How do financial intermediaries create value in security issues?

We study incentive provision in a model of securities issuance with an informed issuer and uninformed investors. We show that the presence of an informed intermediary may increase surplus even if we allow for collusion between the intermediary and the issuer. Collusion is neutralized by introducing a misalignment between the interests of the issuer and those of the intermediary. To achieve this, the intermediary commits to hold some of the securities. The intermediary then underprices the remaining securities and extracts any investor surplus through a “participation fee.” We provide an explanation for the diffusion of book building and quid pro quo practices in Initial Public Offerings (IPOs)

Director Characteristics and Firm Performance

The traditional methodology examining optimal boards relates a simple board variable (e.g. independence or board demography) to firm performance, however, ig- noring other board characteristics. This paper investigates how the education and business experience of directors affect firm performance. The sample consists of 1,574 directorships from 224 listed firms in Switzerland. Using OLS and including control variables, the results show that graduates of minor Swiss universities are negatively related to Tobin’s Q, and industrial knowledge and Tobin’s Q are nega- tively correlated if the firm has more divisions. In addition, director fixed effects (or unobserved characteristics) are significant, but improve the explanatory power of the models only by 5 percent

The role of earnout financing on the valuation effects of global diversification

This article examines the impact of earnout financing on the value of acquiring firms engaged in cross-border acquisitions (CBAs), using a dataset of UK, US, Canadian and Australian firms from 1992 to 2012. The results show that firms initiating international business operations via earnout-financed CBAs enhance their value more than acquirers in (a) domestic acquisitions and (b) remaining CBAs by established multinational corporations (MNCs). Our findings demonstrate the superiority of earnout financing in CBAs announced by acquirers that have no prior international business experience. The results are robust to the firms’ endogenous choice to diversify globally and to the use of earnout financing. We contend that earnouts contribute to the reduction of valuation risk faced by firms acquiring a foreign target firm for the first time. Our empirical findings contribute to the existing debate on the merit of international expansion through CBAs and the role of earnout contingent payment

Entrepreneurial Human Capital, Complementary Assets, and Takeover Probability

Gaining access to technologies, competencies, and knowledge is observed as one of the major motives for corporate mergers and acquisitions. In this paper we show that a knowledge-based firm's probability of being a takeover target is influenced by whether relevant specific human capital aimed for in acquisitions is directly accumulated within a specific firm or is bound to its founder or manager owner. We analyze the incentive effects of different arrangements of ownership in a firm's assets in the spirit of the Grossman-Hart-Moore incomplete contracts theory of the firm. This approach highlights the organizational significance of ownership of complementary assets. In a small theoretical model we assume that the entrepreneur's specific human capital, as measured by the patents they own, and the physical assets of their firm are productive only when used together. Our results show that it is not worthwhile for an acquirer to purchase the alienable assets of this firm due to weakened incentives for the initial owner. Regression analysis using a hand collected dataset of all German IPOs in the period from 1997 to 2006 subsequently provides empirical support for this prediction. This paper adds to previous research in that it puts empirical evidence to the Grossman-Hart-Moore framework of incomplete contracts or property rights respectively. Secondly, we show that relevant specific human capital that is accumulated by a firm's founder or manager owner significantly decreases that firm's probability of being a takeover target