2. securities markets[1]
TRANSCRIPT
8/12/2019 2. Securities Markets[1]
http://slidepdf.com/reader/full/2-securities-markets1 1/49
Securities Markets
October 2010
Korea Exchange
8/12/2019 2. Securities Markets[1]
http://slidepdf.com/reader/full/2-securities-markets1 2/49
Table of ContentsI. Investment and Securities Markets
II. Floating New Securities(Primary Market)
III. Creating Demand for Securities(Secondary Market)
8/12/2019 2. Securities Markets[1]
http://slidepdf.com/reader/full/2-securities-markets1 3/49
I. Investment and Securities Markets
8/12/2019 2. Securities Markets[1]
http://slidepdf.com/reader/full/2-securities-markets1 4/49
Essential nature of investment• Reduce current consumption•
Consume more in the future
Real Assets• Assets used to produce goods and services
Financial Assets• Claims on real assets
Investment and Financial Assets
8/12/2019 2. Securities Markets[1]
http://slidepdf.com/reader/full/2-securities-markets1 5/49
• Consumption Timing
•
Allocation of Risk• Separation of Ownership and Management
- Agency Issues
Investment and Financial Assets
8/12/2019 2. Securities Markets[1]
http://slidepdf.com/reader/full/2-securities-markets1 7/49
General Class i f icat ion o fA Secu ri t ies Market
Short-termMoney Market)
Long-termCapital Market)
SecuritiesMarket Primary
Market ExchangeMarket
OTCMarket
SecondaryMarket
CD s, CPs, T-BillsRepos, etc.
8/12/2019 2. Securities Markets[1]
http://slidepdf.com/reader/full/2-securities-markets1 8/49
ISSUERS (Money Demanders)
- Corporations, Government
INVESTOR (Money Suppliers)
-Individuals, Institutionals
INTERMIDIARIES (Underwriters)
-Securities Firms,Investment Banks
M oney
Securities
SubscriptionsPayments
Sales Underwriting
Primary Market
8/12/2019 2. Securities Markets[1]
http://slidepdf.com/reader/full/2-securities-markets1 9/49
Securities Securities
INVESTORSISSUERS INVESTORS
Fund Fund
Primary Market Secondary Market
Struc tur e o f a Secu ri t ies Market
8/12/2019 2. Securities Markets[1]
http://slidepdf.com/reader/full/2-securities-markets1 10/49
Regulatory Bodies
Investors(buy-side)
Investors(sell-side)Brokers BrokersExchange
Banks
Regulation Supervision Cash Flow Securities
Securities Depository
Secondary Market
8/12/2019 2. Securities Markets[1]
http://slidepdf.com/reader/full/2-securities-markets1 11/49
Mobilizing industrial fundsPool small & short-term savings and make them availablefor large & long-term use by corporate sector
Diversified financing choices at lower costsEquity financing, debt financing… Companies can set their own interest rates
Providing a conduit for savings to the publicDiversified investment vehicles - stocks, bonds,derivatives, etc.
Roles o f a Secu ri t ies Mark et
8/12/2019 2. Securities Markets[1]
http://slidepdf.com/reader/full/2-securities-markets1 12/49
Change of ownership structure andmanagement pattern
Privatization is central to transitional countries’economic reforms and developments
Shareholders wealth-maximization bring aboutchanges in management patterns
Redistribution of national wealth Wide distribution of corporate shares inducesredistribution of corporate profit
Roles o f a Secu ri t ies Mark et(cont’d)
8/12/2019 2. Securities Markets[1]
http://slidepdf.com/reader/full/2-securities-markets1 13/49
Attracting foreign capitalCredible and well regulated emerging markets
Providing liquidity for savers Easy conversion of financial instruments into cash
Alleviating poverty issueEconomic growth supported by efficient allocation ofresources reduces unemployment, enabling povertyalleviation
Roles o f a Secu ri t ies Mark et (cont’d)
8/12/2019 2. Securities Markets[1]
http://slidepdf.com/reader/full/2-securities-markets1 14/49
Pol icy Goals in
Fos ter ing a Secu ri t ies Mark et
Improving corporate financial status
High leverage leads to financial distress and riskierinvestments
Lowering cost of capital of corporations Improving corporate governanceEnhancing financial market efficiencyEnsuring economic equity
8/12/2019 2. Securities Markets[1]
http://slidepdf.com/reader/full/2-securities-markets1 15/49
Sup ply-s ide Pol ic ies
Incentives to Go Public
To issuers
Lower corporate taxesPreferential bank loansProtection of founders’ interests – ownershipceilings, restrictions on M&A, etc.
To investorsDiscounted public offering pricesLower income tax on dividend income
8/12/2019 2. Securities Markets[1]
http://slidepdf.com/reader/full/2-securities-markets1 16/49
Supp ly-s id e Pol ic ies (cont’d)
Compulsory to Going Public
Government’s order to go public
Disadvantages to firms reluctant to go publicsurcharge in income taxrestrictions on loans & borrowingsaccounting of interest payable (not tax deductible),etc.
8/12/2019 2. Securities Markets[1]
http://slidepdf.com/reader/full/2-securities-markets1 17/49
Supp ly-s id e Pol ic ies (cont’d)
Privatization of SOEs through public offeringsLarge-sized SOEs with high profitability & growthpotential
Full or partial sell-outDiscounted selling pricesTarget middle- & low-income people
8/12/2019 2. Securities Markets[1]
http://slidepdf.com/reader/full/2-securities-markets1 18/49
Dem and -sid e Pol ic ies
Investment TrustsConvert small investment funds into industrialfundsEncourage indirect investments
Securities savings schemeEligible for low income bracket peopleTotal investment amount is limitedProceeds is tax deductible
8/12/2019 2. Securities Markets[1]
http://slidepdf.com/reader/full/2-securities-markets1 19/49
Dem and -sid e Pol ic ies (cont’d)
Employees Stock Ownership Plan (ESOP)Employees become shareowners of their own companiesCertain portion of shares is assigned to employees
Company’s financial support Employees’ increased commitment to productivity
Opening securities market to foreignersForeign capital inflowTransfer of modern investment techniques
8/12/2019 2. Securities Markets[1]
http://slidepdf.com/reader/full/2-securities-markets1 20/49
II. Floating New Securities
8/12/2019 2. Securities Markets[1]
http://slidepdf.com/reader/full/2-securities-markets1 21/49
II. Floating New Securities
Economy Size, Development, Growth Rate
Degree of Market Economy and Corporatization
Attitudes of Business People
Government Enticement including Interest andTax Policies
8/12/2019 2. Securities Markets[1]
http://slidepdf.com/reader/full/2-securities-markets1 22/49
II.1. Countries in Transition
State is the only Supplier of Securities
Privatization is Difficult and a Slow Process
Initially the Market is not a Source of CompanyFinancing but a Source of Income for the State
Need for Clear Method of Valuation
8/12/2019 2. Securities Markets[1]
http://slidepdf.com/reader/full/2-securities-markets1 23/49
II.1. Countries in Transition
(cont’d)
Clear Legal and Institutional Framework to decidethe of Shares available to the Public
Listing Privatized Companies
As Demand goes up, Share Prices rise.With Government Incentives, then more listing.Need for Good Infrastructure and RegulatoryFramework (Underwriting, Broking, Listing)
Having Adequate of Shares to Trade is more
Important than the of Investors
8/12/2019 2. Securities Markets[1]
http://slidepdf.com/reader/full/2-securities-markets1 24/49
II.1. Countries in Transition
PolandGo slow, Listing initially only 5 Stockswith High Listing Requirements,a few Years Later, very active IPO Market
Czech (more politically stable and economically promising)Listing hundreds companies, however,only 40 Stocks are Active.
Why?Transparency and the Difference between wellRegulated versus Lax Regulation
8/12/2019 2. Securities Markets[1]
http://slidepdf.com/reader/full/2-securities-markets1 25/49
II.2. Taxation Policies
In Korea, stock market boom in 1984 and 1988.As stock prices rise, the cost of capital declines,which should lead to rising investmentopportunities and the need for funds. However,few IPOs and little new financing. Why?
Interest rate ceiling, government implicit loanguarantees, and favorable tax treatment of debt.In 1988 new listing started to pick up.
8/12/2019 2. Securities Markets[1]
http://slidepdf.com/reader/full/2-securities-markets1 27/49
II.3. Maximize floating share
Cross-Shareholding among Chaebols
Percentage of Shares floated out of issued Shares
Monitoring of the of Shareholders stipulated inthe Listing Requirements
8/12/2019 2. Securities Markets[1]
http://slidepdf.com/reader/full/2-securities-markets1 28/49
II.4. Going public
In rapidly growing Economies, Investmentsgreater than internal Financing Sources
Separation of Ownership and Management.Taxes on transferring Shares must be givenspecial Treatment.
Sale of Shares in the Bull Market brings largeCash Flow above Book Value.Capital Gains Issue must be closely examined.
8/12/2019 2. Securities Markets[1]
http://slidepdf.com/reader/full/2-securities-markets1 29/49
II.4. Going public
Initially Business Owners will be concerned withHigh Dividend Requirements, Losing ManagementControl to Outside Shareholders.It may be reasonable for the Government toprovide Tax Credit, Financial Support, CorporateControl Protection, and others to encourage Public
Offering.Sometimes coercive measure must be taken.
8/12/2019 2. Securities Markets[1]
http://slidepdf.com/reader/full/2-securities-markets1 31/49
II.6.
Compulsory measures to go public Enactment of special Law Force Companies to gopublic
If violated, no Interest Tax Deductibility, surchargeon Corporate Tax and Individual Income Tax ofShareholders, Restriction on Bank Loans andIssuance of Bonds
Qualified Firms must register and discloseCorporate Information, which encourage soundmanagement.Prerequisite for going pubic
8/12/2019 2. Securities Markets[1]
http://slidepdf.com/reader/full/2-securities-markets1 33/49
II.8. Underwriting
In Korea, when the Primary Market was yetdeveloped, Korea Investment Corporation (1968)was established to promote issuance anddistribution of shares.
Roles of KICunderwriting, trading, market stabilization,
sales agency of stocks owned by the governmentand private corporation, credit analysis
8/12/2019 2. Securities Markets[1]
http://slidepdf.com/reader/full/2-securities-markets1 34/49
II.9. Tax incentives (Korea)
Up to 16.6% lower Corporate Tax Rate
Additional Depreciation / Bad Debt Allowances
Lending restrictions to selected closely held
Companies
8/12/2019 2. Securities Markets[1]
http://slidepdf.com/reader/full/2-securities-markets1 35/49
III.Creating Demand for Securities
8/12/2019 2. Securities Markets[1]
http://slidepdf.com/reader/full/2-securities-markets1 36/49
Some factors
of financially sophisticated individuals withcash to invest
of institutional investors including insurancecompanies, pension and mutual funds
Relative attractiveness of securities to other
investment alternatives
Rules on foreign portfolio investment
8/12/2019 2. Securities Markets[1]
http://slidepdf.com/reader/full/2-securities-markets1 37/49
III.1.
Enhancing Investor Confidence Lack of securities demand :lost confidence, inadequate regulations, few institutionalinvestors
Strong supervision :insider trading issues, stock market manipulations
Exogenous factors :political instability, social culture, education
Endogenous factors :inadequate regulatory environment
8/12/2019 2. Securities Markets[1]
http://slidepdf.com/reader/full/2-securities-markets1 38/49
III.1. Enhancing Investor Confidence
Availability of Corporate Information
Competent securities companies: research on markets andstocks
Information dissemination communication system, researchon microstructure of the market
Mandatory information disclosure rules in the listingrequirements
Accounting and auditing practices: only large blue-chipcompanies may survive
When demand for securities is greater than the supply,issuing firms take the situation granted.
8/12/2019 2. Securities Markets[1]
http://slidepdf.com/reader/full/2-securities-markets1 39/49
III.4.
Proper regulation
Deregulating in areas that inhibit operation ofan efficient market
Strong regulation and supervision in areas thatprotect shareholders
8/12/2019 2. Securities Markets[1]
http://slidepdf.com/reader/full/2-securities-markets1 40/49
III.5. Institutional investors
Mutual funds, pension funds, universityendowments, insurance companies
In emerging markets, institutional investors play
a small role whereas it is contrary in developedmarkets. It could be due to investment restriction.Nevertheless, they play an important role asliquidity providers
8/12/2019 2. Securities Markets[1]
http://slidepdf.com/reader/full/2-securities-markets1 41/49
III.6.
Institutional investors (cont’d)
Positive functions
Supplying long-term funds
Stabilizing the market during turmoil
Investment vehicle for small investors
Country funds attract overseas funds
Educated and knowledgeable investors force the marketefficient
Monitoring listed companies as influential investors
8/12/2019 2. Securities Markets[1]
http://slidepdf.com/reader/full/2-securities-markets1 42/49
III.6.
Institutional investors(cont’d)
Negative functions
Enormous power to move the market
Dry up liquidity if stocks were held for a long time
Incentive for government to intervene in management tomove the market
8/12/2019 2. Securities Markets[1]
http://slidepdf.com/reader/full/2-securities-markets1 43/49
III.6.
Institutional investors
Popularize
Who can be called institutional investors
Minimize restrictions
Tax exemption on dividend income
8/12/2019 2. Securities Markets[1]
http://slidepdf.com/reader/full/2-securities-markets1 44/49
III.7.
Retail Investors
Despite of their small ownership in the market, veryactive in trading
Introducing securities savings: preferential treatment(tax deduction, guaranteed return rates) for smallinvestors who fall under certain criteria
Wealth building tool for low income people Accumulating industrial funds Enlarging the investor base
8/12/2019 2. Securities Markets[1]
http://slidepdf.com/reader/full/2-securities-markets1 45/49
III.7.Retail Investors
(cont’d) Introducing Employee Share Ownership Plan (ESOP)
As employee shareholders, companies become more stable in
their operations and deter any hostile takeover threatsCompanies allow partial payment or provide loans for stock
purchase
Preferential tax treatment
In Korea, the tax rates vary; minority versus majorityshareholders or dividend-paying corporations is listed orunlisted.
No capital gains taxes on listed securities but not unlisted
securities
8/12/2019 2. Securities Markets[1]
http://slidepdf.com/reader/full/2-securities-markets1 46/49
III.7.Retail Investors
Margin transaction
In Korea, until 1996 it was restricted by the SEC because ofits speculative nature.
Types of securities credit in Korea: by securities companiesto investors for margin trading, by the Korea Securities FinanceCorporation to underwriting companies, securities collateralloans by securities trust company
8/12/2019 2. Securities Markets[1]
http://slidepdf.com/reader/full/2-securities-markets1 47/49
III.8.Foreign investors
From investable fund surplus market to deficitmarket either directly or indirectly
Their contributions: additional resources, modernmanagement know-how and technology,improvement in the market efficiency and servicequalities
Factors attracting: consistent and predictableregulatory environment, deregulated capital market,width and depth of the market, fit with the globalmarket
8/12/2019 2. Securities Markets[1]
http://slidepdf.com/reader/full/2-securities-markets1 48/49
III.8.Foreign investors
Factors to be concerned about: repatriation ofinvestment proceeds, voting rights, trading hours,tax consequences
Adverse factors: low EPS, high inflation, uncertainexchange rates, unreliable macroeconomic policiesand inconsistent regulatory changes, political
uncertainty