History, as they say, repeats itself. The cyclical nature of the stock market and its corollary markets means that the economy will undeniably face some periods of “highs” and some periods of “lows”. We are currently experiencing a low period in the primary market. This assertion comes in the face of numerous firms tending towards insolvency, individuals increasingly declaring for bankruptcy, plummeting stock prices and a generally unhealthy financial industry. However, initial public offering deals (conversion of private limited liability company to a public limited liability company) seem to pass unnoticed.
In the article, “For IPO’s in August, a Sound Silence” Lynn Cowan talks about the small number of IPO deals that occurred during the month of August 2008. Even though the month of August is a time when a lot of people are on holidays, which will concurrently result to fewer deals being carried out, it is no excuse for the lowest number of deals since data providers started tracking the number and value of IPOs worldwide in 1995. Cross sectional data analysis reveals that August 2008 brought about twenty-five IPO deals worldwide as opposed to twenty-nine in January 1995, thirty-two in January 1998, and thirty-five in August 2003. Although the number of deals may not vary significantly, the monetary value in billions of dollars makes for a substantial difference. The article also talks about the August value of IPOs worldwide summing up to $1.25b, which is an 84.72% drop from the value of August 2007 IPO capital raising. This shows that not only are firms being majorly hit by a huge decline in company value, but raising capital is also a difficult task.
The world experienced an IPO boom for the last few years that provided companies with huge amounts of capital and also an optimistic stock market. With the huge declines in company valuations and one of the worst years of IPOs for companies and investment banks, one may wonder if the IPO bubble has come to an end. I believe it is too early to correctly assess this claim, especially because there has traditionally been an incumbent “recoil” period following periods of economic sluggishness. For instance, after the 9/11 attacks (Sept 9, 2001), the American economy experienced slow growth rates and thousands of layoffs, but was able to regenerate itself fairly well by 2004. I believe certain events such as the presidential election and the encouraging price of oil, will help the economy. It is only a matter of time before the economy experiences some stimulation in the form of investments, purchasing of government bonds and securities, reduction of the required reserve ratio, and positive fiscal and monetary policies. The chairman of the Federal Reserve – Dr. Ben Bernanke – is among those who can help to revitalize the economy. The big question though, is how soon will this be?
Lynn Cowan, “For IPO’s in August, a sound of silence”, Wall Street Journal, September 2, 2008.
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5 comments:
A current problem right now is fear. With all of the economic woes peple are afriad of looseing their money. With that fear people are less willing to invest. This fear is not just assoicated with regular investors but also with companies. They are afraid to put in their capital in such a frightful time. People must realize the best time to invest is when the economy is in a down fall. Once people realize the oppertunties that are out there that can make them money the economy will turn around.
It will be interesting to see if the new policy that may be adopted with the government buying the bad debt from large corporations to try to help the economy will encourage investors as well and maybe get rid of this fear and get things back on track.
I agree with Aaron in that the primary reason for the marked decrease in IPO is that the overall feeling towards IPO's has shifted from optimism to skepticism. The percentage of 84.72% decrease in value of IPO's compared to 2007 is staggering. With the market in its current state, we have seen seemingly stable companies go under, so inventors are weary of putting their money into a new publically traded company. You say that it is only a matter of time before there is some stimulation in the economy; however, we can only wait and see how long that will take.
When the financial crisis was coming, not only the economics itself, but also the forecasts of investors in the markets let things go even worse. Recently, The White House and Congress has apporved the $700 million program, which meant that the bailout from the federal government is on the way. Let's just wait and see what will happen to the economics and people's feeling of the markets.
I am sorry that I made a big mistake in my last comment. Actually, the Congress denied the 700 billion Program just today...That seems terrible...
Let's just wait and see what will happen.
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