Knowledge that Transforms

In this paper we examine how separation of ownership and control evolves as a result of an Initial Public Offering (IPO) and how the underpricing of the issue can be used by insiders to retain control. Using data from a sample of 69 IPOs in the UK, we show that underpricing is used to ensure oversubscription and rationing in the share allocation process so as to allow owners to discriminate between applicants for shares and to reduce the block size of new shareholdings. We find that of the pre-IPO shareholders in a firm, directors sell only a modest fraction of their shares at the time of the offering and in the seven subsequent years. In contrast, holdings of non-directors are virtually eliminated during the same period. As a result, in less than seven years, almost two-thirds of the offering company's shares have been sold to outside shareholders, thereby substantially advancing the process of separation of ownership and control. Additional evidence in the paper suggests that rationing in the IPO discriminates against applicants who apply for large blocks, and that larger under-pricing is associated with smaller blocks being held by new investors some seven years after the IPO. Also, there is a low level of hostile takeovers in the period of up to ten years after the IPO, which is consistent with effective protection by insiders against hostile changes of control.

In the first round of the Czech privatization scheme, the authorities set a uniform share price for all companies, creating a natural experiment for testing several hypotheses concerning the determinants of share demand. We find a positive relation between first-round share demand and later stock market prices, supporting use of share demand to measure relative share values. We find that share demand is related to proxies for agency costs and the expected costs of financial distress. Interestingly, share demand is directly related to the percentage of shares held by insiders, which is relevant for the debate in former Communist countries over whether privatization programs should restrict insider holdings.

This study uses a new database to describe the composition and compensation of boards of directors of U.S. open-end mutual funds. We use these data to examine the relation between board structure and the fees charged by a fund to its shareholders. We find that shareholder fees are lower when fund boards are smaller, have a greater fraction of independent directors, and are composed of directors who sit on a large fraction of the fund sponsor's other boards. We find some evidence that funds whose independent directors are paid relatively higher directors' fees approve higher shareholder fees.

We examine the role of the target firm's independent outside directors during takeover attempts by tender offer. We find that when the target's board is independent, the initial tender offer premium, the bid premium revision, and the target shareholder gains over the entire tender offer period are higher, and that the presence of a poison pill and takeover resistance lead to greater premiums and shareholder gains. We conclude that independent outside directors enhance target shareholder gains from tender offers, and that boards with a majority of independent directors are more likely to use resistance strategies to enhance shareholder wealth.

This study explores multivariate methods for investment analysis based on return histories that differ in length across assets. The longer histories provide greater information about moments of return, not only for the longer-history assets, but for the shorter-history assets as well. To account for the remaining parameter uncertainty, or ‘estimation risk’, portfolio opportunities are characterized by a Bayesian predictive distribution. Examples involving emerging markets demonstrate the value of using the combined sample of histories and accounting for estimation risk, as compared to truncating the sample to produce equal-length histories or ignoring estimation risk by using maximum-likelihood estimates.

This special issue of the Journal of Financial Economics includes six articles that analyze the market microstructure of Nasdaq in various ways. The question of the costs of trading on Nasdaq has become contentious in both the academic and legal/regulatory arenas since the Christie and Schultz (1994) article first noted that many actively traded Nasdaq stocks were almost never quoted on odd eights. The articles in this symposium bring new and interesting insights to this debate.

Going public typically leads to a separation of managerial control and stock ownership, and potentially worsens managerial incentives. We document that the median ownership stake of officers and directors declines significantly from the year before going public to ten years later. Median operating return on assets also declines from the year before the offering to the end of the first year of public trading, but performance declines no further in ten years. In general, operating performance both within one year of the offering and during the first ten years of public trading is unrelated to ownership of officers and directors.

Mutual funds are typically grouped by their investment objectives or the ‘style’ of their managers. We propose a new empirical to the determination of manager ‘style’. This approach is simple to apply, yet it captures nonlinear patterns of returns that result from virtually all active portfolio management styles. Our classifications are superior to common industry classifications in predicting cross-sectional future performance, as well as past performance, and they also outperform classifications based on risk measures and analogue portfolios. Interestingly, ‘growth’ funds typically break down into several categories that differ in composition and strategy.

We analyze the empirical power and specification of test statistics in event studies designed to detect long-run (one- to five-year) abnormal stock returns. We document that test statistics based on abnormal returns calculated using a reference portfolio, such as a market index, are misspecified (empirical rejection rates exceed theoretical rejection rates) and identify three reasons for this misspecification. We correct for the three identified sources of misspecification by matching sample firms to control firms of similar sizes and book-to-market ratios. This control firm approach yields well-specified test statistics in virtually all sampling situations considered.

This paper examines the magnitude and determinants of transactions costs for a sample of institutional traders with different investment styles. Using order-level data for recent equity transactions totaling $83 billion, we find that trading costs are economically significant and increase with trade difficulty. In addition, costs vary with traderspecific factors such as investment style and order submission strategy, as well as stock-specific factors such as exchange listing. We find evidence that institutional trades in exchange-listed stocks have lower costs than in comparable Nasdaq stocks.