Motivation for listing (advantages)
There are many reasons / advantages for listing on an exchange:
• Enhanced ability to raise capital.
• Acquisition of capital at the best possible price.
• Incentive for employees.
• Incentive for owners.
• Credibility and reliability of the company.
• Source of information.
Enhanced ability to raise capital
It is easier to raise capital if a company's shares are listed. This is because substantially more investors will be aware of the primary issue, and this is because a primary issue to be listed is advertised widely in the press and by the members of the exchange, particularly by the sponsoring broker.
Investors generally prefer to hold listed shares because they have an exit mechanism, i.e. they have the benefit of being able to dispose of the shares if they so desire.
The company is also better able to raise other forms of finance such as bank loans, and funds from the issue of bonds. This is because creditors are better disposed toward a listed company, and this springs from the knowledge that listed companies are subjected to the scrutiny of the public and the exchange.
A credible listed company is also able to raise additional equity finance for acquisitions and takeovers. This may be substantially cheaper than alternative forms of finance.
Acquisition of capital at the best possible price
Apart from the improved access to capital, a company that lists its shares on an exchange is able to raise capital at a reduced price. There is a premium for marketability. This is because the investment horizon of the investor is rendered flexible by listed shares. In the case of unlisted shares the investors in effect make an investment for an indefinite period (remember shares are similar to perpetual bonds, but with uncertain returns). However, in the case of listed shares the investor may hold on to them for as long as s/he desires.
Investors also have the comfort of knowing that there are many professional analysts that will be monitoring the share to be listed, which does not apply in the case of unlisted shares. Also, investors in a new issue will generally regard the initial pricing to be fair because it is known that the professional investors will most likely also be taking up the shares.
Incentive for employees
Many companies offer their employees benefits in the form of a parcel of shares in the company either directly or via a share incentive scheme. If the shares are listed or if a listing is planned, the company will attract a better quality of managing director, executive directors and other management. With high quality management, the company will perform better than otherwise.
Incentive for owners
The original owners of a company have two main incentives to list:
• Provides an opportunity to cash in a portion of their investment in their company and diversify their portfolios.
• In the case of older owners (when experiencing more frequent senior or senile moments) to retire and to replace themselves with competent management.
Credibility and reliability of the company
A listed company is seen to be more credible than a non-listed company in the same line of business. This improves the prospects for business. Also, the public draws comfort from the fact that analysts and the exchange carefully monitor the listed company.
Source of information
As noted above, analysts and the public in general are trading in the company's shares on a daily basis, reflecting thus their collective judgment of the share (risk free rate plus premium for risk). This is a valuable source of information in respect of:
• The public's impression of the company.
• The receptiveness of the market for further issues, i.e. the timing of further issues of shares when required.