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Abstract:
We examine the risk-return characteristics of a rolling portfolio investment strategy where more than six thousand Nasdaq initial public offering (IPO) stocks are bought and held for up to five years. The average long-run portfolio return is low, but IPO stocks appear as 'longshots', as five-year buy-and-hold returns of 1000% or more are somewhat more frequent than for non-issuing Nasdaq firms matched on size and book-to-market ratio. The typical IPO firm is of average Nasdaq market capitalization but has relatively low book-to-market ratio. We also show that IPO firms exhibit relatively high stock turnover and low leverage, which may lower systematic risk exposures. To examine this possibility, we launch an easily constructed 'low minus high' (LMH) stock turnover portfolio as a liquidity risk factor. The LMH factor produces significant betas for broad-based stock portfolios, as well as for our IPO portfolio and a comparison portfolio of seasoned equity offerings. The factor-model estimation also includes standard characteristics-based risk factors, and we explore mimicking portfolios for leverage-related macroeconomic risks. Because they track macroeconomic aggregates, these mimicking portfolios are relatively immune to market sentiment effects. Overall, we cannot reject the hypothesis that the realized return on the IPO portfolio is commensurable with the portfolio's risk exposures, as defined here.

Asset pricing, liquidity, risk and return, Initial Public Offering (IPO), capital structure, market efficiency

Abstract:
We examine the risk-return characteristics of a rolling portfolio investment strategy where more than six thousand Nasdaq initial public offering (IPO) stocks are bought and held for up to five years. The average long-run portfolio return is low, but IPO stocks appear as longshots, as five-year buy-and-hold returns of 1,000 percent or more are somewhat more frequent than for non-issuing Nasdaq firms matched on size and book-to-market ratio. The typical IPO firm is of average Nasdaq market capitalization but has relatively low book-to-market ratio. We also show that IPO firms exhibit relatively high stock turnover and low leverage, which may lower systematic risk exposures. To examine this possibility, we launch an easily constructed low minus high (LMH) stock turnover portfolio as a liquidity risk factor. The LMH factor produces significant betas for broad-based stock portfolios, as well as for our IPO portfolio and a comparison portfolio of seasoned equity offerings. The factor-model estimation also includes standard characteristics-based risk factors, and we explore mimicking portfolios for leveragerelated macroeconomic risks. Because they track macroeconomic aggregates, these mimicking portfolios are relatively immune to market sentiment effects. Overall, we cannot reject the hypothesis that the realized return on the IPO portfolio is commensurable with the portfolio's risk exposures, as defined here.

Liquidity, Long-run returns, IPO

Abstract:
This essay surveys the extant literature and adds to the empirical evidence on issuance activity,flotation costs, and valuation effects of security offerings. We focus primarily on public offerings of equity for cash, although we also review and present new evidence on debt offerings and private placements. The essay has four major parts: (1) We review aggregate issue activity in exchange listed securities from 1980 through 2004. Following the IPO, only about one-half of the publicly traded firms undertake a public security offering of any type, and only about one-quarter undertake a SEO. Thus, SEOs are relatively rare, which is consistent with adverse selection costs being an important consideration when raising cash externally. (2) We review the evidence on direct issue costs across security types and flotation methods, including the more recent SEO underpricing phenomenon. A large number of studies provide evidence on the determinants of underwriter compensation, and confirm the importance of variables capturing information asymmetries and underwriter competition. (3) We survey and interpret the valuation effects of security issue announcements. In the period since the Eckbo and Masulis (1995) survey, many studies examining announcement-period stock returns have focused on the effects of flotation method choice and foreign offerings. The well-known negative average announcement effect observed for U.S. SEOs appears to be a somewhat U.S.-specific phenomenon. (4) We review and extend evidence on the performance of issuing firms in the five year post-issue period. The literature proposes either a risk based-explanation or a behavioral explanation for the phenomenon of low average realized returns following IPOs and SEOs. Standard factor model regressions fail to reject the null that the low average returns are commensurate with issuers' risk exposures. Recent theoretical developments suggest that lower risk levels following equity issues may be linked to issuers' investment activity, a promising direction for future research.

Security offering, IPO, SEO, debt offer, flotation method, underwriting, rights offer, private placement, shelf registration, adverse selection, announcement returns, long run performance

Abstract:
We present unique empirical tests for overbidding using data from Sweden's auction bankruptcy system. The main creditor (a bank) can neither bid in the auction nor refuse to sell in order to support a minimum price. We argue that the bank may increase its expected revenue by financing a bidder in return for a joint bid strategy. The optimal coalition bid exceeds the bidder's private valuation (overbidding) by an amount that is increasing in the bank's ex ante debt impairment. We find that bank-bidder financing arrangements are common, and our cross-sectional regressions show that winning bids are increasing in the bank-debt impairment as predicted. While, in theory, overbidding may result in the coalition winning against a more efficient rival bidder, our evidence on post-bankruptcy operating performance fails to support such allocative inefficiency effects. We also find that restructurings by bank-financed bidders are relatively risky as they have greater bankruptcy refiling rates, irrespective of the coalition's overbidding incentive.

Bankruptcy, auctions, overbidding, fire sale, saleback, governance, premiums, recovery rates, bank bidding

Abstract:
Program of Contemporary Corporate Governance Issues conference, July 7-8, 2000 at Tuck School of Business at Dartmouth, Hanover, NH. Conference sponsored by Tuck and The Journal of Financial Economics.

Abstract:
This essay surveys the recent empirical literature and adds to the evidence on takeover bids for U.S. targets, 1980-2005. The availability of machine readable transaction databases have allowed empirical tests based on unprecedented sample sizes and detail. We review both aggregate takeover activity and the takeover process itself as it evolves from the initial bid through the final contest outcome. The evidence includes determinants of strategic choices such as the takeover method (merger v. tender offer), the size of opening bids and bid jumps, the payment method, toehold acquisition, the response to target defensive tactics and regulatory intervention (antitrust), and it offers links to executive compensation. The data provides fertile grounds for tests of everything ranging from signaling theories under asymmetric information to strategic competition in product markets and to issues of agency and control. The evidence is supportive of neoclassical merger theories. For example, regulatory and technological changes, and shocks to aggregate liquidity, appear to drive out market-to-book ratios as fundamental drivers of merger waves. Despite the market boom in the second half of the 1990s, the proportion of all-stock offers in more than 13,000 merger bids did not change from the first half of the decade. While some bidders experience large losses (particularly in the years 1999 and 2000), combined value-weighted announcement-period returns to bidders and targets are significantly positive on average. Long-run post-takeover abnormal stock returns are not significantly different from zero when using a performance measure that replicates a feasible portfolio trading strategy. There are unresolved econometric issues of endogeneity and self-selection.

Takeover, merger, tender offer, auction, offer premium, bidder gains, toeholds, markups

Abstract:
Although takeover premiums are large, only 2% of twelve thousand bidders initiating control contests for publicly traded targets acquire target shares (toehold) shortly prior to the bid. We argue that, because toeholds deter competition, toehold bidding may trigger target resistance. If resistance simply means withholding a termination agreement, it takes a toehold of 8% to compensate for the opportunity loss of a typical agreement. As predicted, we find that toehold bidding is significantly more likely when this implied toehold threshold is low. Toehold costs may also arise when target resistance eliminates all bids. We show, however, that the expected marginal toehold effect is positive because toeholds increase the probability of success. Finally, toehold purchases may cause a pre-bid target stock price run-up and increase total takeover costs (markup pricing). However, we find that bidder gains are increasing in both the target run-up and in the toehold. We conclude that friendly bidders appear to abstain from toeholds primarily to avoid toehold-induced target resistance.

Abstract:
Surprisingly, bidders rarely acquire a target stake (toehold) prior to launching control bids, despite paying large takeover premiums. At the same time, toeholds are large when they occur, and toehold bidding is the norm in hostile takeovers. To explain these observations, we develop and test an auction-based takeover model in which toeholds antagonize some (rational) targets, causing these to reject merger negotiations. Optimal toeholds are either zero (to avoid rejection costs) or greater than a threshold so that toehold benefits offset rejection costs. We estimate the toehold threshold, which averages as much as 9\% across 10,000 initial control bids for U.S. public targets, and show that the probability of toehold bidding decreases in the threshold estimate as predicted. The threshold model is also consistent with higher toehold frequencies in hostile bids, and with the steady decline in toehold bidding since the 1980s.

Bidding strategy, tender offer, merger, toehold, termination fee, bid failure

Abstract:
This essay surveys the empirical literature on corporate breakup transactions (divestitures, spinoffs, equity carveouts, tracking stocks), leveraged recapitalizations, and leveraged buyouts (LBOs). Many breakup transactions are a response to excessive conglomeration and reverse costly diversification discounts. The empirical evidence shows that the typical restructuring creates substantial value for shareholders. The value-drivers include elimination of costly cross-subsidizations characterizing internal capital markets, reduction in financing costs for subsidiaries through asset securitization and increased divisional transparency, improved (and more focused) investment programs, reduction in agency costs of free cash flow, implementation of executive compensation schemes with greater pay-performance sensitivity, and increased monitoring by lenders and LBO sponsors. Buyouts after the turn of the century create value similar to LBOs of the 1980s. Recent developments include club deals (consortiums of LBO sponsors bidding together), fund-to-fund exits (LBO funds selling the portfolio firm to another LBO fund), a highly liquid (until mid-2007) leveraged loan market, and evidence of persistence in fund returns (perhaps because brand-sponsors borrow at better rates). The perhaps greatest challenge to the restructuring literature is to achieve a modicum of integration of the analysis across transaction types. Another challenge is to produce precise estimates of the expected return from buyout investments in the presence of limited data on those portfolio companies which do not return to public status.

Restructuring, breakup, divestiture, spinoff, equity carveout, tracking stock, leveraged

Abstract:
I review recent empirical research documenting offer premiums and bidding strategies in corporate takeovers. The discussion ranges from optimal auction bidding to the choice of deal payment form and premium effects of poison pills. The evidence describes the takeover process at a detailed level, from initial premiums to bid jumps, entry of rival bidders, and toehold strategies. Cross-sectional tests illuminate whether bidders properly adjust for winner's curse, whether target stock price runups force offer price markups, and whether auctions of bankrupt firms result in reflect fire-sale discounts. The evidence is suggestive of rational strategic bidding behavior in specific contexts.

Takeover, offer premium, bid strategy, bid jump, merger, tender offer, auction, negotiation, toehold, payment method, markup pricing

Abstract:
Extending the Myers and Majluf (1984) framework, we present a model for the choice of seasoned-equity selling mechanism. A sequential pooling equilibrium exists which implies a positive market reaction to certain flotation strategies. We examine the model implications using the market reaction to issues on the Oslo Stock Exchange using the full range of flotation methods. The average market reaction is non-negative across all methods, and significantly positive for both rights offerings and private placements, as predicted. We also show that average long-run abnormal stock returns to OSE issuers are indistinguishable from zero, supporting the market rationality assumption underpinning the flotation game.

Equity offering, flotation method, sequential equilibrium, adverse selection, rights offer, underwriting

Abstract:
Extending the Myers and Majluf (1984) framework, we present a model for the choice of seasoned-equity selling mechanism. A sequential pooling equilibrium exists which implies a positive market reaction to certain flotation strategies. We examine the model implications using the market reaction to issues on the Oslo Stock Exchange using the full range of flotation methods. The average market reaction is non-negative across all methods, and significantly positive for both rights offerings and private placements, as predicted. We also show that average long-run abnormal stock returns to OSE issuers are indistinguishable from zero, supporting the market rationality assumption underpinning the flotation game.

Adverse selection, equity offerings, flotation method, rights offer, private placement, underwriting, sequential equilibrium, announcement returns, long-run returns

Abstract:
Program of Tuck-JFQA Contemporary Corporate Governance Issues II: International Corporate Governance Conference. The conference was held July 12-13, 2002 at Tuck School of Business at Dartmouth, Hanover, NH. Conference sponsored by Tuck and The Journal of Financial and Quantitative Analysis.

Abstract:
We develop an analytical framework to explain a firm's choice of equity flotation method and the near disappearance of rights offers by U.S. exchange-listed firms. The choice between uninsured rights, rights with standby underwriting, and firm-commitment underwriting depends on information asymmetries, shareholder characteristics, and direct flotation costs. Underwriter certification and current shareholder takeup of issues are viewed as substitute mechanisms for minimizing wealth transfers between shareholders and outside investors. Uninsured rights create adverse selction effects when shareholder takeup is low. Implications for stock price behavior around issue announcements, shareholder subscription precommitments, and relative issue frequencies are supported by large sample evidence.

Flotation method, seasoned common stock, SEO, stock offer, rights offer, adverse selection

Abstract:
The 'new issues puzzle' is that stocks of common stock issuers subsequently underperform nonissuers matched on size and book-to-market ratio. With 7000 seasoned equity and debt issues, we document that issuer underperformance reflects lower systematic risk exposure for issuing firms relative to the matches. A consistent explanation is that, as equity issuers lower leverage, their exposures to unexpected inflation and default risks decrease, thus decreasing their stocks' expected returns relative to matched firms. Equity issues also significantly increase stock liquidity (turnover), again lowering expected returns relative to nonissuers. We conclude that the 'new issue puzzle' is explained by a failure of the matched-firm technique to provide a proper control for risk. This conclusion is robust to issue characteristics and the choice of factor model framework.

New issues puzzle, long-run performance, factor risk, seasoned public offerings, equity issuer

Abstract:
We review the theory and statistical evidence concerning the causes and effects of seasoned public offerings of common stock. We focus in particular on results and findings that post-date the well known survey by Smith (1986). In fact, recent studies now provide at least partial answers to several of the "unresolved issues'' listed by Smith at the end of his survey. These include (i) to what extent does the market reaction to issue announcements depend on the flotation method; (ii) the conditions that lead issuers to select uninsured rights or rights with standby underwriting over a firm commitment underwritten offer; (iii) why rights issues continue to be the predominant flotation method in many foreign jurisdictions while they have become virtually extinct in the U.S.; and (iv) the determinants of direct and indirect flotation costs across flotation methods. In addition, we review (v) recent trends in aggregate issue activity; (vi) the timing of individual equity issues; and (vii) market microstructure effects of equity offers.

Seasoned equity offering, SEO, flotation costs, flotation method choice, underwriting, firm commitment offers, best effort, rights offer, standby rights offer, quality certification, shareholder takeup, adverse selection, market timing, aggregate issue activity, market microstructure effects

Abstract:
We examine whether pre-bid target stock price runups lower bidder takeover gains and deter short-term toehold purchases in the runup period. A dollar increase in the runup raises the initial offer price by $0.80 (markup pricing). Bidder gains, while decreasing in offer price markups, are increasing in runups, suggesting that runups are interpreted by the negotiating parties as reflecting increases in target stand-alone values. We also show that short-term toehold purchases increase runups. However, when purchased by the initial bidder (as opposed to by other investors), short-term toeholds lower markups, possibly because they provide evidence to the target that the runup anticipates the pending offer premium (supporting substitution between the runup and the markup). We conclude that markup pricing per se is unlikely to deter short-term toehold aquisitions.

Bidder returns, target runup, takeover, markup pricing, toehold bidding

Abstract:
We argue that the existence of CEO private control benefits complements managerial reputation in counteracting costly shareholder risk-shifting incentives during severe financial distress, when job-loss may be imminent. We examine this argument empirically using bankruptcy filings in Sweden, where a filing automatically terminates CEO employment and requires the firm to be sold in an open auction. The median CEO income loss is a dramatic 40%, suggesting that bankruptcy filing damages CEO reputation. Empirical proxies for both CEO reputation and control benefits are significant determinants of the probability of the CEO being rehired by the buyer in the auction, as predicted. Moreover, we find that the rehired CEOs generate a post-bankruptcy accounting performance at par with industry rivals. The surprisingly strong survival characteristics of the reorganized firms are consistent with managerial conservatism ex ante, and help alleviate creditor concern with costly asset substitution designed to delay filing in an automatic bankruptcy auction system.

Post-bankruptcy performance, CEO turnover, bankruptcy, executive compensation, private benefits of control, risk-shifting incentives

Abstract:
Swedish bankruptcy filing automatically terminates CEO employment and triggers an auction of the firm. Critics of this system warn of excessive shareholder risk-shifting incentives prior to filing. We argue that private benefits of control induce managerial conservatism that may override risk-shifting incentives. By investing conservatively, the CEO increases the joint probability that the auction results in a going-concern sale and that she is rehired. This uniquely implies that the rehiring probability is increasing in private control benefits, which our empirical results support. We also find that buyers in the auction screen on CEO quality. Overall, labor market discipline is dramatic, as filing CEOs suffer large income losses relative to CEOs of matched, non-bankrupt firms. Firms emerging from bankruptcy typically perform at par with industry rivals.

CEO Turnover, Executive Compensation, Private Benefits of Control, Risk-shifting Incentives, Bankruptcy, Post-bankruptcy Performance

Abstract:
While there is no equilibrium framework for defining liquidity risk per se, several plausible arguments suggest that liquidity risk is pervasive and thus may be priced. For example, market frictions increase the cost of hedging strategies requiring frequent portfolio rebalancing. Also, liquidity risk is likely to play a role whenever the market declines and investors are prevented from hedging via short positions. Using monthly return data from 1963-2000, and a broad set of test assets, we examine six candidate factor representations of aggregate liquidity risk, and test whether any one of these are priced. The results are interesting. First, with the surprising exception of the recent measure proposed by Pastor and Stambaugh (2001), liquidity factor shocks induce co-movements in individual stocks' liquidity measure (commonality in liquidity). The commonality is similar to that found in the extant literature (Chordia, Roll, and Subrahmanyam (2000)), which so far has been restricted to a single year of data. Second, again with the exception of the Pastor-Stambaugh measure, the liquidity factors receive statistically significant betas when added to the Fama-French model. Third, maximum-likelihood estimates of the risk premium are significant for the measure based on bid-ask spreads, contemporaneous turnover, as well as the Pastor-Stambaugh measure, which exploits price reversals following volume shocks. Overall, the simple-to-compute, low-minus-high turnover factor first proposed by Eckbo and Norli (2000) appears to do as least as well as the other factor measures.

Liquidity, Risk factor, Commonality

Abstract:
We present large-sample evidence on the performance of domestic and U.S.(foreign) bidder firms acquiring Canadian targets. Domestic bidders earn significantly positive average announcement-period abnormal returns, while U.S. bidder returns are indistinguishable from zero. Measures of pre- and post-acquisition abnormal accounting performance are also consistent with a superior domestic bidder performance. Domestic bidder announcement returns are on average greatest for offers involving stock-payment and for the bidders with the smallest equity size relative to the target. Neither direct foreign investment controls, horizontal product-market relationships, nor acquisition propensities explain why domestic bidders outperform their U.S. competitors.

Abstract:
We present large-sample evidence on the performance of domestic and U.S.(foreign) bidder firms acquiring Canadian targets. Domestic bidders earn significantly positive average announcement-period abnormal returns, while U.S. bidder returns are indistinguishable from zero. Measures of pre- and post-acquisition abnormal accounting performance are also consistent with a superior domestic bidder performance. Domestic bidder announcement returns are on average greatest for offers involving stock-payment and for the bidders with the smallest equity size relative to the target. Neither direct foreign investment controls, horizontal product-market relationships, nor acquisition propensities explain why domestic bidders outperform their U.S. competitors.

Abstract:
We estimate sequentially outcome-probabilities and expected payoffs associated with first-, second- and final bids in a large sample of tender offer contests. Rival bids arrive quickly and produce large bid-jumps. Greater bidder toeholds (pre-bid ownership of target shares) reduce the probability of competition and target resistance and are associated with both lower bid-premiums and lower pre-bid target stock-price runups. The expected payoff to target shareholders is increasing in the bid-premium and in the probability of competition, but decreasing in the bidder's toehold. The initial bidder's expected payoff is significantly positive in the "rival-bidder-win" outcome, in part reflecting gains from the pending toehold-sale. Despite these dramatic toehold effects, only half of the initial bidders acquire toeholds.

Takeover contest, tender offer, toeholds, bidding, bid jumps, rival bidders

Abstract:
While the classical dividend irrelevance theory implies that shareholders unanimously support the firm's dividend policy, managerial benefits from free cash flow, heterogenous personal tax rates and information asymmetries give rise to internal shareholder conflicts over the dividend decision. We conjecture that observed dividends resolve this conflict by consensus across heterogeneous shareholder groups. We develop and test this consensus-dividend hypothesis using Canadian firms where managers tend to own a large amount of voting stock. The empirical evidence indicates that cash dividends decrease as the voting power of owner-managers increases, and are almost always zero when owner-managers have absolute voting control of the firm. Panel data estimation as well as factor-analytic techniques give further empirical support for the consensus-dividend hypothesis.

Dividend policy, shareholder clieneteles, taxes, free cash flow, consensus dividend, voting power,

Abstract:
This article presents a theoretical model based on the Myers-Majluf framework that attempts to explain the choice of public companies among alternative methods for issuing seasoned equity primarily in terms of differences in information-asymmetry and adverse selection costs. The key insight is that a pure (or uninsured) rights offering is likely to be the lowest-cost flotation method only in cases where a large fraction of current shareholders are expected to subscribe to the offering (i.e., only when expected shareholder takeup is high). In such cases, direct flotation costs are much lower than those associated with book-built underwritten offerings to (mainly) new investors. Even more important, because heavily subscribed rights offerings also involve minimal potential for transfer of wealth between existing and new shareholders (since they are mostly the same people), adverse selection costs are not a concern. But as the expected shareholder takeup falls say, because increases in corporate size cause risk-averse, wealth-constrained shareholders to diversify their investments the potential for costly wealth transfers from issuing mispriced equity leads companies to consider underwriter certification of the new issue. This is evidenced in the data by a systematic move from pure rights offerings first towards rights with standby underwriting as shareholder takeup falls and for sufficiently low shareholder takeup to fully marketed firm commitment offerings.

This adverse selection framework for corporate equity issuance can be used to explain a number of well-documented phenomena in financial markets:

- the disappearance of rights offerings among publicly traded U.S. industrial companies, as well as the notable switch by such companies in all developed economies from pure rights to underwritten offers, as growth leads to less concentrated ownership structure;

- the continuing widespread use of rights issues in foreign jurisdictions characterized by smaller and relatively closely held firms;

- the more frequent use of rights by public utilities (with less discretion over issue policy and more limited possibilities for wealth transfers) than industrial issuers; the use of large shareholder subscription precommitments (to signal high shareholder takeup) in pure rights but not in standby rights offers;

- the neutral average market response to announcements of pure rights offerings, as compared to the negative response to standby rights offerings, and the still more negative reactions to firm commitment underwritten offerings;

- the absence in cases of pure rights offers of the stock price runups that precede firm commitments and, to a lesser extent, standbys; and

- the preference of financially distressed companies for rights offers (as a last resort).

Abstract:
The rights offer method - in which current shareholders receive short-term warrants to purchase a new share issue on a pro rata basis - were once the dominant method for U.S. public companies to raise equity. However, despite the low direct issue costs of rights, since 1980 a mere 2.5% of U.S. public industrial issuers have used rights. Rights offerings have continued to be the dominant issue method in Europe as well as much of Asia during this period. But even in Europe, there has been a clear trend toward various forms of underwriting, especially as listed European companies have grown in asset size and ownership has become more dispersed. I explain why the cost of rights is likely to be prohibitively high in larger companies with a fragmented shareownership structure. The discussion centers on the adverse selection argument originally developed in Eckbo and Masulis (1992) and which implies that a rights offer is the lowest-cost flotation method provided current shareholders are expected to buy and hold the new shares. When shareholders sell their rights to outside investors, the rights method becomes expensive because it fails to address investor concern that the issue (and therefore the rights) are overpriced. For sufficiently low expected shareholder takeup, issuers should consider hiring a reputable investment bank to certify the quality of the offering, and abandoning the rights become optimal. I also discuss empirical evidence which lends support to this argument.

Seasoned equity issue, rights offer, underwritten offer, shareholder takeup, adverse selection, issue costs

Abstract:
Program of Tuck Contemporary Corporate Governance Issues III. The conference was held July 9-10, 2004 at Tuck School of Business at Dartmouth, Hanover, NH. Conference sponsored by Tuck's Center for Corporate Governance.

Abstract:
Institutional shareholders around the world increasingly use active share-voting to protect their portfolio investments and improve corporate governance. However, exercising voting rights involves costly and often arcane country-specific legal rules. This report is one of a series examining the potential for increased harmonization of cross-border share-voting systems and proxy voting in the U.S. and Member States of the European Union (EU). The report describes the share-registration system and voting chain for publicly traded companies in Italy. We highlight voting impediments and examine recent regulatory attempt to make the voting process both more efficient and conforming to the 2007 EU Shareholder Rights Directive. We also provide some first empirical evidence on how Italian listed firms adapt to Italy's share-voting system in practice.

voting, voting chain, shareownership, shareholder rights, proxy voting, voting impediments

Abstract:
We survey empirical research on the Swedish auction bankruptcy system, which requires that filing firms are put up for sale in an auction. The bids determine whether the firm will be liquidated piecemeal or continued as a going concern. The auctions are competitive and there is little evidence of fire-sales. Three-quarters of the firms survive the auction with their core assets intact. In contrast to evidence on reorganizations under Chapter 11 in the U.S., buyers in Sweden restructure the auctioned firms well enough for these firms to perform at par with industry rivals. The CEOs of auctioned firms suffer dramatic personal bankruptcy costs. Nevertheless, there is no indication that this results in value-destroying risk shifting behaviour prior to filing. Overall, the Swedish experience suggests that greater reliance on the auction mechanism, seen recently also in the U.S., enhances economic efficiency.

Bankruptcy, auction, reorganization, liquidation, risk-shifting, asset substitution, fire-sale, bankruptcy costs

Abstract:
This paper tests the hypothesis that horizontal mergers generate positive abnormal returns to stockholders of the bidder and target firms because they increase the probability of successful collusion among rival producers. Under the collusion hypothesis, rivals of the merging firms benefit from the merger since successful collusion limits output and raises product prices and/or lowers factor prices. This proposition is tested on a large sample of horizontal mergers in mining and manufacturing industries, including mergers challenged by the government with violating antitrust laws, and a "control" sample of vertical mergers taking place in the same industries. While we find that the antitrust law enforcement agencies systematically select relatively profitable mergers for prosecution, there is little evidence indicating that the mergers would have had collusive, anticompetitive effects.

Merger, collusion, market power, antitrust, efficiency, rivals, industry rents

Abstract:
We test for fire-sale tendencies in automatic bankruptcy auctions. We find evidence consistent with fire-sale discounts when the auction leads to piecemeal liquidation, but not when the bankrupt firm is acquired as a going concern. Neither industry-wide distress nor the industry affiliation of the buyer affect prices in going-concern sales. Bids are often structured as leveraged buyouts, which relaxes liquidity constraints and reduces bidder underinvestment incentives in the presence of debt overhang. Prices in "prepack" auctions (sales agreements negotiated prior to bankruptcy filing) are on average lower than for in-auction going-concern sales, suggesting that prepacks may help preempt excessive liquidation when the auction is expected to be illiquid. Prepack targets have a greater industry-adjusted probability of refiling for bankruptcy, indicating that liquidation preemption is a risky strategy.

Bankruptcy, auction, going-concern sale, piecemeal liquidation, fire-sale

Abstract:
Event studies often include cross-sectional regressions of announcement effects on exogenous variables. If the event is voluntary and investors are rational, then standard OLS and GLS estimators are inconsistent. Consistent ML estimators are constructed for a cross-sectional model of horizontal mergers relating announcement effects to exogenous characteristics of firms and industries. The OLS and ML estimates differ dramatically for bidders but not for targets. The evidence suggests that managers of bidders, but not targets, have valuable private information about the potential synergies from proposed mergers.

Event studies, voluntary events, consistent estimation, selection bias, OLS, GLS, ML estimation, nonlinear estimator, synergy gains, horizontal mergers, bidder gains

Abstract:
We examine rights issues on the Oslo Stock Exchange, where seasoned public offerings now take place almost exclusively through use of the relatively expensive standby underwriting method rather than unsinsured rights. We show that the propensity to use standby underwriting increases as expected shareholder takeup decreases, that the market reaction to uninsured rights offers is significantly positive, and that standbys elicit the least favorable market reaction to the public issue announcement. These and other cross-sectional results are consistent with the asymmetric information framework of Eckbo and Masulis (1992) and help resolve the longstanding rights offer paradox.

Rights offer, standby underwriting, seasoned equity offer, flotation costs, shareholder takeup, adverse selection

Abstract:
In a model of takeovers under asymmetric information, we identify a separating equilibrium in which the value of the bidder firm is revealed by the mix of cash and securities used as payment for the target. The model predicts that the revealed bidder value is monotonically increasing and convex in the fraction of the total offer that consists of cash. We examine the model restrictions using data from Canada where mixed offers are both relatively frequent and free of the confounding tax-related options characterizing mixed offers in the U.S.. We find that the average announcement-month bidder abnormal return in mixed offers is large and significant. However, maximum likelihood estimates of parameters in both linear and non-linear cross-sectional regressions fail to support the model predictions.

Takeovers, method of payment, separating equilibrium, mix cash-stock payment, all-stock payment, all-cash payment, maximum likelihood estimation, bidder announcement returns

Abstract:
This paper estimates the performance of insider trades on the closely held Oslo Stock Exchange (OSE) during a period of lax enforcement of insider trading regulations. Our data permits construction of a portfolio that tracks all movements of insiders in and out of the OSE firms. Using three alternative performance estimators in a time-varying expected return setting, we document zero or negative abnormal performance by insiders. The results are robust to a variety of trade characteristics. Applying the performance measures to mutual funds on the OSE, we also document some evidence that the average mutual fund outperforms the insider portfolio.

Abstract:
While the U.S. has pursued a vigorous antitrust policy towards horizontal mergers over the past four decades, mergers in Canada have until recently been permitted to take place in a virtually unrestricted antitrust environment. The absence of an antitrust overhang in Canada presents an interesting opportunity to test the conjecture that the rigid market share and concentration criteria of the U.S. policy effectively deters a significant number of potentially collusive mergers. The effective deterrence hypothesis implies that the probability of a horizontal merger being anticompetitive is higher in Canada than in the U.S.. However, parameters in cross-sectional regressions reject the market power hypothesis on samples of both U.S. and Canadian mergers. Judging from the Canadian evidence, there simply isn't much to deter.

Mergers, antitrust, deterrence, market power, merger for monopoly, industry valuation effect, industry concentration, market concentration doctrine, collusive merger, efficiency

Abstract:
While there is growing evidence that stock prices do not follow pure random walks, the degree of existence of temporary components in stock prices is not well known. Modelling stock prices as the sum of a random walk and a general stationary (predictable) component, we propose an estimable lower bound on the proportion of total stock return variance caused by the predictable component. Contrary to the absolute value of the first-order autocorrelation coefficient estimates of Fama and French (1988), this lower bound reasonably estimates the true variance roportion in finite samples also when the temporary component does not follow a first-order autoregressive process. The estimated mean values of the lower bound reach a maximum of 10% for the equal-weighted market portfolio of NYSE stocks over the post-war period 1947-1986, while the maximum is 25% for the pre-war period 1926-46. The value-weighted market portfolio exhibits generally smaller variance proportion estimates. We also reexamine the pure random walk hypothesis using our univariate variance proportion statistic.

Random walk, predictable components of stock prices, mean reversion, lower bound, ARIMA process, variance proportion estimate

Abstract:
Greenmail payments are widely viewed as managerial actions designed to perpetuate their tenure in office. This view, which suggests that greenmail prohibitions would enhance shareholder wealth, receives mixed empirical support in this paper. The average market reaction to charter amendments prohibiting greenmail payments is weakly negative, suggesting there is a value to maintaining managerial flexibility. However, non-linear maximum likelihood estimation reveals a strong positive correlation between the market reaction and the firm's abnormal stock price runup over the three months just prior to the proxy mailing date. For the subsample of firms with a relatively large prior runup, the precommitment not to pay greenmail is value enhancing. If the prior runup reflects takeover rumors, then this evidence is consistent with the proposition that greenmail payments amidst takeover speculations are value decreasing.

Greenmail, managerial entrenchment, corporate governance, takeovers, antigrenmail charter amendment, proxy mailing, takeover rumors, market reaction

Abstract:
In 1970, France introduced disclosure rules governing public tender offers without changing an existing four-week minimum offer period. We document a substantial increase in total offer premiums thereafter. Post-1970 premiums are also significantly higher in public than in private tender offers where information disclosure is not required. and in all-cash than in all-stock offers. The impact of the payment method is evident in minority buyouts as well as in offers for voting control. The component of the total premium reflecting the value of the option to tender appears to be unaffected by either disclosure regulations or the payment method.

Tender offer, takeover premium, disclosure rules, method of payment, all-cash offer, all-stock offer, offer for control, minority buyout

Abstract:
This paper analyzes the effect of corporate debt offerings on stock prices. Straight debt offerings have non-positive price effects, while convertible debt offerings have significantly negative effects. Public utility mortgage (non-convertible) bond offerings have marginally negative effects, and the effect is significantly negative when the proceeds are used to finance the utility’s investment program. Cross-sectional regressions reveal no relation between offer-induced price effects and offering size, rating, post-offer changes in abnormal earnings or debt-related tax shields. The evidence is inconsistent with theories predicting that the price effects of capital structure changes go in the direction of the leverage change.

Straight debt offerings, convertible debt offerings, capital structure change, information effects, adverse selection, agency hypotheses