Listing benefits
In the USA, about 80% of the companies’ funding is raised on the capital market and only 20% through bank loans. In Europe, these numbers are reversed, meaning that the capital market finances about 20% of private initiatives and bank loans represent the remaining 80% of the funding methods. In Romania, these numbers are even lower with a handful of entrepreneurs considering financing through the stock exchange in a medium- to short-term period.
It is important to understand that there are many additional benefits to being a listed company, which can be grouped into four categories – financial, marketing, credibility and governance benefits.
Financial benefits:
- Expand your business and enter new markets, launch new products – the most obvious reason for a company to go public is to obtain the financing necessary for the development and further growth.
- Fund the M&A projects – in cases of takeovers, lack of easily accessible capital is usually one of the biggest obstacles. Using company’s own shares is one of fastest and cheapest manners of acquisitions as own stock will always remain the cheapest to obtain currency.
- Receive a fair market valuation and liquidity – obtaining a market valuation is of a vital interest to any entrepreneur and is crucial when looking for a strategic investor. Additionally, in order to be able to apply modern management methods and improve the effectiveness and the value of the business, it is necessary to know its value. Being a listed company solves the question about the market valuation and provides a liquidity as it is easier and faster to invest in a company listed on the stock exchange.
- Offer financing diversification & additional leverage when issuing debt instruments – apart from gaining an easier access to bank loans, having issued shares or bonds on the stock exchange, the issuers benefit from the shareholders-bondholders transmission effect and have an opportunity to gain an established group of potential investors. What it means in practice is that if the company had a good track record after the first issuance, it is easier for it to find the buyers for a second round of financing.
- Manage the debt-equity ratio – the debt to equity indicator highlights the proportion of debt to finance versus the company’s total equity account. A low indicator reflects a high self-financing capacity on the short, medium and long term. A debt-equity ratio which is higher than 50% may be a warning signal to the company’s creditors. Once listed, it is easier for the issuer to access the needed capital, without raising the debt-equity ratio since a listed company can attract the capital either by issuing new shares or bonds, or it can convert part of its debt into shares – a process through which the creditors become shareholders of the company.
Marketing benefits:
- Gain publicity and long-term visibility with the media and the general public – an IPO process as well as the first day of trading are cornerstones in each company’s life that attract much attention. The value of free advertising provided to companies prior, during and right after listing can be counted in tens to hundreds of thousands of euros. Apart from the coverage surrounding the listing, once quoted, the company gains further, constant visibility as the information provided by it through press releases as well as current reports are picked up by both generalist and financial media. On top of that, thanks to the interest of the media and the constant collaboration with the Bucharest Stock Exchange, companies can benefit from broader and constant exposure when their representatives are invited to conferences, workshops, interviews and other media events to share their experiences as listed companies.
- Brand loyalty – studies show that individual shareholders are more likely to buy the listed companies’ products and have greater brand loyalty, which is higher compared with that of the non-shareholders. There is a 74.4% probability that when making purchasing decision, the buyer who is also a shareholder will chose the brand of company he owns. Interestingly, brand satisfaction also impacts the decision to buy company’s shares which means that your current clients are probably interested in becoming your shareholders.[1]
- Gain exposure to new audiences – through listing on the stock exchange, companies can get on the radar of institutional investors, private equity, venture capital, sector specialists, business partners, index providers and international media. If a company is covered by financial analysts, its reports and financial results have a wide distribution base.
Credibility benefits:
- Improve reputation and prestige – as listed companies have to adhere to certain standards such as those of corporate governance and transparency, the credibility of companies significantly increases after the listing. Becoming a listed company means joining a prestigious circle of issuers, which further transmits into ability to attract new clients, suppliers or business partners. Being a listed company has also a significant impact when trying to access different kinds of grants, including non-refundable European funding, as well as participating in tender offerings as listed companies are considered more transparent, credible and reliable when compared to the not listed ones thanks to the applicable reporting obligations and corporate governance rules.
- Facilitate access to other funding sources (including bank loans) – for financial institutions, reporting obligations as well as adjustment to highest ethical standards by listed companies mean that the partnership with them is fraught with a lesser commercial or credit risk. Thanks to this, issuers generally receive better conditions when trying to access different financial products, such as lower interest rates, commissions or simply access the needed funding faster when compared with unlisted companies.
Governance benefits:
- Improve the company’s corporate governance and transparency – Once a company becomes listed, transparency naturally becomes part of the day-to-day activity, all in order to provide the shareholders and the potential investors a level playing field when it comes to the information about the company’s development. Additionally, subjects that could have been pushed into the background, such as corporate governance, become an interest to the issuers, since they have the power of convincing the investors to buy the shares of the specific company. The improvement of the corporate governance can also be motivated through the support for it of one of the strategic investors.
- Attract new talents and motivate current employees – In Romania, stock option plan is a salary reward with the lowest fiscal cost that is available also to listed companies. By providing stocks to top employees or offering them to potential new employees, the studies show that this improves the productivity and performance of the company’s employees who, having a direct financial benefit from participating in company’s successes, are more motivated. Many listed companies use this method in order to recruit and retain current employees.
[1] Based on: Building brand loyalty through individual stock ownership by D. Schoenbachler, G. Gordon and T. Aurand