Governance and takeovers: are public-to-private transactions different from traditional acquisitions of listed corporations?

Using a unique hand-collected dataset comprising 96 public-to-private (PTP) transactions and 258 acquisitions of listed corporations by existing corporate groups completed during the period 1998 to 2000, this paper investigates the extent to which PTPs have different internal and external governance and other characteristics from traditional acquisitions of listed corporations by existing corporate groups. The paper analyses acquisition activity during a period in which three new features were present: the decline in hostile takeovers, the increase in the adoption of governance Codes of Best Practice and the growth in PTP activity. PTPs are usually a response to takeover threat (Lehn and Poulsen, 1989) and so the paper analyses the acquisition decision from two perspectives: first, takeovers as a disciplinary mechanism which substitute for weak internal governance and second, as part of a non-disciplinary perspective where takeovers are complementary to internal governance mechanisms. We find support for the argument that improved internal governance and non-disciplinary takeovers, that is takeovers where the motive is not as a response to under-performing management, are complementary. PTPs are more likely to have higher board ownership and are likely to have duality of CEO and chairman. They are also more likely to have lower growth prospects and lower valuations. However, they do not have sub-optimal internal corporate governance structures in terms of lower proportions of outside directors. With respect to external governance, they are not more likely to experience pressure from the market for corporate control in the form of greater takeover speculation and are also not more likely to suffer hostile threats. We find that PTPs involving management buy-outs (MBOs) have fewer non-executive directors and a greater incidence of duality. MBOs also have higher board shareholdings. We find no evidence that management buy-ins (MBIs) have different characteristics. Our results suggest that going private by MBO may result from management's knowledge of private information that leads them to believe that the market has an incorrect perspective of the company's prospects

Do company directors underestimate the adoption of corporate governance provisions?

This paper examines whether company directors underestimate the adoption of corporate governance provisions within Ghanaian listed firms. Using a survey approach, the respondents, who were company executives and non-executive directors with knowledge of the Ghanaian Code and its provisions, regard the code as a benchmark for good corporate governance practices within Ghanaian listed firms. They also report some improvement in the standard of corporate governance in their companies since the introduction of the Code. Many of the company directors indicated their preparedness to comply with further corporate governance requirements, such as the adoption of a formal nomination committee something not been currently included in the Ghanaian Code. However, the directors noted that they receive inadequate support from the regulatory and institutional bodies for the implementation of the Ghanaian Code provisions. Many of the directors also supported the review of the Ghanaian Code by an independent committee. With regard to the adoption of the Ghanaian Code and its influence on firm performance, the respondents indicated that the adoption of the specific governance provisions in the area of chief executive officer (CEO)/chairman roles separation, having a balance of executive and non-executive directors on the board, the establishment of audit and remuneration committees, and the full adoption of the Ghanaian Code provisions were all influential in determining firm performance. They, however, did not support the adoption of the board size provision as influential to firm performance. This raises questions about the usefulness of the range of board size as recommended by the Ghanaian Code

Agency costs, corporate governance mechanisms and ownership structure in large UK publicly quoted companies: a panel data analysis.

This paper examines the impact of governance and ownership variables on agency costs for a panel of large UK quoted companies. We use three measures of agency costs: the ratio of sales-to-total assets, the interaction of free cash flows and growth prospects and the number of acquisitions. We employ a range of techniques to analyse the data: fixed-effects, instrumental variables, and Tobit regressions. We find that the changes in board structures that have occurred in the post-Cadbury period have not, generally, affected agency costs. This suggests a range of mechanisms is consistent with firm value maximisation. We also find that having a nomination committee increases agency costs, which indicates that there are costs associated with certain governance mechanisms. Increasing board ownership also helps to reduce agency costs. We also find that debt reduces agency costs. Our results raise questions about the usefulness of the information sent to shareholders when firms adopt a recommended governance framework

Economic consequences of private equity investments on the German stock market

This paper investigates the wealth effects of private equity (PE) investor purchases of shares in German quoted companies. It is the first study to analyze these effects for the German market which is particularly interesting due to its distinct characteristics with regard to the ownership structure of publicly listed companies and the protection of minority shareholders. We find that PE investors generate positive wealth effects for target shareholders of 5.90% around the event day (t = -1 to t = 0). In addition, we find that the wealth effects of PE investor involvement in Germany are positively related to the target's tax liabilities and degree of undervaluation and negatively related to the target's leverage and the shareholding of the second largest ownership block. The latter effect can be interpreted as a supplementary monitoring effect of the management or a monitoring effect of the largest shareholder through which private benefits of control are reduced. --Private Equity,Corporate Governance,Agency Theory,Event Study

Performance effects of appointing other firms' executive directors

This paper studies the relationship between directors’ human capital and the company’s performance. In particular, we focus on the effect on performance of non-executive directors who are also executive directors in other firms. We find a positive relationship between the presence of these non-executive directors and the accounting performance of the appointing company. The effect is stronger if these directors are also executive directors at companies that are performing well. Additionally, the similarity of industry plays a role. The results support the view that appointing firms benefit from the human capital of the appointee

Public to private transactions, private equity and financial health in the UK: an empirical analysis of the impact of going private.

Using a hand collected data set of 138 buy-outs, this paper presents the first analysis of the impact effects of public to private transactions (PTPs) in the UK during a period (1998-2004) in which PTPs became a significant part of the market for corporate control. We find that for all PTPs there is a significant improvement in financial health in the post deal years relative to the year before going private. We also find that there is a significant improvement in the financial health of PTPs relative to firms remaining public. The analysis of the individual elements of the z-score shows that there are significant improvements in working capital and liquidity post deal. Profitability, however, shows significant declines in a number of the post deal years. We also find that both private equity (PE) and non PE-backed deals produce improvements in financial health but that there is no difference between the two types of deal. These outcomes provide some support for the Jensen (Am Econ Rev 76:323-329, 1986, Harv Bus Rev 67:61-74, 1989) arguments that going private creates an organizational structure that reduces agency costs. However, they do suggest that the claims that the financial and governance mechanisms imposed by PE providers will produce better outcomes are strictly limited in the second wave of PTPs

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

Underwriting relationships and analyst independence in Europe.

This paper examines the accuracy of security analysts' earnings forecasts and stock recommendations for firms in 13 European countries. We document at least three key findings. First, we find strong evidence that lead and co-lead underwriter analysts' earnings estimates and stock recommendations are significantly more optimistic than those provided by unaffiliated analysts. Second, we find that lead and co-lead underwriter analysts' earnings forecast and stock recommendations are significantly more optimistic for underwriter stocks than for those they provide for other stocks. Third, we also find evidence that these biases found within earnings forecasts and stock recommendations are not driven by one particular country. In short, these findings suggest that affiliated analysts are more optimistic perhaps to maintain investment banking relations

Returns to buying upward revision and selling downward revision stocks: evidence from Canada.

Purpose: The purpose of this paper is to investigate the role of earnings forecast revisions by equity analysts in predicting Canadian stock returns Design/methodology/approach: The sample covers 420 Canadian firms over the period 1998-2009. It analyses investors’ reactions to 27,271 upward revisions and 32,005 downward revisions of analysts’ forecasts for Canadian quoted companies. To test whether analysts’ earnings forecast revisions affect stock return continuation, forecast revision portfolios similar to Jegadeesh and Titman (2001) are constructed. The paper analyses the returns gained from a trading strategy based on buying the strong upward revisions portfolio and short selling the strong downward revisions portfolio. It also separates the sample into upward and downward revisions. Findings: The authors find that new information in the form of analyst forecast revisions is not impounded efficiently into stock prices. Significant returns persist for a trading strategy that buys stocks with recent upward revisions and short sells stocks with recent downward revisions. Good news is impounded into stock prices more slowly than bad news. Post-earnings forecast revisions drift is negatively related to analyst coverage. The effect is strongest for stocks with greatest number of upward revisions. The introduction of the better disclosure standards has made the Canadian stock market more efficient. Originality/value: The paper adds to the limited evidence on the effect of analyst forecast revisions on the returns of Canadian stocks. It sheds light on the importance of analysts’ earnings forecast information and offers support for the investor conservatism and information diffusion hypotheses. It also shows how policy can improve market efficiency