Belangrijke theoretische begrippen

Question 1

What is activist investing?

Answer 1

Activist investing: activist investors rebranded themselves as defenders of shareholder value. Investors can take large stakes if an firm is underperforming, but also (capital allocation, corporate clarity, corporate control or corprorate governance). Activists often utilize options to build their stakes, providing more upside if the market response is positive.

Question 2

Explain the threat of take over (activist investing)

Answer 2

Even without direct shareholder action, the threat of a hostile takeover disciplines managers. If firm is underperforming, it may become a target  fire current management
possibility of being taken over motivates managers to act in shareholders’ interest

Question 3

What is homemade leverage?

Answer 3

Investors can adjust their own risk by borrowing or lending themselves. They don’t need the firm to do it. They can replicate any capital structure on their own. The firm’s choice in debt/equity does not affect investor value in a perfect market.

Question 4

What is dividend smoothing, signalling and share repurchases

Answer 4

Dividend smoothing firms that keep dividend stable and only raise them when earnings growth is seen as sustainable
Dividend signaling dividend increases signal confidence in future earnings, cuts may signal trouble. Cuts could also mean new investment opportunities
Share repurchases signals share are undervalued and reflects management confidence, often leading to positive market reactions

Question 5

What is the definition of enterprise value

Answer 5

Value of the whole business Price which would have to be paid to acquire all enterprise,

Question 6

Name and explain the 4 characteristics of IPO puzzles

Answer 6

There are 4 common characteristics of an IPO puzzle:
1. Underpriced  IPO are often priced below true value, leading to 1st day price pop-up
Reasons are compensating institutional investors for risk, creating positive buzz, managing uncertainty and avoiding legal issues from disappointed investors
2. Cyclicality  IPO activity is highly cyclical. When times are good, the market is flooded with new issues; when times are bad, the number of issues dries up
3. Cost of IPO 
- High direct costs → underwriting fees: 7%
- Indirect costs → money left on the table due to underpricing
4. Long-run performance → on average underperform in the first 3–5 years after IPO
Reasons are: investors over-optimism, manager opportunism, or return to fundamental value

Question 7

What is corporate governance?

Answer 7

The system of controls, regulations, and incentives designed to minimize agency costs between managers and investors and prevent corporate fraud
The role of the corporate governance system is to mitigate the conflict of interest that results from the separation of ownership and control without unduly burdening managers with the risk of the firm