Shipping Industry Case Study Example | Topics and Well Written Essays - 2250 words

Shipping Industry - Case Study Example Once this is approved by the commission, the bookbuilding process begins, in which the company is introduced to potential investors, who then explicitly express their interest in the venture. At this point, the investment bank proposes a price to the company, and later the trading begins (Ljungqvist, 2005). This process is often very complicated and very costly. The costs are generated by auditing and underwriting, plus legal fees. Ongoing costs are also associated with public offerings, such as those connected with supplying information and dividends to investors (Ritter, 1998, p. 1). Another cost related to going public may come from underpricing, which is a risk that grants initial investors less than the market value of the securities through offering it at too low a price (Clementi, 2005; Ljungqvist 2005; Ritter, 1998). The theories that explain why a firm might do this are several. They include the desire of entrepreneurs and/or investors to lower capital cost and to broaden the firm's ownership base (Brau et al., 2005, p. 5). Other theories suggest that firms decide to go public for reasons of legitimacy and growth (Cohen, 2002). Still others posit the theory that initial public offerings usually occur as a normal stage in a firm's lifecycle (Brau et al., 2005, p. 13; Maug, 2001, p. 1; Ritter, 1998, p. 18). Small firms are usually run by a limited amount of capital. ... argue that the rationale for choosing this is strengthened by the fact that the benefits of liquidity is more desirable for entrepreneurs than compensating investors for the non-liquidity that usually exists in privately owned firms (Ritter, 1998, p. 1). This might be viewed in terms of the desire to reduce a firm's capital costs. A major part of capital costs comes from debt. This is concretised roughly by the interest rate payable on the amount of debt incurred in the financing of the firm. When liquidity is necessary, rather than incur this (or additional) debt, firms might choose to raise capital by selling is equity in the form of securities to the public (Ritter, 1998, p. 1). The same might be done to its debt via an initial public debt offering (Ritter, 1998, p. 1). The life-cycle theory has been propounded by several financial theorists. It states that the IPO occurs within the normal process of a firm's evolution and maturity (Ritter, 1998, p. 1; Brau, 2005, p. 13). The small business is usually at first financed by the owners' limited capital. When growth beyond this capacity is necessary, and all other private avenues (friends and family) have been exhausted, capital is sought from non-affiliated financial sources, such as banks and venture capitalists. However, entrepreneurs and investors will likely not agree on all decisions to be made within the firm. At this point firms consider it desirable to offer its securities to a highly diversified public (Ritter, 1998, p. 18; Boehmer & Ljungqvist, 2004, p. 28). Firms are interested obtaining financing at the cheapest cost. The cost of capital theory can be invoked here as well, since equity does generate a cost (though one much more difficult to calculate than that of debt). When a firm offers i ts shares to