Knowledge that Transforms

We analyze the reasons why companies issue units when they raise additional capital. We find that, in contrast to previous evidence, units are not offered to mitigate the agency conflicts or to signal security mispricing as they are predominantly issued during cold periods, in public rather than in rights offerings, and when the issue is underwritten. In addition, the results indicate that companies choose to offer units to increase their offer price flexibility and to underprice their seasoned equity offering so as to minimize the issue cost and the risk of failure of the issue. These results provide support for the net proceeds maximization hypothesis.

We document that Regulation Fair Disclosure has reduced differences in information quality between investors prior to quarterly earnings announcements consistent with the intent of the regulation. This reduction is driven by small firms and high technology firms, rather than the large firms targeted by the SEC, which suggests that selective disclosure among large firms may have been much more limited than what was presumed by proponents of FD. In addition, we document that FD has decreased the average information quality of investors in small and high technology firms in the period prior to an earnings announcement while having no lasting effect on other firms. Taken together these two results suggest that, for small and high technology firms, FD succeeded in eliminating selective disclosure but also lowered the average quality of information available about these firms.

We re-examine old evidence and provide new evidence on private placements of large-percentage blocks of stock. Our goal is to judge whether the prevailing hypotheses of monitoring and certification explain most private placements. Examining new evidence on events following the private placements and using a much larger sample than previous studies, our findings suggests that private placements are often made to passive investors, thereby helping management solidify their control of the firm. Although monitoring and certification may motivate some private placements, the evidence with respect to placement discounts, stock-price reactions, the post-placement activities of the purchasers, and a comparison with arm's-length trades of large blocks of stock favors managerial entrenchment as the explanation for many private placements.

Technology has dramatically reduced the cost of disclosing information to investors and created new conduits for securities' sales. The result is stock ownership, both direct and indirect, has never been more widely distributed. Equally important, changes have occurred in the institutional market for new offerings. Bought deals, Internet road shows, the preeminence of mutual funds and pension funds, and foreign investors and issuers have changed the market. In the wake of these changes, the SEC's disclosure policy has evolved. The evidence suggests we have moved from a world where information was released relatively infrequently and with significant lags to a world where information is released relatively rapidly on a continuous basis to as many investors as possible.

This paper explores the advantage of private equity in fixing turnaround situations. Meaningful corporate value creation may require addressing operational problems, replacing management, or changing the incentive structure. Change may be implemented under either without change of ownership or through a buyout. The paper derives scenarios under which transferring ownership to private equity prior to implementing a turnaround can emerge as an optimal solution, even when current ownership can conceivably implement the same operational changes as private equity. Also considered is the possibility of investment syndication in which the private equity buyer shares the transaction with other private equity firms. Various alternatives are considered for implementing turnarounds; in particular, ones that allow for management replacement and others that are effectively management buyouts.

Although international evidence suggests that families may be unhelpful to firm performance, recent analyses of U.S. public companies indicate that family firms outperform. This study probes these contrasting findings by investigating more fine-grained measures of family business in the U.S. Specifically, it makes a fundamental but neglected distinction between lone founder businesses in which no relatives of a founder are involved, and true family businesses that do include multiple family members as major owners or managers. The research also seeks to overcome issues of endogeneity and selection bias by examining both Fortune 1000 firms and a random sample of 100 much smaller public companies. The results show that findings are indeed highly sensitive both to the way in which family businesses are defined and to the nature of the sample. Fortune 1000 firms that include relatives as owners or managers never outperform in market valuation, even during the first generation. Only businesses with a lone founder outperform. Moreover neither lone founder nor family firms exhibited superior valuations within a randomly drawn sample of companies. Our results confirm the difficulty of attributing superior performance to a particular governance variable.

Ostensibly, the SEC's new round of regulatory activity is motivated by a bout of well-publicized business scandals and an explosive increase in financial innovations and instruments. Many critics of the “new” SEC question the proportionality and usefulness of the responses, which move the SEC well beyond reliance on disclosure and promotion of transparency. Others argue that more heavy-handed and far-reaching regulation is necessary given the vast changes in financial markets, the increasing importance of (largely unregulated) hedge funds and private equity, and corporate scandals that allege fraud and deception. This paper provides a rationale for studying recent regulatory changes and for addressing the overarching question of how to define the boundaries of SEC intervention in financial markets. The study provides an overview of papers in this special issue and concludes with suggestions for how policymakers can use research to better evaluate the costs and benefits of regulation.

To ascertain whether the form of managerial compensation affects a firm's long-term operating performance, we track IPOs for 5 years after the expiration of the stabilization period. New public companies perform better when managers receive a balanced combination of stock option grants and equity ownership. Firms with unbalanced compensation arrangements, large option grants and little equity ownership or vice versa do not perform as well. This empirical finding is consistent with a theoretical explanation based on managerial risk aversion and the alignment of managerial and owner incentives.