Ukraine. In addition, it is planning to develop already existing housing and business real estate in Estonia and Latvia. In the prospectus, it was said that some of the proceeds might be used for the development and growth of other sectors of the company, to pay back preexisting debt, or for other general business purposes. Financial statement information for Arco Vara is in Appendix 3. According to the Current Ratio, Arco Vara was not in a good position before the IPO having a low, below 1, ratio. Quick Ratio (also known as the Acid-Test Ratio) is fluctuating from 0.2 to 0.5 at different years before the IPO and shows very bad liquidity to the company. Equity Ratio indicates the leverage to investment in operations. Leverage is defined as borrowed capital. Arco Vara had a ratio of 39.7% in 2005 and 32.1% in 2006, which can be seen from the Table 1 also. After IPO, equity capital from all of the assets was 53.4% for Arco Vara. Arco Vara had a low Return on Assets (ROA) before going public. Their ROA for 3 years before going public was at range from 8.5% to 11.7%. After IPO the ROA for Arco Vara was 7.5% and the next year, 2008, it was -38.3%. Return on Equity (ROE) shows the amount of net income returned as a percentage of shareholders equity. Arco Varas ROE for the years before IPO were 26.9% and 31.5%. After IPO the ROE for Arvo Vara was 14.2% for 2007 and -74.5% for 2008. Revenue growth had a little slowdown in 2006 right be fore the IPO, but the year of the public offering they had a 50% growth of revenues. In 2008 they had a negative growth of -9.3% caused by the cooling down of the real-estate market. Gross Profit Margin indicates the relationship between net sales revenue and the cost of goods sold. A high Gross Profit Margin indicates that a business can make a reasonable profit on sales, as long as it keeps overhead costs in control. Arco Varas Gross Profit Margin was 24.7% in 2005 and 27.8% in 2006. After IPO the margin stayed almost the same in 2007 but the next year, in 2008, it fell -53.2%. Net Profit Margin shows how much profit a company makes from investing into its operations. In 2005 and 2006 Arco Vara had Net Profit Margins 24.5% and 44.9% respectively. After the IPO it was 32.4% in 2007 and -175.8% in 2008. Their Net Profit Margin is very sensitive to the changes in the economy and in the demand of real-estate. It is also reflected in the Net Profit Margin of 2008. Table 1: Fin ancial Ratios of Arco Vara 2005 2006 IPO 2007 2008 Equity Ratio 0.39 0.32 0.52 0.36 ROA 9% 12% 8% -38% ROE 27% 32% 14% -75% Revenue Growth 36% 2% 50% -9% Gross Profit Margin 25% 28% 25% -53% Net Profit Margin 24% 45% 32% -176% Source: Annual reports, calculations based on data from annual reports In Figure 3, the price movement of Arco Varas stock is shown. As can be seen the price started falling right away after the IPO. One reason for Arco Varas stock price fall might have been the poor work of underwriters as market makers. Underwriters were supposed to create trades and manipulate the market for the price to go up in the beginning. Arco Vara did not have that classical IPO where at first the price would rise for some time, also creating a possibility for exit strategy, and after the market makers have stopped, the price would start to fall. Figure 3: Arco Vara stock p rices and volume of trade Source: NASDAQ OMX Baltic 3.4.2. Olympic Entertainment Group AS Lead manager for the IPO of Olympic Entertainment Group was Hansapank with a co-lead manager LHV Financial Advisory Services. IPOs size was 14  000  000 ordinary shares, where net proceeds were expected to be approximately EEK 1  038 million, and the cost of listing approximately EEK 24 million. The primary purpose of the Offering is to attract additional capital to finance the further expansion of the group in Estonia, Latvia, Lithuania, Ukraine, Belarus, Poland and other Central-Eastern European countries. Such additional capital will allow the Group to maintain its strategy of aggressive geographic expansion and facilitate the opening of new casinos in the existing and new markets as well as the acquisition of other operators or their existing casinos. Financial statement information for Olympic Entertainment Group is in Appendix 4. Olympic Entertainment Group had a high equity ratio already before the IPO. It was 63.1%. After the IPO it was 89.8%. Ret urn on assets pre-IPO were 28.5%, which showed a slight upwards movement, although it was relatively high already. After the IPO, return on assets decreased to 24.8%. Before IPO the return on equity was 42.2% and post-IPO it was 30%. Revenues were also growing at a high rate 41.6% in 2005. As seen from the Table 2, net profit margin and other margins rose before public offering, which made the IPO even more promising. The asset base of the company almost doubled from 2004 to 2005. Considering all the facts presented in the prospectus and the financial statements for prior years, the IPO looked promising. As can be seen from Figure 4, it was successful investment during the six months after the IPO, with stock prices rising from EEK 90 to almost EEK 180. A possible explanation for this movement of the stock is the lock-up period lasting about 6 months, after what some of the owners and underwriters might have sold a large amount of stock. Table 2: Financial Ratios of Olympic Ente rtainment Group 2004 2005 IPO 2006 2007 Equity Ratio 0.75 0.63 0.89 0.86 ROA 25% 29% 25% 15% ROE 33% 42% 30% 17% Revenue Growth 33% 42% 90% 51% Gross Profit Margin 62% 64% 62% 61% Net Profit Margin 21% 24% 24% 15% Source: Annual reports, calculations based on data from annual reports Figure 4: Olympic Entertainment Group stock prices and volume of trade Source: NASDAQ OMX Baltic 4. Conclusion From the analysis of the prospectuses the author concludes that the motives to go public were similar for both of the companies. They were planning to use the proceeds to invest to widen their market share behind the borders and to geographically expand. Financial data did not show good signs for Arco Vara because firstly the company did not have enough liquidity in their assets. Also the equity ratio was too low being before the IPO only 32%. In the profitability analysis the return on assets was low being in the range of 8.5% to 11.7% before the IPO. On the other hand the gross profit margin and net profit margin were fairly high. Olympic Entertainment Group had much better financial data before the IPO. Before the IPO they already had a high equity ratio, good return on asset and the return on equity ratio. Also the profit margins were fair. These were two very different initial public offerings. Arco Vara started to fall right from the beginning and did not have that c lassical IPO slope where it rises in the beginning for some time and then starts to fall when the underwriters have finished their job. Then again Olympic Entertainment Group rose for a few months before it started to fall. Then the question was why did Arco Vara had worse IPO than Olympic Entertainment Group. Arco Varas public offering cost them almost three times than it did to Olympic Entertainment Group. The reason why Arco Varas IPO was not very successful was the cooling down of the real estate market and the economy in general. The timing of the IPO was bad. It can be seen from Appendix 5 that the prices of other real estate and construction companies share started falling even some time before the IPO of Arco Vara. And right at the time of their IPO, the OMX Tallinn index started to fall also. Therefore in conclusion we can say that the underwriters cant always push the price of the share up. There are other factors that might make it almost impossible, for example the timing of the IPO. The example of Arco Vara showed that they did not have that window of opportunity at the time. At least the general economic situation did not favor them. References https://www.bizjournals.com/kansascity/stories/1997/12/15/focus2.html Draho, Jason. The IPO Decision: Why and How Companies Go Public. New York: Edward Elgar Publishing, 2004. https://en.wikipedia.org/wiki/Underwriting Desache, Jean-Marc, Christopher Mead, and Gide Loyrette Nouel. Equity Markets: Investing Conditions with Buoyant IPO Activity in Europe. Paris EUROPLACE. New York. 23 October 2006. Markets in Financial Instruments Directive. Wikipedia. 24 March 2009 https://en.wikipedia.org/wiki/Markets_in_Financial_Instruments_Directive. European Union. European Parliament and the Council. DIRECTIVE 2004/39/EC. Apr. 2004. 25 March 2009 https://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2004:145:0001:0044:EN:PDF. European Union. European Parliament and the Council. DIRECTIVE 2003/71/EC. Nov. 2003. 25 March 2009 https://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2003:345:0064:0089:EN:PDF. Market Abuse Directive. International Capital Market Assoc iation. 25 March 2009 https://www.icma-group.org/Regulatory-Policy/eu_market_abuse_directive0.aspx. European Union. European Parliament and the Council. DIRECTIVE 2003/6/EC. Jan. 2003. 25 March 2009 https://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2003:096:0016:0025:EN:PDF. European Union. European Parliament and the Council. DIRECTIVE 2004/109/EC. Dec. 2004. 25 March 2009 https://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2004:390:0038:0057:EN:PDF. What are the reasons that companies go for an IPO? Yedda. 30 March 2009 https://yedda.com/questions/reasons_companies_IPO_business_1491169155564/. Organisation for Economic Co-Operation and Development. OECD Principles of Corporate Governance. 2004. 14 March 2009 https://www.oecd.org/dataoecd/32/18/31557724.pdf. https://stason.org/TULARC/investing/public-offerings-IPO-DPO/Positioning-your-Company-to-become-an-IPO.html https://www.finance30.com/forum/topics/ipo-timeline-template Initial Public Offe ring (IPO). NASDAQ OMX Baltic. 1 May 2009 https://www.nasdaqomxbaltic.com/?id=1418137. https://stason.org/TULARC/investing/public-offerings-IPO-DPO/IPO-What-you-Can-and-Can-t-Say.html https://stason.org/TULARC/investing/public-offerings-IPO-DPO/What-Is-Going-Public.html Underwriting https://chestofbooks.com/finance/private/Business/Chapter-XV-Underwriting-Origin-Of-Underwriting.html https://chestofbooks.com/finance/private/Business/Importance-Of-Underwriting-In-Present-Day-Financing.html https://chestofbooks.com/finance/private/Business/The-Underwriting-Syndicate.html https://chestofbooks.com/finance/private/Business/Syndicate-Agreements.html https://chestofbooks.com/finance/private/Business/Community-Of-Interest-Among-Underwriting-Houses.html Underpricing https://www.hec.unil.ch/cms_mbf/master_thesis/0001.pdf OMX Tallinn NASDAQ OMX Tallinn Estonian CSD. NASDAQ OMX Baltic. 03 October 2010 https://www.nasdaqomxbaltic.com/en/exchange-information/a bout-us/nasdaq-omx/nasdaq-omx-tallinn-3. Financial results for NASDAQ OMX Tallinn Stock Exchange and Estonian CSD for 2008. The FINANCIAL. Apr 2009. 28 April 2009 https://www.finchannel.com/index.php?option=com_contenttask=viewid=36054Itemid=43. Overview of Companies A. Ross, Stephen, Wandolph W. Westerfield, and Bradford D. Jordan. Corporate Finance Fundamentals. 7th ed. New York: McGraw-Hill/Irwin, 2006. General. Arco Real Estate. 27 April 2009 https://www.arcorealestate.com/en/company/general. Olympic Entertainment Group About Issuer. NASDAQ OMX Baltic. 27 April 2009 https://www.nasdaqomxbaltic.com/market/?instrument=EE3100084021list=2currency=EEKpg=detailstab=company. Arco Vara AS. Initial Public Offering Prospectus. Jun 2007. 16 March 2009 https://www.baltic.omxnordicexchange.com/files/tallinn/bors/prospekt/arc/arco_en_prospect.pdf. Current Ratio. Investor Glossary. 9 May 2009 https://www.investorglossary.com/current-ratio.htm. Quick Ratio. Value Based Management.net. 9 May 2009 https://www.valuebasedmanagement.net/methods_quick_ratio.html. Equity Ratio. Wikipedia. 9 May 2009 https://en.wikipedia.org/wiki/Equity_ratio. Return On Assets (ROA). Investopedia. 9 May 2009 https://wwwinvestopedia.com/terms/r/returnonassets.asp. ROE. Tarkinvestor.ee. 9 May 2009 https://www.tarkinvestor.ee/wiki/index.php/ROE. Gross Profit Margin. Wikipedia. 9 May 2009 https://en.wikipedia.org/wiki/Gross_profit_margin. Stock Historical Data. NASDAQ OMX Baltic. Jan 2009. 5 March 2009 https://www.nasdaqomxbaltic.com/. Arco Vara AS. Annual Report 2003. Jun 2004. 3 April 2009 https://www.arcorealestate.com/upload/Aruanded/2003maj_eng.pdf. Arco Vara AS. Annual Report 2004. Apr 2005. 3 April 2009 https://www.arcorealestate.com/upload/2004_Annual_Report.pdf. Arco Vara AS. Annual Report 2005. Mar 2006. 3 April 2009 https://www.arcorealestate.com/upload/AV_AS_2005_Annual.pdf. Arco Vara AS. Annual Report 2006. Apr 2007. 3 April 2009 https ://www.arcorealestate.com/upload/Aruanded_ENG/2006_MAA_final_ENG.pdf. Arco Vara AS. Annual Report 2007. Apr 2008. 3 April 2009 https://www.arcorealestate.com/upload/Aruanded_2007_ENG/2007_ar_en_uni.pdf. Arco Vara AS. Annual Report 2008. Apr 2009. 23 April 2009 https://www.arcorealestate.com/upload/Aruanded_ENG/Annual_report_2008.pdf. Arco Vara AS. Yearbook 2006. Apr 2007. 23 April 2009 https://www.arcorealestate.com/upload/yearbook_2006_eng.pdf. Olympic Entertainment Group AS. Initial Public Offering Prospectus. Sep 2006. 16 March 2009 https://www.baltic.omxnordicexchange.com/files/tallinn/bors/prospekt/oeg/oeg_prosp_eng.pdf. Olympic Entertainment Group AS. Annual Report 2004. Apr 2005. 3 April 2009 https://www.olympic-casino.com/public/Corporate/documents/AnnualReport2004_ENG.pdf. Olympic Entertainment Group AS. Annual Report 2005. May 2006. 3 April 2009 https://www.olympic-casino.com/public/Corporate/documents/AnnualReport2005_ENG.pdf. Olympic Entertainment Gr oup AS. Annual Report 2006. Mar 2007. 3 April 2009 https://www.olympic-casino.com/public/Corporate/documents/aruanne2006eng.PDF. Olympic Entertainment Group AS. Annual Report 2007. Apr 2008. 30 April 2009 https://www.olympic-casino.com/public/Corporate/documents/Olympic_annual_2007_eng_EEK.pdf. Olympic Entertainment Group AS. Annual Report 2008. Apr 2009. 2 May 2009 https://www.olympic-casino.com/public/Corporate/documents/Olympic_annual_2008_eng_EEK.pdf. OMX Tallinn Index Historical Data. NASDAQ OMX Baltic. Jan 2009. 28 February 2009 https://www.nasdaqomxbaltic.com/. Resà ¼mee Appendices Appendix 1. IPO Process Timeline Example Time Period Process 1st Day Initial organization meeting and due dilligence; Review Timetable; Review letter of intent and discuss underwriting issues; Discuss Underwriters fees and compensation; Assign registration statement preparation responsibilities; Identify accounting and other problems; Select Printer; Review financial forecasts; Management due dilligence presentations; Discuss transfer agent and registrar; Prepare list of parties involved (phone numbers, addresses, secretaries, etc.) referred to as the working group list. 14th Day First draft of registration statement distributed. 21st Day First drafting session and due dilligence: Complete due dilligence presentations; Review draft of registration statement; Discuss problems. 21st to 22nd Day Revise registration statement; underwriters counsel to draft and distribute underwriters agreement, agreement among other underwriters, selling agreement and other documents relating to underwr iting (underwriting document) to company counsel. 27nd Day Distribution of second draft of registration statement. 31st to 32nd Day Second drafting session to review registration statement. 32nd to 46th Day Questionnaires completed by officers, directors, and 10% shareholders and returned to company counsel for review. 33rd Day Distribution of third draft of registration statement. 33rd Day Distribution of mangements discussion and analysis of financial position and results of operations. Source: ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¦

PSY 301 Week 3 Assignment Persuasion Who What To Whom Essay

This paperwork comprises PSY 301 Week 3 Assignment Persuasion Who What To Whom Persuasion: Who, What, To Whom â€Å"As we explore persuasion, we can divide the persuasive communication into three parts: the communicator, the message, and the audience. First, we will deal with what characteristics of persuaders make people more likely to be persuaded. Next, we will think about characteristics of the message that lead people to change. Finally, we will explore what characteristics of the audience can lead them to be persuaded.† (Feenstra, 2011, p. 88) For your assignment this week, provide an in-depth analysis of the three parts of persuasion. Please reference the bullet points below to complete your assignment. Who –†¦show more content†¦This article is jam packed with tips to help you have a fantastic, worthwhile college experience. Psychology - General Psychology Persuasion: Who, What, To Whom In your textbook, Feenstra (2011) states, â€Å"As we explore persuasion, we can divide the persuasive communication into three parts: the communicator, the message, and the audience.† (p. 88). For your assignment this week, construct a paper that provides an in-depth analysis of the three parts of persuasion. Address the following points in your paper: 1. Who – Describe the Characteristics of the Persuader: What influences our ability to become persuaded by someone? What specific characteristics must this person possess? Be sure to address the impact of credibility, physical attractiveness, and likeability in your response. Why do we respond well to those who possess such characteristics? Would we respond the same to an unattractive, angry, or non-credible person? Why not? 2. What – Discuss the Characteristics of the Message: What attributes are inherent in persuasive messages? How are we influenced by the emotion, framing, narratives, and rational appeals in the messaging we receive? What is the significance of the sleeper effect? 3. To Whom – Examine the Characteristics of the Audience: Why do different audiences perceive messages in different ways? What is the role of culture, gender, and self-esteem inShow MoreRelatedHuman Resources Management150900 Words   |  604 Pagesmanagement as a strategic business contributor. Explain why HR professionals and operating managers must view HR management as an interface. Discuss why ethical issues and professionalism affect HR management as a career field. ââ€"  ââ€"  ââ€"  ââ€"  ââ€"  3 HR TRANSITIONS HR Management Contributes to Organizational Success More effective management of human resources (HR) increasingly is being seen as positively affecting performance in organizations, both large and small. A joint venture between

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Analysis of an Advertisement Essay - 728 Words

As I finished reading a rather intellectually stimulating article in a popular mens magazine, I flipped the page to reveal quite an interesting advertisement. My gaze fell upon the following print ad, which contained the photograph of a decrepit old man dressed in a black suit, wearing a diamond encrusted gold dollar sign ring, embraced by a wedding-gown clad, large breasted, peroxide bleached blond, young bimbo. Next to the shocking newly-weds was a new, cherry red Dodge Viper convertible, parked on a black patterned brick driveway, in front of a gorgeous mansion wall adorned with lavish vegetation and concrete Grecian pottery overflowing with ferns. The inept, liver spotted, incontinent, prune-like old geezer stood in vulgar†¦show more content†¦It appeared that the reader was being subjected to an advertisement for divorce or for potential infidelity rather than that for a sports car. 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ap nslChapter 18: Reading Questions 1. Read the handout on incorporation doctrine and write a definition of incorporation clarifying the concept of incorporation in your own words as well as explaining the role of the 14th Amendment in incorporation. I will cover this in class! 2. We will write a custom essay sample on Ap Nsl or any similar topic only for you Order Now What are the three reasons why the liberties claimed by some people become major issues? Give one or two examples for each reason. 3. Explain briefly how the Supreme Court has interpreted the Free Exercise and Establishment clauses. 4. What are the difficulties in using the â€Å"wall of separation† principle? 5. List and explain the circumstances when the Supreme Court has ruled that freedom of speech may be limited. 6. Define the â€Å"clear-and-present-danger test,† libel, preferred position, prior restraint, imminent danger, and symbolic speech. You may just want to put these straight onto your flashcards 7. Summarize the Supreme Court’s changing interpretations of how to protect both the due process rights of accused criminals and to preserve the safety of the community. Define the exclusionary rule and the â€Å"good faith exception. †. Chapter 19 Reading Outline 1. What does the book say is the pertinent question regarding civil rights? 2. What were the strategies that black leaders followed in order to obtain civil rights? Once basic rights such as voting and integration had been obtained, what issues did civil rights leaders focus on? 3. Briefly outline the steps in the NAACP’s strategy in the fight against segregated schools and indicate the success they had in the courts and in implementing desegregation. . What was the issue concerning desegregation vs. integration? How has this issue been resolved? 5. What were the four developments that made it possible to pass civil rights bills? 6. What accounts for the change in attitude in Congress towards civil rights issues from the 1960s to the present? 7. How has the Supreme Court changed in its attitudes towards equal rights for women from the early 20th century to today? 8. What are t he two standards the Court uses today to in considering sex discrimination cases? What is the debate between those who support â€Å"equality of result† and those who support â€Å"equality of opportunity†? 9. What are the criteria that the Supreme Court has adapted in defining strict scrutiny of any law involving racial preferences? 10. Briefly summarize the highlights of the government’s response to abortion. 11. How did activists for the disabled manage to get The Americans with Disabilities Act passed? 12. Briefly summarize what is included in the law and the objections that some have had to the law. How to cite Ap Nsl, Papers

Earnings Management And Ownership Structure -Myassignmenthelp.Com

Question: Discuss About The Earnings Management And Ownership Structure? Answer: Introduction A rapid progress has been observed in the property rights, finance and agency theory for developing an ownership framework in the organization. Moreover, the accounting theories elaborate the determination of some specifications and optimal capital structure. This is in consideration to credit agreements concept, company theories and supply side regarding extensiveness of the market problem (Agoglia et al. 2017). In account of the same, agency theory anticipates to elaborate that the manager or owner of the organization gains mixed financial structure. This includes equity claims and debts. This supports in choosing activities set for organization in a way that total revenue of the organization is less. It might be the case that he was the only owner and the findings are independent devoid of the fact that the organization has its operation in monopolistic market or within competitive products. Agency theory elaborates the reasons for which the managers are failing to increase the company value which is increasingly consistent with efficiency (Baik et al. 2015). The intention of this essay is to evaluate the managerial behavior, agency costs and ownership structure which will support in elaborating agency theory from formal peer reviewed article. The article is chosen in the essay for elaborating accounting theories implication within the company is Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure. Discussion The article has an objective of maintaining an ownership structure theory for the organization which centers on property rights theory, agency and finance theory. The article also elaborated the concept of agency cost, elaborated the relationship for control issue and investigated the agency cost nature (Beaudoin, Cianci and Tsakumis 2015). It explained existence of outside equity and debt in the organization. In addition, the article conducted an innovative analysis of the organizations that signified effectiveness of their evaluation process. Such evaluation is conducted to reveal the factors affecting the insurance and generation of equity and debt. The article revealed that agency relationship acts as a contract in which more than one individual gets associated with other person (agent) for offering some service on the behalf of the agent (Briamonte et al. 2017). This offers authority of decision making to the agent. In a situation where the contractual parties involved in the relationship acts as utility maximizers there is high chance that they may not act towards the principals best interests. The article also elaborated that agency cost is related with residual loss so an agents bonding expenses and supervising expenses are provided by the principal. Agency theory is implemented by organizations with increased efforts within every management level. This theory is implemented within universities, mutual organizations, cooperatives, government authorities and unions. The article centered on analysis of agency costs revealed from contractual agreements conducted by the owners and the companys top management (Devers and Sanders 2016). It is evaluated that people deal with normative issues taking into account that just stocks and bonds can be issued as claims. This investigates the incentives collected from all the contractual parties and the aspects entering in equilibrium contractual form determination. This explains the relationship between the companys manager (agent) and the outer equity and debt holders (principals). Agency Costs of Equity If a wholly owned organization is managed by an entrepreneur, the person can make operating decisions which can increase its utility (Dutta and Fan 2014). Including the outside equity can develop agency costs due to interests divergence for the reason that principal then just deals with these expenses. This is for attaining non-pecuniary benefits that can further facilitate managers in attaining utility maximization. For this reason, it is observed from the article that the managers focus on increasing company size in case gross value increase fails because of some incremental loss (Ferri, Zheng and Zou 2017). This is related with the implementation of additional fringe benefits. This is due to his lessening fractional interests within the organization. The article review explained that there is a considerable role of monitoring and bonding agreements in decreasing agency costs in the organization. For example, in certain cases the equity market is highly competitive and maintains un biased estimations considering impacts of expenditures. The prospective consumers will remain indifferent for both of the contracts. First contract explains an organizations share price at a total price with having no rights to control or supervise perquisites developed by the managers. Additionally, existence or size of agency cost is dependent on monitoring expenses nature, the managers intention of attaining non-pecuniary benefits and on supply of potential managers. The managers are able to finance the overall company with their personal wealth (Dutta and Fan 2015). The article investigated that agency costs encompassing the economic bonding expenses and residual loss presents an unavoidable result in agency relationship. It is also explained that some agency costs are decreased for the decision maker attains advantages from decrease in agency expenditures. Additionally, it is also evaluated that certain security analysis conducts in the company decreases the agency costs associated with ownership separation. This includes expenses and control that are socially productive (Ge and Kim 2014). Agency theory can be implemented in big and modern organizations whose managers have no equity. This accounting theory supports development of positive analysis regarding increased supply within markets. Moreover, elaboration concerning a positive welfare enhancement from increase in certain claims results in emergence of new basic contingent options or claims. This can be deemed as analysis of demand conditions in new markets. Corporate Ownership Structure Theory In comparison to capital structure, the ownership structure elaborates that certain vital variables must be determined which includes relative amounts of debts and equity along with a part of equity maintained by the manager (Indjejikian et al. 2014). The article elaborated that till the time the capital markets remain effective the cost of assets including outer equity and debt will indicate unbiased anticipations of supervising expenses. This will include redistributions that can face risks from agency relationships. Moreover, the selling manager might deal with agency costs. From the viewpoint of managers and owners, the maximum part of outside funds should be gathered from equity for maintaining a particular level of internal equity. This can result in decreasing overall agency costs. Agency costs is observed to have a great effect on the ownership structure of the organization. Changing effects of ownership variables are analyzed for revealing the agency cost impacts that takes place. The organization uses sales-to-asset turnover for making sure whether the management is boosting shareholders wealth in an efficient way. They also signify that sales increases because of better use of companys resources which in turn can lead to shareholders wealth maximization and decreased agency costs (Lamboy-Ruiz, Cannon and Watanabe 2016). One more major use of agency theory in the company encompass free cash flows and growth opportunities which is present within the organization. This is in alignment with the situation that a manager has increased cash flows that can be used within perquisites. Moreover, the management ensures high dividends that is considered to be compromising from the perspective of the organization. This also signifies poor external regulation forces as t he company do not consider visiting the financial market in order to obtain capital for all the projects. Conversely, in situation where the CEO focuses on shareholder value maximization, the individual might become non-executive directors within other boards. The Agency Costs of Debt According to the provided article, it could be stated that the large organizations are individually owned with a minute amount of capital on the part of the owners in return for 100% equity. This is due to the fact that there is strong relationship between the incentive effects and the increasingly leveraged firms. This could be achieved with the help of strong incentives for involvement with activities or investments, which promise enhanced payoffs, if successful, even if the probability of success is minimal (Lovata et al. 2016). Along with this, in few large organizations, it has been identified that the debt insurance accumulates the agency costs, which are the accountability of the managers or the owners. The managers are probable to encounter the bonding costs so that the influence of internal and external monitoring costs could be minimized. Furthermore, the operating costs and revenues of the organization are identified to be influenced adversely. More specifically, it could be cited that the agency costs, which are endangered due to the availability of external owners, remain positive (Nieken and Sliwka 2015). In addition, it would enable the shareholders to transfer the same to an expert or professional, since this would enable in addressing these costs. The agency costs pertaining to debt constitute of the loss of opportunity wealth, which is due to the influence of debt by taking into consideration the investment decisions of the organization. Along with this, the monitoring and bonding costs on the part of the bondholders and the overall organization contain agency cost, which is associated with debt. Such costs take into account various bankruptcy and reorganization costs. In accordance with the article, the primary concentration is on the relationship between the shareholders and the top-level management, which overlaps, if the owner performs the role of a manager. In addition, the agency issues within the organization explicate the institutional decisions within various other dimensions. A person, who is full in-charge of the organization and manages it, could undertake operating decisions that takes into account the benefits the individual obtains from the financial returns (Nygaard et al. 2017). In addition, the individual obtains non-monetary aspects related to managerial work for increasing the overall utility. An optimum combination of monetary as well as non-monetary benefit is obtained when the marginal utility is accomplished from the additional money incurred. This is similar with all the non-financial items, which matches with the obtained marginal utility from an additional amount of purchase after tax (Rashid 2015). The agency costs would not be similar in relation to the interests of the managers or owners and the external stakeholders, if the person sells a minute portion of the residual claims of the organization, which is similar to its own. In addition, the person could carry out the duty of the owner or the manager related to a portion of the expenditures of various non-financial benefits in order to increase the overall utility. On the contrary, it has been identified that the entire effects of wealth related to the estimated expenses would be encountered on the part of the owner until the time the impact hits the market. If the fraction of equity for the owner or the manager rises, the aspect of the claim on the result decreases as well (Tabassum, Kaleem and Nazir 2015). Due to this reason, the owner or the manager is needed to possess reserved corporate resources as a portion of non-financial benefits. Finally, if there is fall in the claims of the individual, the incentive willingness for obtaining anything innovative would fail as well. Conclusion The intention of this essay was to evaluate managerial behavior, agency costs and ownership structure which will facilitate in elaborating agency theory from a formal peer reviewed article. It is understood from this article that it has an objective of maintaining an ownership structure theory for the organization. This centers on the property rights, finance and agency theory. The article also elaborated the concepts of agency cost as well as analyzed the association between control issue and separation. It also investigated the nature of agency cost that is developed through existence of outer debt or equity. It is also indicated that agency theory is maintained by all organization with supportive efforts at every management level. The essay also explained that including the outer equity might develop agency costs because of interest divergence. This is for the reason that the principle can then experience just a part of this expense for attaining non-pecuniary advantages that can further increase managers unity maximization. Therefore, it can be stated that the article elaborated the ways in which the developed strategies for increasing company size. This is in case the gross value increase remains offset through some incremental loss related with use of additional fringe benefits and decreasing fractional interests in the organization. References Agoglia, C.P., Beaudoin, C., Bennett, G.B. and Tsakumis, G.T., 2017. Can Corporate Social Responsibility Counteract Managers' Incentives to Manage Earnings?. Baik, B., Cho, K., Choi, W. and Kang, J.K., 2015. 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