Why Issue Mandatory Convertibles? Theory and Empirical Evidence.

Abstract Mandatory convertibles, which are equity-linked hybrid securities that automatically convert to common stock on a pre-specified date, have become an increasingly popular means of raising capital in recent years (about $20 billion worth issued in 2001 alone). This paper presents the first theoretical and empirical analysis of mandatory convertibles in the literature. We consider a firm facing a financial market characterized by asymmetric information, and significant costs in the event of financial distress. The firm can raise capital either by issuing mandatory convertibles, or by issuing more conventional securities like straight debt, common stock, and ordinary convertibles. We show that, in equilibrium, the firm issues straight debt, ordinary convertibles, or equity if the extent of asymmetric information facing it is large, but the probability of being in financial distress is relatively small; it issues mandatory convertibles if it faces a smaller extent of asymmetric information but a greater probability of financial distress. Our model provides a rationale for the three commonly observed features of mandatory convertibles: mandatory conversion, capped (or limited) capital appreciation, and a higher dividend yield compared to common stock. We also characterize the equilibrium design of mandatory convertibles. Our model also has implications for the abnormal stock returns upon the announcement of mandatory convertibles and for the post-issue operating performance of mandatory convertible issuers. We test the implications of our theory using a sample of firms which have chosen to issue either mandatory convertibles or ordinary convertibles, and we also study the long-term abnormal stock performance of mandatory convertible issuers. The evidence supports the implications of our theory.security design, new security, mandatory convertible, asymmetric information, financial distress

What Kinds of Companies Go Public?

A firm's productivity and sales growth will peak when the firm goes public. Sales, capital expenditures, and other costs associated with the company's product and market continue to increase after a firm makes its IPO.York's Knowledge Mobilization Unit provides services and funding for faculty, graduate students, and community organizations seeking to maximize the impact of academic research and expertise on public policy, social programming, and professional practice. It is supported by SSHRC and CIHR grants, and by the Office of the Vice-President Research & Innovation. [email protected] www.researchimpact.c

Management quality, certification, and initial public offerings

Abstract We empirically examine the relationship between the quality and reputation of a firm's management and various aspects of its IPO and post-IPO performance, a relationship that has so far received little attention in the literature. We hypothesize that better and more reputable managers are able to convey the intrinsic value of their firm more credibly to outsiders, thereby reducing the information asymmetry facing their firm in the equity market. Therefore, IPOs of firms with higher management quality will be characterized by lower underpricing, greater institutional interest, more reputable underwriters, and smaller underwriting expenses. Further, if higher management quality is associated with lower heterogeneity in investor valuations, firms with better managers will have greater long-term stock returns. Finally, since better managers are likely to select better projects (having a larger NPV for any given scale) and implement them more ably, higher management quality will also be associated with larger IPO offer sizes and stronger post-IPO operating performance. We present evidence consistent with the above hypotheses

Management Quality and Antitakeover Provisions

We present the first empirical analysis of the relationship between a firm’s management quality and the prevalence of antitakeover provisions in its corporate charter and their influence on initial public offering (IPO) valuation and post-IPO performance. We test the implications of the managerial entrenchment hypothesis, which implies that antitakeover provisions serve only to enhance the control benefits of incumbent management, and the long-term value creation hypothesis, which implies that such provisions can enhance value in the hands of higher quality management. We find that, first, firms with higher quality management and greater growth options are associated with a greater number of antitakeover provisions. Second, firms with higher management quality and a greater number of antitakeover provisions outperform other firms in the sample in terms of post-IPO operating and stock return performance and obtain higher IPO valuations. Our findings reject the managerial entrenchment hypothesis and support the long-term value creation hypothesis

Top Management Team Quality and Innovation in Venture-Backed Private Firms and IPO Market Rewards to Innovative Activity

Using hand-collected data on top management team human capital (“top management quality”) of a large venture-backed private firm sample, we analyze the relation between top management team quality and pre-initial public offering (IPO) innovation productivity and the relation between pre-IPO innovation productivity and IPO market valuations. We hypothesize that firms with higher quality top management teams invest more in innovative projects and select better projects, yielding higher innovation productivity; pursue explorative rather than exploitative innovation strategies; and hire more high quality inventors. Finally, we hypothesize that IPO market rewards more innovative private firms with higher IPO firm valuations. The evidence supports these hypotheses

The Economics of Debt Collection: Enforcement of Consumer Credit Contract,”

Abstract In the U.S., third-party debt collection agencies employ more than 140,000 people and recover more than $50 billion each year, mostly from consumers. Informational, legal, and other factors suggest that original creditors should have an advantage in collecting debts owed to them. Then, why does the debt collection industry exist and why is it so large? Explanations based on economies of scale or specialization cannot address many of the observed stylized facts. We develop an application of common agency theory that better explains those facts. The model explains how reliance on an unconcentrated industry of third-party debt collection agencies can implement an equilibrium with more intense collections activity than creditors would implement by themselves. We derive empirical implications for the nature of the debt collection market and the structure of the debt collection industry. A welfare analysis shows that, under certain conditions, an equilibrium in which creditors rely on third-party debt collectors can generate more credit supply and aggregate borrower surplus than an equilibrium where lenders collect debts owed to them on their own. There are, however, situations where the opposite is true. The model also suggests a number of policy instruments that may improve the functioning of the collections market