Corporate Regulation of Alternative Investment Market - Case Study Example

FINANCE – ALTERNATIVE INVESTMENT MARKET FINANCE – ALTERNATIVE INVESTMENT MARKET Insert name: Insert course code: Instructor’s name: 30 July, 2010. Introduction The “Alternative Investment Market” (AIM) was founded in 1995 by the LSE to satisfy the requirements of small upcoming firms and is a high-reward/ high-risk market. Generally firms or companies on the AIM should have a market capitalization of not less than £2 million while the largest would have about £500 million. Disclosure necessities are less thorough than on a full LSE listing. A starting company may go to the AIM without three years of IFRS accounts, but it ought to show the accounts if it has a track record. It is not necessary for an AIM company to obtain shareholder sanction if it needs to make an attainment of less than 100 % of a corporation. The LSE has been supporting the AIM as a secondary stock market listing in London for non-UK corporations that wish to retain their local market main listing (Davidson, 2008 p. 44). AIM has admitted more than 2,500 companies managing to raise more than £34 billion collectively. For an AIM to be considered as mature, 57 % of its shares must be held by institutions. The regulatory structure of AIM centers on the Nominated consultant, or Nomad, which brings the corporation to the bazaar and is accountable for its performance afterwards. A firm has a direct line to its Nomad, which is later controlled by the LSE. On February, 2007, the LSE announced some changes in the way AIM is controlled. The Nomads have larger accountability than before for evaluating a firm’s suitability, its business plan as well as its management, and it is easier for the LSE to discipline the companies. For firms that deal with natural resources, a competent person’s report must be carried out. AIM corporations are subject to enhanced disclosure requirements, which include a requirements, form August 2008, to display core management as well as financial documents on websites (Davidson, 2008 p. 45). Corporate regulation AIM companies must announce their results twice a year. A number of companies provide quarterly results, but this is not necessary for UK companies, but is a requirement for US companies that have file with the SEC. every company must also make a trading statement at the AGM once a year. Within the year, it is the obligation of the company to provide any available information to the market if it can affect investor’s evaluation of the firm’s prospects. The annual report ought to be published six months after the year end as well as interim results within three months of the period end. It is very vital that companies meet these deadlines. Failures to this, the shares are suspended and reputational damage occurs. The companies that do not follow these instructions regularly are delisted from AIM. Apart from this, the companies are supposed to inform the market the date they are planning to announce the results. This assists the investors to obtain a sense of regularity on which date to expect results as well as helping them build confidence that there are strong financial reporting process in place. Characteristics of unsuccessful company on AIM One where founders are exiting or the owner/ chief executive is leaving. The main reason for an unsuccessful float is in most cases the management team. The management is supposed to be clears as to why it wants to undertake a float, what this involves, why it cannot undertake a trade sale and that it is focused and incentivized via options as well as profit share to grow the business. In the event that management quits, investors become worried that the company is aware of something the market doesn’t. Where there is no focus. Lack of a clear and coherent strategy that can be understood by the market is a big problem. The market requires understanding on where the future growth will come from as well as how the company is going to deliver it. This is basically a three to five year plan that will be laid out in the IPO prospectus. It is the obligation of companies to remind the market of this strategy when necessary: trading statements, results as well as presentations. The company must not aim at floating and then leave AIM within a short period of time. Most of firms that float ought not to have a restricted shelf life and are expected to be in market for five to ten years. Lack of analysis. Autonomous research on the firm is significant to assist the understanding of investors. Failure to do research can hinder growth. Institutions along with private investors need to be able to supervise the growth of a company, evaluate the financials in understandable set-up as well as find out other important financial information. A research report provides a benchmark along with expectations in the market, and informs investors whether to purchase, sell or hold shares. The company’s retained broker ought to write a research report at least twice a year, and more if there are numerous corporate activities (Reuvid, 2007 p. 211). Loss-incurring firms: finance For a period of 22-year period, the percentage of loss-incurring (delisting) firms was measured from the financial year 1985 to financial year 2006. Anglo-Saxon countries were found to have more than 20% loss companies in general. The mean of Germany was found to stand at an average of 20%. The Neuer Markt (New Market) in Frankfurt that closed down in 2002 had a number of emerging loss-incurring companies. The percentage of loss-incurring companies in other European as well as Asian countries was found to below 20%. It was found that the increased number of loss-incurring firms was as a result of steady rise in the annual frequency of losses. Looking at the accounting and non-accounting factors for the last fifty years, it was found that the annual percentage of losses for firms in the Unite States was mainly related to accounting (financial) conservatism, increased number of small firms, real firm performance as well as business cycle factors. Furthermore, non-accounting factors were found to be playing a dominant role behind the occurrence of losses. The IPO (initial public offering) hypothesis explains the phenomenon of loss-incurring firms. When the macro-economic condition is excellent, few companies register accounting losses and thus reduced rate of delisting of firms. On the other hand, when there is an economic recession, more companies would record losses and several would be delisted. Annual change in real-GDP growth rate was found to have a harmful effect on the proportion of loss-incurring firms. In other word, an increase in the number of companies through IPOs augments the number of loss-incurring companies in Anglo-Saxon nations. Moreover, macro-economic recession raises the number of delisted companies (Itami, Kusunoki and Numagami 2010 p. 284). Growth effect The increase in the number of companies through IPOs is positively correlated to the increase in the number of loss-incurring firms. In addition, an increase in the loss-incurring firms enlarges the profitability dispersion of companies. As more companies float their share in the stock market, some of the less competitive companies suffer great losses and end up being delisted. It has been found that the companies that are delisted are the ones that the management is weak due to lack of analysis as well as lack of focus. Risk effect Every country has its own distinct dispersion characteristics. A high-risk investment brings high returns, while low risk investment yields low returns. Major risks indicate that a deal is almost taking place. Depending on the sufficiency of the individual information as well as the risk appetite, the manager can invest in not publicly announced or only publicly announced transactions. Any firm event, bankruptcy, restructuring, merger, acquisition or spin-off is a trade off opportunity and may lead to delisting. The leverage ought to be low to medium particularly in bearish markets. Leverage negatively affects the liquidity of funds and may lead to delisting of companies. It is found that of most of the companies that have been delisted, most of them were involved in low risk investment which eventually reduced the returns. Consequently the companies became less competitive in the stock exchange market and were delisted. The risk involved determines whether in the long-run the companies will de delisted or not (Vancas, 2010 p. 37). Profitability dispersion It has been found that the profitability dispersion is increasing in a world economy. Also, the dispersion levels as well as its time-series performance vary across nations. In Anglo-Saxon countries, the dispersion level is high in addition to being expanded. In the Anglo-Saxon countries, there is a positive correlation between the increase in the number of listed firms and the increase in the percentage of delisting or loss-incurring firms. In countries like UK, the stock market is not only for established firms but also for the emerging companies. Thus some companies go bankrupt while as some survive. Establishment of de-listing mechanism Te establishment of a working mechanism for delisting assists in separating successful listed firms from those that have not been successful thus improving listed companies’ operational performance. There are two main systems: Special Treatment (ST) and Particular Treatment (PT). The ST system applies to the firms within which financial or other financial abnormalities have taken place for two consecutive years to an extent that it is difficult for investors to judge what the company’s future prospect are and thus producing a risk that investors’ rights might be influenced. The PT system applies to the firms within which financial or other abnormalities have occurred for three consecutive years. The main reason is to utilize limitations on daily price fluctuation as well as trading time to avoid excessive speculation (Chen and Shi 2002 p. 20). Graphical representation of factors leading to delisting The chart below shows the percentage of the factors that contribute to the delisting of AIM companies. Other than the financial characteristics, other factors seem to contribute to the delisting of companies, but the main one in the financial constraints of companies. Conclusion Low trading volumes are the main reason as to why most of companies are delisted. Other companies were delisted due to the high cost of listing. Companies delisting from the TSE market may loose value in the event that delisting decision is as a result of the non-fulfillment of the benefits of cross-listing or gain value if the delisting decision is presented as a section of more general, coherent strategy of the firm. There are other several factors that may lead to delisting of a company from AIM. However, the financial performance of a company plays greatest role towards delisting of a company (Veit D. et al. 2008 p. 122). References: Chen J. and Shi H. (2002). The evolution of the stock market in China's transitional economy Cheltenham, Edward Elgar Publishing. Retrieved July 29, 2010 from http://books.google.com/books?id=yEBmHuHCETYC&pg=PA20&dq=AIM+companies+and+the+cause+for+their+delisting+from+the+market&as_brr=3&cd=3#v=onepage&q&f=false Davidson A. (2008). How the City Really Works: The Definitive Guide to Money and Investing in London's Square Mile. London, Kogan Page Publishers. Retrieved July29, 2010 from http://books.google.com/books?id=QR7dupp_wcoC&pg=PA45&dq=AIM+companies&hl=en&ei=-XBRTIDdIdSisQaH2_XkAQ&sa=X&oi=book_result&ct=result&resnum=6&ved=0CEAQ6AEwBQ#v=onepage&q=AIM%20companies&f=false Itami H., Kusunoki K. and Numagami T. (2010). Dynamics of Knowledge, Corporate System and Innovation. London, Springer. Retrieved July 29, 2010 from http://books.google.com/books?id=pktIq4wewWAC&pg=PA290&dq=characteristics+of+AIM+companies+and+the+cause+for+their+delisting+from+the+market&hl=en&ei=N3NRTIDvD8LFsgbNnvCOAg&sa=X&oi=book_result&ct=result&resnum=1&ved=0CCcQ6AEwAA#v=onepage&q&f=true Reuvid J. (2007). Floating Your Company: The Essential Guide to Going Public. London, Kogan Page Publishers. Retrieved July29, 2010 from http://books.google.com/books?id=vw63pvCJFIC&pg=PA211&dq=AIM+companies+and+the+cause+for+their+delisting+from+the+market&as_brr=3&cd=1#v=onepage&q&f=false Vancas I. (2010). Due Diligence and Risk Assessment of an Alternative Investment Fund. BoD – Books on Demand. Retrieved July 29, 2010 from http://books.google.com/books?id=XrGet6TwijMC&pg=PA36&dq=leverage+of+Alternative+Investment+Market+companies&hl=en&ei=KWJSTN7PLeWL4gb9h7WDAw&sa=X&oi=book_result&ct=result&resnum=5&ved=0CEAQ6AEwBA#v=onepage&q=leverage%20of%20Alternative%20Investment%20Market%20companies&f=true Veit D. et al. (2008). Enterprise applications and services in the finance industry: 3rd international workshop, Finance Com 2007: Montreal, Canada, December 8, 2007: revised papers. New York, Springer. Retrieved July 29, 2010 from http://books.google.com/books?id=gAoKbrLhpJgC&pg=PA114&dq=the+cause+for+their+delisting+from+the+market+of+AIM+companies&hl=en&ei=l3NRTMekE9DdsgaUxrjZAQ&sa=X&oi=book_result&ct=result&resnum=2&ved=0CCwQ6AEwAQ#v=onepage&q&f=false Read More