Question

A company announced a public offering of its common stock. Give 2 reasons why this should raise concern?

Answer 1

When any company announces its public offering of common stock, a positive response in the stock markets is expected. With high expectations comes a sense of responsibility which the company must realize. The first concern that the company should have is the oversubscription that its stock might have (in spite of knowing the limitations of one’s company). Any stock, if it’s overpriced in relation to its future earnings will crash down heavily in the days to come and hence the company should not mislead the public in oversubscribing its shares. Another concern that the company should have is the involvement of any lawsuit with any third party which might ruin the public offering as investors would never want to pay their money in a company where the large portion of the funds is kept aside by the company to mitigate their losses. There are other reasons too such as over-dependence on debt, liquidity crunch and lack of maintaining regulatory compliance with the regulatory authority which can raise eyebrows for the company while issuing its stock in the market.