Capital market is like an investment funds such as bonds, equities and mortgages are traded in the market. Then, capital market can be defined as a market of securities or equities or debt, where a company as well as government can raise a long-term fund. The market of money is provided longer than a year. If it is the raising of short term funds, then it will be taking place on other markets that is money market.
In this assignment, we are given the title of Asian Market Capital. There are many countries of Asian, so we have chosen few countries to further details on it. There countries include Japan, Indonesia as well as Hong Kong.
Among the countries, we have gone further deeper on the country from Japan about their background as well as history. We would further search for the information on the market capital happen in Japan. Moreover, we going to compare the different investor will be having in market capital field. In addition, we will be discussing the advantages and disadvantages of going initial public offering for a firm. The example and details of cases will be further explained in this assignment.
In this assignment, we will be discussing about the Asian’s capital market. Among the countries, we choose to go in deep about the capital market in Japan. In Japan, the Japanese venture capital funds managers always to select either direct managerial monitoring or portfolio diversification to manage their firm’s investment risks (Gorman and Sahlam, 1989). However, in recent years of 2004, JVCs have used a mix of different strategies, including direct managerial monitoring. This change in industry practice provides an opportunity to test the applicability of agency theory in the JVC industry.
There will be some background history about market capital happened in Japan in the past years.
The graph above shown that the increase of land in Japan has affected the stock price. The price of the land goes to the peak in the year of 1991. However, the peak area for the stock’s price is in the year between 1989 and 1990. Moreover, the both prices started to fell when the year of 2000, and it is affected to both prices of land as well as stocks.
This shown that the total loan outstanding and real estate loans outstanding held by all Japanese banks in year 1980 to 2000. From the year 1980 to 1990, the both total of loans and real estate loans increased substantially. When the total loans levelled off in year 1990, the real estate loans is continued to increase until the year 1998.
Furthermore, there were a happened that Japan faced problem in the year of 1998 that bank failure resulted from excessive real estate lending. For example, the company of Nippon Credit Bank, there were only 25% real estate loan comprised up of the total loans, and it was failed in 1998.( Kentaro Iwatsubo, 2005)
There are many countries in Asian, and in this assignment we have choose few countries as comparison. That is Japan, Indonesia, Hong Kong and Vietnam about their country’s capital market.
The business firms from Japan have relationships with commercial main banks. The main banks may hold the equity interests in their credit clients in turn, including investment banks. We study the impact of the relationships between firms, main banks as well as investment banks in Japan’s initial public offering (IPO) underwriting market. By issuing firms can choose whether to engage an investment bank that is related, by virtue of sharing the same main bank, or to engage a non-related investment bank. There are one of the literature concerns on the effects of banking relationships on access to credit and the cost of raising capital.
First, the banking relationships and access to credit according to Stiglitz and Weiss (1981) observe that market frictions related information asymmetry can restrict the flow of the capital to investments. However, Petersen and Rajan (1994) hypothesize that by producing information about firms and using the information in their decisions can be partially solving the problem of market friction to the creditors. There are small effect on the cost of credit if ties with creditors, but the available of credits financing is more for firms with ties.
Secondly, there are the concerns about commercial bank integration into investment banking. Based on Rajan (1992) models the borrower’s choice between informed bank debt and arms length public debt as an aspect of the firm’s effort to offset the benefits of the related lender’s ongoing monitoring against the lender’s bargaining power. If banking relationships yield information advantages, then integration of commercial banking and investment banking may enhance a lender’s bargaining power. In addition, a lender that is integrated is faced with a conflict of interest, in that the proceeds of capital market financing may be used inappropriately to extinguish risky bank debt.
Thirdly, the concern about choice of organizational structure. It is given the tension between information cost savings and conflict of interest, the structure of banking organizations can be expected to reflect efforts to realize information cost savings while lessen the conflicts. From Kroszner and Rajan (1997), he use pre-Glass-Steagall data to investigate that how integration affects issue of quality and pricing. They have concluded that market pressures induced commercial bank to address conflicts by choosing levels of integration into investment banking that’s is separately incorporated affiliates versus integrated investment banking departments.
According to Fisman, (2001), the valuable resources for many firms are political connections, however, the connections impact firms’ strategies and their long-run financial performance are only a handful of studies that document (Faccio, 2002; Johnson and Mitton, 2003). The study shows that the consequences of political ties are a particular interest because these ties are often inconsistent with other value-creating business strategies. By taking the benefit at face value, it is difficult to understand why only a minority of companies access foreign capital markets. Domestic opportunities significantly reduce the net benefits of foreign securities for some firms are a core idea. ‘For instance, the firm with political ties often receive low price loan from state-owned banks (Faccio, 2002; Wiwattanakantang et al., 2006), ‘so they do not need to tap into foreign capital markets. It is also possible that global financing imposes extra costs on closely connected firms because the decision to cross-list shares on foreign exchanges often forces firms to adapt to the regulations that govern these markets’ (Coffee, 2002; Reese and Weisbach, 2002; Siegel, 2005). If only minority of shareholders are better protected abroad, then the foreign securities issue will becoming expensive for controlling owners accustomed to exploiting domestic investors. Equally, the international business press and foreign analysts will only pay attention on the firms with foreign securities (Baker et al., 2002; Lang et al., 2003). However, the political favours that often dubious legality is difficult to be reconciled by the high levels of public scrutiny.
Steen, P. Carey (2006) said that ‘the relationship between ‘hot’ issues markets and under pricing is well documented in IPO literature.’ ‘Hot issues markets are characterized by a large number of offerings, concentration of new issues in particular industries, preponderance of smaller issues, frequent over subscription and abnormally high initial returns’, Ibbotson and Jaffe (1975).
Steen, P. Carey (2006) wrote that Hong Kong IPO market given the size and importance of Hong Kong Stock Exchange (HKSE). That is Hong Kong Stock Exchange Market play an important role in the economy in Hong Kong. We can see Hong Kong economy by viewing it stock exchange market; by this we can also know the capital of the country. Several market conditions have been considered in the context of examining initial under pricing within the papers that have been written. Dawson and Hiraki (1985) in their research of the Hong Kong IPO market between 1979 and 1984 note that under pricing appeared to be superior during growing markets than declining markets. Steen. P. Carey (2006) state that ‘their study predates the unification of the four Hong Kong stock exchanges in April 1986 into one central exchange (HKSE).’ McGuinness (1992), find out that the Hong Kong IPO market from year 1980 to 1986 that reports under pricing was completely linked with the state of market giving support to the suggestion of Beatty and Ritter (1986) that under pricing increases during the raising market period and decreases during the diminishing markets.
In the stage of under assessment, ‘Asian financial markets suffered one of the most severe and protected reversals of the post war period.’ Steen, P. Carey (2006). The collision of market situation on IPO under pricing was likely moderated in Hong Kong by the fundamental stability and formation of financial system. Miller (1998 p.277) said that ‘Hong Kong was able to avoid devaluation because it has a monetary and foreign exchange system that is fundamentally different from that of the rest of Southeast Asia’. Hong Kong has a exchange board but no central bank, and as Miller show that the resident of Hong Kong have the confidence in the exchange board. An additional resource of potency is that the financial stability and transparency of Hong Kong companies had extensively privileged interest coverage and return on equity than those in other Asian countries. Jaggi (1997) also found out that the performance and strength of Hong Kong companies is consistent because the company used the company information to monitor it.
In year 1997 there is a financial crisis occurred in Hong Kong when Hong Kong is beyond dispute. Chowdry and Goyal (2000) propose that the characteristic to define a country that experiences financial crisis will face a huge falling in its traded equity prices. In general, research investigating the impact of market condition on IPO underpricing has a well defined event which is recognized with the conversion from ‘hot’ to ‘cold’. Steen, P. Carey (2006), found out that ‘the year 1997 provides a unique measurement challenge as two significant events affected Hong Kong in that year; the 27 October stock market correction and the political return of Hong Kong to Chinese rule on June 30.’ When the Hong Kong is tender to Chinese, this historical event has a huge impact on Hong Kong Stock Exchange. The political handover was an exclusive event and many people celebrate for it, it was connected with a period of hesitation and was followed soon after by the October 27 stock market correction. This uncertainty happens because the investor is unsure about the post handover economic and monetary performance of Hong Kong.
In capital market, there will be variety of investors for a company or firms who are wanted to expand their business. Moreover, there are some of the firms who need the investors not because to expand their business, but also to support their businesses start up.
Individual investors who buy equity in small private firms are called angel investors. Mostly, the first round of outside private equity financing is often obtained from angels. These investors included friends or acquaintances of the entrepreneur. The business receives a sizeable equity share for their funds because their capital investment is often large relative to the amount of capital already in place at the firm. Thus, these investors may have substantial influence in the business decisions of the firm. Besides that, angels may also bring expertise to firm that the entrepreneur lacks. There is a difficulty on finding angels since it is a function how well a firm connected the entrepreneur is in the local community.
Venture Capital Firms
Venture capital is a limited partnership specializes in raising money to invest in the private equity of young firms. Moreover, venture capitalist is defined as a person or investment firms that makes venture investment. Besides that, they are also expected to bring managerial and technical expertise and capital to their investment. Furthermore, venture capital is fascinated to the fresh company with the limited operating history which is too small to raise capital to the public market. This is because they are yet to reach the levels that are able to secure a bank loan as well as debt offering.
The differentiation between Angel Investor and Venture Capital
There are different between angel investor and venture capital. Angel investors are always the provider of risk capital to the small or private firms. In addition, the providers are not from the intermediary of other company, but they are wealth people. Moreover, angels are always as the second round of financing start-up goes through, before the firm looks for venture capital partnership, but it is after they has exhausted of all their family and friends’ money. On the other hand, venture capital is the investors who invest their capital to a firm as part of the company’s partners. So, the company will be the part of the partnership, and they are allowed to vote and make decision. Then, angels investors are only waiting for the return earns from company to them, and they are never go learn deeper to the company. Furthermore, they are not vote or make decision as part of the firm they had invested. However, the venture investors will be planning and finding the way on how much their investment will earn them the amount of returns.
Initial Public Offering (IPO)
IPO is an acronym for Initial Public Offering. An IPO is the first sale of shares in a company to the public. When IPO occurs, a company will be listed in Bursa Malaysia, and shares will begin to trade immediately. The IPO market goes in cycles depending upon the appetite of investors for new issues. Often the share price will increase quickly after an IPO, so purchasing shares at the IPO price may be a coveted investment opportunity. When management says it plans to take a company public, it means that an eventual IPO is planned. A successful IPO can raise a large amount of capital for the newly public company and create substantial wealth for insiders who owned shares prior to the IPO.
The differences between public and private is that public company can offer its stock to the public in huge amount, while private company is restricted to only friends and family members. Going public is important for those company which want to raise their capital. There are some pro and cons for going public.
The Advantages of an Initial Public Offering (IPO)
The public offering increased the company stock and value this is so call increased in capitalization of the business. The stock can be used for various activities for instance: currency for mergers and acquisitions, as stock option to help maintain key personnel, they may also sell their shares in the open market. The company will have the better access to the stock markets for future capital inflow. In general terms, the company’s valuation and debt to equity ratio will perk up after going public. Company is able to receive much better terms from lenders.
The company which going public is easier to promote compare to the company that are private. We can view the achievement of the public company in Bursa Malaysia and thus it had a higher recognition than private company. This benefit raises the public relation images and identifies the stability of a public company.
IPO can provide the company with a chance to implement share options schemes for its workforce. This scheme is competent to enhance employee morale, maintain the loyalty of staff to company, and catch the attention of first rate employees. In long term, this can raise the employees’ productivity and increase the profitability of a company.
The Disadvantages of an Initial Public Offering (IPO)
For a company which going public need higher reporting requirements, it means further obligations and reporting requirements as public companies have to fulfill the range of regulatory necessities and meet accepted standards of corporate governance. For example, listed companies need an auditor to audit their account and report the financial statement and publish the annual report in the Bursa Malaysia.
As the annual report is going to publish in the Bursa Malaysia annually, the company is said to be losing it privacy. The company needs to disclose the report honestly to the public. They cannot hide any details regarding stock option plans, details of lease agreements, gross profit, net income and its borrowing.
The others disadvantages is when a company go public, they have to offer the shares to the public or in other word which means that the business owners will have to share it ownership with other investor, and shareholders can affect the company operations; they can voice out their opinion and decisions.
As a conclusion, each country has different experience about the economic growth and the capital markets. Every country applies different style, for Hong Kong they do not have central bank and for Japan they have many commercial banks that they call as ‘main bank’. The capital market of the country can be view by the venture capital in the market or the listed company in the stock exchange market. The listed company in the stock exchange market show that the investment of the public to the achievement of the capital market in the country. It reveals how much wealth the country has and how good was the economics of the country.