Showing papers by "Henri Servaes published in 2005"

Changes in Equity Ownership and Changes in the Market Value of the Firm

Abstract: The empirically-observed cross-sectional relationship between the level of insider share ownership and the level of firm value has often been interpreted to mean that a change in share ownership can lead to a change in firm value. Such an interpretation has been criticized for ignoring potential endogeneity. In this paper, we perform two sets of tests to circumvent this alleged endogeneity. First, we regress changes in firm value against changes in insider ownership. We find that the cross-sectional variability in stock price responses to announcements of share purchases by corporate insiders is described by a curvilinear relation between firm value and insider ownership where the value of the firm first increases, then decreases, as insider ownership increases. Second, we test whether the firms in our sample are moving toward a new optimal equilibrium ownership level or that insiders are purchasing shares to signal that the firm is undervalued. We find no evidence to support this interpretation. Overall, our results are consistent with a causal interpretation of the relationship between insider ownership and firm value.

Corporate Governance, Incentives, and Industry Consolidations

Abstract: This article studies the determinants of the success of industry consolidations using a unique sample of firms established at the time of their initial public offering: roll-up IPOs. In these transactions, small, private firms merge into a shell company, which goes public at the same time. These firms deliver poor stock returns; their operating performance mimics that of comparable firms but does not justify their high initial valuations. However, 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, and future acquisitions are better received by the market. Higher ownership by the sponsor of the transaction leads to a reduction in performance, consistent with the view that the sponsor’s compensation is excessive. These findings highlight the impact of corporate governance on performance. Duringtheprevioustwodecades,improvementsininformationtechnology and the advent of outsourcing substantially increased the optimal scale of firms in a large number of fragmented industries. 1 How does an industry evolve to reach the new optimal firm size? Three methods are possible. The first is for larger firms in the industry to acquire smaller competitors, or to force them out of business through competition. Of course, this implies that some firms are large enough to start with and have

The Response of Industry Rivals to Control Threats

Abstract: This paper studies how rival firms respond when a firm in the industry encounters a control threat because it suffers from agency problems. We find that after the control threat, rival firms increase leverage, cut capital expenditures, reduce their cash balances and free cash flows, and adopt more takeover defenses. The competitors with the largest increases in debt after the control and the highest industry-adjusted level of investment before the control threat have the largest cuts in capital spending. We also find that before the control threat, rival firms have less debt and higher levels of investment than predicted. Rivals gain 0.55%, on average, when the control threat is announced. The stock price reaction is higher for rivals with high free cash flow, high capital expenditures, and low insider ownership. The stock price reaction is lower for firms that have insulated themselves from takeover pressures. These results are consistent with the argument that the control threat leads to a reduction in the agency costs of the rival firms in the industry.