Corporate Governance, Incentives and Industry Consolidations

40 Pages Posted: 26 Apr 2003

See all articles by Amy K. Dittmar

Amy K. Dittmar

University of Michigan at Ann Arbor - The Stephen M. Ross School of Business

Keith C. Brown

University of Texas at Austin - Department of Finance

Henri Servaes

London Business School; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: February 2003

Abstract

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

Dittmar, Amy and Brown, Keith C. and Servaes, Henri, Corporate Governance, Incentives and Industry Consolidations (February 2003). Available at SSRN: https://ssrn.com/abstract=379621 or http://dx.doi.org/10.2139/ssrn.379621

Amy Dittmar (Contact Author)

University of Michigan at Ann Arbor - The Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-764-3108 (Phone)

HOME PAGE: http://webuser.bus.umich.edu/adittmar/

Keith C. Brown

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-471-6520 (Phone)
512-471-5073 (Fax)

Henri Servaes

London Business School ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom
+44 20 7000 8268 (Phone)
+44 20 7000 8201 (Fax)

HOME PAGE: http://faculty.london.edu/hservaes/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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