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CFE-8: Private Firms and IPOs
Do Private Firms (Mis)Learn from the Stock Market?
Stockholm School of Economics
This paper develops a novel strategy to test whether and to what extent firms learn from the stock market. Using data for the United Kingdom, I find that private firms' investment responds positively to the valuation of public firms in the same industry. The sensitivity increases with price informativeness. To establish causality, I construct a measure of price noise based on industry leaders' unrelated minor-segment business and show that it positively affects private firms' investment. The results are consistent with models featuring learning from noisy signals, and are not driven by alternative channels in the absence of learning.
Management Quality and Innovation in Private Firms and the IPO Market Rewards to Innovative Activity
1Boston College; 2University of Nottingham; 3Suffolk University
We make use of hand-collected data on the human capital of the top management teams ("management quality") of a large sample of private firms to analyze the relation between the management quality of such firms and their pre-IPO innovativeness, and the effect of the above two variables on various IPO characteristics. We hypothesize that higher quality management teams may invest in a greater proportion of long-term (innovative) projects rather than short-term projects; select better innovative projects; and hire higher quality scientists and other researchers and manage these innovation-related resources more ably, resulting in higher innovation productivity for their firms. Consistent with this, in the first part of our analysis we show in our baseline regressions that firms with higher management quality are associated with higher innovation productivity in their pre-IPO years. The above relationship holds for measures of inputs to innovation (R&D expenditures) and for measures of outputs from innovation such as the number of patents (innovation quantity) and citations per patent (innovation quality). We use an instrumental variable (IV) analysis to establish that the above relationships are causal. In the second part of our analysis, we show that the IPO market rewards firms with greater pre-IPO innovativeness and higher management quality with higher valuations (both at IPO and in the immediate secondary market) and by enabling them to go public at a younger age. Consistent with this, such firms also exhibit higher growth in operating performance post-IPO.
Pre-IPO Trusts, Private Information, and Corporate Spillover
1University at Buffalo; 2Penn State University; 3University of Washington
Twenty-three percent of CEOs place equity in tax-advantaged trusts prior to an IPO. Tax-advantaged trust ownership positively predicts one-year post-IPO abnormal returns, but only for firms with high informational asymmetry. Because trusts generate larger tax benefits when trust assets increase in value, this finding is consistent with CEOs having private information prior to their IPO. We also document a positive relation between trust ownership and corporate tax avoidance, suggesting that CEOs’ personal tax preferences spill over into corporate tax policy. Thus, trust establishment is a personal finance decision that reveals information about subsequent firm performance and policies.
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Conference: EFA 2017
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