Distributing Start‐Up Equity: A Theoretical Foundation for an Emerging Practice

We use agency theory to model equity division in venture capital financing with three complementary value‐creation factors—the entrepreneur's effort, the venture capitalist's advising/monitoring service, and the investment amount. While considering that investors often base their funding decisions on gut feeling, even as they employ rational decision‐making processes, we derive closed‐form expressions for optimal ownership sharing. Our findings provide theoretical explanation to support the recent call for practitioners to allocate ownership equity based on the relative potential contributions of the entrepreneur and the venture capitalist to generate value for the new investment prospect.     

Is reversal of large stock‐price declines caused by overreaction or information asymmetry: Evidence from stock and option markets

The role of option markets is reexamined in the reversal process of stock prices following stock price declines of 10% or more. A matched pair of optionable and nonoptionable firms is randomly selected when their price declines by 10% or more on the same date. The authors examine the 1,443 and 1,018 matched pairs of New York Stock Exchange/American Stock Exchange (AMEX) and National Association of Securities Dealers Automated Quotations firms over the period from 1996 to 2004. It was found that the positive rebounds for nonoptionable firms are caused by an abnormal increase in bid–ask spread on and before the large price decline date. On the other hand, the bid–ask spreads for optionable firms decrease on and before the large price decline date. An abnormal increase in the open interest and volume in the option market on and before the large price decline date was also found. Overall, the results suggest that the stock‐price reversal neither is a result of overreaction nor can it be simply explained by the bid–ask bounce. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 29:348–376, 2009     

Regional Economic Integration in the Pacific: An Empirical Study

Abstract

The Pacific Islands Forum, the regional organization comprising 14 Pacific Island countries (PICs), Australia and New Zealand is committed to strengthen regional cooperation and integration. This paper examines progress in real and financial integration in the region. Utilizing the methodology based on international parity conditions: purchasing power parity and uncovered interest parity, the study concludes that while PICs’ integration amongst themselves and with Australia and New Zealand, is relatively advanced with respect to goods and services, the financial market integration remains incomplete. The policy implication is impact of further liberalization is likely to be substantial on financial markets.     

CDS and the Resolution of Financial Distress

The dramatic growth of Credit Default Swaps (CDS)—contracts that allow creditors to hedge their default exposure or take leveraged credit positions—threatens to complicate the resolution of financial distress in ways that existing reorganization methods and institutions have yet to adapt to. CDS contracts undermine a major premise that underlies current reorganization methods—namely, that the holder of legal rights has, and is motivated by, corresponding economic interests. Because hedging in the CDS markets immunizes creditors from the debtor's financial condition, they effectively separate their legal rights and economic interests. In this article, the authors discuss the challenges this separation poses for the resolution of distress both in and out of bankruptcy, and consider ways in which “on‐ground” realities may be reconciled with the legal structure that underlies the resolution of distress. At a minimum, disclosure of CDS positions in times of financial distress—along the lines of the disclosures presently required of equity investors under the Williams Act—are an essential first step toward a solution.     

Factors influencing wealth creation from mergers and acquisitions: A meta-analysis

This study analyzes the empirical literature concerning the influence of various factors on shareholder wealth creation in mergers and acquisitions using a multivariate framework. Overall, results indicate that while the target firm's shareholders gain significantly from mergers and acquisitions, those of the bidding firm do not. Findings also indicate that the use of stock financing has a significant impact on the wealth of both the target and bidding firms' shareholders. The presence of multiple bidders and the type of acquisition influence the bidders' return, while regulatory changes and tender offers influence the targets' returns. The paper also provides a comparison of our findings with that of previous narrative reviews and discusses their implications from the viewpoint of managers and researchers.     

The Competitive Impact of Commercial Bank Underwriting on the Market for Municipal Revenue Bonds

This paper examines the impact of commercial bank entry in the market for municipal revenue bonds. We show that issues underwritten by commercial banks have lower underwriter spreads but not lower yields relative to issues underwritten by nonbank investment firms. In particular, this is more significant for non-investment-grade bonds underwritten by commercial banks. Our results are consistent with the interpretation that bank entry has resulted in increased competition in the municipal revenue bond market and that the lower yields observed for bank-underwritten commercial bonds may be due to banks having private information. Overall, our results suggest that policy changes leading to the relaxation of restrictive provisions concerning bank underwriting of municipal revenue bonds have had beneficial effects.     

The Role and Impact of Financial Advisors in the Market for Municipal Bonds

Significantly more and more issuers of municipal bonds use the services of financial advisors during the bond issuance process. We investigate the benefits to issuers and market participants arising from the role of financial advisors in the issuance of municipal bonds. Using a large sample of 9,493 tax-exempt municipal bonds, we show that financial advisors have significant impact on borrowing costs, reoffering yields and underwriter gross spreads. Our results are more pronounced for revenue bonds, particularly for negotiated revenue issues. In addition, our results show significant advantages to using a financial advisor for refunding issues supporting the view that financial advisors play important roles for more complex issues. Our results are consistent with the interpretation that financial advisors provide important and useful services resulting in monitoring and information asymmetry reduction benefits accruing to issuers and market participants.      

Characteristics and behavior of newly listed firms: Evidence from the Asia-Pacific region

We examine the size, profitability and delisting experience during 1980–1999 of new lists in the Pacific Basin countries. We also examine the impact of the legal environment on post-listing behavior. We find that new lists are more numerous in common law countries. They are smaller than seasoned firms, regardless of legal regime. New lists are more profitable in civil law countries, but this is due to the high profitability of Japanese new lists. Asian new lists have lower rates of delisting compared to U.S. firms. The delisting frequency of seasoned firms exceeds that of new lists for our sample countries.     

An alternative approach to discriminating multivariate populations and its applications to marketing research

A new method for discriminating among multivariate populations, called the Hausdorff procedure, is introduced to the marketing literature. Rules for classification are defined and a limited simulation study is conducted. For the simulation, both the level of collinearity among the discriminating variables and the level of overlap among the populations are varied. The results indicate that this new procedure is particularly suitable when there is either a high degree of collinearity among the predictor variables or considerable overlap of the populations being investigated. The Hausdorff procedure is also applied to two sets of consumer data. In each instance, it is found to be superior to linear discriminant analysis with respect to the percentage of correct classifications.