• Selected
• Entire List

Abstract:
In the "Aircraft Carrier," the Securities and Exchange Commission (SEC) proposed changes in federal securities disclosure requirements in an attempt to enhance and facilitate the process of issuing new securities. Under the proposed regulatory regime, the registration process would be simplified so that many larger, more experienced issuers would be able to use a new, shorter registration statement called Form B (as opposed to the more extensive Form A) whenever they sell securities to the public. To qualify to use Form B, a company with at least twelve months reporting history under the Exchange Act must either have a public float of $75 million or more and an average daily trading volume (ADTV) of $1 million or more, or have a public float of $250 million or more.

In this paper, we argue that the SEC's study of capital market efficiency employs too broad a definition of what constitutes "an analyst" who represents an important conduit for information between a company and its investors. We adjust the definition of an analyst to more accurately reflect only those analysts whose research effectively disseminates information to investors in the market (sell-side analysts) and find that the proposed numerical cutoffs for the use of Form B are set much too low to insure adequate analyst following. This finding is consistent with evidence we present that a substantial percentage of companies eligible to use Form B have low levels of institutional investor shareholdings.

Based on a sample of companies whose stock price was greater than $1.00 on 12/31/99, we find that 3,413 (43.3%) of firms in the sample qualify to file Form B using the SEC's proposed numerical cutoffs. Using First Call's consensus earnings estimate service, we examine the analyst following of firms that have a market capitalization greater than $250 million and find that 26.1% of these firms have less than three analysts compared to the 5.0% reported by the SEC. We also examine the SEC's second criteria (market capitalization greater than $75 million and average daily trading volume (ADTV) of $1 million) and find that 38.1% of companies have less than three analysts compared to the 14.0% reported by the SEC. We argue that equity or sell-side analyst following represents an important source of information to investors and should be considered when establishing criteria for relaxed reporting requirements when companies issue securities.

Abstract:
Although the owners of publicly traded companies have had the right to offer shareholder proposals using Rule 14a-8 for several decades, the effectiveness of the rule has been frequently questioned because few of these proposals received substantial support from other shareholders and even fewer have been implemented by boards. Using new data from the 2002-2004 proxy seasons, we analyze shareholder voting patterns on these proposals, board reactions to them, and market responses. We find some big changes from earlier periods: many more proposals are receiving majority shareholder support during our sample period relative to earlier studies, and this support has translated into directors implementing more of the actions called for by shareholders. In particular, boards are increasingly willing to remove important anti-takeover defenses, such as the classified board and poison pill, in response to shareholders' requests, something rarely seen in the past. Despite the increase in support for shareholder proposals and board action in response, we find small and insignificant stock market reaction. We conclude that shareholder proposals under Rule 14a-8 have an emerging role in reducing agency costs by increasing director responsiveness to shareholder concerns to open the market more fully to corporate control.

shareholder, corporate governance, investors, market performance

Abstract:
We analyze voting data from five proxy seasons (2003-2008) to identify the extent to which shareholders generally, and mutual funds in particular, vote in accordance with the voting recommendations of RiskMetrics’ ISS Corporate Governance Services. We look at voting by all shareholders and voting decisions by mutual funds on non-election and non-routine proxy proposals - both those submitted by management and those submitted by shareholders. We find that shareholders generally tended to vote more consistently with ISS voting recommendations than management recommendations during this period, with more consistency among mutual funds than all shareholders. We also find that independent voting is unusual: Shareholder voting and, even more so, mutual fund voting decisions generally follow either the recommendations of management or of the ISS. Mutual fund voting decisions are consistent with ISS recommendations more frequently than management recommendations, whether the proposal is submitted by management or by shareholders, and whether relating to anti-takeover issues or corporate governance issues. Our univariate results are confirmed by multivariate regressions that examine the weight mutual funds give to ISS recommendations. In short, ISS has an impact on voting by shareholders generally and, across the board, an even greater impact on voting by mutual funds.

mutual fund voting, ISS, corporate governance, shareholders

Abstract:
This paper examines the role buyout specialists play in structuring the debt used to finance the LBO and in monitoring management in the post-LBO firm. We find that when buyout specialists control the majority of the post-LBO equity, the LBO transaction is likely to be financed with less short-term and/or senior debt and less likely to experience financial distress. We also find that buyout specialists have greater board representation on smaller boards, suggesting that they actively monitor managers, and that for these transactions, using debt with tighter terms does not significantly increase the firm's performance. In contrast, in all other transactions using such debt does significantly increase the firm's performance. These findings suggest that active monitoring by a buyout specialist substitutes for tighter debt terms in monitoring and motivating managers of LBOs.

Leveraged buyouts; Buyout specialists; Active investors; Financial distress; Debt structure

Abstract:
This article examines firm-commitment initial public offerings, exploring the ways underwriters use and abuse the over-allotment option to affect legal price stabilization in after-market trading. After illustrating that underwriters always profit when they make full use of the over-allotment option, the authors suggest that the NASD reexamine the size of the over-allotment option and require disclosures concerning the use of the option be included in the prospectus distributed to potential buyers of newly issued securities.

Abstract:
In this paper we address underwriters' use of the over-allotment option (OAO) as a means of reducing the risks associated with a firm commitment underwriting. We argue that the OAO is an effective device for reducing the risk of adverse market changes in a firm commitment underwriting. We conduct an empirical analysis to test whether underwriters exercise the OAO strategically to reduce these risks.

The over-allotment option allows the underwriter to sell additional shares, up to 15% of the number of shares registered in the "official" offering. If the underwriter sells the shares covered by the over-allotment option when the offer commences, this establishes a short position in the stock that can be covered with stock repurchases in the open market if the stock price does not increase, or by exercising the OAO if it does.

If the price of the newly issued shares drops, the underwriter places a bid to purchase shares in the market at or below the offering price to cover its short position without exercising the over-allotment option. By contrast, if the price increases, the underwriter exercises the over-allotment option and collects the commission or gross spread for these shares. Thus no matter which direction the stock price moves after issuance, the underwriter eliminates much of the market risk associated with any potential change in the market's condition and makes money on the over-allotted stock, so long as it can sell the additional securities at issuance.

Our results suggest that underwriters use the OAO in different ways depending on market conditions after the issuance of the new stock, and that their actions are consistent with our hypothesis that the OAO acts to decrease the risks associated with unsuccessful IPOs. In particular, we find that the extent to which the OAO is exercised is positively related to both the initial return on securities sold in a public offering and the return on the newly issued shares during the first four weeks after issuance.

Our estimates of underwriter profitability are almost always positive and are always positive when at least some of the OAO is exercised. This suggests that underwriters of IPOs are not subjected to significant financial risks, in part due to their use of the OAO. Finally, we show that the number of shares exercised of the OAO is negatively related to the number of shares repurchased through underwriter stabilization activities in the secondary market after issuance, even after controlling for other characteristics of the offer.

Overall, these results suggest that the extent of the OAO exercise is related to the after-issuance performance of an issuing firm's stock price, and that the underwriter can strategically exercise the OAO to greatly reduce the risks from underwriting an IPO.

Abstract:
This study investigates the structure of the debt and equity financing for a sample of leveraged buyouts for the period 1984 to 1989. We find that as the average maturity of the debt increases, the likelihood of a subsequent default decreases. This suggests that choosing debt with longer maturities reduces the probability of loss of control. We also find that firms in which buyout specialists have majority control have a significantly lower likelihood of subsequent default and debt with a significantly higher average maturity. In addition, these firms have more buyout specialists on the board of directors. These findings suggest that buyout specialists provide valuable monitoring benefits which substitute for the disciplining power of shorter debt maturity.

Abstract:
Authors' description of their article: Whereas the gains to target shareholders are usually large in tender offers, managers of takeover targets can have incentives to defeat such offers. We examine whether the presence of independent outside directors on boards of tender offer targets help to control such conflicts of interests. Using a sample of 169 tender offer contests that occurred during 1988 to 1992, we document that the gains to target shareholders are significantly greater when the target's board comprises a majority of independent outside directors. Contests involving independent target boards are associated with higher initial offer premiums and greater revisions in the intial premium. Further, takeover resistance and the use of poison pills by targets with independent boards are associated with greater gains to target shareholders. These results indicate that boards with a majority of directors who are independent outsiders help control agency problems between shareholders and managers when firms are targets of tender offer bids.