tailieunhanh - Ebook Business finance - Theory and practice (8th edition): Part 2

(BQ) Part 2 book "Business finance - Theory and practice" has contents: The secondary capital market (the stock exchange) and its efficiency; cost of capital estimations and the discount rate; gearing, the cost of capital and shareholders’ wealth; the dividend decision, management of working capital; international aspects of business finance,.and other contents. | 11/19/08 10:14 Page 252 Chapter 9 The secondary capital market (the stock exchange) and its efficiency Objectives In this chapter we shall deal with the following: ‘ the role of the capital markets in their secondary function ‘ the mechanisms of the London Stock Exchange ‘ the efficiency of the secondary capital market ‘ tests of efficiency ‘ the implications of capital market efficiency Introduction The capital market is a title given to the market where long-term finance is raised by businesses and by local and national governments. Businesses raise this type of finance through the issue of equity (shares) and debt (loan notes, debentures or bonds) to members of the public and to investing institutions (unit trusts, insurance businesses and so forth), usually in exchange for cash. It is also a market where holdings of equity or debt (securities) may be transferred from one investor to another. The new finance market is known as the primary capital market, whereas the market in which second-hand securities are traded is referred to as the secondary capital market. We have already considered this primary role in Chapter 8. In this chapter we shall confine ourselves to consideration of the secondary aspect. Secondary capital markets The most important secondary capital markets throughout the world tend to be the official stock exchanges or stock markets. They are not the whole of the secondary capital market, however – certainly not in the UK, as we shall see later in the chapter. Nonetheless, the world’s official stock exchanges are the major forums for trading local, and increasingly international, securities. Most of these official stock exchanges fulfil a primary function as well as a secondary one. 252 11/19/08 10:14 Page 253 The London Stock Exchange The existence of a secondary capital market is vital to businesses wishing to raise long-term finance. Potential long-term investors will not generally be prepared to take up .