Venture capitalists in mature public firms

By using an original hand-collected data on the professional backgrounds of board members of S&P companies, this paper presents evidence on the role of venture capitalists (VCs) in mature public companies long time after their initial public offering (IPO). We find that 30.5% of S&P firms, which have gone public almost 20 years ago, have at least one VC director on their board, suggesting that VCs' governance role extends from newly public firms to mature public firms. VCs' presence as board members is not only limited to public firms which were VC-backed at the time of their IPO. 34.8% of the firms with VC directors were not VC-backed at the time of their IPO. We find that firms with VC directors on board exhibit greater research and development (R&D) and innovation activity measured by their patenting output. There is also a significant difference in the acquisition activity of firms with VC directors and firms with no VC directors. Firms with VC directors acquire smaller, more R&D intensive and VC-backed targets. They also exhibit a greater amount of corporate venture capital (CVC) investment and form a greater number of joint ventures and strategic alliances with VC-backed firms than firms with no VC directors. Overall, this paper provides the first piece of evidence that, in addition to their role as providers of finance, monitoring and advice for small private firms, VCs also play a significant role in mature public firms, especially in promoting the R&D and innovation activity in such firms

The relationship of G-Index and convertible debt issuance in the presence of restrictive covenants

We examine the relationship between the Governance Index (G-Index) and convertible bond use by firms, specifically in the presence or absence of covenants. We find that the better the shareholder governance (lower G-Index) of firms, the more they are likely to issue convertible instead of straight bonds. More importantly, we find that the complementary relationship between shareholder governance and convertible bond use is driven by the existence of certain covenants attached to these convertible securities. We also find that this effect is accentuated in firms with smaller size, higher market-to-book, R&D and intangibles as well as higher beta. We conclude that this link between strong shareholder rights and increased convertible bond use is conditional on the presence of covenants and therefore shows the important interaction of these three governance mechanisms. In addition, this triple link being emphasized in firms with higher agency costs and adverse selection problems is consistent with value-maximizing use of convertible bonds

How an IPO Helps in M&A

An initial public offering (IPO) can often provide a powerful stimulus to private companies seeking to pursue an acquisition-driven growth strategy. Based on a comprehensive analysis of U.S. IPOs, the authors show that newly public companies are prolific acquirers. Over 30% of companies conducting an IPO make at least one acquisition in their IPO year, and the typical IPO firm makes about four acquisitions during its first five years as a public company. Copyright Copyright (c) 2010 Morgan Stanley.

Going public to acquire? The acquisition motive in IPOs

Newly public firms make acquisitions at a torrid pace. Their large acquisition appetites reflect the concentration of initial public offerings (IPOs) in mergers and acquisitions-(M&A-) intensive industries, but acquisitions by IPO firms also outpace those by mature firms in the same industry. IPO firms' acquisition activity is fueled by the initial capital infusion at the IPO and through the creation of an acquisition currency used to raise capital for both cash- and stock-financed acquisitions along with debt issuance subsequent to the IPO. IPO firms play a bigger role in the M&A process by participating as acquirers than they do as takeover targets, and acquisitions are as important to their growth as research and development (R&D) and capital expenditures (CAPEX). The pattern of acquisitions following an IPO shapes the evolution of ownership structure of newly public firms.Initial public offerings Acquisitions Mergers Acquisition currency