This paper investigates how French underwriters value the stocks of companies they bring public. Underwriters often use several valuation methods to determine their fair value estimate of the initial public offering (IPO) firm's equity. We investigate five of these valuation methods: peer group multiples valuation, the dividend discount model, the discounted cash flow model, the economic value-added method, and underwriter-specific methods. We document that underwriters base their choice for a particular valuation method on firm characteristics, aggregate stock market returns, and aggregate stock market volatility in the period before the IPO. In addition, we examine how underwriters combine the value estimates of the valuation methods they use into a fair value estimate by assigning weights to these value estimates. We demonstrate that these weights also depend on firm-specific factors, aggregate stock market returns, and aggregate stock market volatility. Finally, we show that underwriters discount their fair value estimate to set the preliminary offer price of the shares. This discount is higher for IPO firms with greater valuation uncertainty and lower for companies that are brought to the market by more reputable underwriters and that are forecasted to be more profitable.

This paper investigates how underwriters set the IPO firm’s fair value, an ex-ante estimate of the market value, using a unique dataset of 228 reports from French underwriters. These reports are issued before the IPO shares start trading on the stock market and detail how underwriters determined fair value. We document that underwriters often employ multiples valuation, dividend discount models and discounted cash flow (DCF) analysis to determine fair value but that all of these valuation methods suffer from a positive bias with respect to equilibrium market value. We also analyze how this fair value estimate is subsequently used as a basis for IPO pricing. We report that underwriters deliberately discount the fair value estimate when setting the preliminary offer price. Part of the intentional price discount can be recovered by higher price updates. We find that, controlling for other factors such as investor demand, part of underpricing stems from this intentional price discount.

This paper examines (i) whether market reactions to cross-listings differ across destination markets and (ii) to what extent the following explanations for value creation around cross-listings can account for differences in market reactions across cross-listings on various destination markets: overcoming market segmentation, increased market liquidity, improved information disclosure, and better investor protection ("bonding"). We analyze 526 cross-listings from 44 different countries on eight major stock exchanges and document significant announcement returns of 1.3% on average for cross-listings on US exchanges, 1.1% on London Stock Exchange, 0.6% on exchanges in continental Europe, and 0.5% (not significant) on Tokyo Stock Exchange. We find evidence consistent with improved disclosure and bonding creating value for cross-listings on US exchanges, while overcoming segmentation and bonding are associated with higher announcement returns on the London Stock Exchange. The evidence is mixed for continental European exchanges and for Tokyo. Our results highlight the role of the destination market in value creation around cross-listings. © 2009 Elsevier B.V. All rights reserved.

Going public often creates an agency conflict between the owner–manager and minority shareholders. This problem is especially severe in countries with poor legal investor protection, such as France. We examine the controlling position of owner–managers in French initial public offering (IPO) firms. We find that investors anticipate the increased agency conflict associated with a lock on control and lower firm value when the owner–manager is more powerful. Shareholder agreements in which the owner–manager agrees to share control with other pre-IPO owners enhance firm value. We also report that higher cash flow ownership by the owner–manager is positively related to firm value when he is not in full control. Finally, we document that the large (non-pecuniary) private benefits of control in France may motivate owner–managers to retain control after the IPO.

This paper examines whether the stock market valuation impact is consistent with subsequent operating performance of firms. We use data for equity rights offerings—the widely adopted flotation method in the Netherlands. We first examine the stock market announcement effect of rights issues and observe that a statistically significant stock price decline takes place when companies announce rights issues. Further stock price decline is also observed during the subscription period. We then analyze post-rights issue operating performance of firms and find that, consistent with the announcement period decline in stock price, rights issuing firms subsequently exhibit a statistically significant decline in their operating performance. Additional investigation of both stock and operating performance declines provides full support for the information asymmetry hypothesis, partial support for the free cash flow hypothesis but no support for the window of opportunity hypothesis.

Using a comprehensive database of firms from 21 European countries over the period 1998–2008, we find that venture capital investment has a positive effect on the rate of new business creation. This is especially true in countries with higher entry costs, higher protection of intellectual property rights, and lower taxes on capital gains. Our results suggest that, controlling for country and industry characteristics, venture capital is beneficial to bringing new ideas to the marketplace in the shape of new companies.

We investigate whether and how government interventions in the U.S. banking sector influence the stock market performance of corporate borrowers during the financial crisis of 2007–2009. We measure firms’ exposures to government interventions with an intervention score that is based on combined information on the firms’ structure of bank relationships and their banks’ participation in government capital support programs. We find that government capital infusions in banks have a significantly positive impact on borrowing firms’ stock returns. The effect is more pronounced for riskier and bank-dependent firms and for those that borrow from banks that are less capitalized and smaller.

Managers have the choice to take the firm private themselves in a management buyout or to seek private equity backing. We argue that managers seek private equity backing in case they are more constrained to finance the deal themselves. We confirm the hypothesis using a sample of UK public-to-private transactions over the period 1997–2003. A post going private performance analysis reveals that both management buyouts and private equity backed deals outperform their industry peers. However, private equity backed deals outperform their peers already before the deal takes place whereas management buyouts improve performance afterwards. This suggests a passive role for private equity firms in going private transactions.

We test whether stock liquidity affects acquirer returns through its hypothesized effect on institutional monitoring. We find that firms with lower stock liquidity have higher acquirer gains for takeovers of private targets, but not for takeovers of public targets. The negative relation between liquidity and acquirer gains is stronger when the threat of disciplinary trading (exit) by institutions is weaker and acquirers have higher agency costs. Acquirers of private targets with lower stock liquidity are more likely to withdraw deals and experience higher involuntary CEO turnover following value-destroying acquisitions. Our results support the hypothesis that stock liquidity weakens institutions' incentives to monitor management decisions, except in those cases where the disciplining effect of the threat of exit may be particularly high.

We investigate whether and how firms manage their rollover risk by having a dispersed bond maturity structure (granularity). Granularity can be achieved or maintained by frequently issuing sets of bonds with different maturities. We find that firms with higher granularity have higher availability of financing, lower cost of financing, lower financial constraints and lower stock return volatility. The effects are stronger for firms that face higher rollover risk. The evidence suggests that spreading out bond maturities is an effective corporate policy to manage rollover risk.