By: 1. Kenneth A. Kim
John R. Nofsinger
And
2. A. C. Fernando
Lesson 11
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Last Lecture Review
◦ A BoDs is a body of elected or appointed members
who jointly oversee the activities of a company.
◦ BoDs are appointment at the public Annual General
Meeting of shareholders.
◦ BoDs main primary function is to safeguard the
shareholder’s interest.
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Board Committees
◦ An Executive Committee
◦ A Finance Committee
◦ A Public Relation Committee
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Board Sub Committees
◦ Audit Committee
◦ Compensation Committee
◦ Nomination Committee
◦ More attention on Directors
◦ What is a “Good Board”?
 Experienced members
 Having different back ground i.e. technical as well as
non technical
 Independent board-having fraction of non-insider
directors (difficult to find unambiguously independent
directors)
 Small board
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Good for Goose, good for Gander
◦ One form of board may be/may not be good for
others.
◦ Small board may be/may not be good for others
firms and vice versa.
◦ Can good board lead to better firm performance?
 No positive correlation between the board quality and
firm performances.
 Normally board are reactive, not proactive
 Sometimes inside directors are good for board (e.g.
infant or new firms or when the firm has to make any
huge financial/investment decision) and some times
outside directors (e.g. when audit as well as
compensation matters are required)
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Some potential problems with today's board
◦ Outside Directors relationship with the top
management (e.g. CEO)
◦ Outside directors full motivation is still a question
mark for firm’s board.
◦ Inexperienced as well as busy outside directors are
fruitless for the board
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Lecture Outlines
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What is Investment Bank?
Examples of Investment banks
What does Investment Bank actually do?
What is “Security”?
Who are analysts in Investment Banks?
Duties and responsibilities of “Analysts”.
Methods of issuing stocks and bonds
 Underwriting method
 Best effort method
◦ What is “IPO”?
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Investment Bank
◦ An investment bank is a financial institution that
assists corporations and governments to raise
capital by underwriting and acting as the agent in
the issuance of securities.
 Investment banks also assist companies involved in
mergers and acquisitions.
 Unlike commercial banks and retail banks, investment
banks do not take deposits
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In recent years, however, the lines between
the two types of structures have blurred,
especially as commercial banks have
offered more investment banking services.
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Examples of Investment Banks in Pakistan
◦ Invest Bank Ltd
◦ Islamic Investment Bank
◦ IGI Investment bank
◦ First Credit and Investment Bank (Joint venture of
NBP and WAPDA)
These are some of leading Pakistani investment
banks providing financial management and advisory
services.
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Investment bankers
◦ investigate,
◦ analyze,
◦ research,
◦ underwrite and
◦ distribute
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Security
◦ A security is a negotiable instrument representing
financial value and signifies an ownership interest
in something tangible.
◦ That may be freely bought, sold and transferred.
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Investment banks should;
◦ Sell “good” securities i.e. They should not be selling
securities of a poorly run firm
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Analysts should;
◦ recommend “good” securities i.e. They should not
be recommending stocks that they think will go
down in value.
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Investment banks offers variety of services
but their most notable business is selling
newly-created securities.
When a private firm wants to become a public
firm, it requires an investment bank for two
reasons;
◦ To design and
◦ To sell the new stocks for the investing public to
purchase.
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An existing firm can also take the services of
Investment banks for additional capital growth.
Investment bank is an intermediary to sell
securities on behalf of firms.
Jobs of the analysts are;
◦ To evaluate securities and make recommendations in
buying and selling of securities
◦ To make earning forecasts for the firms as well as the
investors.
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Both investment banks and analysts;
◦ Evaluate the firms position
◦ Bring investment opportunities
◦ Possess better information for the investors
◦ In better position to monitor firms
◦ To identify problems for shareholders.
Investment Banking Activities
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To help companies issue new debt and equities
securities.
Banks advises the company on the optimal
security (stocks, bonds etc) for the amount of
capital being raised, keeping in mind the
company’s situation.
The bank charge the company for this service.
Methods of Issuing Stocks and Bonds
1.
Underwriting
1.
Best Efforts
the bank will guarantee that the company will
receive a specific amount of capital, if not then
bank will compensate and buy the shares.
the bank will not guarantee that the
company will receive a specific amount of
capital but do maximum efforts.
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The fee charge is much lower for the bestefforts methods than for underwriting.
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The process of selling securities to public
investors first involves;
◦ Registering securities with SEC and
◦ Documents
 Preliminary prospectus containing information about
the security issue and
 The company
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Financial condition
Business activities
Management experience
How the fund raised will be used.
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The prospectus and the banker’s “road show”
relay information about the company to
investors.
The “road show” is the marketing campaign
done by bankers to generate interest and to
market the issue.
To sell to individual investors, investment
banks use their brokerage operations.
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The crucial importance of investment banks
arises when the firm is new.
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Investments banks experience greater risk
when underwriting an IPO
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An initial public offering (IPO), referred to
simply as an "offering" or "flotation", is when
a company (called the issuer) issues common
stock or shares to the public for the first
time.
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Summary
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◦
◦
◦
◦
◦
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What is Investment Bank?
Examples of Investment banks
What does Investment Bank actually do?
What is “Security”?
Who are analysts in Investment Banks?
Duties and responsibilities of “Analysts”.
Methods of issuing stocks and bonds
 Underwriting method
 Best effort method
◦ What is “IPO”?