Financial Tunneling and the Mandatory Bid Rule
Jeremy Grant, Tom Kirchmaier and Jodie Kirshner
In this paper we use clinical studies to document how dominant shareholders have circumvented mandatory bid rules to appropriate wealth from minority shareholders. Dominant shareholders are numerous in continental Europe. Creative compliance with mandatory bid rules reveals the failure of boards and regulators to protect minority shareholders and the difficulties of legislating in this area. We propose enhanced means for protecting their interests.
Corporate Governance and Value Creation: Evidence from Private Equity
Viral Acharya, Conor Kehoe and Moritz Hahn
We examine deal-level data on private equity transactions in the UK initiated during the period 1996 to 2004 by mature private equity houses. We un-lever the deal-level equity return and adjust for (un-levered) return to quoted peers to extract a measure of "alpha" or abnormal performance of the deal. The alpha is significantly positive on average and robust during sector downturns. In the cross-section of deals, higher alpha is related to greater improvement in EBITDA to Sales ratio (margin) and greater growth in EBITDA multiple during the private phase, relative to that of quoted peers. In particular, deals with higher alpha either grow their margins more substantially, and/or grow multiples more substantially, whilst expanding their revenues only in line with the sector. Based on interviews with general partners involved with the deals, we find that deals with higher alpha and higher margin growth are associated with greater intensity of engagement of private equity houses during the early phase of the deal, employment of value-creation initiatives for productivity and organic growth, and complementing top management with external support. Overall, our results are consistent with mature private equity houses creating value for portfolio companies through active ownership and governance.
Ownership: Evolution and Regulation
Julian Franks, Colin Mayer and Stefano Rossi
This article is the first study of long-run evolution of investor protection and corporate ownership in the United Kingdom over the twentieth century. Formal investor protection emerged only in the second half of the century. We assess the influence of investor protection on ownership by comparing cross-sections of firms at different times in the century and the evolution of firms incorporating at different stages of the century. Investor protection had little impact on dispersion of ownership: even in the absence of investor protection, rates of dispersion of ownership were high, associated primarily with mergers. Preliminary evidence suggests that ownership dispersion in the United Kingdom relied more on informal relations of trust than on formal investor protection.
The Life Cycle of Family Ownership: A Comparative Study of France, Germany, Italy and the UK
Julian Franks, Colin Mayer, Paolo Volpin and Hannes F. Wagner
Equity Markets and Institutions: The Case of Japan
Julian Franks, Hideaki Miyajima and Colin Mayer
Corporate ownership and financing in Japan in the 20th century are striking. In the first half of the 20th century equity markets were active in raising more than 50% of the external financing of Japanese companies. Ownership was dispersed both by the standards of other developed economies at the time and even by those of the UK and US today. In the second half of the 20th century, bank finance dominated external finance and interlocking shareholdings by banks and companies became widespread. The change from equity to bank finance and from an outsider system of public equity markets to an insider system of private equity in the middle of the 20th century coincided precisely with a marked increase in investor protection. Informal institutional arrangements rather than formal investor protection explain the existence of equity in the first half of the century - business co-ordinators in the early 20th century and zaibatsu later. Insider ownership in the form of bank ownership and cross-shareholdings emerged in the second half of the century as a response to the equity financing needs of fast growing firms and the financial restructuring of failing firms.
Private Equity versus Plc Boards in the U.K.: A Comparison of Practices and Effectiveness
Viral Acharya, Conor Kehoe and Michael Reyner
We interview 20 executives in the UK who have been members of both PE and PLC boards of relatively large companies. The main difference we find in PE and PLC board modus operandi is in the single-minded value creation focus of PE boards versus governance compliance and risk management focus of PLC boards. PE boards see their role as leading the strategy of the firm through intense engagement with top management; in contrast, PLC boards "accompany" the strategy of top management. PE boards report almost complete alignment in objectives between executive and non-executive directors, whereas the PLC boards report lack of complete alignment and focus on management of broader stakeholder interests. Finally, PE board members receive information that is primarily cash-focused and undergo an intensive induction during the due diligence phase. In contrast, PLC board members collect more diverse information and undergo a more structured (formal) rather than an intense induction.
The Internal Governance of Firms
Viral Acharya, Stewart Myers and Raghuram Rajan
We develop a model of internal governance where the self-serving actions of top management are limited by the potential reaction of subordinates. Internal governance can mitigate agency problems and ensure that firms have substantial value, even with little or no external governance by investors. Internal governance works best when both top management and subordinates are important in generating cash flow. External governance, even if crude and uninformed, can complement internal governance and improve efficiency. This leads to a theory of investment and dividend policy, where dividends are paid by self-interested CEOs to maintain a balance between internal and external control. Our paper can explain why firms with limited external oversight, and firms in countries with poor external governance, can have substantial value.
Creditor Rights and Corporate Risk-taking
Viral Acharya, Yakov Amihud and Lubomir Litov
We analyze the link between creditor rights and firms' investment policies, proposing that stronger creditor rights in bankruptcy reduce corporate risk-taking. In cross-country analysis, we find that stronger creditor rights induce greater propensity of firms to engage in diversifying acquisitions, which result in poorer operating and stock-market abnormal performance. In countries with strong creditor rights, firms also have lower cash flow risk and lower leverage, and there is greater propensity of firms with low-recovery assets to acquire targets with high-recovery assets. These relationships are strongest in countries where management is dismissed in reorganization, and are observed in time-series analysis around changes in creditor rights. Our results question the value of strong creditor rights as they have an adverse effect on firms by inhibiting management from undertaking risky investments.
Returns to Investor Activism
Marco Becht, Julian Franks, Colin Mayer and Stefano Rossi
This article reports a unique analysis of private engagements by an activist fund. It is based on data made available to us by Hermes, the fund manager owned by the British Telecom Pension Scheme, on engagements with management in companies targeted by its UK Focus Fund. In contrast with most previous studies of activism, we report that the fund executes shareholder activism predominantly through private interventions that would be unobservable in studies purely relying on public information. The fund substantially outperforms benchmarks and we estimate that abnormal returns are largely associated with engagements rather than stock picking.
Another Option for Determining the Value of Corporate Votes
This paper proposes a new method using option prices to measure the value of the voting right attached to a stock. The method consists of synthesizing a non-voting share using put-call parity, and comparing its price to that of the underlying stock. Empirically, I find this measure of the value of a voting right to increase around shareholder meetings, particularly for those which are contested. The measure is also more frequently positive for activist hedge fund targets. I estimate the mean (median) annualized value of a voting right to be 1.23% (0.86%) of the underlying stock price.