A Third Leg In The Strategy Tripod Commerce Essay

A Third Leg In The Strategy Tripod Commerce Essay In recent times strategy has become a major and significant part of international businesses (IB). A strategy is there to help the organisation to achieve its objectives and goals. There are various factors in the industry that multinationals can take to make investment decisions, nevertheless in the international business environment, it has been dominated by both industry and resource base views. A resource base view lies within the company and not on the outside, it also tells us how the company or organisation will deliver a sustainable competitive advantage and how these resources will be controlled and managed in a way that its end results cant be copied by its competitors and would create a competitive barrier and generate a competitive advantage at a sustainable level Porter 1980).An industry base view is based on a clear understanding of the organisations competitive and economic structure, the challenge here is to position the company in a way that it could gain a bigger po rtion of the profits in the market that the company is operating in and even with new entrants coming into the market place , the organisation should turn its core competencies in an advantage. According to the journal the authors (M.W.Peng, D.Y.L. Wang and Y. Jiang) state that the view of international business strategy emerged through and institution base. They also state that this one of the legs that support and uphold the tripod strategy, and the other two part of the tripod strategy is based on a resource base view and an industry base view. In the journal the authors did a review of four distinct characteristic s or qualities of important research , these four characteristics are :(1)antidumping as entry barriers;(2)competing in and out of India;(3)growing the firm in China and the fourth being governing the corporation in emerging economies. According to the authors they state that there were questions confronting the international business raised by (Peng 2004a), where he identified emerging nations in Asia to indicate a realistic and intermediate phase during the early and late stages of institution transitions. In the article the authors stats two arguments that is based on network strengths and network content. To determine strategy and performance the authors cite (Porters 1980) competitive strategy, which a frame works for industry analysis (Porters Five Force analysis). A third leg in the strategy tripod In the third leg of the strategy tripod the authors state that the industry-base view is rooted in a way the MNEs strategy is based on certain conditions within the nature of the industry that the company has a focus on. They (authors) also state that with a resource based view IB concentrate more internally that externally, as most of the value lies within the organisation. With both industry and resource-based views, it still brings up questions to investment locations. In the tripod strategy the authors cite (Scot 1995:33) where he define institutions as concrete structures , e.g. buildings and as human capital , including political and social aspects which they state , e.g.corruption,economic liberations and ethical norms , these are a few examples from the article that also affect the stability of markets that MNEs operate in. Research by (Lawrence Lorsch , 1969) clearly shows that the dominate part of research is a task environment view , where economic variables were looked at and what the market demand are and a change in technology.(Peng 2008) states that shaping strategies and performance have an impact on both formal and informal institutions. Antidumping as entry barriers Peng citing (Porter 1980) states one of the five forces that govern competitiveness within an industry is entry barriers. Within the IB environment entry barriers give rise to a new term known as liability of foreignness. Dumping is legally defined as an exporter selling goods below price abroad. Mexico is an active user of anti-dumping policy and they have initiated investigations against China. Anti-dumping is a contingent protection and is permitted by the WTO, the law is there to protect market price and minimum pricing protection is inconsistent with regards to anti-dumping legislation. The law was primarily used by four nations, USA, EU, Canada and Australia. During the period 1995-2000 South Africa had 173 anti-dumping investigations and 113 anti-dumping measures imposed, compared to USA with 354 and 219 and India with 400 and 302. In Australia, Customs is responsible for anti-dumping and the Department of Commercial Defence in Brazil and discrimination is also evident, whereb y cases are filled by local companies. Competing in and out of India (Dacin, Goodstein Scot, 2002) state that institutional logic is what shapes a companys strategy. Peng cites (Kapur Ramaurti, 2001) that Indian and non-Indian company strategies are affected by politics, societal and legal changes, also documented in the article is the rise of Indias information technology (IT) and there emergence as the 2nd largest player in the IT field behind the USA. The reason for the growth in India is due to government investing in higher education. Since 1991 India made major changes to its legal and regulatory reforms and this has liberalized the economy and made it a competitive market for IBs. Indian companies abroad are having issues with the local or host countries, where the western countries are passing laws to protect jobs and a ban on contracts to the Indian companies.(Lewin Peeters 2006) state that a lot of MNEs have invested in India because of the quality of work and the value created by the IT industry .MNEs that invested in India are Cisco , I BM , SAP and GE to mention a few , these MNEs also tap into the talent pool and with the arrival of so many MNEs in India , it has forced the local IT companies to be more competitive. Growing the firm in China Chinas growth started in 1978, it embarked on economic reform and prior to that everything was state controlled. The government liberalised foreign investment and trade and relaxed on prices. They invested by educating their workforce and industrial production. IMF research shows increase worker efficiencies are the major factors behind the growing economy, together with new factories , machinery for manufacturing and communications. (Peng Heath , 1996 ) did research that shows the local managers in China and the interpersonal networks has helped informal substitutes and has translated micro into macro , thus linking alliances to grow the company. According to (North, 1990) strategic choices are formed through networks of formal and informal structures, where he states the weakness come from formal institutions and informal institutions with governing relations play a bigger role in organisation strategies and performance. Governing the Corporate in Emerging Economies According to (Jensen Meckling 1976) the system used to govern developed economies is known as the Anglo-America system, they also state that conflicts by both the shareholder and managers are the key conflict issues.(Morck,2000:11)states that concentrated ownership is how most companies throughout the world is controlled. In emerging nations the authors raise issues where key conflicts are based on two principles and this is controlling and minority shareholders. Emerging nations that do not understand the nature of conflict policies in corporate governance becomes disastrous and irrelevant. In South Africa which is an emerging nation, directors are appointed from outside to assist the company in improving its performance. , e.g. Pick n Pay a south African company employed its CEO from the UK (Tesco) , Pick n Pay is a family owned company (90%) with a smaller interest from outside shareholders. IB in emerging economies have to focus on various things other than the companies capabilities and the nature of the business .IBs have to focus on the political aspect , as well as cultural and language. In South Africa they have to understand the countrys diverse race groups, religions and languages as the country has eleven official languages, as for China MNEs are operating on their door step via Hong Kong and with India now a leader in the IT field, the west must work together with both China and India so that capitalise on their resources. Industry-base view and resource-based view are there to maintain a tripod strategy, thus giving the opportunity to IBs to invest in foreign countries and to gain market share

The Natural Cycle of Humanity and the Decay of Modern Society in The Wasteland

There is no romance, no passion, only a mundane circular sequence of events, â€Å"crowds of people, walking round in a ring† (56). In The Wasteland, by T. S. Eliot, the society of the twentieth century is described as detached, dreary and monotonous. It is a collection of dysfunctional relationships and tedious tasks, saturated with an anxiety about death. There is a parallel between the atrophy of society and the land destroyed during the Second World War. To escape a routine and apathetic existence, humans strive for the unattainable, to overcome the limits of humanity. However any departure from the natural cycle of the human world leads to the emergence of the wasteland. Although death haunts the speakers in the poem, it is liberation in comparison to the horror of the wasteland. There is persistent angst and fear of death in the poem, yet death is everywhere. The many speakers in the poem wish for immortality and to overcome the confines of humanity. In â€Å"The Burial of the Dead† the woman, anxious about her fate, goes to see the fortune-teller, Madame Sosostris, who pulls out the â€Å"Hanged Man† tarot card and warns her to â€Å"fear death by water† (55). The fortune-teller's words reoccur later in â€Å"Death by Water†, a description of the grotesque death of â€Å"Phlebas the Phoenician. † His death, symbolized by â€Å"the whirlpool,† confirms that there is no regeneration; there is no return from â€Å"the whirlpool. † The realization of the fortune implies that fate cannot be defeated. In â€Å"What the Thunder Said† Eliot again states that there is no escape from death: â€Å"He who was living in now dead/ We who are living are now dying† (328-329). In â€Å"The Burial of the Dead† the speaker desires to abandon memories, he describes spring as cruel; it causes sorrowful memories to resurface, while â€Å"winter kept us warm/ covering Earth in forgetful snow† (5-6). What he does not realize is that human existence is a collection of fragments that distinct memories in an ongoing cycle, illustrated in the first stanza of â€Å"The Burial of the Dead. † Abandonment of memories leads to a futile existence. The wasteland first appears in the second stanza of â€Å"The Burial of the Dead† contrasting the first stanza, which is full of life and memories. The narrator is separated from the natural course of existence and is addressing a person of the human world, â€Å"Son of man (†¦ ) for you only know a heap of broken images† (20-23). The listener is part of the human cycle, he is still part of time: â€Å"Your shadow at morning striding behind you/ Or your shadow rising to meet you† (28-29). He does not understand the true fear that comes once time ceases to exist the way the speaker does: â€Å"I will show you fear in a handful of dust† (30). The speaker has disconnected from society and drifted into the wasteland, suggested by Eliot's diction: â€Å"stony rubbish†, â€Å"dead tree†, â€Å"dry stone†, â€Å"dust†. Only there has he discovered the true meaning of fear; an unearthly abyss. The wasteland is a situation or a place more terrifying than human imagination can conceive. It is complete emptiness, devoid of the structures of person, place and time. Without time memories become meaningless repetitions and cease to exist. The epigram at the beginning of the poem introduces the immortal character Sibyl. Sybil is detached from the rest of the world by her cursed immortality and lives withering away and shriveled up, longing for death, the only escape from her suffering. The other immortal character in the poem, Tiresias, is â€Å"blind, throbbing between two lives† (line 218), also alienated from the human world, not only by his immortality but also because he is a hermaphrodite. Sybil and Tiresias's separation from the sequence of life compel them to lead a miserable existence. The voices of these immortal characters portray how only once immortality is experienced can death become a salvation, a place of peace. The modern relationships that Eliot portrays are devoid of love, companionship and desire. The theme â€Å"when love fails, a wasteland develops† is recurring throughout the poem. The author constantly alludes to the legend of the Fisher King. In the legend, The Fisher King was hurt and became impotent and ill, disabling him to care for his kingdom. He was left alone to lead a meaningless life, fishing. Without his love the land deteriorated, lost its fertility and perished into the wasteland. Similarly, in the modern society, alienation from the natural world and a depletion of love leads to decay. The woman in â€Å"A Game of Chess† attempts to speak to her significant other, distressed about their relationship. She pleads with him to stay with her, to speak to her and to share his thoughts with her (111-113). He is detached, remaining silent and thinking only of death. The man has separated from humanity while the woman remains part of the cyclical existence. The couple remains together yet their relationship has become a wasteland; there is nothing between them. In â€Å"A Game of Chess†, Lil and Albert's relationship is presented though a conversation in a pub. Lil is revolting to Albert, he tells her that he cannot even bare to look at her (144). Lil's body is disintegrating, a consequence of the pills, given to her by the pharmacist, that she took to induce an abortion. They caused her to drastically age and lose her teeth. Lil's desire to not have children is portrayed as unnatural, â€Å"What you get married for it you don't want children? † (164). Lil's actions lead to her body becoming a wasteland. The encounter between the banker and the typist in â€Å"The Fire Sermon† again manifests the absence of love. Their meeting is solely sexual and devoid of any feelings. Even the sex holds no pleasure and is non-reproductive. The woman is indifferent to their relations and upon his departure thinks: â€Å"Well now that's over: and I'm glad it's over† (252), as if she had completed another chore. These series of affairs reflect the atmosphere of the society, the lack of intimacy and the disconnection of human relations. The wasteland is a consequence of the failure to care, to love, to give birth and to partake in the cycle. T. S Eliot creates a parallel between the wretched land of the Fisher King and the slaughter, destruction and ruin created by World War II. The barren landscape left by World War II reflects the inner decay of humanity the same way the sterile land of the Fisher King is an outward projection of his inner sickness. The desolate landscape of the wasteland described in the beginning of the poem, returns along with the character of the Fisher King. Eliot describes the miserable condition of the wasteland, sterile, dry and unbearable. He creates a surreal image of a desert â€Å"mountains of rock without water†, â€Å"endless plains†, â€Å"cracked earth† (370), and â€Å"bats with baby faces in the violet light† (380). This place transforms into the barren kingdom of the Fisher King, suggested by â€Å"the empty chapel†, which is an allusion to the Chapel Perilous. In the legend of the Holy Grail, Parsifal found the Holy Grail in the Chapel Perilous and life returned to the land. However, in the empty chapel in the poem there are only â€Å"dry bones†, signifying that vitality will not return to the land like it does in the legend. Instead society continues to decay illustrated in the line â€Å"London Bridge is falling down† (427). In reality there is no Holy Grail, there is no change: â€Å"I sat upon the shore/ Fishing with the arid plain behind me† (424-425). The banal, circular sequence of human life continues. Eliot explores the themes of life, death, immortality and alienation throughout The Wasteland. These themes are examined in various historical contexts, from ancient myths to the modern society and tied together by the immortal characters, Sibyl and Tiresias. Disconnected by the varying historical context and the many narrators, T. S. Eliot's style of writing in The Wasteland mirrors the disintegrated moments that give meaning to human life. Human life is cyclical, routine and mundane with memories as the only specks of color on an otherwise gray canvas. Death is not an ending; it is only part of the cycle. Immortality, the desire to forget and deprivation of emotion and of love are unnatural and create a partition from the human world where the wasteland appears. Modern Society consists of failed relationships and hollow humans existing in the â€Å"Unreal City. † Its loss of fertility and love results in the emergence of a wasteland.

Text Response the Catcher in the Rye - 1379 Words

Text Response: The Catcher in the Rye The novel, The Catcher in he Rye, written by J.D. Salinger was set in the late 1940 - early 1950s in New York. This novel explores the themes of loneliness, relationships and deception though the use of literary devices. Many symbols are used to enhance our understanding of the novel; such as Holden Caulfield s red hunting hat, the museum of Natural History, the ducks in Central Park Lagoon and the carousel. The author gives us an insight into the life of a young teenager facing physical and emotional exhaustion. He struggles to understand and connect to the society. he uses self deception to view society as phoney : fake and not genuine. The author has achieved the purpose of this novel. The†¦show more content†¦This creates a comparison between Holden and the novel. The novel is unpredictable and messy, completely opposite to Holden s idealised world/imagination; simple and understandable. Furthermore, the theme of this novel relies strongly on character development. The three themes of the novel: the painfulness of growing up, alienation as a form of self defence and the phoniness of adulthood are all based on the main character, Holden. Throughout the novel, Holden seems to isolate himself from the world. As he says to Mr Spencer, he feels trapped on the other side of life , and he constantly attempts to fit in as well as protecting himself from maturity. As the novel progresses, we began to realise that Holden s alienation is his way of protecting himself. Just as he wears his red hunting hat as a sign of individuality, he uses isolation as a proof that he is better than everyone else around him. He never describes his own emotions directly, and never attempts to discover the source of his pain, which shows he desperately needs love and companion. This painfulness of growing up is another theme of The Catcher in the Rye that helps our understanding of the novel. Holden is growing into adulthood, yet, he resists it. He fears change and complexity and wants everything to be simple and predictable; just like childhood. He rejects his fears and creates an idea that adulthood is superficial and phoney. As theShow MoreRelatedThe Catcher in the Rye Essay1442 Words   |  6 PagesThis paper proposes to delineate the characteristics of Holden Caulfield, the adolescent protagonist hero of J.D. Salinger’s The Catcher in the Rye and illu minate the reasons as to why this prototype of brooding adolescence, displaying a rather uber-cool style of disaffection, disenchantment and disillusionment became an indispensable figure of interest, in literary circles as well as popular culture. The paper seeks to take issue with the wider dimensions attached to the ‘incapacitation and debilitation’Read MoreAnalysis Of Salinger s The Catcher Rye 1074 Words   |  5 PagesJournal Responses Salinger’s The Catcher in the Rye has been pronounced a literary classic for its atypical portrayal of adolescence, to effectively convey the protagonist’s alienation and confusion. The introduction of The Catcher in the Rye is underpinned by disorder and confusion through a stream-of-consciousness narration, which digresses from one subject to another. Consequently, Holden’s multitudinous thoughts and feelings appear to lack a cohesive pattern. Additionally, Holden’s prevalentRead More J.D. Salinger’s The Catcher in the Rye1435 Words   |  6 PagesThis paper proposes to delineate the characteristics of Holden Caulfield, the adolescent protagonist hero of J.D. Salinger’s The Catcher in the Rye and illuminate the reasons as to why this prototype of brooding adolescence, displaying a rather uber-cool style of disaffection, disenchantment and disillusionment became an indispensable figure of interest, in literary circles as well as popular cul ture. The paper seeks to take issue with the wider dimensions attached to the ‘incapacitation and debilitation’Read More Definition Of Modernism In Fiction Essay622 Words   |  3 Pagesin such texts as Go Tell It On The Mountain, by James Baldwin, Miss Lonelyhearts, by Nathanael West and The Catcher in the Rye, by J.D. Salinger. This is a revision from the previous focal point of exterior events and places in correlation with the character’s reflections. Emphasis is placed on review upon feelings and thoughts, and even conversations with oneself, as opposed to the more directly event-driven reflections in texts of the pre-modernist era. This is not to say that texts of the modernistRead MoreThemes Of The Catcher Rye And On The Sun Also Rises 1780 Words   |  8 PagesThe motifs and themes presented in both The Catcher in the Rye, and in The Sun Also Rises, present fascinating resemblances and differences in the psychological condition of the characters, loneliness and the search for a meaningful companionship after experiencing a loss of a loved one are thoroughly addressed in both books. The desires for fulfillment drive the characters into dangerous psychological states which they try to make up for with excessiveness in the form of alcohol use and promiscuousRead MoreAnalysis Of Salinger s The Catcher Rye 3756 Words   |  16 PagesSummer Reading-TASIS 2014 Rising 9th Grade Mainstream English The Catcher in the Rye by J.D. Salinger and Fahrenheit 541 by Ray Bradbury Please write a typed or handwritten response (200 words each in the language relevant to your course) to each of the following prompts on each of the works assigned for the course(s) you will be taking in 2014-2015: The Catcher in the Rye Initial Understanding: What are your thoughts and questions about the story? You might reflect upon characters, theirRead MoreCharacter Portrayal Of John Caulfield s The Big Day 1911 Words   |  8 Pagesabout his personality or his relationship with his children, but rather focuses the reader on that with which he is truly concerned: money. This prioritization of wealth over family is implied many times throughout the novel. A clear section of the text that clearly demonstrates the issue is regarding Phoebe’s play. When Holden returns home unexpectedly, Phoebe describes the Christmas Pageant in which she will be acting in. Her pride in and excitement for this opportunity is evident in her exaggerationRead More Censorship in the Classroom Essay2774 Words   |  12 PagesAdventures of Huckleberry Finn by Mark Twain The Adventures of Tom Sawyer by Mark Twain My House by Nikki Giovanni    Written by a Russian: Crime and Punishment by Dostoevsky    Rebellion to Parental Authority: The Catcher in the Rye by J.D. Salinger A Day No Pigs Would Die by Robert Peck SEX In general: The New Teenage Body Book by Kathy McCoy and Charles Wibbelsman Our Bodies Ourselves Edited by the Boston Womens Health Collective    ExplicitRead MoreRealism in 21st Century2776 Words   |  12 Pagesfor weeks for the response. But now we communicate with each other through emails and text messages in a fraction of seconds. Now younger generations have forgotten how to write and spell a complete sentence due to rapid increase in text messaging. Teenagers are totally reliant on simple tenses and a limited use of vocabulary, and that to with the help of spell check. At the same time there is also a reduction in a personal face to face communication. Nowadays, people just text message their friendsRead MoreLiterary Theories And Literary Criticism1318 Words   |  6 PagesIt states that literature should be studied and interpreted in context with the author’s history as well as the history of the critic. †¢ Acknowledges that the author’s literature is influenced by his/her situations or surroundings. †¢ The critic’s response is also influenced by his/her surroundings, beliefs, values and prejudices. †¢ Shows how the author’s settings affected their work and how the literary work reflects on the author. †¢ Recognizes current cultural contexts, which helps critic’s to come

Raising Capital Theory and Evidence - Free Essay Example

Sample details Pages: 11 Words: 3254 Downloads: 1 Date added: 2017/09/13 Category Advertising Essay Did you like this example? Introduction New information announcements about security offerings by publicly listed firms can cause one of three reactions in the financial markets: (i) positive, (ii) negative, or (iii) indifferent reactions. These responses are measured in the average two-day common stock price reactions adjusted for general market price changes (abnormal returns) to announcements of public issues of common stock, preferred stock, convertible preferred stock, straight debt and convertible debt. Stock markets react to such news by adjusting the market value of the company either upwards or downwards. to take account of the newly announced information. In 1986, Clifford W. Smith Jr. , took note of some very important patterns about the stock market’s reactions security offerings and explored them through his article entitled Raising Capital: Theory and Evidence. His primary finding was that, on average, announcements either lead to reductions in the market valuations of companies issuing securities or being ‘insignificantly different from zero. Furthermore he noted that there is usually no significant positive reaction to the valuation of a company as a result of a new security offer announcement. His findings also differentiated and drew correlations among the types of security offerings and the intensity of market response. The stock market’s reaction to common stock offers was ‘more strongly negative’ than when preference stock and debt cap ital was issued. As a senior claim to common stock, it could be argued that issuing debt capital communicates information about management’s confidence in the firm to the financial markets. Don’t waste time! Our writers will create an original "Raising Capital Theory and Evidence" essay for you Create order Smith also observed that stock markets react more unfavorably to announcements of issue of convertible loans when compared to issuance of non convertible loans. Given the characteristics of convertible loans, which contain elements of common stock, these negative reactions seemed to fit the general pattern of findings. Once a firm has decided on the type of security to issue it must then take into account the different methods of marketing it. These options include pro-rata issuance to existing stockholders, hiring underwriters to issue securities publicly, or private placement of securities. Against this backdrop, Clifford W. Smith laid out two primary objectives to be addressed in the article: (i) to examine evidence on market response to security offerings by public expectations, and (ii) to evaluate methods of marketing corporate securities. This report draws upon and provides critiques of Smith’s survey of three less credible explanations, (Optimal Capital Structure, Earning Per Share Dilution, and Price Pressures) and three more important explanations for the market reactions to security offerings: (i) Unanticipated Announcements; (ii) Insider Information; and (iii) Ownership Changes. Additionally, the report tracks the evolution of the decision-making process from choice of security, through Smith’s three identified tradeoffs in marketing corporate securities: (i) rights versus underwritten offerings; (ii) negotiated versus competitive bid contracts; and (iii) traditional versus shelf registration. The special case of initial public offerings (IPO) is also evaluated. Finally, the report provides an overall evaluation of Smith’s body of work in relation to present day finance. Survey of Potential Explanations for Market Responses Optimal Capital Structure (OCS) As explained in chapters 15 and 16 of the Financial Management textbook, firms organize their capital to maximize the wealth of the firm, and achieve the lowest weighted average cost of capital. Therefore, in this context the OCS argument puts forth an idea purported by some financial economists that negative market response could be related to investors fear of a new issuance moving a firm’s capital structure away from its optimum. However, this does not align well with evidence that shows a consistently negative response, whereas investors to always bear an unfavorable outlook if the OCS argument alone held true. In effect, this would imply that equity issuance always move the capital structure away from its optimal level which is inaccurate. Earnings Per Share (EPS) Dilution The first commonly cited argument by financial analysts to explain the above-mentioned findings is that negative adjustments to firm valuations occur as a result of equity offerings that cause short-term reductions of earnings per share, as well as a reduction in the return on equity. The argument is based upon the premise that increasing the number of shares will immediately increase the denominator of the EPS calculation (Net Income less preferred stock/Number of shares outstanding). As such, more shares outstanding equals lower earnings per share. The assumption is that investors main objective is to maximize their EPS and automatically will reduce their estimates to any issuance of equity. This would seem at odds with modern finance theory as the goal of shareholders is to maximize share price and not necessarily earnings per share. Particularly in cases where investors are cognizant and approving of the use of funds from an equity issuance (i. e. the capital expenditure program is value creating), then the share price would, if anything, rise. Smith quickly dismisses this theory highlighting that the market is far more sophisticated than the implied mechanical reactions to the increase in the number of shares outstanding. Additionally, there is immense difficulty in isolating causality of reductions in earnings per share as the only reason for negative stock price effects from equity issue announcements. Price Pressures Similar to EPS dilution, the Price Pressure theory is related to announcements of equity or convertible issues. The theory assumes a downward sloping demand curve for shares of any company, therefore requiring discounts in market prices proportional to the size of the issuance. This theory too, however, has many flaws and little empirical evidence. Given the availability of close substitutes Smith argues that the demand curve for corporate securities is more horizontal than downward sloping. Furthermore, Smith cites three separate studies to disprove the theory. Scholes (1972) dissertation found that although prices declined for distribution of large blocks of shares, that the reduction is better explained by the information communicated by the stock issuance than the result of price pressure. Kalay and Shimrat (1986) discovered that bond prices reactions to new equity offers also dropped. This is important because according to the logic of price pressures, bond prices should either remain unaffected or even rise as a result of its senior claim on a firms cash flows. Therefore, price pressures alone could not be the answer. Finally, Linn and Pinegar (1985) found that preferred stock prices did not fall as with announcements, closing the argument that price pressures could provide a sufficient argument. Unanticipated Announcements Timing and/or awareness of announcements weighs heavily on their revisions of firm valuation. According to Smith, the magnitude of stock prices change at an announcement will vary inversely with the degree of predictability of the announcement if other effects are held constant. This is precisely because stock price changes only reflect the unanticipated component of the announcement. In order to maintain a firm within its target capital structure range, debt repayment must be matched with new debt issuance. Similarly, the predictability of earnings will determine the predictability of the new externally obtained equity funds. In general, a new debt issue is likely to be more predictable than a new equity issue because principal repayments are more predictable than earnings. Another reason for the greater predictability of public debt offerings is related to the cost structures of public versus private debt. Flotation costs for publicly placed debt have a larger fixed component and more pronounced economies of scale than bank debt. If potential security holders can observe the amount of bank borrowing and the pattern of public debt issuance, then predictable announcements of public bond issues should have smaller price reactions. Therefore, Smith finds some validity to the unanticipated announcements argument with regard to debt versus equity offerings. Insider Information Financial theory suggests that when managers have a number of financing alternatives and choose equity as the preferred source of funding, this decision is interpreted by the investors as a negative signal regarding the future of the firm. The results show that in general the market reaction to these announcements is significantly negative. The negative announcement effects imply that market participants perceive the decision to issue additional equity as an unfavorable signal about the future prospects of the firm. On the other hand, investors may perceive that management is overconfident about its future profitability and operating performance, and is in fact timing the issuance of its offerings when the market conditions are favorable. In both circumstances there is recognition that managers possess more accurate and relevant information than do outside investors. As such, investors will discount the stock prices of companies issuing new offerings. Smith argues that new security offerings affect investors’ outlook via two primary channels: (i) implied changes in net operating cash flows, and (ii) the leverage change. According to Smith, investors ultimately care about the company’s ability to generate cash flows and therefore will make inferences about the changes in operating cash flows from announcement that do no explicitly link the sources with the use of funds. Funds may be raised either to fund new capital investments or to compensate for a shortfall in cash or operating performance. Following this line of reasoning, the more explicit a firm’s intentions, the better (if pursuing a capital investment). Insofar as leverage is concerned, the market responds remarkably favorable to leverage increasing and the opposite to leverage decreasing transactions. This theory seems intuitive with the evidence given that security offerings with less sensitivity to the firm’s value will be viewed by investors as signs of a positive outlook by management. In sum, Smith finds the insider information theory to have reasonable explanatory power of market reactions. Changes in Ownership Key changes in ownership and control of the firm are also reflected in the observed price reaction. Smith finds that announcements of â€Å"transactions that increase ownership concentration raise share prices, while those that reduce concentration lower share prices†. Therefore, the insider information impact is offset by the positive signals sent to investors. Additionally, on average voluntary organizational restructuring tends to benefit shareholders. For example, he cites Schipper and Smith (1986) examination of firms that sell common stock of a previously wholly owned subsidiary. These ‘equity carve-outs’ are associated with significant positive returns for the ive days around the announcement. There are important control implications of the public sale of a minority interest in a subsidiary. Schipper and Smith also found that 94 percent of the carve-outs adopted incentive compensation plans based on the subsidiary’s stock. The evidence from equity carve-outs is also consistent with the insider information argument. If management expects that the su bsidiary is undervalued, then by segregating the subsidiary’s cash flows and selling separate equity claims, the firm can more effectively capture that gain. Some security sales involve potentially important ownership structure changes, which lends credence to this explanation. Development of Smithsonian findings: From selection to marketing corporate securities Once Smith identified the three main arguments that play a vital role in a firm’s choice of corporate securities, he develops his ideas further by ushering us through the marketing methods decision-making process. To tackle this second objective Smith outlines the alternative methods. The firm can offer securities on a pro rata basis to its own stockholders through a rights offering; it can hire an underwriter to offer the securities for sale to the public; or it can opt for private placement. Hiring an underwriter would require negotiations between the firm and the underwriter on the terms of the offering. Conversely, the firm could choose to structure the offering internally and tender it for competitive bidding. The underwriting contract can be a firm commitment or a best efforts offering. Finally, under its traditional registration procedures the issue would be registered with the Securities and Exchange Commission (SEC), unless it can employ shelf registration in which the firm registers all securities it intends to sell over a period of two years. Rights versus Underwritten offerings Particularly given the issues identified with insider information it should be less of a surprise that 80% of equity offerings employ underwriters despite being 3 to 30 times more expensive than rights offerings. In an underwritten offering the firm sells the issue to a financial intermediary investment bank), which then resells the issue to the public. Therefore, given the information asymmetry between investors and management, Smith rationalized that the performance of due diligence by investment banks and their effective monitoring mechanisms of firms’ activities provide an â€Å"implicit guarantee† to investors when securities are resold. Conversely, in a rights offeri ng, while the stockholder receives a warrant to buy the security, the onus is on the investor to forecast the value of the firm without the backing an insider. Therefore, even though there is a higher cost to the firms to use underwriters, Smith contends that their usage increases the value of the firm by reducing the information gap between management and investors thereby raising the price investors are willing to pay for the security. Negotiated versus Competitive Bid Contracts In similar fashion to the rights vs. underwritten offerings tradeoff, negotiated contracts are used far more frequently than competitive bids despite higher flotation costs. Yet again information disparity plays a key role. Again, investors receive an implicit guarantee of monitoring in the case of negotiated offerings because the â€Å"issuing firm has less control over the terms and financing of the offer† and hence investors are less susceptible to exploitation. Furthermore, the firm also reaps a benefit by having some measure of control over the use of information by investment bankers who place and unsuccessful bid. As such, Smith notes that the majority of firms that use the competitive bidding process are those that are required to do so by law. That being said, he notes that there are occasions in which the competitive bidding process is more valuable. When there is little disparity between the management and the investors‘ perceptions of market value, and/or with senior claims such as debt, the savings achieved through the competitive bidding process can be more pronounced and worthwhile for the firm. This point, however, does not take away from the importance of the insider information theory. Shelf versus Traditional Registration All public security offerings require registration with the SEC. In this tradeoff, both information asymmetry and unanticipated announcements become relevant. Under traditional registration procedures investors can count upon greater assurance of the management’s intentions for the offering as multiple entities (investment bank, audit firm, law firm etc) play a role in the participants in filing. On the other hand, as previously stated, qualifying firms those authorized by Rule 415 with more than $150 million of stock held by investors unaffiliated with the company avail themselves of shelf registration. This means that the firms can register the dollar amount of securities they anticipate will be sold over the coming two years and issue them at management’s discretion. Therefore, Smith anticipates that stock price reactions to offerings from shelf registration could be more negative given the flexibility for management to exploit the information gap and the timing of the issuance. As such, he also argues that shelf registration should be more frequently used with senior claims such as debt rather than with equity offerings. Special Case of IPOs Smith acknowledges that the obvious outlier to these dynamics is the case of initial public offerings, in which neither the firm nor the investors has the upper hand in the information game. Uncertainty about the market clearing price of the offering as well as analysis of the market reactions to the initial announcement are unlikely to provide productive recommendations. Therefore, Smith claims that this leads to separate pricing, contractual and management issues. If securities are underpriced then both informed and uniformed investors will submit bids and full subscription is more likely. Conversely, if overpriced the informed investors will not submit bids and the issue will be undersubscribed. Additionally, Smith asserts that the greater the uncertainty about the after-market price of an IPO, the more attractive best efforts contracts are to investors as overpriced offerings would be more likely to cancelled altogether if sales fall short of the contractual minimum. Finally, if a Green Shoe option is included in the contractual arrangement between the firm and the investment bank, Smith affirms that there less likelihood for the investor that the issue would be overpriced since the option would be taken after the investment bank’s due diligence another implicit guarantee. Critical Evaluation There are certain elements that must be reviewed in greater scope given the age of the academic piece. Smith’s findings and recommendations were geared toward, and therefore can only be applied to developed markets. The operating assumption of the paper is that firms have the choice of what instruments to employ when raising capital, which carries latent within it, the opportunity for insider information. However, when a firms financing alternatives are limited, the market participants may not perceive the announcement of a stock offering as a negative signal. In developing economies alternative sources of capital are usually limited, and therefore, analysis of market reaction to stock offering announcements in such economies may yield results different from those in developed economies. In those markets where investors as a whole may not be as informed, sophistication and rational judgments cannot always be assumed. Therefore, further research would need to be carried out to assess stock price reactions to announcements of security offerings in other markets before concluding upon universal applicability. It is also worth mentioning that significant value is generally created by what is on the left side of the balance sheet. In other words, Smith’s research outcomes could have been different if the announcement on the stock market was that of an investment program and not that of a common stock offer announcement. Given that management in many firms may not have understood this subtlety, the average abnormal returns could have shown slightly different readings had the announcements been categorized by left-side or right-side balance sheet. As analyzed throughout the course of this report, Clifford Smith answer the questions of why stock prices of companies announcing new stock and convertible offers systematically experience reductions. Primarily owing to the insider information which management can exploit at the investors’ expense via overvalued equity or convertible offerings, market responses reflect this lack of trust, power and risk exposure by reducing their firm aluation estimates. As such Smith’s argument that firms should be sensitive to investor interpretations of these announcements, and that they clearly state their intentions for the use of funds is critical on both sides of the equation. He has shown that the basis for interaction between the firm and the market is not solely about maximizing the capital raised in each individual offering, but in nurturing trust over the medium to long term. In sum, this body of work is extremely significant to our understanding of how to select, how to price, and how to market corporate securities. References: Avner Kalay and Adam Shimrat, â€Å"Firm Value and Seasoned Equity Issue: Price Pressure, Wealth Redistribution, or Negative Information,† New York University 1986. Clifford W. Smith, â€Å"Alternative Methods for Raising Capital: Rights versus Under-Written Offerings,† Journal of Financial Economics 5 (1973), 273-307. Clifford W. Smith, â€Å"Raising Capital: Theory and Evidence,† Journal of Financial Economics 5 (1986). Katherine Schipper and Abbie Smith, â€Å"A Comparison of Equity Carve-Outs and Seasoned Equity Offerings: Share Price Effects and Corporate Restructuring,† Journal of Financial Economics 15 (1986), pp. 153-186. Scholes, â€Å"Market for Securities: Substitution versus Price Pressure and the Effects of Information on Share Prices,† Journal of Business 45 (1972), 179-211. Scott Lian and J. Michael Pinegar, â€Å"The Effect of Issuing Preferred Stock on Common Stockholder Wealth,† University of Iowa, 1985.