How to Sell a (Bankrupt) Company

The restructuring of a bankrupt company often entails the sale of such company. This paper suggests a way to sell the company that maximizes the creditors' proceeds. The key to this proposal is the option left to the creditors to retain a fraction of the shares of the company. Indeed, by retaining the minority stake, creditors reduce to a minimum the rents that the sale of the company leaves in the hands of the buyer.Bankruptcy, control stakes, auction

Monitoring Managers: Does it Matter?

We test under what circumstances boards discipline managers and whether such interventions improve performance. We exploit exogenous variation due to the staggered adoption of corporate governance laws in formerly Communist countries coupled with detailed ‘hard’ information about the board’s performance expectations and ‘soft’ information about board and CEO actions and the board’s beliefs about CEO competence in 473 mostly private-sector companies backed by private equity funds between 1993 and 2008. We find that CEOs are fired when the company underperforms relative to the board’s expectations, suggesting that boards use performance to update their beliefs. CEOs are especially likely to be fired when evidence has mounted that they are incompetent and when board power has increased following corporate governance reforms. In contrast, CEOs are not fired when performance deteriorates due to factors deemed explicitly to be beyond their control, nor are they fired for making ‘honest mistakes.’ Following forced CEO turnover, companies see performance improvements and their investors are considerably more likely to eventually sell them at a profit.Corporate Governance, Large Shareholders, Boards of Directors, CEO Turnover, Legal Reforms, Transition Economies, Private Equity

Investor Sentiment and Pre-Issue Markets

What role do sentiment investors play in the pricing of newly listed stocks? We derive conditions under which we can distinguish between sentiment and rational pricing behavior and test for the rationality of small investors’ demand for new stock issues using data from pre-issue (or ‘grey’) markets in Europe. Under sentiment, the model predicts asymmetric relations between the prices at which small investors trade new stock issues in the grey market and i) the subsequent issue price set by the investment bank, ii) prices in the early after-market, and iii) the degree of stock price reversal in the long run. Our empirical results suggest that sentiment demand is present and influences the pricing of newly listed firms

Monitoring Managers: Does it Matter?

We document how gathering ‘hard’ and ‘soft’ information helps boards of directors to learn a CEO’s ability over time; test under what circumstances boards fire CEOs; and show that such interventions lead to improved firm performance. Our empirical design exploits detailed hard information about performance relative to pre-agreed, firm-level targets and soft information reflecting the board’s views of CEO actions, CEO decisions, and CEO competence coupled with plausibly exogenous variation due to the staggered adoption of corporate governance laws in formerly Communist countries between 1993 and 2010. We find that CEOs are fired when a firm underperforms its targets and, especially, when evidence has mounted that they are incompetent, but not when poor performance reflects factors deemed explicitly to be beyond their control or for making ‘honest mistakes.’ The level of CEO turnover increases following corporate governance reforms that increase board power, as does the sensitivity of CEO turnover to soft information relative to that of hard information. Following forced CEO turnover, firms see performance improvements and their investors are considerably more likely to eventually sell them at a profit

Large Shareholders, Private Benefits of Control and Optimal Schemes for Privatization

We analyze optimal schemes for privatization in a transitional economy. In many cases, established Western firms are good candidates for large shareholders of a local firm, since the sale of the shares can generate large amount of revenues and furthermore, in the future, the home country can free-ride on the efficiency improvement of the firm. However, not all Western firms are good owners. Some of them are more interested in the private benefit of control than the potential of efficiency improvement. Such Western firms are bad owners in the long run, although they may well be willing to pay a high price to obtain the control right. Assuming that the government cares about a convex combination of sales revenue and the future value of the firm, we show that the optimal scheme is dependent upon the magnitude of the control benefit. Moreover, we show that the number of shares sold is a crucial instrument to attract the most efficient company.Center for Research on Economic and Social Theory, Department of Economics, University of Michiganhttp://deepblue.lib.umich.edu/bitstream/2027.42/100862/1/ECON316.pd

Optimal Patent Renewals

When firms have different R&D productivities, it may be welfare increasing to differentiate patent lives across inventions. The reason is that the uniform patent life provides excessive incentives to do R&D to the low productivity firms and insufficient incentives to high productivity firms. Such a differentiated scheme is implementable through renewal fees, which endogenously determine an optimal pattern of patent life-spans and show how it depends on key features of the economic environment, such as the degree of heterogeneity in R&D productivity across firms, the ability of patentees to appropriate the potentital rents generated by R&D and the learning process about the value of innovation. The potential welfare gains associated with optimal renewal schemes are illustrated through simulation analysis.Patents, renewal fees, R&D, welfare gains, productivity, firms.

A Soft Budget Constraint Explanation for the Venture Capital Cycle

We explore why venture capital funds limit the amount of capital they raise and do not reinvest the proceeds. This structure is puzzling because it leads to a succession of several funds financing each new venture which multiplies the well known agency problems. We argue that an inside investor cannot provide a hard budget constraint while a less well informed outsider can. Therefore, the venture capitalist delegates the continuation decision to the outsider by ex ante restricting the amount of capital he has under management. The soft budget constraint problem becomes the more important the higher the entrepreneur’s private benefits are and the higher the probability of failure of a project is

Monitoring Managers: Does it Matter?

We document how gathering ‘hard’ and ‘soft’ information helps boards of directors to learn a CEO’s ability over time; test under what circumstances boards fire CEOs; and show that such interventions lead to improved firm performance. Our empirical design exploits detailed hard information about performance relative to pre-agreed, firm-level targets and soft information reflecting the board’s views of CEO actions, CEO decisions, and CEO competence coupled with plausibly exogenous variation due to the staggered adoption of corporate governance laws in formerly Communist countries between 1993 and 2010. We find that CEOs are fired when a firm underperforms its targets and, especially, when evidence has mounted that they are incompetent, but not when poor performance reflects factors deemed explicitly to be beyond their control or for making ‘honest mistakes.’ The level of CEO turnover increases following corporate governance reforms that increase board power, as does the sensitivity of CEO turnover to soft information relative to that of hard information. Following forced CEO turnover, firms see performance improvements and their investors are considerably more likely to eventually sell them at a profit

Debt Recovery in Firm Liquidations: Do Liquidation Trustees Matter?

Insolvency systems play a crucial role in protection of creditor rights, yet micro-level empirical evidence on the functioning of insolvency regimes worldwide is sparse. We investigate whether creditors’ recovery of outstanding claims, a measure of ex-post efficiency of an insolvency regime, depends on the characteristics of the trustee delegated the administration of the liquidation proceedings. To this end, we draw on a novel dataset of firm liquidations from Slovenia and exploit courts’ de facto random assignment of firm liquidation cases to licensed liquidation trustees. Using a wide range of specifications and controls, we find that a subset of trustee characteristics indeed matters for debt recovery. Thus, ex-post efficiency of an insolvency regime depends not only on its formal rules and procedures, but also on who implements them in practice

Initial Public Offerings and the Firm Location

The firm geographic location matters in IPOs because investors have a strong preference for newly issued local stocks and provide abnormal demand in local offerings. Using equity holdings data for more than 53,000 households, we show the probability to participate to the stock market and the proportion of the equity wealth is abnormally increasing with the volume of the IPOs inside the investor region. Upon nearly the universe of the 167,515 going public and private domestic manufacturing firms, we provide consistent evidence that the isolated private firms have higher probability to go public, larger IPO underpricing cross-sectional average and volatility, and less pronounced long-run under-performance. Similar but opposite evidence holds for the local concentration of the investor wealth. These effects are economically relevant and robust to local delistings, IPO market timing, agglomeration economies, firm location endogeneity, self-selection bias, and information asymmetries, among others. Findings suggest IPO waves have a strong geographic component, highlight that underwriters significantly under-estimate the local demand component thus leaving unexpected money on the table, and support state-contingent but constant investor propensity for risk