Uncertain private benefits and the decision to go public

This paper focuses on the decision to go public when both seller and potential buyers have private benefits of control. The basic model by Zingales (1995) is extended to account for uncertainty of private benefits. This leads to new implications for the sales process, ownership structure, measurement of private benefits and the efficiency of takeover regimes. The optimal way to sell the company differs from the model with perfect information in that the incumbent always choses to go public instead of selling directly to a potential rival whenever the rival is expected to increase cash flow but not necessarily total firm value. IPO price and volume are lower than under perfect information which induces a socially non-optimal solution in takeover transactions. Imperfect information also explains post-IPO underperformance of firms which are not subject to control transfers. To compensate shareholders for potential losses during the sales process, the offering price has to be lower than under perfect information. This provides the basis for a differential stock price performance depending on the buyer taking over or not. Furthermore, an overestimation bias exists in prior estimates of control premiums, because some firms going public are never sold but nevertheless provide private benefits. Finally, mandatory tender offers in the form of a fair price rule and an equal opportunity rule are discussed, which indicate that the social superiority of either rule is strongly dependent on the empirical distribution characteristics of private benefits. --initial public offerings (IPOs),corporate control,private benefits,long-run performance,mandatory bid

Takeover law to protect shareholders: increasing efficiency or merely redistributing gains? (Working Paper No. 486)

We construct a dynamic takeover law index using hand-collected data on legal provisions and empirically examine the effect of takeover regulation to protect shareholders on shareholder wealth for bidders and targets in a multi-country setting. We find that a stricter takeover law increases combined wealth for bidders and targets, which suggests that stronger shareholder protection in the takeover bid process increases the efficiency of the takeover market. Contrary to our hypothesis, results show that stricter takeover law does not hurt bidders. Its effect on target announcement returns and takeover premiums is significantly positive and economically large. Our findings suggest that the mandatory bid rule and ownership disclosure increase synergistic gains in takeovers, whilst the fair-price rule and squeeze-out rights may reduce combined gains. Further results show that increased overall gains can be explained by greater competition in the market for corporate control and a shorter time to successful completion of a takeover under stricter takeover law

Endogenous Financial Constraints and Innovation

We investigate which indicators of a firm’s innovation activities are associated with financial constraints and analyse the nature and direction of causal links between innovation and financial constraints. By estimating simultaneous bivariate probit models on data from the UK Innovation Surveys, we show that among innovation inputs, R&D activity increases the likelihood that firms face financial constraints while innovation outputs in the form of new-to-market products seem to generate financial constraints. Reverse effects on innovation appear limited to external R&D

Takeover regulation to protect shareholders: Wealth creation or wealth destruction?

Takeover regulation is fundamental to the efficient workings of the market for corporate control since it affects the size and distribution of expected gains to shareholders of targets and acquirers. To investigate the impact of takeover regulation on shareholders’ wealth distribution, we first construct a dynamic takeover law index consisting of six legal provisions for major European countries. Our index reveals that takeover law in the European Union has changed substantially over the past 25 years. We further examine the wealth effects of takeover law in European takeovers between 1986 and 2010. Our empirical results suggest that the effect of takeover law on target announcement returns and takeover premiums is positive, economically large, and statistically significant. We also find evidence that stricter takeover law does not reduce the returns to bidders. Overall, the effect of takeover law on total wealth effects from mergers and acquisitions is significantly positive. Finally, in terms of the components of our takeover law index, we find that the mandatory bid rule significantly increases the takeover premium, target announcement returns and combined returns; the ownership disclosure rule leads to higher target announcement returns and higher combined returns; whilst the fair-price rule and the squeeze-out rights rule may reduce the total gain enjoyed by the combined companies

Takeover law to protect shareholders: Increasing efficiency or merely redistributing gains?

We construct a dynamic takeover law index using hand-collected data on legal provisions and empirically examine the effect of takeover regulation to protect shareholders on shareholder wealth for bidders and targets in a multi-country setting. We find that a stricter takeover law increases the wealth gains to the shareholders of the combined bidder and target firm, which suggests that stronger shareholder protection in the takeover bid process increases the efficiency of the takeover market. In contrast to our hypothesis, results show that stricter takeover law does not hurt bidders. Its effect on target announcement returns is significantly positive and economically large. Our findings on individual provisions suggest that the mandatory bid rule and ownership disclosure increase overall synergistic gains in takeovers, whilst the fair-price rule and squeeze-out rights may reduce them. Further results show that stricter takeover regulation increases competition in the market for corporate control and reduces the time to successful completion of a takeover bid, which explains increased combined wealth gains under stricter takeover regulation

Fat tails in private equity fund returns: The smooth double Pareto distribution

Does the distribution of private equity returns have fat tails? A new smooth double Pareto distribution can explain the stationary distribution of private equity funds' valuation multiples. This distribution emerges from a random growth model with lognormally distributed initial fund valuations. This model endogenously generates power-law tails in the stationary cross-section. The new distribution fits the data better than competing distributions. Fat tails are particularly pronounced in venture capital funds and suggest returns with infinite variance over the lifetime of the fund. The smooth double Pareto distribution has wide applicability to growth processes with a random initial value

The impact of business accelerators and incubators in the UK

This report explores how incubators and accelerators impact the startups they support, and which types of support drive this impact. It also examines how incubators and accelerators affect the wider business ecosystem. The report: - examines the objectives of UK accelerators and incubators, and the barriers to reaching these objectives - determines which types of support offered by incubators and accelerators (for example provision of workspace, mentoring, funding or training) add the most value to participating startups - presents a “theory of change” explaining how these types of support make their impact - investigates how Local Enterprise partnerships and Growth Hubs interact with or support accelerators and incubators in their region, and how this interaction helps both parties achieve their objective

An improved test for earnings management using kernel density estimation

This paper describes improvements on methods developed by Burgstahler and Dichev (1997, Earnings management to avoid earnings decreases and losses, Journal of Accounting and Economics, 24(1), pp. 99–126) and Bollen and Pool (2009, Do hedge fund managers misreport returns? Evidence from the pooled distribution, Journal of Finance, 64(5), pp. 2257–2288) to test for earnings management by identifying discontinuities in distributions of scaled earnings or earnings forecast errors. While existing methods use preselected bandwidths for kernel density estimation and histogram construction, the proposed test procedure addresses the key problem of bandwidth selection by using a bootstrap test to endogenise the selection step. The main advantage offered by the bootstrap procedure over prior methods is that it provides a reference distribution that cannot be globally distinguished from the empirical distribution rather than assuming a correct reference distribution. This procedure limits the researcher's degrees of freedom and offers a simple procedure to find and test a local discontinuity. I apply the bootstrap density estimation to earnings, earnings changes, and earnings forecast errors in US firms over the period 1976–2010. Significance levels found in earlier studies are greatly reduced, often to insignificant values. Discontinuities cannot be detected in analysts’ forecast errors, while such findings of discontinuities in earlier research can be explained by a simple rounding mechanism. Earnings data show a large drop in loss aversion after 2003 that cannot be detected in changes of earnings

Lithic technological responses to Late Pleistocene glacial cycling at Pinnacle Point Site 5-6, South Africa

There are multiple hypotheses for human responses to glacial cycling in the Late Pleistocene, including changes in population size, interconnectedness, and mobility. Lithic technological analysis informs us of human responses to environmental change because lithic assemblage characteristics are a reflection of raw material transport, reduction, and discard behaviors that depend on hunter-gatherer social and economic decisions. Pinnacle Point Site 5-6 (PP5-6), Western Cape, South Africa is an ideal locality for examining the influence of glacial cycling on early modern human behaviors because it preserves a long sequence spanning marine isotope stages (MIS) 5, 4, and 3 and is associated with robust records of paleoenvironmental change. The analysis presented here addresses the question, what, if any, lithic assemblage traits at PP5-6 represent changing behavioral responses to the MIS 5-4-3 interglacial-glacial cycle? It statistically evaluates changes in 93 traits with no a priori assumptions about which traits may significantly associate with MIS. In contrast to other studies that claim that there is little relationship between broad-scale patterns of climate change and lithic technology, we identified the following characteristics that are associated with MIS 4: increased use of quartz, increased evidence for outcrop sources of quartzite and silcrete, increased evidence for earlier stages of reduction in silcrete, evidence for increased flaking efficiency in all raw material types, and changes in tool types and function for silcrete. Based on these results, we suggest that foragers responded to MIS 4 glacial environmental conditions at PP5-6 with increased population or group sizes, 'place provisioning', longer and/or more intense site occupations, and decreased residential mobility. Several other traits, including silcrete frequency, do not exhibit an association with MIS. Backed pieces, once they appear in the PP5-6 record during MIS 4, persist through MIS 3. Changing paleoenvironments explain some, but not all temporal technological variability at PP5-6.Social Science and Humanities Research Council of Canada; NORAM; American-Scandinavian Foundation; Fundacao para a Ciencia e Tecnologia [SFRH/BPD/73598/2010]; IGERT [DGE 0801634]; Hyde Family Foundations; Institute of Human Origins; National Science Foundation [BCS-9912465, BCS-0130713, BCS-0524087, BCS-1138073]; John Templeton Foundation to the Institute of Human Origins at Arizona State Universit

Virtual histological assessment of the prenatal life history and age at death of the Upper Paleolithic fetus from Ostuni (Italy)

The fetal remains from the Ostuni 1 burial (Italy, ca 27 ka) represent a unique opportunity to explore the prenatal biological parameters, and to reconstruct the possible patho-biography, of a fetus (and its mother) in an Upper Paleolithic context. Phase-contrast synchrotron X-ray microtomography imaging of two deciduous tooth crowns and microfocus CT measurements of the right hemimandible of the Ostuni 1b fetus were performed at the SYRMEP beamline and at the TomoLab station of the Elettra - Sincrotrone laboratory (Trieste, Italy) in order to refne age at death and to report the enamel developmental history and dental tissue volumes for this fetal individual. The virtual histology allowed to estimate the age at death of the fetus at 31–33 gestational weeks. Three severe physiological stress episodes were also identifed in the prenatal enamel. These stress episodes occurred during the last two months and half of pregnancy and may relate to the death of both individuals. Compared with modern prenatal standards, Os1b’s skeletal development was advanced. This cautions against the use of modern skeletal and dental references for archaeological fnds and emphasizes the need for more studies on prenatal archaeological skeletal samples