Corporate venture capital, strategic alliances, and the governance of newly public firms

We examine the effect of investments by corporate venture capitalists (CVCs) on the governance structures of venture backed IPOs. One of the main differences between CVCs and traditional venture capitalists (TVCs) is that the former often invest for strategic reasons and enter into various types of strategic alliances with their portfolio firms that last well beyond the IPO. We argue that the presence of such strategic alliances will have a significant impact on the governance structure of CVC backed firms when they go public and in the following years. Using a sample of venture backed IPOs, we evaluate several hypotheses concerning the role of CVCs in the corporate governance of newly public firms. We find that strategic CVC backed IPOs have weaker CEOs and more outsiders on the board and on the compensation committee than a carefully selected sample of matching firms. In addition, the probability of forced CEOs turnover is higher for strategic CVC backed IPOs, while at the same time these firms use staggered boards more frequently. In contrast, the governance structures of purely financial CVC backed IPO firms and their matching firms do not exhibit any significant differences.

Does Private Equity Create Wealth? The Effects of Private Equity and Derivatives on Corporate Governance

Private equity has reaped large rewards in recent years. We claim that one major reason for this success is due to the corporate governance advantages of private equity over the public corporation. We argue that the development of substantial derivative contracts and trading has significantly weakened the governance of public corporations and has created a need for financially sophisticated directors and much closer supervision of management. The private equity model delivers these benefits and allows corporations to be better governed, creating wealth gains for investors

The effect of the 1987 Stock Crash on international financial integration

This paper examines daily open-to-close returns from three major stock markets over the past five years including the October 1987 Stock Market Crash. We find some evidence that volatility spillover effects emanating from Japan have been gathering strength over time, especially after the 1987 Crash. This may be attributed to a growing awareness of domestic investors about the economic interdependence of international financial markets

Comparing CEO Employment Contract Provisions: Differences Between Australia and the United States

This study compares CEO employment contracts across two common law countries: the United States and Australia. Although the regulatory regimes of these jurisdictions enjoy many comparable features, there are also some important institutional differences in terms of capital market, tax, and regulatory structures, which are discussed here. Debate has raged in the United States on the issue of whether executive compensation is efficient and determined at arm\u27s length, or skewed by a power imbalance between managers and shareholders. A comparative analysis of the kind undertaken in our study provides an additional perspective on the optimal contracting and managerial power models of executive pay in U.S. academic literature. Even if one model has greater explanatory power in the U.S. context, this will not necessarily be the case in other jurisdictions, such as Australia. In order to do our comparison, we create pairs of U.S. and Australian firms that are matched on a number of dimensions including firm size and industry. We find that Australian CEOs have significantly greater base salaries than their U.S. counterparts, while U.S. CEOs are more likely to be compensated with restricted stock and stock options than the Australian CEOs. More striking is the fact that U.S. CEO employment contracts tend to last longer than Australian contracts, and they are more likely to have arbitration provisions, change-in-control provisions, tax gross ups, do-not-compete clauses, and supplemental executive retirement plans. We also find that Australian contracts are much more apt to include performance hurdle requirements before CEOs can receive restricted stock and options, and restrictions on CEO hedging of restricted stock and options. A number of the contractual differences we document appear to be consistent with key institutional differences between the two countries

Shareholder Litigation in Mergers and Acquisitions

Using hand-collected data, we examine the targeting of shareholder class action lawsuits in merger & acquisition (M & A) transactions, and the associations of these lawsuits with offer completion rates and takeover premia. We find that M & A offers subject to shareholder lawsuits are completed at a significantly lower rate than offers not subject to litigation, after controlling for selection bias, different judicial standards, major offer characteristics, M & A financial and legal advisor reputations as well as industry and year fixed effects. M & A offers subject to shareholder lawsuits have significantly higher takeover premia in completed deals, after controlling for the same factors. Economically, the expected rise in takeover premia more than offsets the fall in the probability of deal completion, resulting in a positive expected gain to target shareholders. However, in general, target stock price reactions to bid announcements do not appear to fully anticipate the positive expected gain from potential litigation. We find that during a merger wave characterized by friendly single-bidder offers, shareholder litigation substitutes for the presence of a rival bidder by policing low-ball bids and forcing offer price improvement by the bidder

Do Independent Expert Directors Matter?

The generally weak correlation between board independence and firm performance is a major empirical puzzle. One possible explanation is that director independence alone is not enough. To explore this possibility, we examine the full employment histories of independent directors at S&P 1500 companies. We define an independent expert director (IED) as an independent director who has worked in the same 2-digit SIC industry as the company where he/she serves as an independent director. We show that the proportion of IEDs on a board is positively and significantly correlated with firm performance. We find that when the proportion of IEDs is higher, there are fewer earnings restatements and larger cash holdings. Firms with IEDs have higher CEO pay-performance sensitivity, higher CEO turnover-performance sensitivity, and more patents with more citations. Stock market investors react positively to IED appointments. We also find the higher the CEO power, the less likely IEDs will be on board

Do Independent Expert Directors Matter?

The generally weak correlation between board independence and firm performance is a major empirical puzzle. One possible explanation is that director independence alone is not enough. To explore this possibility, we examine the full employment histories of independent directors at S&P 1500 companies. We define an independent expert director (IED) as an independent director who has worked in the same 2-digit SIC industry as the company where he/she serves as an independent director. We show that the proportion of IEDs on a board is positively and significantly correlated with firm performance. We find that when the proportion of IEDs is higher, there are fewer earnings restatements and larger cash holdings. Firms with IEDs have higher CEO pay-performance sensitivity, higher CEO turnover-performance sensitivity, and more patents with more citations. Stock market investors react positively to IED appointments. We also find the higher the CEO power, the less likely IEDs will be on board