Firm Transparency and the Costs of Going Public

We demonstrate that firms that are more transparent pay less, in all components of issuance costs, to go public. We employ a sample of 334 previous leveraged buyouts and a characteristic-matched control sample to test the hypothesis that greater firm transparency before the issue decreases the flotation costs of the initial public offering. These flotation costs are divided into initial underpricing, underwriter discount, administrative expenses, and the overallotment option required to take the firm public. Our results provide further evidence of the asymmetric information hypothesis as it applies to initial public offerings.     

The performance of reverse leveraged buyouts

Reverse leveraged buyouts (RLBOs) have received increased public scrutiny but attracted little systematic study. We collect a comprehensive sample of 526 RLBOs between 1981 and 2003 and examine the three-year and five-year stock performance of these offerings. RLBOs appear to perform as well as or better than other initial public offerings and the stock market as a whole, depending on the specification. Evidence exists of a deterioration of returns over time.     

The decision to first enter the public bond market: The role of firm reputation,funding choices,and bank relationships

This paper uses survival analysis to investigate the timing of a firm’s decision to issue for the first time in the public bond market. We find that firms that are more creditworthy and have higher demand for external funds issue their first public bond earlier. We also find that issuing private bonds or taking out syndicated loans is associated with a faster entry to the public bond market. According to our results, the relationships that firms develop with investment banks in connection with their private bond issues and syndicated loans further speed up their entry to the public bond market. Finally, we find that a firm’s reputation has a “U-shaped” effect on the timing of a firm’s bond IPO. Consistent with Diamond’s reputational theory, firms that establish a track record of high creditworthiness as well as those that establish a track record of low creditworthiness enter the public bond market earlier than firms with intermediate reputation.     

The effects of regulation on industry structure and trade generation in the US securities industry

This study investigates the effects of Regulation FD and the Global Research Analyst Settlement on market share within the US securities industry as well as the determinants of market share during 1996–2004. We find that these regulations did not cause top brokers to lose market share in spite of their reduction of information asymmetries existing within the brokerage industry. They did, however, significantly reduce the quarterly variability in market share changes. We find that Regulation FD and the Global Research Analyst Settlement reduce the importance of an all-star analyst, issuer affiliation, and analyst optimism for gaining brokerage market share. We further discover that the Global Research Analyst Settlement increases the importance of coverage as a market share determinant while reducing the value of analyst experience for non-top brokers. We find that our results remain robust even when we limit our analysis to a set of pure brokerage firms.     

The impact of all-star analyst job changes on their coverage choices and investment banking deal flow

Using a sample of all-star analysts who switch investment banks, we examine (1) whether analyst behavior is influenced by banking relationships and (2) whether analyst behavior affects investment banking deal flow. Although the stock coverage decision depends on the relationship with the client firms, we find no evidence that analysts change their optimism or recommendation levels when joining a new firm. Investment banking deal flow is related to analyst reputation only for equity transactions. For debt and M&A transactions, analyst reputation does not matter. There is no evidence that issuing optimistic earnings forecasts or recommendations affects investment banking deal flow.     

The JOBS Act and the Costs of Going Public

We examine the effects of Title I of the Jumpstart Our Business Startups Act for a sample of 312 emerging growth companies (EGCs) that filed for an initial public offering (IPO) from April 5, 2012 through April 30, 2015. We find no reduction in the direct costs of issuance, accounting, legal, or underwriting fees for EGC IPOs. Underpricing, an indirect cost of issuance that increases an issuer's cost of capital, is significantly higher for EGCs compared to other IPOs. More importantly, greater underpricing is present only for larger firms that are newly eligible for scaled disclosure under the Act. Overall, we find little evidence that the Act in its first three years has reduced the measurable costs of going public. Although there are benefits of the Act that issuers appear to value, they should be balanced against the higher costs of capital that can occur after its enactment.     

The role of institutional investors in seasoned equity offerings

Do institutional investors possess private information about seasoned equity offerings (SEOs)? If so, do they use this private information to trade in a direction opposite to this information (a manipulative trading role) or in the same direction (an information production role)? We use a large sample of transaction-level institutional trading data to distinguish between these two roles of institutional investors. We explicitly identify institutional SEO allocations for the first time in the literature. We analyze the consequences of the private information possessed by institutional investors for SEO share allocation, institutional trading before and after the SEO and realized trading profitability, and the SEO discount. We find that institutions are able to identify and obtain more allocations in SEOs with better long-run stock returns, they trade in the same direction as their private information, and their post-SEO trading significantly outperforms a naive buy-and-hold trading strategy. Further, more pre-offer institutional net buying and larger institutional SEO allocations are associated with a smaller SEO discount. Overall, our results are consistent with institutions possessing private information about SEOs and with an information production instead of a manipulative trading role for institutional investors in SEOs.     

The effect of leverage on the cost of capital of US buyouts

This paper addresses the problem to assess the effect of leverage on the cost of capital for buyout performance analyses. It draws on a unique and proprietary set of data on 133 US buyouts between 1984 and 2004. For each of them, we determine a public market equivalent that matches it with respect to its timing and its systematic risk. We show that under realistic mimicking conditions, the average cost of capital is below the commonly used benchmark S&P 500. Thereby, we control for two important aspects: for the risks taken by lenders in the buyout transactions (which affects the sponsors’ risks), and for the corresponding cost of debt (which lowers the return of the public market equivalent). Only with borrowing and lending at the risk-free rate is the average cost of capital close to the average index return. This finding is particularly important as existing literature on that topic tends to rely on benchmarks without a proper risk-adjustment.     

Bought deals: The value of underwriter certification in seasoned equity offerings

The bought deal is the predominant method of underwriting SEOs in Canada. Offer prices are set and underwriters commit to purchase offerings several days earlier for bought deals than for firm commitment issues, implying stronger underwriter certification for bought deal issues. Consistent with the certification hypothesis, this study finds a significantly smaller negative stock price reaction around the announcement of bought deals compared to firm commitment issues. Bought deals are further shown to have smaller offer price discounts and smaller underwriting fees, implying superior pricing and thus, higher quality offerings. These findings suggest that investment banks’ underwriting method of choice is informative of issue quality.     

On the marketing of IPOs

Derrien [2005. Journal of Finance 60, 487–521] and Ljungqvist et al. [2006. Journal of Business] build upon the work of Miller [1977. Journal of Finance 32, 1151–1168] and claim that issuers and the regular customers of investment bankers benefit from the presence of sentiment investors (noise traders) in the market for an initial public offering (IPO). Thus we argue that investment bankers have an incentive to promote an IPO to induce sentiment investors into the market for it. Consistent with this motivation and these models, we expect that the promotional efforts of investment bankers should influence the compensation of investment bankers, the valuation of an IPO, its initial returns and trading, the wealth gains of insider shareholders, and the likelihood that an issuer switches investment bankers for a subsequent seasoned equity offering. Examining data for a sample of IPOs from 1993 through 2000, we find evidence consistent with these predictions and so with the proposition that an investment banker's ability to market an IPO to sentiment investors is important.     

An analysis of the liquidity benefits provided by secondary markets

Listing shares in liquid secondary markets either to facilitate acquisitions or to diversify owner’s personal wealth are among the most important reasons for firms to go public [Brau, J.C., Fawcett, S.E., 2006. Initial public offerings: An analysis of theory and practice. Journal of Finance 61, 399–436]. We contend that the expected benefits derived from the liquidity provided by secondary markets are relevant for understanding important decisions made in preparation for an IPO. We hypothesize that the potential losses caused by an IPO failure induce firms that benefit more from going public to hire more reputable underwriters and to adopt more conservative pricing policies. We use several proxies for the benefits firms derive from post-IPO liquidity. The results indicate that firms that benefited more from liquidity were taken public by more prestigious underwriters and exhibited substantially larger levels of price revisions and underpricing. Post-IPO liquidity is also important for understanding the decision to retain the lead underwriter in subsequent SEOs.     

Determinants of start-up firm external financing worldwide

The typical new start-up firm acquires external financing in stages through its development. Researchers have frequently examined the later stages of financing; however, they have rarely analyzed the early stages of financing. This study examines the determinants of the initial start-up financing of entrepreneurial firms in 27 countries. There are information asymmetries and moral hazard problems inherent in the funding of an initial start-up firm. Empirical results show that institutional investors rely on the experience of entrepreneurs in managing start-ups and the quality of investor protection to reduce moral hazard. On the other hand, informal investors are also common in initial start-up funding. They tend to be attracted to the type of products in the new firm. In comparison, informal investors are likely to have a social relationship with the entrepreneur, and thus have information about that person’s skill and character, which renders entrepreneurial experience less important.     

Fund size, limited attention and valuation of venture capital backed firms

This paper examines the effect of fund size on investee firm valuations in the venture capital market. We show a convex (U-shape) relationship between fund size and firm valuations. We further document that firm valuations are positively correlated to measures of limited attention. In addition, we show a concave (inverse U-shape) relationship between fund size and venture's performance measured as the probability of successful exits. Further, this relation is particularly strong when the pre-money valuation of the investment is high. Our findings hold across a wide range of robustness checks, including but not limited to sample selection and correction for unobserved company-level value drivers. Our findings support the notion that there is diseconomy of scale in the venture capital industry, which is partially due to the constraints from the quality and quantity of human capital when fund size grows.     

The determinants of shareholder value in European banking

This paper examines the determinants of shareholder value creation for a large sample of European banks between 1998 and 2005. As the recent turmoil in global banking systems has illustrated, bank performance can have a substantial influence on efficient capital allocation, company growth and economic development. We use a dynamic panel data model where the bank’s shareholder value is a linear function of various bank-specific, industry-specific and macroeconomic variables. We show that shareholder value has a positive relationship with cost efficiency changes, while economic profits are linked to revenue efficiency changes. Credit losses, market and liquidity risk and leverage are also found to substantially influence bank performance. These results are robust to a variety of different model specifications.     

The market for certification by external parties: Evidence from underwriting and banking relationships

This paper provides evidence that an underwriter is better able to certify an equity issue if it has a lending relationship with the firm. An announcement of being underwritten by the firm’s lending-relationship bank reduces ex post information asymmetry, thereby improving the announcement return. Further, because this reduction in information asymmetry effectively disseminates what was previously the lending bank’s private information, it decreases its affiliated market maker’s information advantage, thus reducing its contribution to price discovery and liquidity. These results provide evidence on the value of information production and transmission by banks, and more generally on the role of external parties in reducing information asymmetry.     

Stock exchange demutualization,self-listing and performance: The case of the Australian Stock Exchange

This paper examines the effects of the recent spate of financial exchange mutual-to-stock conversion phenomenon on the performance of listed exchanges and the quality of the stock market using the Australian Stock Exchange (ASX) as a case study. We find that the ASX stock significantly outperformed the stock index and the control group on a market-adjusted return basis. The stock market performance is driven by strong operating performance. The profitability ratios of the ASX have significantly improved in the five years following the demutualization and self-listing. The performance improvements remain significant even after controlling for growth in the Australian economy. From a market quality perspective, we document evidence of increased trading activity by foreign investors after ASX’s demutualization and self-listing. Interestingly, we also find that bid-ask spreads of the stock market have narrowed in the post-conversion period. In particular, small-cap firms have become more liquid. The results show that stock exchange conversion from mutual to publicly traded exchange is not only value enhancing for the exchange and its shareholders, but it is also beneficial for the stock market as a whole.     

The colors of investors’ money: The role of institutional investors around the world

We study the role of institutional investors around the world using a comprehensive data set of equity holdings from 27 countries. We find that all institutional investors have a strong preference for the stock of large firms and firms with good governance, while foreign institutions tend to overweight firms that are cross-listed in the U.S. and members of the Morgan Stanley Capital International World Index. Firms with higher ownership by foreign and independent institutions have higher firm valuations, better operating performance, and lower capital expenditures. Our results indicate that foreign and independent institutions, with potentially fewer business ties to firms, are involved in monitoring corporations worldwide.     

Tax and Regulatory Motivations for Issuing Non-voting, Non-convertible Preferred Stock

This paper extends prior studies that attempt to explain the existence of unique securities, particularly Engel, Erickson, and Maydew [1999], by investigating why firms issue non-voting, non-convertible preferred stock (PS) instead of other securities. We find that the choice of PS is influenced by tax and regulatory changes imposed by the Tax Reform Act of 1986 (TRA86) and the 1989 Basle Banking Accord as well as various firm specific incentives. We find that industrials issue PS to preserve tax attributes by avoiding an ownership change and to maximize foreign tax credit utilization. In addition, we find that the regulatory requirements of the Basle Accord influence the choice by banks to issue PS. Finally, we show that although firms could have issued alternative securities that would have allowed them to achieve the same tax or regulatory goals, firm specific factors limit their ability to do so. For example, firms can also avoid triggering an ownership change by issuing straight debt, however, financial distress considerations may constrain their ability to issue additional debt. Therefore, we demonstrate that the final choice of PS is influenced by a combination of tax, regulatory, and firm specific incentives.     

Pre-IPO ownership structure and its impact on the IPO process

We investigate the impact of pre-issue ownership structure on the key decisions surrounding an IPO. We find that managerial ownership is significantly related to (1) the proportion of shares offered, (2) share allocation, and (3) direct issue-related expenses. This suggests that pre-IPO ownership by managers influences their incentive to maintain control and to lower the cost of going public. In comparison, large pre-IPO non-managerial shareholders are more concerned about exiting, and their presence tends to increase issue size and costs. Our findings indicate that differences in pre-IPO owners’ incentives and bargaining power as implied by their pre-IPO shareholdings can significantly influence the IPO process.