Why do firms go public? evidence from the banking industry

The lack of data on private firms has made it difficult to empirically examine theories of why firms go public. However, both public and private banks must disclose financial information to regulators. We exploit this requirement to explore the going-public decision. Our results indicate that banks that convert to public ownership are more likely to become targets than control banks that remain private. Banks that go public are also more likely to become acquirers than control banks. IPO banks grow faster than control banks after going public, although there is some evidence that their performance deteriorates.Financial institutions

The Buffering Effect of Brands for Companies Facing Legislative Homogenization: Evidence from the Introduction of Sarbanes-Oxley

Brands not only enhance the positive impact of marketing initiatives, but also buffer the firm from the full consequences of unexpected and negative market shifts. While this protective effect has been demonstrated for firm-specific events (e.g., product recalls, public relations crises), its impact has not been observed in response to market-wide environmental shifts. Our study demonstrates the buffering properties of strong brands in exactly such a context: the passing of new legislation. By examining responses to the introduction of the Sarbanes-Oxley Act of 2002, we show that (1) firms exhibit a rapid and homogeneous response as they comply and adjust strategy to a new environmental incentive/cost structure; (2) from a marketing perspective, this homogeneity in competitive responses leads to a systemic decrease in marketing efficiency; and (3) stronger brands existing prior to this environmental shift help buffer their companies from this loss in efficiency. We further show that this advantage only holds for the strongest of brands in the market

Do Target CEOs Sell Out Their Shareholders to Keep Their Job in a Merger?

CEOs have a potential conflict of interest when their company is acquired: they can bargain to be retained by the acquirer and for private benefits rather than for a higher premium to be paid to the shareholders. We investigate the determinants of target CEO retention by the acquirer and whether target CEO retention affects the premium paid by the acquirer. The probability that a CEO is retained increases with a private bidder, the performance of the target, and with the fraction of target shares held by insiders. Regardless of the bidder type, we find no evidence that the premium paid is lower when the CEO is retained by the acquirer. Strikingly, the target stock price increases more at the announcement of an acquisition by a private firm when the CEO is retained than when she is not. This result holds whether the private acquirer is a private equity firm or an operating company and for management buyouts.

Principles of managerial finance

921 p. ; 26 cm

Control as a motivation for underpricing: A comparison of dual- and single-class IPOs

We find that dual-class firms experience less underpricing than single-class firms, and we explore several hypotheses which might explain this phenomenon. Compared to single-class firms, dual-class companies have slightly higher post-IPO institutional ownership and experience fewer control events. Although dual-class firms achieve a lower underpricing cost, they trade at lower prices relative to earnings and sales than do single-class IPOs. This pricing differential, combined with evidence that dual-class managers earn higher compensation and that dual-class shares are common among media and entertainment industry IPOs, suggests that dual-class ownership structures protect private control benefits

Dual Class IPOs ARE Underpriced Less Severely

We analyze a sample of dual and single class initial public offerings (IPOs) to investigate whether empirical estimates of underpricing determinants are consistent across alternative measures of firm size and alternative techniques intended to account for underwriter price stabilization efforts. We find that results from long-standing methods for estimating underpricing relations are generally robust to one's choice of size proxy and are consistent with estimates obtained from censored regressions of first-day returns and from least squares regressions of longer horizon initial returns. We also confirm an existing finding in the literature that dual class IPOs endure less underpricing than do single class firms. Copyright 2008, The Eastern Finance Association.

What’s in a vote? The short- and long-run impact of dual-class equity on IPO firm values

We find that relative to fundamentals, dual-class firms trade at lower prices than do singleclass firms both at the IPO date and for at least the subsequent five years. The lower prices attached to dual-class firms do not foreshadow abnormally low stock or accounting returns. However, CEO turnover events do occur less frequently among dual-class firms and the circumstances surrounding CEO turnover vary between single- and dual-class companies. When dual-class firms unify their share classes statistically and economically significant value gains occur. Collectively, our results suggest that the governance associated with dual-class equity influences the pricing of dual-class firms.UnpublishedNon Peer ReviewedAdams, R., Santos, J., 2006. Identifying the effect of managerial control on firm performance. Journal of Accounting and Economics 41, 55-85. Bebchuck, L., Cohen, A., 2005. The costs of entrenched boards. Journal of Financial Economics 78, 409-433. Brickley, J., Coles, J., Terry, R., 1994. The board of directors and the adoption of poison pills. Journal of Financial Economics 35, 371-390. Buck, R., 2005. EU to endorse ”one share, one vote” principle. The Financial Times, Monday, October 17, p. 2. Brav, A., Gompers, P., 1997. Myth or reality? The long-run underperformance of initial public offerings: evidence from venture and nonventure capital-backed companies. Journal of Finance 52, 1791-1821. Choi, J., Park, S., Yoo, S., 2006. The value of outside directors: evidence from corporate governance reform in Korea. Journal of Financial and Quantitative Analysis, forthcoming. Claessens, S., Djankov, S., Fan, J., Lang, L., 2002. Disentangling the incentive and entrenchment effects of large shareholders. Journal of Finance 57, 2741-2772. Comment, R., Schwert, G.W., 1995. Poison or placebo? Evidence on the deterrence and wealth effects of modern antitakeover measures. Journal of Financial Economics 39, 3-43. Core, J., Guay, W., Rusticus, T., 2006. Does weak governance cause weak stock returns? An examination of firm operating performance and investors’ expectations. Journal of Finance, forthcoming. Cotter, J., Shivdasani, A., Zenner, M., 1997. Do independent directors enhance target shareholder wealth? Journal of Financial Economics 43, 195-218. Cox, S., Roden, D., 2002. The source of value of voting rights and related dividend promises. Journal of Corporate Finance 8, 337-351. Daines, R., Klausner, M., 2001. Do IPO charters maximize firm value? Antitakeover protection in IPOs. Journal of Law, Economics, and Organization 17, 83-120. Dahya, J., McConnell, J., 2006. Board composition, corporate performance, and the Cadbury Committee recommendation. Journal of Financial and Quantitative Analysis, forthcoming. DeAngelo, H., DeAngelo, L., 1985. Managerial ownership of voting rights: a study of public corporations with dual classes of common stock. Journal of Financial Economics 14, 33-69. DeAngelo, H., Rice, E. 1983. Antitakeover charter amendments and stockholder wealth. Journal of Financial Economics 11, 329-360. Denis, D., Denis, D., 1994. Majority owner-managers and organizational efficiency. Journal of Corporate Finance 1, 91-118. Eldenburg, L., Krishnan, R., 2003. Public vs. private governance: a study of incentives and operational performance. Journal of Accounting and Economics 35, 377-404. Faleye, O., 2006. Classified boards, firm value, and managerial entrenchment. Journal of Financial Economics, forthcoming. Fan, J., Wong, T., 2002. Corporate ownership structure and the informativeness of accounting earnings in East Asia. Journal of Accounting and Economics 33, 401-425. Fich, E., Shivdasani, A., 2005. The impact of stock-option compensation for outside directors on firm value. Journal of Business 78, 2229-2254. Fischel, D., 1987. Organizational changes and the regulation of dual class common stock. The University of Chicago Law Review 54, 119-152. Francis, J., Schipper, K., Vincent, L., 2005. Earnings and dividend informativeness when cash flow rights are separated from voting rights. Journal of Accounting and Economics 39, 329- 360. Gompers, P., Ishii, J., Metrick, A., 2003. Corporate governance and equity prices. Quarterly Journal of Economics 118, 107-155. Gompers, P., Ishii, J., Metrick, A., 2006. Extreme governance: an analysis of dual-class firms in the United States. Harvard Business School working paper. Grossman, S., Hart, O., 1988. One share one vote and the market for corporate control. Journal of Financial Economics 20, 175-202. Harris, M., Raviv, A., 1988. Corporate governance: voting rights and majority rules. Journal of Financial Economics 20, 203-35. Jarrell, G., Poulsen, A., 1987. Shark repellants and stock prices: the effects of antitakeover amendments since 1980. Journal of Financial Economics 19, 127-168. Jarrell, G., Poulsen, A., 1988. Dual-class recapitalization as antitakeover mechanisms: the recent evidence. Journal of Financial Economics 20, 129-152. Kaplan, S., Zingales, L., 1997. Do investment-cash flow sensitivities provide useful measures of financing constraints? Quarterly Journal of Economics 112, 169-215. Kim, M., Ritter, J., 1999. Valuing IPOs. Journal of Financial Economics 53, 409-437. Lehn, K., Patro, S., Zhao, M., 2006. Governance indices and valuation multiples: which causes which? University of Pittsburgh working paper. Linn, S., McConnell, J., 1983. An empirical investigation of the impact of antitakeover amendments on common stock prices. Journal of Financial Economics 11, 361-400. Lins, K., 2003. Equity ownership and firm value in emerging markets. Journal of Financial and Quantitative Analysis 38, 159-184. London, S., 2004. U.S. pension fund calls for discount in Google shares. Financial Times, May 4, p. 1. Loughran, T., Ritter, J., 2000. Uniformally least powerful tests of market efficiency. Journal of Financial Economics 55, 361-389. Malatesta, P., Walkling, R., 1988. Poison pill securities: stockholder wealth, profitability, and ownership structure. Journal of Financial Economics 20, 347-376. McConnell, J., Servaes, H., 1990. Additional evidence on equity ownership and corporate value. Journal of Financial Economics 27, 595-612. McWilliams, V., 1990. Managerial share ownership and the stock price effects of antitakeover amendment proposals. Journal of Finance 45, 1627-1640. Millon-Cornett, M., Vetsuypens, M., 1989. Voting rights and shareholder wealth: the issuance of limited voting stock. Managerial and Decision Economics, 10, 175-188. Morck, R., Shleifer, A., Vishny, R., 1988. Management ownership and market valuation. Journal of Financial Economics 20, 293-315. Partch, M., 1987. The creation of a class of limited voting stock and shareholder wealth. Journal of Financial Economics 18, 313-340. Paul, D., 2006. Board composition and corrective action: evidence from corporate responses to bad acquisitions. Journal of Financial and Quantitative Analysis, forthcoming. Perry, T., Shivdasani, A., 2005. Do boards affect performance? Evidence from corporate restructuring. Journal of Business 78, 1403-1431. Ritter, J., 1991. The long-run performance of initial public offerings. Journal of Finance 46, 3-27. Ritter, J., Welch, I., 2002. A review of IPO activity, pricing, and allocations. Journal of Finance 57, 1795-1828. Ruback, R., 1988. Coercive dual-class exchange offers. Journal of Financial Economics 20, 153- 173. Ryngaert, M., 1988. The effect of poison pill securities on shareholder wealth. Journal of Financial Economics 20, 377-417. Shivdasani, A., Yermack, D., 1999. CEO involvement in the selection of new board members: an empirical analysis. Journal of Finance 54, 1829-1853. Shivdasani, A., 2006. Are busy boards effective monitors? Journal of Finance 61, 689-724. Smart, S., Zutter, C., 2003. Control as a motivation for underpricing: a comparison of dual- and single-class IPOs. Journal of Financial Economics 69, 85-110. Smart, S., Zutter, C., 2006. The evolution of equity financing, University of Pittsburgh working paper. Stulz, R., 1988. Managerial control of voting rights: financing policies and the market for corporate control. Journal of Financial Economics 20, 25-54. Villalonga, B., Amit, R., 2006. Benefits and costs of control-enhancing mechanisms in U.S. family firms. Harvard Business School working paper. Yermack, D., 1996. Higher market valuation of companies with a small board of directors. Journal of Financial Economics 40, 185-211

What’s in a vote? The short- and long-run impact of dual-class equity on IPO firm values

We find that relative to fundamentals, dual-class firms trade at lower prices than do singleclass firms both at the IPO date and for at least the subsequent five years. The lower prices attached to dual-class firms do not foreshadow abnormally low stock or accounting returns. However, CEO turnover events do occur less frequently among dual-class firms and the circumstances surrounding CEO turnover vary between single- and dual-class companies. When dual-class firms unify their share classes statistically and economically significant value gains occur. Collectively, our results suggest that the governance associated with dual-class equity influences the pricing of dual-class firms.UnpublishedNon Peer ReviewedAdams, R., Santos, J., 2006. Identifying the effect of managerial control on firm performance. Journal of Accounting and Economics 41, 55-85. Bebchuck, L., Cohen, A., 2005. The costs of entrenched boards. Journal of Financial Economics 78, 409-433. Brickley, J., Coles, J., Terry, R., 1994. The board of directors and the adoption of poison pills. Journal of Financial Economics 35, 371-390. Buck, R., 2005. EU to endorse ”one share, one vote” principle. The Financial Times, Monday, October 17, p. 2. Brav, A., Gompers, P., 1997. Myth or reality? The long-run underperformance of initial public offerings: evidence from venture and nonventure capital-backed companies. Journal of Finance 52, 1791-1821. Choi, J., Park, S., Yoo, S., 2006. The value of outside directors: evidence from corporate governance reform in Korea. Journal of Financial and Quantitative Analysis, forthcoming. Claessens, S., Djankov, S., Fan, J., Lang, L., 2002. Disentangling the incentive and entrenchment effects of large shareholders. Journal of Finance 57, 2741-2772. Comment, R., Schwert, G.W., 1995. Poison or placebo? Evidence on the deterrence and wealth effects of modern antitakeover measures. Journal of Financial Economics 39, 3-43. Core, J., Guay, W., Rusticus, T., 2006. Does weak governance cause weak stock returns? An examination of firm operating performance and investors’ expectations. Journal of Finance, forthcoming. Cotter, J., Shivdasani, A., Zenner, M., 1997. Do independent directors enhance target shareholder wealth? Journal of Financial Economics 43, 195-218. Cox, S., Roden, D., 2002. The source of value of voting rights and related dividend promises. Journal of Corporate Finance 8, 337-351. Daines, R., Klausner, M., 2001. Do IPO charters maximize firm value? Antitakeover protection in IPOs. Journal of Law, Economics, and Organization 17, 83-120. Dahya, J., McConnell, J., 2006. Board composition, corporate performance, and the Cadbury Committee recommendation. Journal of Financial and Quantitative Analysis, forthcoming. DeAngelo, H., DeAngelo, L., 1985. Managerial ownership of voting rights: a study of public corporations with dual classes of common stock. Journal of Financial Economics 14, 33-69. DeAngelo, H., Rice, E. 1983. Antitakeover charter amendments and stockholder wealth. Journal of Financial Economics 11, 329-360. Denis, D., Denis, D., 1994. Majority owner-managers and organizational efficiency. Journal of Corporate Finance 1, 91-118. Eldenburg, L., Krishnan, R., 2003. Public vs. private governance: a study of incentives and operational performance. Journal of Accounting and Economics 35, 377-404. Faleye, O., 2006. Classified boards, firm value, and managerial entrenchment. Journal of Financial Economics, forthcoming. Fan, J., Wong, T., 2002. Corporate ownership structure and the informativeness of accounting earnings in East Asia. Journal of Accounting and Economics 33, 401-425. Fich, E., Shivdasani, A., 2005. The impact of stock-option compensation for outside directors on firm value. Journal of Business 78, 2229-2254. Fischel, D., 1987. Organizational changes and the regulation of dual class common stock. The University of Chicago Law Review 54, 119-152. Francis, J., Schipper, K., Vincent, L., 2005. Earnings and dividend informativeness when cash flow rights are separated from voting rights. Journal of Accounting and Economics 39, 329- 360. Gompers, P., Ishii, J., Metrick, A., 2003. Corporate governance and equity prices. Quarterly Journal of Economics 118, 107-155. Gompers, P., Ishii, J., Metrick, A., 2006. Extreme governance: an analysis of dual-class firms in the United States. Harvard Business School working paper. Grossman, S., Hart, O., 1988. One share one vote and the market for corporate control. Journal of Financial Economics 20, 175-202. Harris, M., Raviv, A., 1988. Corporate governance: voting rights and majority rules. Journal of Financial Economics 20, 203-35. Jarrell, G., Poulsen, A., 1987. Shark repellants and stock prices: the effects of antitakeover amendments since 1980. Journal of Financial Economics 19, 127-168. Jarrell, G., Poulsen, A., 1988. Dual-class recapitalization as antitakeover mechanisms: the recent evidence. Journal of Financial Economics 20, 129-152. Kaplan, S., Zingales, L., 1997. Do investment-cash flow sensitivities provide useful measures of financing constraints? Quarterly Journal of Economics 112, 169-215. Kim, M., Ritter, J., 1999. Valuing IPOs. Journal of Financial Economics 53, 409-437. Lehn, K., Patro, S., Zhao, M., 2006. Governance indices and valuation multiples: which causes which? University of Pittsburgh working paper. Linn, S., McConnell, J., 1983. An empirical investigation of the impact of antitakeover amendments on common stock prices. Journal of Financial Economics 11, 361-400. Lins, K., 2003. Equity ownership and firm value in emerging markets. Journal of Financial and Quantitative Analysis 38, 159-184. London, S., 2004. U.S. pension fund calls for discount in Google shares. Financial Times, May 4, p. 1. Loughran, T., Ritter, J., 2000. Uniformally least powerful tests of market efficiency. Journal of Financial Economics 55, 361-389. Malatesta, P., Walkling, R., 1988. Poison pill securities: stockholder wealth, profitability, and ownership structure. Journal of Financial Economics 20, 347-376. McConnell, J., Servaes, H., 1990. Additional evidence on equity ownership and corporate value. Journal of Financial Economics 27, 595-612. McWilliams, V., 1990. Managerial share ownership and the stock price effects of antitakeover amendment proposals. Journal of Finance 45, 1627-1640. Millon-Cornett, M., Vetsuypens, M., 1989. Voting rights and shareholder wealth: the issuance of limited voting stock. Managerial and Decision Economics, 10, 175-188. Morck, R., Shleifer, A., Vishny, R., 1988. Management ownership and market valuation. Journal of Financial Economics 20, 293-315. Partch, M., 1987. The creation of a class of limited voting stock and shareholder wealth. Journal of Financial Economics 18, 313-340. Paul, D., 2006. Board composition and corrective action: evidence from corporate responses to bad acquisitions. Journal of Financial and Quantitative Analysis, forthcoming. Perry, T., Shivdasani, A., 2005. Do boards affect performance? Evidence from corporate restructuring. Journal of Business 78, 1403-1431. Ritter, J., 1991. The long-run performance of initial public offerings. Journal of Finance 46, 3-27. Ritter, J., Welch, I., 2002. A review of IPO activity, pricing, and allocations. Journal of Finance 57, 1795-1828. Ruback, R., 1988. Coercive dual-class exchange offers. Journal of Financial Economics 20, 153- 173. Ryngaert, M., 1988. The effect of poison pill securities on shareholder wealth. Journal of Financial Economics 20, 377-417. Shivdasani, A., Yermack, D., 1999. CEO involvement in the selection of new board members: an empirical analysis. Journal of Finance 54, 1829-1853. Shivdasani, A., 2006. Are busy boards effective monitors? Journal of Finance 61, 689-724. Smart, S., Zutter, C., 2003. Control as a motivation for underpricing: a comparison of dual- and single-class IPOs. Journal of Financial Economics 69, 85-110. Smart, S., Zutter, C., 2006. The evolution of equity financing, University of Pittsburgh working paper. Stulz, R., 1988. Managerial control of voting rights: financing policies and the market for corporate control. Journal of Financial Economics 20, 25-54. Villalonga, B., Amit, R., 2006. Benefits and costs of control-enhancing mechanisms in U.S. family firms. Harvard Business School working paper. Yermack, D., 1996. Higher market valuation of companies with a small board of directors. Journal of Financial Economics 40, 185-211