Corporate Governance, Incentives and Industry Consolidations
40 Pages Posted: 26 Apr 2003
Date Written: February 2003
Several changes, such as the advances in information technology and the advent of outsourcing, led to increases in optimal firm size in many fragmented industries over the last decade. This paper studies the determinants of the success of these industry consolidations using a unique sample of firms that were created at the time of their initial public offering: rollup-up IPOs. In these transactions, many small firms merge into a shell company, which goes public at the same time. This sample allows us to follow firms from the day they were established. We find that these firms deliver poor absolute and relative stock returns, on average. Their operating performance mimics that of other firms of the industry, but does not justify to their high initial valuations. However, the average performance hides substantial cross-sectional differences. If the managers and owners of the firms included in the transaction remain involved in the business as shareholders and directors, operating and stock price performance improve dramatically, which suggests that incentive effects outweigh power struggles. Higher promoter ownership leads to a reduction in long-run performance, consistent with the view that the sponsor compensation is excessive. Restructuring activities after the IPO are unable to halt poor performance, which indicates that the proper governance structure needs to be in place from the start.
Keywords: industry consolidation, roll-up, governance, incentives
JEL Classification: G32, G34
Suggested Citation: Suggested Citation