Are private firms more efficient than public firms? Jensen (1986) suggests that going-private could result in efficiency gains by aligning managers’ incentives with shareholders and providing better monitoring. In our paper, Do Going-Private Transactions Affect Plant Efficiency and Investment?, forthcoming in the Review of Financial Studies, we examine a broad dataset of going-private transactions, including those taken private by private equity, management and private operating firms between 1981 and 2005. We link data on going-private transactions to rich plant-level US Census microdata to examine how going-private affects plant-level productivity, investment, and exit (sale and closure). While we find within-plant increases in measures of productivity after going-private, there is little evidence of efficiency gains relative to a control sample composed of firms from within the same industry, and of similar age and size (employment) as the going-private firms. Further, our productivity results hold excluding all plants that underwent a change in ownership after going-private, alleviating the potential concern that control plants may undergo improvements through ownership changes.
Posts Tagged ‘Firm performance’
In our paper, CEO Ownership, Stock Market Performance, and Managerial Discretion, forthcoming in the Journal of Finance, we examine the relationship between CEO ownership and stock market performance. We show that investing in firms in which the CEO owns a substantial fraction of shares (for example more than 10% of outstanding shares) leads to large abnormal returns. A strategy based on public information about managerial ownership delivers annual abnormal returns (annual alphas in a Fama-French portfolio setting) of 4 to 10%. These results are stronger for firms in which the impact of the CEO can expected to be large, that is, in firms in which the CEO has a lot of discretion.
The literature on event studies has long established the properties of excess returns and tests of their statistical significance. However, it is useful in certain settings to examine excess dollar returns. For example, mergers and acquisitions often require the examination of dollar returns to assess the impact on the wealth of securities’ holders. Other examples include the analysis of managerial skill on actively managed funds, of the magnitude of price manipulation, or of the impact of disclosure events on prices in securities litigation.
Some works in the literature on mergers and acquisitions suggest that mergers do not generate any efficiency for the acquirer and that, in fact, they have a negative effect on operating performance. This work examines whether freezeouts (that is, transactions in which a controlling shareholder acquires the remaining shares of a corporation for cash or stock) also produce a negative effect on the performance of the acquirer.
On a theoretical level, there are legitimate reasons to think that freezeouts should not generate any significant efficiency for the controlling shareholder, especially because, after completing the deal, he maintains control over the same assets he was already controlling before. From this perspective, the only gain arising from a freezeout is the savings in regulatory costs associated with the public status of the target, without much room for significant synergies. Moreover, it is possible that the reduction in public monitoring of the target that results from a freezeout could not only translate into long-term losses for that company, but also affect negatively the controlling shareholder in an indirect way. In this sense, a freezeout could actually be expected to lead to drops in the controlling shareholder’s operating performance.
In our paper, Has Persistence Persisted in Private Equity? Evidence from Buyout and Venture Capital Funds, which was recently made publicly available on SSRN, we use detailed cash-flow data to study the persistence of buyout and VC fund performance over successive funds. We confirm the previous findings that there was significant persistence in performance, using various measures, for pre-2000 funds—particularly for VC funds. Post-2000, we find that persistence of buyout fund performance has fallen considerably. When funds are sorted by the quartile of performance of their previous funds, performance of the current fund is statistically indistinguishable regardless of quartile. At the same time, however, the returns to buyout funds in all previous performance quartiles, including the bottom, have exceeded those of public markets as measured by the S&P 500.
Much corporate finance research is concerned with causation—does a change in some input cause a change in some output? Does corporate governance affect firm performance? Does capital structure affect firm investments? How do corporate acquisitions affect the value of the acquirer, or the acquirer and target together? Without a causal link, we lack a strong basis for recommending that firms change their behavior or that governments adopt specific reforms. Consider, for example, corporate governance research. Decisionmakers—corporate boards, investors, and regulators—need to know whether governance causes value, before they decide to change the governance of a firm (or all firms in a country) with the goal of increasing firm value or improving other firm or market outcomes. If researchers provide evidence only on association between governance and outcomes, decisionmakers may adopt changes based on flawed data that may lead to adverse consequences for particular firms.
As the fallout from the financial crisis recedes and both institutional investors and corporate boards gain experience with expanded corporate governance regulation, the coming year holds some promise of decreased tensions in board-shareholder relations. With governance settling in to a “new normal,” influential shareholders and boards should refocus their attention on the fundamental aspects of their roles as they relate to the creation of long-term value.
Institutional investors and their beneficiaries, and society at large, have a decided interest in the long-term health of the corporation and in the effectiveness of its governing body. Corporate governance is likely to work best in supporting the creation of value when the decision rights and responsibilities of shareholders and boards set out in state corporate law are effectuated.
In our paper, Distracted Directors: Does Board Busyness Hurt Shareholder Value?, which was recently accepted for publication in the Journal of Financial Economics, we examine the impact of independent director busyness on firm value in a setting that addresses a key challenge that the board of directors is an endogenously determined institution. A large number of publicly-traded firms in the U.S. have recently limited the number of multiple directorships held by their board members. For example, a recent survey shows that 74 percent of S&P 500 firms impose restrictions on the number of corporate directorships held by their independent directors, up from 27 percent in 2006, and the Institutional Shareholder Services recommends restrictions on the number of multiple directorships. Although such shareholder initiatives are consistent with standard theoretical considerations (e.g., Holmstrom and Milgrom, 1992), the empirical evidence on whether director busyness has any effect on the firm is thus far mixed. While several studies find that busy directors are associated with lower firm valuations and less effective monitoring (e.g., Fich and Shivdasani, 2006; Core, Holthausen and Larcker, 1999) others either do not, or provide mixed evidence (e.g., Ferris, Jagannathan and Pritchard, 2003; Field, Lowry, and Mkrtchyan, 2013).
The JP Morgan Chase board of directors has vexed the world with its terse announcement in a recent 8-K filing that CEO Jamie Dimon would receive a big pay raise—$20 million in total pay for 2013, up from $11.5 million for 2012, a 74 percent increase.
Not surprisingly, the news sparked strong reactions, from indignant critique to justification and support. Dimon’s raise obviously has special resonance because JP Morgan’s legal woes were one of the top business stories last year as it agreed to $20 billion in payments to settle a variety of cases involving the bank’s conduct since 2005 when Dimon became JPM CEO. But the ultimate question that gets fuzzed-over in the filing and response is one of culture and accountability—whether a long-serving CEO is accountable for a corporate culture that has spawned major regulatory inquiries and settlements across a broad range of legal issues, even though the firm has otherwise performed well commercially.
It is often argued that venture capital (VC) plays an important role in promoting innovation and growth. Consistent with this belief, governments around the world have pursued a number of policies aimed at fostering local venture capital activity. The goal of these policies has been to replicate the success of regions like Silicon Valley in the United States. However, there remains scarce evidence that the activities of venture capitalists actually play a causal role in stimulating the creation of innovative and successful companies. Indeed, venture capitalists may simply select companies that are poised to innovate and succeed, even absent their involvement. In this case, efforts by policy-makers to foster local venture capital activity would be misguided. In our paper, The Impact of Venture Capital Monitoring: Evidence from a Natural Experiment, which was recently made publicly available on SSRN, we examine whether the activities of venture capitalists do indeed affect portfolio company outcomes.