THE EFFECT OF TAKEOVER ACTIVITY ON INTEREST RATES: FOLKLORE VERSUS FACTS

This study develops and tests two hypotheses concerning the effect of takeover activity on interest rates. The first hypothesis is concerned with the effect of bank financed takeovers on interest rates. Folklore has it that the bank credit lines used to carry out large takeovers siphon credit from the financial system and crowd out legitimate borrowing for productive investments thereby putting strong upward pressure on interest rates. We call this the folklore hypothesis. Another avenue through which takeover activity can affect interest rates is by increasing the aggregate efficiency in the economy. An increase in aggregate efficiency would cause the aggregate production function to shift outwards causing an increase in investment demand. This increase in investment demand would result in higher interest rates. This is the efficiency hypothesis. To distinguish the efficiency hypothesis from the folklore hypothesis, we note that this hypothesis would predict an increase in interest rates on the announcement of any takeover regardless of financing. This study attempts to resolve the above described issues empirically

The Post-Issue Operating Performance of IPO Firms.

This article investigates the change in operating performance of firms as they make the transition from private to public ownership. A significant decline in operating performance subsequent to the initial public offering (IPO) is found. Additionally, there is a significant positive relation between post-IPO operating performance and equity retention by the original entrepreneurs but no relation between post-IPO operating performance and the level of initial underpricing. Postissue declines in the market-to-book ratio, price/earnings ratio, and earnings per share are also documented. Copyright 1994 by American Finance Association.

An Investigation of Pooled Purchasing as a Source of Value Creation in Diversifying Acquisitions

We take a broad product-market approach to examine whether pooled purchasing is a source of value creation in diversifying acquisitions. We find that our proxies for the merging firms’ change in purchasing concentration are positively related to the combined wealth effect of merging firms, positively related to the change in the gross profit margin of merging firms, negatively related to the wealth effects of main common supplier-industry firms and acquirer-industry rival firms, and unrelated to the wealth effects of main common customer-industry firms. We document a postacquisition decrease in output prices with no concomitant decrease in revenues for the main common supplier industry. We also document a decrease in output prices and an increase in revenues for the acquirer’s industry. Our firm- and industry-level evidence suggests that the benefits of pooled purchasing in diversifying acquisitions come from an efficiency-increasing volume-discount channel rather than anticompetitive channels

Does the Presence of Venture Capitalists Improve the Survival Profile of IPO Firms?

The role of venture capital in the creation of the public corporation is now widely recognized. This study investigates whether venture capitalists add value to the going public process by improving the survival profile of IPO issuers. The survival of IPO issuers is not only likely to depend on managerial actions but also on the effectiveness of key market participants such as investment bankers and analysts. The form and function of the venture capital industry allows venture capitalists to influence the actions of managers, investment bankers, and analysts, and attract institutional interest. Conducting survival analyses using the Cox hazard methodology, we find that the involvement of venture capitalists improves the survival profile of IPO firms. Several other variables that are potentially influenced by VC involvement like R&D allocations, analyst following, investment banker prestige, and success on road shows are also positively related to the survival time of IPO issuers. Copyright Blackwell Publishers Ltd 2000.

The Life Cycle of Initial Public Offering Firms

This study uses an integrated and comprehensive approach to study the evolution of IPO issuing firms to the three basic post-IPO states: survive as an independent firm, get acquired, or fail. We develop multinomial logit models that utilize information available at or prior to the IPO to predict the probability of subsequent transition to the three post-IPO states. We find that lower risk, larger firm size, higher investment banker prestige, higher pre-IPO operating performance, and higher industry R&D intensity increase the probability of survival relative to failure. We also find that higher firm size, higher industry R&D intensity, and industry concentration increase the probability of survival relative to being acquired. Finally, lower risk and higher investment banker prestige increase the probability of being acquired relative to failure. Overall, we identify several factors that influence the probability of subsequent transition to one of the three basic post-IPO states. Copyright Blackwell Publishers Ltd 1999.