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.     

Conflicts of Interest and Research Quality of Affiliated Analysts in the German Universal Banking System: Evidence from IPO Underwriting

The quality of equity research by financial analysts is a prerequisite for an efficient capital market. This study investigates the quality of earnings forecasts and stock recommendations for initial public offerings (IPOs) in Germany. The empirical study includes 12,605 earnings forecasts and 6,209 stock recommendations of individual analysts for the time period from 1997 to 2004. The focus of this study is on analysing the potential conflicts of interest that arise when the analyst is affiliated with the underwriter of an IPO. In a universal banking system these conflicts of interest are usually more pronounced and therefore interesting to investigate. The empirical findings for the German financial market suggest that earnings forecasts and stock recommendations of the analysts belonging to the lead-underwriter are on average inaccurate and biased, indicating some conflicts of interest. Moreover, the stock recommendations of the analysts that are affiliated with the lead-underwriter are often too optimistic resulting in a significant long-run underperformance for the investor. In contrast, unaffiliated analysts provide better earnings forecasts and stock recommendations that result in a superior performance for the investor.     

Friends can help: The effects of relationship in the Chinese book-building process

Using detailed bidding information in Chinese IPO book-building process, we find that institutional investors who have a close relationship with the underwriter are more likely to participate in bidding and their bidding prices are higher, compared to other institutional investors. We also find that related institutional investors bid higher when the underwriter is more likely to need or receive their support. Further analysis suggests that related institutional investors gain some benefits for their support to the underwriter, including receiving more shares in profitable IPOs, better timing their exit from the IPO in the open market, and receiving more optimistic earnings forecasts or stock recommendations from analysts of the underwriter. Regarding the economic consequence, we show that the underwriter is more likely to revise the offer price upward if related institutions bid higher. The evidence overall indicates the existence of relationship-driven bidding in the Chinese book-building process.     

Blurred stars: Mutual fund ratings in the shadow of conflicts of interest

Using unique data on trading commission payments to mutual fund rating companies (MFRCs) by mutual funds in China, this paper investigates whether the conflicts of interest arising from trading commission payments bias MFRCs’ mutual fund star ratings and hence affect their informativeness. We find the rating of a mutual fund is more optimistic when the MFRC either (i) receives trading commission fees from the mutual fund or (ii) can potentially receive fees in the future. The paper further shows that the usefulness of ratings in terms of predicting a fund’s future performance is negatively impacted by conflicts of interest. There is also evidence that investors can see through the problem, responding less enthusiastically (in terms of fund flows) to the ratings of conflicted MFRCs. We further find that the introduction of a rating qualification system that aims to improve mutual fund rating quality exacerbates the rating bias.     

The Department of Justice as a gatekeeper in whistleblower-initiated corporate fraud enforcement: Drivers and consequences

We examine drivers and consequences of U.S. Department of Justice (DOJ) oversight of whistleblower cases of corporate fraud against the government. We find that the DOJ is more likely to intervene in and conduct longer investigations of cases that have a higher chance of victory and yield greater monetary proceeds, indicating that DOJ enforcement is influenced by its performance measures. DOJ intervention also affects the firm- and aggregate-level fraud environment. Firms subject to DOJ intervention improve their employee relations, internal controls, and board independence, and experience lower future whistleblowing risk. Whistleblowers avoid courts and agencies with low DOJ intervention rates. In contrast, we do not find that cases pursued by whistleblowers alone affect firms' or whistleblowers' behavior, suggesting that public enforcement through DOJ intervention has a greater deterrent effect on fraud than private enforcement by whistleblowers acting alone.     

The capitalization of taxes in bond prices: Evidence from the market for Government of Canada bonds

This paper provides estimates of the extent to which corporate and personal income taxes are capitalized in bond prices. The methodology yields estimates of the degree of tax capitalization, rather than an implied tax rate. This makes it straightforward to identify the marginal investor and test for changes in tax capitalization. The empirical approach also makes it unnecessary to jointly estimate the degree of tax capitalization and the entire yield curve. Corporate taxes are found to have been fully capitalized in pre-tax Government of Canada bond yields during the period 1986–1993. Since 1994, taxes have not been capitalized in yields. These results are consistent with the existence of a marginal investor, but the identity of the marginal investor changed from a financial sector firm to a non-taxed entity in the early 1990s.     

The Return to Direct Investment in Private Firms: New Evidence on the Private Equity Premium Puzzle*

This paper uses a novel dataset to analyze the return to direct investments in private firms by pension funds. We have two key findings. First, direct investments in private firms have underperformed public equity by 392 basis points per annum under conservative risk adjustments. Second, initial mispricing, due to over‐optimism or misperceived risk, and subsequent low capital gains seem to explain the gap in returns to private firms. Overall, these findings complement the finding of Moskowitz and Vissing‐Jørgensen (2002) of low returns on entrepreneurial investments and provide new insight into the existence of what they call the private equity premium puzzle: Even professional investors with well‐diversified portfolios like pension funds seem to get a poor risk‐return tradeoff from investing directly in private firms.     

The Importance of Adverse Selection in the Credit Card Market: Evidence from Randomized Trials of Credit Card Solicitations

Analyzing unique data from multiple large‐scale randomized marketing trials of preapproved credit card solicitations by a large financial institution, we find that consumers responding to the lender's inferior solicitation offers have poorer credit quality attributes. This finding supports the argument that riskier type borrowers are liquidity or credit constrained and, thus, have higher reservation loan interest rates. We also find a more severe deterioration ex post in the credit quality of the booked accounts of inferior offer types relative to superior offers. After controlling for a cardholder's observable risk attributes, demographic characteristics, and adverse economic shocks, we find that cardholders who responded to the inferior credit card offers are significantly more likely to default ex post. Our results provide evidence on the importance of adverse selection effects in the credit card market.     

The unethical practices of accountants and auditors and the compromising stance of professional bodies in the corporate world: Evidence from corporate Nigeria

Investors in Nigeria have lost several billions of dollars through the collusion of accountants and external auditors with companies’ management and directors to falsify and deliberately overstate companies’ accounts. As a consequence of unethical practices by accountants and auditors, which have resulted in the distress or occasionally the closure of companies, some indigenous Nigerian Managing Directors of multinational corporations such as Lever Brothers Nigeria Plc and Cadbury Nigeria Plc have been sacked and replaced with expatriates. Some companies placed under receivership have also lost billions of dollars due to professional misconduct by their official receivers. Contrary to the claim of ‘protecting the public interest,’ accountants and auditors may be partly responsible for cases of distress and closure of companies and banking institutions in Nigeria. However, the various Statutory Provisions and Acts relating to companies and professional bodies all place the responsibility on the accountants and auditors to detect and report to the regulators cases of suspected fraud and accounting malpractice. Through detailed consideration of cases of fraud, falsifications and deliberate overstatement of companies’ accounts, this paper examines the claim that the professional bodies are capable of protecting the public interest. It utilizes archival documents to provide evidence that suggests professional misconduct by accountants, particularly the members of the Institute of Chartered Accountants of Nigeria (ICAN). The paper provides further evidence that ICAN has been reluctant to either investigate or sanction its erring members. The paper posits that the reluctance or inability of the ICAN's “Investigation and Disciplinary Machinery” to either investigate or discipline the erring accountants and auditors suggests that whether by design or default, the ICAN's “Investigation and Disciplinary Machinery” operates to shield the activities of its erring members in accountancy firms from critical scrutiny.     

The Responsiveness of Corporate Investments to Changes in Corporate Income Taxation During the Financial Crisis: Empirical Evidence from Slovenian Firms

I examine the responsiveness of corporate investments to changes in corporate income taxation during the financial crisis. When investigating tax effects in financially constrained firms, the model of investment demand needs to be extended to include an additional channel through which taxes could affect investments. I model the tax effects via two transmission channels, the traditional user cost of capital channel and the cash flow channel, which is crucial for financially constrained firms. The empirical results show that corporate investments in financially constrained firms do not respond to changes in corporate income taxation through the user cost of capital channel, but there is strong evidence of the effect that materializes through the cash flow channel.     

Ritual legitimation, de-coupling and the budgetary process: managing organizational hypocrisies in a multinational company

The study of participation in the budgetary cycle has formed a prominent part of the research literature concerned with the budgetary process. More recently there has emerged a body of literature concerned with exploring the political and symbolic nature of the budgetary process. The paper reports upon the outcomes of an empirical study of the introduction of `budgetary participation' in a division of a European subsidiary of a large North American car manufacturer. We detail the long process of consultation and negotiation within the subsidiary, and between it and the European Headquarters. The study provides a revealing instance of the roles of formal budget participation as a ritual of control and legitimation without the substantive involvement of middle managers and suggested to us the introduction of de-coupling and organizational hypocrisy alongside the introduction of budget participation. The study pays close attention to the contingent effects of the wider political context of the division and the relationships between the division, its organizational context and organizational environment, and how this context played upon the budgetary process in the division. The outcomes that we analyse at `Delta' reflect the de-coupling strategies and organizational hypocrisies commonly found in public sector organizations. In this wider setting the corporation persists with the ritual of `tight' budget negotiation and target setting and apparent underachievement in performance. Yet we conclude that the complex technological and political context to the formation and siting of Delta continued and may continue to support its existence.$g0