Knowledge that Transforms

This paper identifies the determinants of market-wide issue cycles for initial public offerings (IPOs) using an autoregressive conditional count model. We consider whether IPO volume is related to business conditions, investor sentiment, and time variation in adverse selection costs caused by asymmetric information between managers and investors. We provide evidence indicating that time variation in business conditions and investor sentiment are important determinants of monthly issue activity. By contrast, time variation in adverse selection costs does not significantly affect IPO volume.

We extend the literature regarding the importance of corporate governance and bank monitoring by examining the association between loan announcement wealth effects and the corporate governance characteristics of the borrowers. Using a sample of over 800 commercial loan announcements over a period of more than 20 years we find that loan announcements are more likely to have positive wealth effects for firms with weak internal corporate governance. However, we also find that this relation between perceived bank monitoring and board independence and incentive-based pay exists only for firms with weak external governance, specifically the market for corporate control.

We find that the geographic dispersion of a corporation affects its firm valuation. Firms with subsidiaries located in different regions of the United States experience a valuation discount of 6.2% after controlling for the impact of both global and industrial diversifications. The valuation discount increases as firms expand their operations to different regions nationwide. Results show that firms with more anti-takeover provisions are more likely to be geographically diverse, and that these firms experience greater value discounts compared with their counterparts with fewer such provisions. Our overall evidence suggests that the geographic location of corporate activities is an essential component of corporate policies and has important market valuation implications.

We examine investment banks' networking function in capital markets, using a sample of Private Investments in Public Equity (PIPEs). We argue that investment banks develop relationships with investors through repeat dealings, and that investment banks' networks of relationship investors form the basis of their networking function. We find that investment banks, especially those with larger investor networks, help issuers attract investors. Correspondingly, an issuer that desires more investors is more likely to hire an investment bank than place the shares directly. We also find that issuers pay higher fees to hire investment banks with larger investor networks. Our empirical findings suggest that the networking function of investment banks is important in securities offerings.

Using a sample of 438 firms that issued seasoned equity, we investigate the ex ante reasons stated by the firm for the use of capital, the actual ex post use of funds, and the market reaction to this information. We find that, regardless of the stated use of funds, firms increase capital expenditures and research and development following an SEO. In addition, firms increase their long term debt following an SEO, even when the stated reason for the capital is to pay down debt. The market reacts more favorably to the anticipated investment increases if the firm provides specific plans for the use of the soon-to-be-raised capital. The evidence is consistent with the view that agency issues are important factors in SEOs.

In cross-border acquisitions, the differences between the bidder and target corporate governance (measured by newly constructed indices capturing shareholder, minority shareholder, and creditor protection) have an important impact on the takeover returns. Our country-level corporate governance indices capture the changes in the quality of the national corporate governance regulations over the past 15 years. When the bidder is from a country with a strong shareholder orientation (relative to the target), part of the total synergy value of the takeover may result from the improvement in the governance of the target assets. In full takeovers, the corporate governance regulation of the bidder is imposed on the target (the positive spillover by law hypothesis). In partial takeovers, the improvement in the target corporate governance may occur on voluntary basis (the spillover by control hypothesis). Our empirical analysis corroborates both spillover effects. In contrast, when the bidder is from a country with poorer shareholder protection, the negative spillover by law hypothesis states that the anticipated takeover gains will be lower as the poorer corporate governance regime of the bidder will be imposed on the target. The alternative bootstrapping hypothesis argues that poor-governance bidders voluntarily bootstrap to the better-governance regime of the target. We do find support for the bootstrapping effect.

Using financial and ownership data from eight East Asian emerging markets before the Asian financial crisis, we document that while the sensitivity of a firm's capital investment to its cash flow decreases as the cash-flow rights of its largest shareholders increase, this sensitivity increases as the degree of the divergence between the control rights and cash-flow rights of the firm's largest shareholders increases. We interpret the results to be consistent with the free cash-flow hypothesis, which postulates that too much free cash flow in the hands of entrenched managers is likely to lead to overinvestment. This is particularly true for firms with the greatest divergence between the largest shareholders' control rights and their cash-flow rights and for firms with lower profitability.

This paper investigates the effect of stock market microstructure on managerial compensation schemes. We propose and empirically demonstrate that the sensitivity of chief executive officer's (CEO's) compensations to changes in stockholders' value is higher when the stock market facilitates the production and aggregation of private or public information. Using stock trading data and analysts' earnings forecast data, we construct five different measures of the information content in stock prices. These measures, separately and jointly, account for the cross-sectional variations in CEO pay-performance sensitivity well. Our results are robust to the choice of samples, incentive measures, model specifications, and estimation methods. We extend the analysis to non-CEO executives and executive teams and find similar results.

Firms that made earnings-decreasing restatements over the period 1990 to 2001 lost $72 billion around restatement announcements. Forty-seven large-loss firms restating their earnings in the 1998 to 2001 period account for $66 billion of these losses. Despite very good stock performance and low book-to-market values before earnings misstatements, large-loss firms are associated with mean abnormal returns of −39% during the announcement period, and underperform matched firms by 44% during the first post-restatement year. Collectively, our results support Jensen's [Jensen, M.C. Agency costs of overvalued equity. Financial Management 2005;34; 5–19.] argument that substantial overvaluation of equity pressures managers to manipulate earnings and when investors learn about earnings restatements by overvalued firms, they reevaluate firms to correct not only for pre-misstatement overvaluation, but also for the loss of confidence in the firms' managers.

Using panel data on 275 German exchange-listed companies I examine the relationship between founding-family ownership and firm performance. By separating the family effect from general blockholder effects, the paper shows that family firms are not only more profitable than widely-held firms but also outperform companies with other types of blockholders. However, the performance of family businesses is only better in firms in which the founding-family is still active either on the executive or the supervisory board. These findings suggest that family ownership is related to superior firm performance only under certain conditions. If families are just large shareholders without board representation, the performance of their companies is not distinguishable from other firms. In addition, the results indicate that other blockholders either affect firm performance adversely or have no detectable influence on performance measures.