Can the Stock Market anticipate Future Operating Performance? Evidence from Equity Rights Issues

This paper examines whether the stock market valuation impact of rights issues is consistent with subsequent operating performance of issuing firms. Analysing a sample of rights issues in the Netherlands, we find that a significant stock price decline takes place with the announcement of rights issues. We then analyse post-rights issue operating performance and find that, consistent with the decline in stock price during the announcement period, issuing firms also exhibit a significant decline in their operating performance. Our analysis thus demonstrates that the stock market can successfully anticipate future changes in operating performance of firms.equity offerings;rights issues;valuation effect;firm performance

Corporate governance mechanisms in IPO firms

This thesis studies the use of corporate governance mechanisms in IPO firms. The IPO often marks the beginning of a more diffuse ownership structure by selling shares to a large group of outside investors. In the thesis corporate governance is viewed as a relevant design issue at the time of the IPO. On the one hand, management may strategically decide to ignore small shareholders' rights and structure corporate governance to its own advantage. This allows management to pursue personal interests that are (possibly) conflicting with those of small shareholders. Alternatively, management may choose to mitigate agency costs by adopting an effective corporate governance structure. In this case, corporate governance is organized to align the interests of management with those of small shareholders. The thesis consists of three studies that examine the use of corporate governance mechanisms by IPO firms in the Netherlands, France and the United Kingdom, respectively.

Can the stock market anticipate future operating performance? Evidence from equity rights issues

This paper examines whether the stock market valuation impact isconsistent with subsequent operating performance of firms. We use datafor equity rights offerings - the widely adopted flotation method inthe Netherlands. We first examine the stock market announcement effectof rights issues and observe that a statistically significant stockprice decline takes place when companies announce rights issues.Further stock price decline is also observed during the subscriptionperiod. We then analyze post-rights issue operating performance offirms and find that, consistent with the announcement period declinein stock price, rights issuing firms subsequently exhibit astatistically significant decline in their operating performance.Additional investigation of both stock and operating performancedecline provides full support for the information asymmetryhypothesis, partial support for the free cash flow hypothesis but nosupport for the window of opportunity hypothesis.firm performance;equity offerings;rights issues;valuation effect

On the Real Effects of Private Equity

Private equity has become an increasingly important part of our economy. Around the world the companies owned by private equity investors account for a substantial percentage of Gross Domestic Product (GDP) and private sector employment. These investors have recently been under fire in the media when they takeover companies. Private equity investors are at best seen as ‘kings of capitalism’ and at worst as ‘barbarians’ and ‘weapons of mass destruction’. The first part of this address contrasts this negative press with what we know about the real effects of private equity from academic studies. In general, private equity seems to be more negatively written about in the media then is warranted based on recent empirical evidence. However, as this address will show the jury is still out on a large number of issues that deserve further attention. One of the issues we know surprisingly little about is the real effects of private equity. Although policymakers are extremely wary of buy-outs, they tend to welcome venture capital investments. They believe that venture capital helps to close the funding gap faced by small high-growth companies that banks are reluctant to finance. The second part of this address discusses recent research that investigates the impact of private equity on the creation of new businesses in Europe. We find that private equity positively impacts the number of start-up firms at the country and industry level. Especially the availability of venture capital to finance these new ventures has a positive impact on new business creation, as many European policymakers assume.private equity;venture capital;entrepreneurial finance;buyouts

Private equity and public-to-private transactions

What considerations lie behind the decision to mount a management buy-out of a publicly listed firm, and should third party investors be involved? Indeed, does the involvement of private equity investors actually aid company performance after a deal is done

Industry Valuation Driven Earnings Management

This paper investigates whether industry valuation impacts firms’ earnings management decisions. Existing accounting literature assumes that industry valuation has a constant impact on this decision. We argue that a higher industry valuation increases the perceived benefits of earnings management at a time when the negative consequences associated with accrual reversal and the probability of detection are believed to be lower. Using a sample of quarterly data of U.S. firms from 1985 to 2005, we find that the four-quarter lagged industry valuation has a positive relationship with industry aggregate (current) discretionary accruals. More specific, one standard deviation increase in the aggregate industry valuation is associated with a significant increase of 2.4 cents in quarterly earnings per share. Our results are robust after controlling for several factors, including bubble years, size, leverage and performance.Industry valuation;Earnings management;Market to book ratio

Takeover defenses and IPO firm value in the Netherlands

The central question of this study involves the relation between the use of takeover defenses and IPO firm value. We report that management frequently uses takeover defenses before taking the firm public. The use of takeover defenses is primarily motivated by managerial entrenchment. IPO investors anticipate potential conflict of interests with management and reduce the price they pay for the IPO shares if takeover defenses are adopted. Although managers internalize this cost of takeover defenses to the degree they own pre-IPO stock, they are likely to gain through private control benefits. Non-management pre-IPO owners lose. Their shares are worth less, but different from managers, they do not get offsetting private control benefits. We infer that managers use takeover defenses to protect private control benefits at non-management pre-IPO owners' expense.firm valuation;initial public offering;takeover defense

How do underwriters value initial public offerings? An empirical analysis of the french IPO market

This paper investigates how French underwriters value the stocks of companies they bring public. Underwriters often use several valuation methods to determine their fair value estimate of the initial public offering (IPO) firm's equity. We investigate five of these valuation methods: peer group multiples valuation, the dividend discount model, the discounted cash flow model, the economic value-added method, and underwriter-specific methods. We document that underwriters base their choice for a particular valuation method on firm characteristics, aggregate stock market returns, and aggregate stock market volatility in the period before the IPO. In addition, we examine how underwriters combine the value estimates of the valuation methods they use into a fair value estimate by assigning weights to these value estimates. We demonstrate that these weights also depend on firm-specific factors, aggregate stock market returns, and aggregate stock market volatility. Finally, we show that underwriters discount their fair value estimate to set the preliminary offer price of the shares. This discount is higher for IPO firms with greater valuation uncertainty and lower for companies that are brought to the market by more reputable underwriters and that are forecasted to be more profitable

The Impact of Media Attention on the Use of Alternative Earnings Measures

The practice of reporting earnings measures that deviate from generally accepted accounting principles (non-GAAP measures) has received negative attention in the media. Regulators argue in favour of reporting GAAP earnings measures and utter their concerns that investors may be misled by the use of non-GAAP measures. In a period of increased regulatory concern for these reporting practices, we explore whether there has been a shift away from the use of non-GAAP metrics. We analyse a sample of earnings press releases in the period 1999-2004 from companies listed at Euronext Amsterdam. Our findings indicate that reporting non-GAAP measures is a common practice and that the frequency of reporting non-GAAP earnings measures has increased despite the concerns voiced by regulators. On the other hand, investors seem to have become more hesitant towards the use of alternative earnings measures for their decision-making. Our findings suggest that investors find non-GAAP measures informative before 2003, but they turn away from these measures in the following years and price GAAP earnings metrics instead. Together, these findings suggest that the negative media attention for non-GAAP measures has influenced the perception of investors, but not of managers.Regulation;Event study;Non-GAAP earnings;Information content;Value relevance

The Price Of Power: Valuing The Controlling Position Of Owner-Managers In French Ipo Firms

Going public often creates an agency conflict between the owner-manager and minority shareholders. This problem is especially severe in countries with poor legal investor protection, such as France. We examine the controlling position of owner-managers in French IPO firms. We find that investors anticipate the increased agency conflict associated with a lock on control and lower firm value when the owner-manager is more powerful. Shareholder agreements in which the owner-manager agrees to share control with other pre-IPO owners enhance firm value. We also report that higher cash flow ownership by the owner-manager is positively related to firm value when he is not in full control. Finally, we document that the large (non-pecuniary) private benefits of control in France may motivate owner-managers to retain control after the IPO