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Financing Best Practice

Best Practice

Internationally renowned finance leaders, experts and educators distil and summarize the most important aspects of finance best practice. Each Best Practice essay has an Executive Summary for quick reference, outlining the main points. The Making It Happen feature illustrates practical applications, and where relevant authors have provided illustrative case studies and definitions.

  • A Silent Revolution Not to Be Silenced: An Overview of the Microfinance Sector and Its Impact in Pakistan
    by Zohra Khan
    Since its establishment in 1947, Pakistan has struggled to achieve long-run economic stability. There are multiple explanations for this that range from regional conflicts and natural calamities to severe failures of governance. Among the latter can be noted corruption, mismanagement of resources, “hypothetical” economic development measures, and lack of good governance generally. However, the concept of access to finance has strengthened,...
  • Acquiring a Secondary Listing, or Cross-Listing
    by Meziane Lasfer
    Cross-listing is controversial and raises a number of academic and practitioner questions, particularly: Why and how does a firm cross-list, and does cross-listing create additional value for existing stockholders? The purpose of this article is to discuss the institutional framework of cross-listing, the classification of depository receipts (DRs), the types of DR available in the United States, the reasons why companies list abroad (by...
  • Assessing Venture Capital Funding for Small and Medium-Sized Enterprises
    by Alain Fayolle, Joseph LiPuma
    Entrepreneurs and SME managers face two key choices when financing their ventures: debt or equity. Debt in the form of personal loans (including credit cards) and bank loans, key sources for most nascent ventures, gives efficient incentives for managers to exert effort and allow entrepreneurs to maintain control. The availability and utility of debt vary significantly with economic conditions, which, in turn, will have an impact on the supply...
  • Attracting Small Investors
    by Wondimu Mekonnen
    A company is financed by various sources, such as short-term borrowings, long-term debt, and owner’s equity—ordinary shares, preference shares, and reserves. Small investors can participate in most of these. A significant portion of funds finds its way into the bond or stock markets through financial institutions that are the repositories of household savings. Therefore, the size of resources available for financing a company’s activities...
  • Credit Ratings
    by David Wyss
    There are three major international rating agencies in the United States: Standard & Poor’s Ratings Services (a unit of The McGraw-Hill Companies), Moody’s Investors Service, and Fitch Ratings (a unit of Fimalac SA). In addition, there are many regional and niche rating agencies that tend to specialize in a geographical region or industry. The major agencies state that their opinions of the credit quality of securities are based on established,...
  • Equity Issues by Listed Companies: Rights Issues and Other Methods
    by Seth Armitage
    This article is about issues of shares to investors by companies that are already listed on a stock exchange. Such issues are often called rights issues, although in fact the rights issue is only one of several issue methods used. Other methods will also be discussed here. A generic term for issues by listed companies is seasoned equity offers (SEOs).
  • Financial Steps in an IPO for a Small or Medium-Size Enterprise
    by Hung-Gay Fung
    An initial public offering (IPO) of stocks is a share offering to the public by a small or medium-sized enterprise (SME) undertaken to raise additional cash for future growth or to enable existing stockholders to cash out by selling part of their holdings. Among other things, a successful IPO will provide a company with an objective valuation of its stock, create a good public image of the company—thus lowering its cost of borrowing—and provide...
  • Forget Sovereign Wealth Funds
    by Diana Choyleva
    The hype about sovereign wealth funds began in early 2007, when China announced it was setting up such a fund and planned to invest $3 billion in US private equity group Blackstone. The realization that SWF assets had nearly doubled since the start of the decade, reaching $3.3 trillion by the end of 2007, while China had $1.2 trillion in foreign exchange reserves which could be channelled through its SWF in riskier assets, caused a quick...
  • How and When to Use Nonrecourse Financing
    by Thomas McKaig
    When companies are negotiating loans from lenders, there are many clauses that are important points for negotiation over and above the amount of the loan and interest charged. These items can include assignment of the loan (on the part of either the borrower or the lender), future fund advances, and prepayment capability. Another key clause is the nonrecourse clause, under which the lender agrees not to hold the borrower (the company) liable in...
  • IPOs in Emerging Markets
    by Janusz Brzeszczynski
    An initial public offering (IPO) is the sale of a company’s shares to the public for the first time, leading to a stock exchange listing. This process is known also as a public offering, or “going public.”The main reason for IPOs is the need for fresh capital to finance various business activities, such as the development of new products or expansion into new markets. Most IPOs are launched by relatively small but dynamic companies, which grow...
  • Islamic Capital Markets: The Role of Sukuk
    by Rodney Wilson
    Islamic capital markets are made up of two components, stock markets and bond markets. This contribution is primarily concerned with the latter rather than shariah-compliant stock determination. In particular it is sukuk that have become the accepted Islamic alternative to conventional bills, bonds, and notes, and hence are the major focus here.Conventional capital market instruments such as treasury bills, bonds, and notes are unacceptable from...
  • Islamic Microfinance: Fulfilling Social and Developmental Expectations
    by Mehmet Asutay
    Islamic banking and finance (IBF) has become a mainstream financing method utilized by Islamic, as well as conventional, banking and financial institutions all over the world. Recently, however, IBF has been criticized for its social failure, in the sense that its operations are not different from the existing conventional tools minus the interest. An essential nature of this criticism is related to the foundational axioms and principles of IME...
  • Islamic Modes of Finance and the Role of Sukuk
    by Abdel-Rahman Yousri Ahmad
    Broadly speaking, Islamic modes of finance can be divided into two types: either they provide direct finance as capital funds through partnership (musharaka and mudaraba), or they provide indirect finance through leasing (ijara) and sale contracts (murabaha, bai ajil, salam, and istisna). All modes are based on the principle of riba (interest) prohibition, and all seek to maintain Islamic business ethics (freedom and leniency of transactions,...
  • Issuing Corporate Debt
    by Steven Lowe
    The existence and determination of optimal capital structure is an ongoing topic of research in corporate finance. In a perfect market setting, with no frictions, Modigliani and Miller’s seminal research in 1958 suggested that the market value of a firm is independent of its capital structure. In other words, capital structure does not matter.Miller (1991) explained the intuition for this with a simple analogy: “Think of the firm as a gigantic...
  • Managing Activist Investors and Fund Managers
    by Leslie L. Kossoff
    Whether or not your organization has been a target in the past for activist investors and fund managers, you have to plan on it becoming a fact of life from now on—things have changed.It used to be that only a few organizations were hit by activist investor activity. From the almost prophetic, and beautifully constructed, Benjamin Graham move on Northern Pipeline in 1951, to Carl Icahn’s dramatic moves on Yahoo! during the “Microhoo”...
  • Minimizing Credit Risk
    by Frank J. Fabozzi
    Financial corporations and investors face several types of risk. One major risk is credit risk. Despite the fact that market participants typically refer to “credit risk” as if it is one-dimensional, there are actually three forms of this risk: credit default risk, credit spread risk, and downgrade risk.Credit default risk is the risk that the issuer will fail to satisfy the terms of the obligation with respect to the timely payment of interest...
  • Optimizing the Capital Structure: Finding the Right Balance between Debt and Equity
    by Meziane Lasfer
    There are three financing methods that companies can use: debt, equity, and hybrid securities. This categorization is based on the main characteristics of the securities.Debt FinancingDebt financing ranges from simple bank debt to commercial paper and corporate bonds. It is a contractual arrangement between a company and an investor, whereby the company pays a predetermined claim (or interest) that is not a function of its operating performance,...
  • Price Discovery in IPOs
    by Jos van Bommel
    The most important, yet most difficult, part of the initial public offering (IPO) process is setting the offer price. In an IPO, the issuer, aided by an intermediating investment bank, plans to sell a relatively large number of shares of common stock in which there is at that point no market. However, they know that soon after the IPO process the secondary market will impute all the information in the market in an efficient manner. Investors who...
  • Private Investments in Public Equity
    by William K. Sjostrom, Jr
    PIPE transactions are highly negotiable; hence, there is a fair amount of variation from deal to deal with respect to the attributes of the PIPE securities. PIPE securities may consist of common stock or securities convertible into common stock, such as convertible preferred stock or convertible notes, and may be coupled with common stock warrants.Regardless of the type of securities involved, PIPE deals are categorized as either traditional or...
  • Public–Private Partnerships in Emerging Markets
    by Peter Koveos, Pierre Yourougou
    Given the poor state of public-sector resources around the world, made even worse by the global financial crisis, governments have been seeking to enhance resources by attracting private sector participation. Such participation may be somewhat unstructured, or more formal. The public–private partnership (PPP) is one of the formal approaches to cooperation. PPP, in various forms, is not a new construct. The current frailties of the global economy...
  • Raising Capital in Global Financial Markets
    by Reena Aggarwal
    During the last decade global financial markets have grown tremendously, becoming large and liquid, and with substantial depth. At the same time demand for capital has increased significantly, with capital markets continuing to play a dominant role in the allocation of capital. However, some major shifts are occurring in the roles of suppliers and users of capital. These shifts became even more apparent during the recent financial crisis. This...
  • Raising Capital in the United Kingdom
    by Lauren Mills
    Raising capital to grow a business has never been more challenging or time-consuming. While there are still many sources of finance, ranging from government and EU grants, to bank loans, private equity, angel investors, or a stock market flotation, some will be easier to come by than others in the post-credit crunch climate. One of the biggest problems will be deciding which route is best for you.Before weighing up the pros and cons of each,...
  • Rigidity in Microfinancing: Can One Size Fit All?
    by Dean Karlan, Sendhil Mullainathan
    In the span of a single decade microfinance has gone from being virtually unknown—to bankers, to development workers, and, most of all, to the poor—to being a household word. Ask anyone today to describe microfinance and most likely you will get a common answer: “That’s when banks lend to groups of poor women to start little businesses.” Much of this increase in awareness is thanks to the tireless work of industry advocates who have traveled the...
  • Securitization: Understanding the Risks and Rewards
    by Tarun Sabarwal
    In broad terms, securitization can be viewed as pooling receivables and selling claims to these receivables in capital markets. For example, a mortgage lender may pool together thousands of mortgages and sell claims on mortgage receivables to investors. Historically, the first securitizations in the 1970s in the United States were those of pools of mortgages. With the success of mortgage-backed securities, other groups of receivables were...
  • Sources of Venture Capital
    by Lawrence Brotzge
    There are many sources of venture capital. They include:friends and family; individual angel investors or angel investor groups; early-stage venture capital funds (VCs); expansion-stage and later-stage VC funds; community-based venture funds; these are often run by development agencies, which are usually funded or subsidized by local government funds designed to stimulate business growth. This article answers a number of questions about...
  • Tawarruq at a Glance
    by Adil Msatfa
    At a time when the global Islamic finance industry is gaining increasing acceptance from both Muslim and non-Muslim investors, many challenges emanating from the lack of harmonization have yet to be overcome. The fact of the matter is that the Islamic financial market is still witnessing inconsistencies in nomenclature from one region to another, with certain products considered as halal (permissible) by some scholars and declared haram...
  • The Cost of Going Public: Why IPOs Are Typically Underpriced
    by Lena Booth
    When firms go public, they incur direct and indirect costs associated with the initial public offering (IPO) process. Direct costs are fairly predictable—they include registration, underwriting, and attorney and auditing fees. The indirect cost, commonly known as IPO underpricing, is one of the most perplexing puzzles in finance. It is observed in almost every financial market in the world and across all procedures of share allocation. IPOs are,...
  • The Role of Institutional Investors in Corporate Financing
    by Hao Jiang
    Institutional investors have become increasingly important in global capital markets. As of the end of December 2007, total assets under management by major global institutional investors reached US$81.90 trillion. In particular, mutual funds, pension funds, and insurance companies managed US$26.2, 28.2, and 19.9 trillion of assets, respectively, while assets managed by nontraditional managers such as hedge funds, sovereign funds, and private...
  • Understanding and Accessing Private Equity for Small and Medium Enterprises
    by Arne-G. Hostrup
    Private equity is the generic term for all forms of financing through external equity capital in the broader sense. The generic term is often subdivided into:Venture capital (VC) is made available by business angels (who provide so-called informal venture capital, or IVC) and venture capital companies, usually management companies with a venture capital fund under administration. VC is made use of in a company’s early stages—from foundation,...
  • Understanding Equity Capital in Small and Medium-Sized Enterprises
    by Siri Terjesen
    Entrepreneurs may require both debt and equity financing, and often start their firms by financing growth through equity. Equity capital is money invested in the venture with no legal obligation on the entrepreneur to repay the principal amount or to pay interest on it; however, it requires sharing the ownership and profits with the funding source, and possibly also paying dividends to equity investors.After value has been built, entrepreneurs...
  • Understanding the True Cost of Issuing Convertible Debt and Other Equity-Linked Financing
    by Roger Lister
    Convertible securities (CSs) and other equity-linked instruments combine debt and equity. Depending on the terms and the issuer’s future performance, CSs can range from almost pure equity to an option-free bond. In option terms, a CS can be viewed in two ways. It amounts to a straight bond with a call option on a specified number of shares. It is also effectively a share with a put option whose exercise price is the market value of the...
  • Using Securitization as a Corporate Funding Tool
    by Frank J. Fabozzi
    Securitization is the process of creating securities backed by a pool of loans or receivables. For a corporation, securitization is an alternative fund-raising process to the issuance of secured corporate bonds. The securities issued via the securitization process differ from traditional secured corporate bonds, where it is necessary for the corporate issuer to generate sufficient earnings to repay the bondholders. So, for example, if an...
  • What the Rise of Global Banks Means for Your Company
    by Chris Skinner
    Over the past decade, it has seemed that big banks have only gotten bigger. This is down to a variety of factors—from mergers and acquisitions through to technological leverage—but the most overriding factor has been the impact of globalization. As corporations and organizations have created global supply chains, so the largest banks have tried to follow their clients’ needs by creating global infrastructures. For most firms, this means is that...

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