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12.6.1 Advantages And Disadvantages Of Listing

Detailed analysis and comparison of the advantages and disadvantages of listing a public company on a major stock exchange, exploring impacts on prestige, market visibility, management controls, and market dynamics.

12.6.1 Advantages And Disadvantages Of Listing

Introduction

When a public company considers listing on a major exchange, it involves a comprehensive evaluation of the pros and cons. Listing can significantly affect the company’s operations, market visibility, and relationship with its shareholders. We offer a detailed examination into the key elements of this decision as delineated in Table 12.2.

Advantages and Disadvantages of Listing

Here is an illustration to better understand the balanced aspects of listing in context for a public company:

Table 12.2 | Benefits and Drawbacks of Listing

Advantages Disadvantages
Prestige and Goodwill Additional Management Controls
Increased public visibility can enhance the prestige of a company and improve shareholder goodwill by making buying and selling shares easier. Listing imposes certain restrictions on management like stock options for internal use only, reporting of dividends, issue of shares for assets, and other operations.
Established and Visible Market Value Need to Keep Market Participants Informed
A listed company’s market value is readily visible, attracting financial analysts and new shareholders, thereby enhancing marketability in the secondary market and for new issues. Company’s management must allocate significant time to meet with security analysts, institutional investors, and the press to explain developments.
Excellent Market Visibility Market Indifference
The daily and weekly financial press details listed company performance, increasing visibility. Low trading volume and poor market performance are made public, revealing weaknesses to potential investors.
More Information Available Additional Disclosure
Strict exchange disclosure regulations provide investors with regular access to company information. Listing requires continued and prompt disclosure of any material changes, affecting management time.
Simplified Valuation for Tax Purposes Additional Costs to the Company
Easier valuation of securities for estate tax purposes and estate tax planning. Listing fees and ongoing annual sustaining fees need to be paid to the exchange.

Key Takeaways

  1. Increased Prestige and Goodwill - Being listed heightens a company’s public profile and can potentially improve the ease of stock transactions, enhancing investor trust and attraction.
  2. Enhanced Market Value Transparency - The visibility of market value and analyst interest can lead to greater shareholder enthusiasm and ease of raising capital for new projects.
  3. Improved Market Visibility - Regular reporting in financial press increases investor awareness of the company’s performance and market activities.
  4. Broader Availability of Information - Investors receive extensive and regular updates on the company’s performance and decision-making processes, encouraging informed shareholder decisions.
  5. Simplified Tax Valuations - Helps smoothly perform securities valuations for estate tax purposes.
  6. Management and Reporting Responsibilities - Significant time and resources must be invested to meet additional reporting and disclosure obligations.
  7. Public Scrutiny of Poor Performance - Investors are made aware of low trading volumes and erratic market performance, potentially harming the company’s public image.
  8. Incurring Additional Costs - Continuous fees paid to the exchange for listing and annual maintenance.

FAQs

1. Why is enhanced prestige an advantage of listing?

Enhanced prestige arises because listing a public company on a major exchange increases its visibility among investors and the public, positively impacting shareholder perception and market trust.

2. What challenges do companies face with increased disclosure requirements?

Companies must disclose material changes promptly and continuously, requiring significant administrative efforts and resources from management.

Glossary

  • Market Value: It is the current value of a company’s shares in the market, often determined by factors such as company profitability, industry’s health, and economic conditions.
  • Secondary Market: A market where investors buy and sell securities they own. It is instrumental in providing liquidity and determining the market value of securities.
  • Material Changes: Any information about the company that could influence investors’ decision to buy, sell or hold the company’s securities.
  • Stock Options: Financial instruments that give the holder the right to buy or sell a stock at an agreed-upon price and date.
  • Estate Tax Purposes: Taxes levied on the net value of the estate of a deceased individual before distribution to the heirs.

Summary

Listing a company on a major exchange offers numerous advantages such as enhanced visibility, streamlined market valuations, and potential investor goodwill. However, these come with certain disadvantages, including increased regulatory oversight, public scrutiny on performance aspects, and additional costs. Companies must weigh these factors carefully to ensure a beneficial decision for their organizational goals and shareholder relationships.


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markdown ## Which of the following is an advantage of listing for a public company? - [ ] Additional controls on management - [ ] Market indifference - [ ] Additional disclosure requirements - [x] Prestige and goodwill > **Explanation:** Prestige and goodwill are enhanced through increased public visibility, and shareholder goodwill increases as buying and selling become easier and market performance becomes more visible. ## Why do listed companies need to keep market participants informed? - [x] To explain company developments to security analysts, institutional investors, and the press - [ ] To avoid paying annual sustaining fees - [ ] To restrict stock options for internal use only - [ ] To prevent the disclosure of material company information > **Explanation:** Management must devote considerable time to communicate with security analysts, institutional investors, and the press to explain company developments. ## What is one disadvantage of listing mentioned in the text? - [ ] Simplified valuation for tax purposes - [ ] Increased shareholder goodwill - [ ] Enhanced company prestige - [x] Additional costs to the company > **Explanation:** Listed companies incur various fees, including a listing fee and an annual sustaining fee. ## How does market value visibility benefit a listed company? - [ ] Reduces the number of investors - [x] Attracts new shareholders and enhances overall marketability - [ ] Prevents additional disclosure requirements - [ ] Ensures low trading volume > **Explanation:** Visible market value can attract new shareholders, enhance overall marketability in the secondary market, and increase the market for new issues by the company. ## What effect does poor market performance of a listed company have? - [ ] Enhances company prestige - [ ] Increases trading volume - [ ] Simplifies tax valuation - [x] Becomes a matter of public record > **Explanation:** Low trading volume and poor market performance of a listed company become publicly visible. ## Which of the following rights is imposed on a company after it becomes listed? - [ ] Reduced public visibility - [x] Additional disclosure requirements - [ ] Exemption from paying listing fees - [ ] Unregulated dividend reporting > **Explanation:** Listing imposes additional disclosure requirements on the company, making continuous and prompt disclosure of material changes necessary. ## What is a financial benefit for investors in listed companies? - [ ] Limited access to market performance details - [ ] Difficulty in following company developments - [x] More information available on a regular basis - [ ] Infrequent market analysis > **Explanation:** Strict exchange disclosure regulations provide investors with access to more information on a regular basis. ## What type of cost must a listed company bear? - [ ] Only a one-time listing fee - [ ] Reduced management time - [x] Listing fee and annual sustaining fee - [ ] No costs involved > **Explanation:** Listed companies must pay a listing fee and subsequent annual sustaining fees to the exchange. ## How is the market value of a listed company commonly perceived? - [x] Established and more visible - [ ] Infrequently followed by financial analysts - [ ] Not readily visible - [ ] Less likely to attract new shareholders > **Explanation:** The market value of a listed company is established and readily visible, making it more likely to be followed by financial analysts and attract new shareholders. ## What is an advantage regarding the tax valuation of listed company securities? - [ ] Less marketability - [ ] Infrequent listing updates - [x] Simplified valuation for tax purposes - [ ] Increased management effort > **Explanation:** The valuation of securities for estate tax purposes and estate tax planning is easier for listed companies.

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