Abstract
The essential advantage of the corporation over other forms of business organization lies in its ability to bring together large amounts of capital. This is especially true of those corporations, which are publicly held or widely held. The small family-held, closely held, or closed corporation has basically the same financial sources as other business forms, i.e., trade credit, the banks, and the resources of family and friends willing to invest in the business. A widely held corporation, although it will also finance through trade creditors and banks, has the additional ability to tap the flow of investment funds available in the security markets, the market for stocks and bonds. The security market, alternately called the investment, financial, or capital market, comprises the group of institutions through which old corporate securities are traded and new issues of securities are floated. These markets have provided a significant part of the capital that has nourished the growth of corporate enterprise. Thus, to understand the birth of new corporations and the growth of established firms, it is necessary to understand the functions of the security markets.
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Notes
- 1.
English practice distinguishes between “public corporations” (basically our widely held corporations) and “private corporations.”
- 2.
AMEX was previously a mutual organization, owned by its members. In December 2002, some 796 companies were traded on the American Stock Exchange.
- 3.
Source: www.nyse.com. Rule 102.01C
- 4.
Quoted from a letter by Leverett Lyon appearing in the Wall Street Journal, March 20, 1955.
- 5.
In a price or market economy, the process of allocation starts when increased demand raises profits or rates of return in a given industry or segment of the economy, or decreased demand lowers profits. However, the security markets are quick to recognize such portents and mark prices up or down accordingly.
- 6.
If net new funds are invested in the secondary markets, some portions of old portfolios—securities—will have been liquidated, turned into cash. Since it is unlikely that all of these funds will be spent on consumption, a large portion must be reinvested in the primary market, i.e., net new securities.
- 7.
If the firm is legally a single proprietorship or partnership, it must, of course, first organize as a corporation before it can sell shares.
- 8.
None of these arrangements need be perpetual. Companies have sold off all or part of their investment in a subsidiary or “spun off” the shares to their own stockholders. In other instances, a parent company has purchased the public’s holding in a subsidiary.
- 9.
Of course, the exemption of issues from federal preregistration, which are under the minimum amount, does not excuse the promoters of such securities (nor, as a matter of fact, the promoters of registered securities) for violations of pertinent state statutes nor from the penalties of the general antifraud provisions of the common law.
- 10.
- 11.
Preemptive rights are not confined to issues of common stock but may be extended to the issue of other types of securities if these are convertible to common stock.
- 12.
In the feverish era of the 1920s, initial margin went as low as 10%.
- 13.
See F.A. Bradford, Money and Banking, Longmans, Green, 1949, p. 800.
- 14.
This authority over financial affairs should not be confused with the rate-regulating function given to the various state Public Utility Commissions and to the Federal Power Commission for interstate business.
- 15.
This act follows many of the provisions suggested by Henry Simon in his pamphlet “A Positive Program for Laissez Faire,” University of Chicago, 1935, reprinted in Economic Policy for a Free Society, University of Chicago Press, 1948.
- 16.
- 17.
SEC Annual Report, 2003, pp. 44–52.
- 18.
- 19.
C. Leuz, “Why Firms go Dark: Causes and Economic Consequences of Voluntary SEC Deregulations,” working paper, The Wharton School, University of Pennsylvania. See also R.E. Verrecchia) and C. Leuz “The Economic Consequences of Increased Disclosure.” Journal of Accounting Research (2000).
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Guerard, J.B., Saxena, A., Gultekin, M. (2021). Capital and New Issue Markets. In: Quantitative Corporate Finance. Springer, Cham. https://doi.org/10.1007/978-3-030-43547-9_7
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