Why do public firms go private in the UK? The impact of private equity investors,incentive realignment and undervaluation

This paper examines the magnitude and the sources of the expected shareholder gains in UK public to private transactions (PTPs) in the second wave from 1997 to 2003. Pre-transaction shareholders on average receive a premium of 40% and the share price reaction to the PTP announcement is about 30%. We test the sources of the anticipated value creation of the delisting and distinguish between: tax benefits, incentive realignment, control reasons, free cash flow reduction, transactions cost reduction, takeover defences, undervaluation and wealth transfers, The main sources of the shareholder wealth gains are undervaluation of the pre-transaction target firm, increased interest tax shields and incentive realignment. An expected reduction of free cash flows does not determine the premiums, nor are PTPs a defensive reaction against a takeover.     

Separation of Ownership from Control and Acquiring Firm Performance: The Case of Family Ownership in Canada

Abstract:   This study investigates the relationship between ownership structure and acquiring firm performance. A large proportion of Canadian public companies have controlling shareholders (families) that often exercise control over voting rights while holding a small fraction of the cash flow rights. This is achieved through the concurrent use of dual class voting shares and stock pyramids. Many suggest that these ownership structures involve larger agency costs than those imposed by dispersed ownership structures and that they distort corporate decisions with respect to investment choices such as acquisitions. We find that average acquiring firm announcement period abnormal returns for our sample of 327 Canadian transactions are positive over the 1998–2002 period. Cash deals, acquisitions of unlisted targets and cross‐border deals have a positive impact on value creation. Governance mechanisms (outside block‐holders, unrelated directors and small board size) also have a positive influence on the acquiring firm performance. Further, the positive abnormal returns are greater for family firms. We do not find that separation of ownership and control has a negative impact on performance. These results suggest that, contrary to other jurisdictions offering poor minority shareholder protection or poor corporate governance, separation of control and ownership is not viewed as leading to value destroying mergers and acquisitions, i.e., market participants do not perceive families as using M&A to obtain private benefits at the expense of minority shareholders. We do find a non‐monotonic relationship between ownership level and acquiring firm abnormal returns. Ownership of a majority of the cash flow rights has a negative impact on announcement returns. This is consistent with the view that large shareholders may undertake less risky projects as their wealth invested in the firm increases.     

A Test of the Debt-Monitoring Hypothesis: The Case of Corporate R&D Expenditures

Studies that test for shareholder wealth effects of announcements of plans to increase R&D expenditures find an average positive effect, but also a significant cross-sectional variation. This study determines whether the effect can be predicted when the announcing firm's capital structure is considered. Results suggest a positive relation between the debt ratio and the R&D induced abnormal stock returns. These results are robust using different industry-adjusted and unadjusted measures of capital structure and while controlling for several potentially influential variables. In addition, the gains to shareholders do not seem to be wealth transfers from bondholders. This evidence provides support to the debt-monitoring hypothesis.     

It's Showtime: Do Managers Report Better News Before Annual Shareholder Meetings?

Annual shareholder meetings provide an opportunity for shareholders to express their concerns with corporate performance, pressuring managers to demonstrate good performance. We show that managers respond to the shareholder pressure by reporting positive corporate news before the annual shareholder meetings. Specifically, we find significantly positive average cumulative abnormal returns (CARs) during the 40 days before the annual meeting date. The premeeting returns are significantly higher when shareholder discontent with managerial performance is likely to be stronger. The decile of companies with the worst past stock price performance exhibits average CARs of 3.4% and buy‐and‐hold returns of 7.0% during the 40‐day premeeting period. Companies with poor past performance exhibit even higher premeeting returns when shareholder pressure on management is greater, such as when institutional ownership is high, when CEO compensation is high, and when shareholders submit proxy proposals on corporate governance. We complement the evidence based on CARs by showing how managers of poorly performing firms manage the timing and content of earnings announcements and management forecast announcements before the annual shareholder meetings. Overall, the results suggest that managers attempt to influence shareholders before annual shareholder meetings through positive news.     

Multiple blockholders and earnings management

This paper examines the impact of multiple blockholders on earnings management when the main conflict of interest is between controlling shareholder and other shareholders. Using a sample of Chinese listed firms from 2000 to 2017 and controlling for potential sample selection and endogeneity, we find that firms with multiple blockholders tend to have higher earnings management than firms with a single controlling shareholder. The positive impact of multiple blockholders on earnings management is more pronounced when those blockholders are the same type – state or private. Earnings management is also enhanced with more large shareholders and higher relative ownership of other large shareholders to the controlling shareholder. The results are consistent with the cost-sharing hypothesis, where the other large shareholders shoulder the costs of earnings management with the controlling shareholder proportionally, but not the private benefits of control. Further tests show that the positive relation between multiple large shareholders and earnings management is less pronounced in firms with stronger internal or external governance. Overall, our paper demonstrates a potential dark side of multiple blockholders from the angle of financial reporting quality.     

中小股东仅能“搭便车”么?——来自深交所社会公众股东网络投票的经验证据

本文利用深交所的社会公众股东网络投票数据,研究了中小股东参与网络投票与公司决策的影响因素和经济后果。结果表明,大股东代理问题严重、机构投资者持股比例较高的公司,中小股东的网络投票参与率较高;中小股东的网络投票参与率与公司股票异常回报正相关,并且这种关系随着大股东代理问题的严重程度而增强。与小股东利益更为相关的股权分置改革提案中,中小股东投票参与率更高,并且这种更高的投票参与率在股权分置改革提案中能为中小股东增进财富。     

Capital gains taxation and shareholder wealth in takeovers

Before December 1999, the capital gains of shareholders who sold their shares into Australian takeovers have been taxable irrespective of payment method. Subsequently, shareholders can elect to rollover capital gains in equity takeovers. We examine the effect of this change on the association between target shareholder capital gains and bidder and target firm shareholder wealth. The results indicate that prior to the regulatory change, cash consideration results in higher target shareholder returns for non‐taxation reasons. After the introduction of capital gains tax rollover relief, we find that target and acquiring firm shareholders earn lower returns when cash consideration is offered to shareholders with greater capital gains.     

Shareholder wealth gains through better corporate governance—The case of European LBO-transactions

We examine shareholder wealth effects in a heterogeneous sample of 115 European leveraged going private transactions from 1997 to 2005. Average abnormal returns as reaction to the LBO announcement amount to 24.20%. In cross-sectional regressions, we find that these value gains can largely be attributed to differences in corporate governance: on a macro level, abnormal returns for pre-LBO shareholders are larger in countries with a poor protection of minority shareholders. On a firm level, companies with a high pre-LBO free float and comparatively weak monitoring by shareholders tend to show high abnormal returns. Furthermore, companies that are undervalued with respect to an industry peer-group exhibit higher announcement returns, indicating that agency conflicts and/or market inefficiencies can serve as an explanation.

Who benefits from bond tender offers in Europe?

This paper investigates the wealth effects of European cash tender offers for bonds during the period from 1996 to 2005. European bond offers are made to refinance (35% of cases), to reduce debt (40%) or triggered by an ownership change (25%). We investigate the wealth effects to both bondholders and shareholders. Cash tender offers for bonds turn out to be value creating for firms; with bondholders taking most of the gains on a relative basis. We find no evidence of wealth transfers from shareholders to bondholders: bondholders are paid an average tender premium of 3.9% but shareholders do not experience a significant wealth loss. Shareholders even benefit from making refinancing bond tender offers after a drop in interest rates. The wealth effects to both bondholders and shareholders increase in the remaining time to maturity. This suggests that tendering the bonds, rather than waiting for them to mature, is a win-win situation for both types of security holders.     

Non-controlling large shareholders in emerging markets: Evidence from China

Non-controlling large shareholders play an important role in corporate governance in emerging markets where controlling shareholder expropriation is a major concern. We argue that non-controlling large shareholders are faced with two non-conflicting incentives: to take advantage of their information advantage and obtain positive abnormal returns when they trade company shares, and to serve as effective monitors and minimize controlling shareholders' appropriation of company wealth. Using a sample of large shareholders' selling events upon the expiration of the lockup period following the split-share structure reform in China, we find that non-controlling large shareholders successfully time the market, as shown by their positive abnormal returns when selling their shares. Their returns are higher if they have a greater information advantage. Furthermore, the positive returns of the controlling large shareholder are negatively related to non-controlling large shareholders' ownership, suggesting that non-controlling large shareholders play a monitoring role and prevent controlling shareholders from looting the company. We also show that large shareholders affiliated with the controlling shareholders are not subject to as high a level of monitoring as those controlling shareholders are. Furthermore, both firm opaqueness and the severity of agency cost affect the quality of non-controlling large shareholders' monitoring.     

Dividend taxation and the ownership structure of private firms

This paper examines the effect of dividend taxation on the ownership structure of private firms. I exploit a German dividend tax increase that only affects corporate shareholders owning a minority stake. Using data on private German firms and their shareholders, I find that corporate shareholders reduce their minority stakes in firms after the dividend tax reform. This result is in line with the notion that, because minority shareholders do not have sufficient decision-making power to influence the payout policy, they can only react to a dividend tax increase by selling their shares. This effect is larger when the affected minority shareholders face high dividend tax costs. However, I find a smaller effect when the benefits of the minority stakes are highly relevant for the firm and the affected shareholders, suggesting that non-tax factors mute the response to dividend taxes. In addition, I find that the largest shareholder of the firm buys the minority stake, resulting in greater ownership concentration. These findings extend the prior literature that finds no effect of dividend taxes on the ownership structure of private firms.     

Governance quality and privately negotiated stock repurchases: Evidence of agency conflict

This study examines the impact of shareholder rights on the wealth effects of privately negotiated stock repurchases. Our results show that wealth gains are lower when shareholder rights are more suppressed. We also find that the premium paid for shares is inversely related to the strength of shareholder rights, and this suggests that managers pay higher premiums when shareholder rights are more restricted. These findings imply that managers use shareholders’ funds to eliminate blockholders who are more likely to monitor them when shareholder rights are relatively weak, thereby entrench themselves. Consistent with this view, we further show that significant positive abnormal long-run returns after private stock repurchases are limited to firms with stronger shareholder protection. Overall, the evidence is consistent with the predictions of agency theory.     

The Role of ESOPs in Takeover Contests

This article examines both the shareholder wealth effects of employee stock ownership plans (ESOPs) announced by firms subject to takeover pressure and the takeover incidence of targets with and without ESOPs. Although we do not find that defensive ESOPs significantly reduce shareholder wealth on average, we identify two factors—the change in managerial and employee ownership due to the ESOP and the simultaneous announcement of other defensive tactics—that are associated with negative stock price reactions. We find that ESOPs are strong deterrents to takeover. ESOP targets that are acquired earn higher returns than targets without ESOPs, but the difference is not statistically significant.     

Shareholder Value Creation in European M&As

This paper looks at the value generated to shareholders by the announcement of mergers and acquisitions involving firms in the European Union over the period 1998–2000. Cumulative abnormal shareholder returns due to the announcement of a merger reflect a revision of the expected value resulting from future synergies or wealth redistribution among stakeholders. Target firm shareholders receive on average a statistically significant cumulative abnormal return of 9% in a one‐month window centred on the announcement date. Acquirers’ cumulative abnormal returns are null on average. When distinguishing in terms of the geographical and sectoral dimensions of the merger deals, our main finding is that mergers in industries that had previously been under government control or that are still heavily regulated generate lower value than M&A announcements in unregulated industries. This low value creation in regulated industries becomes significantly negative when the merger involves two firms from different countries and is primarily due to the lower positive return that shareholders of the target firm enjoy upon the announcement of the merger. This evidence is consistent with the existence of obstacles (such as cultural, legal, or transaction barriers) to the successful conclusion of this type of transaction, which lessen the probability of the merger actually being completed as announced and, therefore, reduce its expected value.     

Voice and power: Do institutional shareholders make use of their voting power?

I investigate the role of voting power – the ability to influence a vote's outcome – in the voting behavior of institutional shareholders. Using hand-collected data from Israel, an environment with concentrated ownership, I employ a power index borrowed from the political science literature to examine the voting power wielded by institutional shareholders and the voting patterns they display. I find that institutional shareholders' voting power is negatively related to their tendency to vote against management: the stronger the shareholder, the higher the probability they will vote in favor of a management-sponsored proposal. Based on evidence obtained here, this behavior is attributable to pre-vote negotiations as well as to the voting strategy of “counting on my vote not counting.” Next, I use detailed data on shareholders' votes to identify the channel through which a voting rule affects minority shareholder protection. I find that powerful institutional shareholders almost never use their voting power to vote against management, not even when signals of poor governance are discernible. I conclude that the effect of a voting rule on minority shareholder protection operates through proposal selection, rather than through direct voting.     

Shareholder Taxes in Acquisition Premiums: The Effect of Capital Gains Taxation

We exploit cross‐temporal differences in capital gains tax rates to test whether shareholder‐level capital gains taxes are associated with higher acquisition premiums for taxable acquisitions. We model acquisition premiums as a function of proxies for the capital gains taxes of target shareholders, taxability of the acquisition, and tax status of the price‐setting shareholder as represented by the level of target institutional ownership. Consistent with a lock‐in effect for acquisition premiums, results suggest a unique positive association between shareholder capital gains taxes for individual investors and acquisition premiums for taxable acquisitions, which is mitigated by target institutional ownership.     

Does cross-listing facilitate changes in corporate ownership and control?

This paper examines whether controlling shareholders of foreign firms use a US cross-listing to facilitate changes in ownership and control. Prior to listing, about three quarters of the firms in our sample have a controlling shareholder. After listing, about half of the controlling shareholders’ voting rights decrease, with an average decrease of 24% points that differs significantly from that of the controlling shareholders of benchmark firms that do not cross-list. Large decreases in voting rights are associated with controlling shareholder characteristics, domestic market constraints, and better stock market performance and liquidity. In addition, there is control change in 22% of the firms. Controlling shareholders are more likely to sell control, and are more likely to do so to a foreign buyer, than controlling shareholders of benchmark firms. The results suggest that controlling shareholders who want to sell shares or their control stake can use a US cross-listing to decrease the cost of transferring ownership.     

What Drives Shareholder Reaction and Wealth Effect in Block Trades? Evidence from the Warsaw Stock Exchange

The main objective of this article is to present the determinants of shareholder reaction to block trades and their wealth effect on the Warsaw Stock Exchange. The positive abnormal returns obtained for the entire sample indicate that block trades create shareholder value. Shareholders reacted positively to block trades without a control transfer in the Polish market, and their reaction was stronger than in the US market. Abnormal returns of block trades concluded at a discount were twice as high as those for the entire sample. Moreover, cross-border block trades had a negative impact on shareholder value creation, as did financial investors as an acquirer. However, cumulative average abnormal returns (CAARs) were driven up by the relative power of minority shareholders (ocean) prior to the transaction. The absolute size of the block acquired by an investor was also observed to have a positive impact on price rises and abnormal returns.     

Founders,heirs, and corporate opacity in the United States

We argue that information about firm activities can vary substantially in the presence of founder or heir ownership, thereby influencing the risks borne by minority investors. We explore two hypotheses with regard to these controlling shareholders and corporate transparency, focusing on their role as monitor in-place and their potential to exploit firm opacity to accrue private benefits of control. To test these notions, we create an opacity index that ranks the relative transparency of the two thousand largest industrial US firms and find founder and heir ownership in 22% and 25% of these firms, respectively. Our analysis indicates that, in large, publicly traded companies, both founder and heir firms are significantly more opaque than diffuse shareholder firms. We also find that founder and heir-controlled firms exhibit a negative relation to performance in all but the most transparent firms. Surprisingly, additional tests reveal that concerns about divergences in ownership versus control (management type, dual class shares, and board influence) appear to be substantially less important than corporate opacity in explaining the performance impacts of founder and heir control. Finally, we decompose corporate opacity into disclosure and market scrutiny components, finding that the disclosure quality component appears to be of greater importance to investors. However, irrespective of whether these controlling shareholders create or stay in the firm because of corporate opacity, our analysis suggests that founders and heirs in large, publicly traded firms exploit opacity to extract private benefits at the expense of minority investors.     

Effects of recontracting on shareholder wealth: The case of voluntary spin-offs

This paper investigates the effect of voluntary corporate spin-off announcements on shareholder wealth. A significant positive share price reaction is documented for 93 voluntary spin-off announcements between 1963 and 1981. These shareholder gains do not appear to come wholly at the expense of bondholders. Evidence suggests the gains to shareholders may arise from tax and regulatory advantages and/or improved managerial efficiency resulting from the spin-off.