Common Shareholders Research Articles

A Valuation Model of Venture Capital-Backed Companies with Multiple Financing Rounds

This paper develops the first option pricing model of venture capital-backed companies and their security values that incorporates the dilutive future financing rounds prevalent in the industry. Applying our model to 19,000 companies raising 37,000 rounds shows that preferred contractual features make the most recently issued preferred shares worth on average 56% more than common shares. While future rounds have a negligible impact on most securities, they significantly impair the value of securities with high liquidation multiples or seniority. Counterintuitively, future “investor-friendly” rounds transfer value from current investors to founders and other common shareholders, significantly reducing the value of many preferred protections. Our model-implied valuations predict exit values, price changes, and outcomes. Modeled security values are consistent with prices reported by specialized intermediaries but suggest dramatic underreporting of common share values for tax purposes.

Corporate Governance and the Feminization of Capital

Between 1900 and 1956, women increased from a small proportion of public company stockholders in the U.S. to the majority. In fact, by the 1929 stock market crash, women stockholders outnumbered men at some of America’s largest and most influential public companies, including AT&T, General Electric, and the Pennsylvania Railroad. This Article makes an original contribution to corporate law, business history, women’s history, socio-economics, and the study of capitalism by synthesizing information from a range of historical sources to reveal a forgotten and overlooked narrative of history, the feminization of capital—the transformation of American public company stockholders from majority-male to majority-female in the first half of the twentieth century, before the rise of institutional investing obscured the gender politics of corporate control. Corporate law scholarship has never before acknowledged that the early decades of the twentieth century, a transformational era in corporate law and theory, coincided with a major change in the gender of the stockholder class. Scholars have not considered the possibility that the sex of common stockholders, which was being tracked internally at companies, disclosed in annual reports, and publicly reported in the financial press, might have influenced business leaders’ views about corporate organization and governance. This Article considers the implications of this history for some of the most important ideas in corporate law theory, including the “separation of ownership and control,” shareholder “passivity,” stakeholderism, and board representation. It argues that early-twentieth-century gender politics helped shape foundational ideas of corporate governance theory, especially ideas concerning the role of shareholders. Outlining a research agenda where history intersects with corporate law’s most vital present-day problems, the Article lays out the evidence and invites the corporate law discipline to begin a conversation about gender, power, and the evolution of corporate law.

La responsabilidad de los administradores frente a los accionistas de diferente clase con intereses contrapuestos

En contraste con la pregunta sobre si se debe maximizar el patrimonio social o tratar igualitariamente a accionistas y otros grupos de interés, el interrogante sobre la responsabilidad de los administradores en sociedades con diferentes clases de acciones ha sido objeto de poca atención en Colombia. ¿Puede preferirse a algunos accionistas o debe tratarse a todos ellos equitativamente? Este artículo concluye que se debe preferir a los accionistas ordinarios cuando una decisión implique un conflicto entre estos y accionistas preferenciales. Empero, en relación con acciones de voto múltiple, de seguimiento o de pago debe tratarse equitativamente a todos los accionistas.

Dividend Policy and the COVID-19 Crisis

This paper examines dividend payment behavior of the S&P1500 firms during the COVID-19 crisis characterized by the stock market crash and a V-shaped stock price recovery propelled by technology stocks. We find that the great majority of firms either maintain or increase the level of dividend payment during the crisis period. Yet, the relationship between the dividend payout and bottom-line earnings available to common shareholders is significantly negative. This relationship holds even for dividend-increasing firms whose earnings streams should be relatively higher (or increasing) compared to other firms in the sample. We also find that forecast earnings of up to one year in the future are negatively associated with the current dividend level implying that the existing payout policies are unsustainable. Interestingly, we document similar patterns for stock repurchases.

Don't Go Chasing Waterfalls: Fiduciary Duties in Venture Capital Backed Startups

We develop a model of venture capital contracting and use it to evaluate an emergent set of judicial precedents in corporate law, which we label the Trados doctrine. In our model, founders hold common stock while venture capital investors hold convertible preferred stock. We show that preferred shareholders have inefficient incentives to liquidate low-valued firms and to continue high-valued firms, while common shareholders inefficiently favor the opposite. The extent of incentive misalignment depends on the firm’s intrinsic and outside valuations, and it is most severe around preferred’s liquidation preference and conversion point. Although legal liability rules can rectify these misalignments, they can only do so categorically when management is obligated to prioritize preferred shareholders’ interests. The Trados doctrine, however, requires the opposite: under Trados, boards must accord primacy to common shareholders’ interests, treating preferred shareholders as contractual claimants. More generally, we offer a precise mechanism for how capital structure, corporate governance, and legal doctrine jointly determine firm value.

The Impact of CEOs’ Characteristics on Corporate Leverage: Indian Scenario

Ever since the prominent work by Modigliani and Miller (1958), much research has been undertaken in trying to identify the factors affecting the capital structure. Lately, behavioural finance has begun to take hold of a more prominent position in trying to explain aspects of finance which traditional research has failed to clarify. In fact, a growing body of empirical evidence suggests that manager-specific characteristics significantly influence firms' financing decisions. The limited work carried out in lower-middle income countries drives us to thoroughly investigate the role played by CEOs’ characteristics in determining corporate financing decisions.Employing a sample of 307 non-financial firms listed in Nifty 500 index, the panel regression results indicate that CEO tenure is significantly and positively associated to firm’s leverage for the possible reason that a long tenure of CEO reflects strong networks and alliances with important stakeholders that allow the CEO to compose, foster, and support risky initiatives like raising debt. Further, the level of leverage is higher at organizations where CEOs are younger on account of the fact that career and financial securities are imperative to a greater extent for older executives; therefore they may evade risky engagements that may interfere with their securities. The results also display that CEO share ownership has a significantly negative relationship to leverage because these executives have a large share of their personal wealth capitalized in the firm in the shape of firm-specific human capital and common stock holdings. This makes managerial insiders unwilling to use the optimum amount of debt funding for the firm for the reason that additional bankruptcy risk associated with higher levels of debt may arise.The findings thus put forward that recurrent job changes among the senior officials should be discouraged because the subsequent short-term focus and dearth of firm-specific knowledge might promote risk evasion. It shows that elder executives desire a more conservative capital structure whereas younger executives endeavour to take more risk. So, there is a need to bring diversification in the management so as to take advantage from the skills and services of the young. The inverse association between CEO share ownership and firm leverage specifies that board of directors and the shareholders should be stringent in checking managers to make sure they perform as per the interests of shareholders. It seems that while making capital structure decisions risk seeking behaviour favouring high corporate leverage is important and should be encouraged.

Property Theory of Corporate Law

The dominant view of the corporation in legal scholarship is contractarian, one that sees the corporation as a “nexus of contracts” among the various suppliers of inputs to the business, such as investors, creditors, and employees. According to this view, the holders of common stock—those who are traditionally the primary focus of corporate law—are not the owners of the corporation, but just one of many contractual claimants. As a result, the corporation is a free-floating nexus of contracts with no property interests in the corporation itself or its assets. Thus, corporate law is seen as essentially a specialized branch of contract law. The contractarian metaphor has largely persuaded the academy and much of the corporate law bench, evidenced by the regularity in which Delaware courts interpret charter documents as “contracts.” Courts and commentators alike regard corporate law as essentially a set of “off-the-rack” contractual default rules provided by the state. Yet the contractarian metaphor has struggled to account for some of the most fundamental features of corporate law. For example, the nexus of contracts view fails to adequately explain why fiduciary duties attach uniquely to shareholders and not to other contractual claimants on the corporation. Equally important, the nexus of contracts approach also fails to account for the many in rem features of the corporation that contract law could not easily replicate. There is a piece missing in the contractarian account of the corporation. This Article argues that property law provides the missing piece of the contractarian puzzle in demarcating the boundaries of corporate law and explaining the distinctive features of it. In the property theory, the corporation is an ownership structure—a device for turning a messy set of in personam claims into an orderly package of in rem property rights, called “shares.” The in rem structure depersonalizes these rights, allowing them to be divided and transferred without contractual assent and without entangling the personal attributes of the holder. The key to the proprietary nature of this ownership interest is the residual control—voting rights—that solidify the status of common stock as a property interest rather than a contractual interest. The property theory’s assertion that claims on the corporation are a mix of property and contract rights provides traction in otherwise slippery areas of corporate law. If there is a line to be drawn between contract and property, this dividing line identifies the boundaries of distinctively corporate law from contract law. Accordingly, the rationale for shareholder-only fiduciary duties is not primarily that shareholders are the residual claimants in the economic sense, but that they have a residual control right constituting an ownership interest unique among corporate claimants. The property theory of corporate law best explains many features of corporate law and clarifies otherwise murky line drawing exercises in defining the scope of fiduciary duties.

Does insiders share pledging stifle innovation? Evidence from China

We examine the relation between insiders share pledging activities for personal loans and firm innovation. Firstly, we find a negative effect of both the existence of pledging and the intensity of pledging activities on firm innovation, measured by R&D and patent application. Pledging by insiders with decision rights is associated with a 4.6% decline in R&D activities and 0.5% decline in patent applications, respectively, which accounts for 4.0% and 10.6% of the mean of each variable. This result holds using a propensity-score matched sample. In addition, we instrument pledging activities by financing constraints faced by other firms controlled by the same controlling insiders who pledge shares. IV estimation yield similar results. Secondly, we find share pledge activities have more pronounced effect on firm innovations when firms are located in areas with strong property rights protection, when firms are non-SOEs, or when pledging insiders serve on corporate boards. Lastly, we also find a negative effect of share pledging of other firms with common shareholders on firm innovations of interest. Overall, our findings suggest that pledging shares by insiders stifle firm innovation because share pledging reduce insiders' preference for risk taking.

The effect of voting rights on firm value

AbstractWe present a simple framework for dual‐class stock shares in which common shareholders receive public and private cash flows (i.e., dividends and any private benefit of holding voting rights) and preferred shareholders only receive public cash flows. We isolate these two cash flows in order to identify the role of voting rights on equity‐holders' wealth. In particular, using a structural cointegrated VAR model, we find a negative relationship between the value of the voting right and the preferred shareholders' wealth.

Share Prices, Performance Information of Financial Statements and Shareholders’ Investment Decisions

Financial statements, being the representations of the management primarily to the shareholders as their employers are expected to attract a reaction in line with the proprietary theoretical framework. This study was borne out of the quest to assess the reliance of the common stockholders on the financial statement information with respect to profitability and stock prices in their investment decisions. Ten money deposit banks in Nigeria were studied using the expost facto research design and multiple regression analytical technique. The results showed that shareholders’ investment decisions in banks rely considerably on stock prices information and financial statement information on profitability with respect to returns on assets at the lag length of one year. It was therefore concluded that financial statements, in practical terms, remain the guide for investors in their quest to see what transpires within organizations; and information on stock prices are also relevant to investment decisions since they complement opinions on the financial statements. Hence, the study recommended that organizations’ management, policymakers, governments and accounting bodies at large should treat the issues bothering on financial reporting with all sense of importance since they are capable of influencing economic decisions and their influence on the capital market is certain.

The IPO Market: Global Practices, Development Trends and IPO in Kazakhstan

Subject. The article discusses the stock market of Kazakhstan, which is crucial for the economy. Its weaknesses inhibit the development and impedes market reforms. We review IPO as a segment of the stock market. Objectives. The study analyzed the global IPO market in terms of the number of placements and volume of capital. We also review what made investment initiatives a success or a failure, investigating milestones of the IPO market evolution in Kazakhstan and formulating our proposals for its further growth. Methods. The study applies methods of relevant sampling, logical reasoning, data grouping, systems and statistical analyses. We intensively used the content analysis of available sources. Results. The IPO market develops in a different manner across countries. Analyzing major placements, even the risk assessment is found to not necessarily make a placement a success. Weak development institutions, unstable banking sector inhibit the development of Kazakhstan's stock market. The first attempts of IPO resulted in a low capitalization of stocks, high volatility due to small volumes. Kazakh IPOs are exposed to the risk associated with ownership, enterprise privatization, uncertainty of price and tariff regulation. Common people do not have enough skills and money to offer their funds in the local stock market. We suggest making the corporate operations more transparent, labeling them as public, determine clear guarantees for common shareholders The suggestions concerning Kazakhstan's IPO market will strengthen the stock market. Research is also useful to emerging economies. Conclusions and Relevance. Kazakh IPO does not meet the development level of the economy. The Kazakh authorities shall be decisive to fairly distribute income, ensure a growth in people's wellbeing, thus expanding their opportunities for acquiring securities. Laws should be refined and enhanced in terms of shareholders' rights protection, transparency of corporate operations, broad involvement of people into operations of stock markets.

State-owned Capital Gains, Profit Shifting and State-owned Enterprises’ Profits

In 2015, the Central Committee of the Communist Party of China and the State Council issued the “Guiding Opinions on Deepening the Reform of State-owned Enterprises”, pointing out that by 2020, decisive results will be achieved in the important fields and key links of the reform of State-owned Enterprises （SOEs）. One of the important aspects is to improve the corporate governance structure of SOEs, which is the important task of state-owned enterprise reform at present. Actually, many SOEs in China have not yet formed an effective governance structure, and the level of governance is limited.As the pillar of China’s national economy, the development of SOEs is of vital importance to the sustained and healthy development of China’s economy and the building of the socialist modernized country. However, there are serious agency problems in China’s SOEs, such as on-the-job consumption, excessive investment and profit shifting, which have led to huge efficiency losses. Western scholars generally hold that dividends can alleviate agency problems between business owners and managers effectively, moreover, increase corporate value. Some scholars in China have also found that the dividend payout of SOEs can bring about the reduction of free cash flow and the increase of supervision from external financing market, thus reducing agency costs and increases the value of SOEs. On the realistic condition provided by the fact that SOEs’ profits are increasing sharply, the call for SOEs to pay dividends to the state is getting higher and higher. In this context, China promulgated the “Administration Ordinance of Charging State-owned Capital Gains” （CQ [2007] No.309） in 2007, and began to collect state-owned capital gains.However, the current governance structure of SOEs in China cannot effectively restrain the behavior of management. In such a governance environment, forced gains payout of SOEs may breed new agency problems and enhance the profit shifting behavior of management, which would worsen corporate governance and lead to a decline in the profit of SOEs. This kind of worry is not unreasonable. After the implementation of the “Administrative Ordinance”, the total profit of SOEs did not continue its growth tendency and began to decline. This fact confirms the increase in the profit shifting behavior of SOEs’ management to some extent. But, there is not only no empirical test on this mechanism in the existing researches, but also less literature on the impact of charging state-owned capital gains on the profit of SOEs. So, this paper attempts to verify this mechanism and test the impact of the “Administration Ordinance” on the profit of SOEs.This paper uses the Difference-in-Differences method to evaluate the impact on the profit of SOEs, taking the “Administration Ordinance” as a policy shock with the A-share data of listed companies from 2003 to 2009.The study finds that: First, the implementation of the “Administration Ordinance” has a negative impact on the profit of SOEs, significantly reducing the rate of return on common stockholders’ equity （ROE） of SOEs. Second, through the mechanism analysis, we find that forced gains payout of SOEs and gains’ circula- ting in the body has increased the management’s behavior to turn over profits under the current governance level of SOEs, resulting in the decline in the ROE of SOEs. Third, the “one size fits all” rate of gains payout has made more decrease in ROE of large-scale SOEs than small-scale ones, which is called the unfair punishment of “whipping the fast and hard-working”.The marginal contribution of this paper is mainly reflected in: （1） Most of the existing empirical research studies the effect of dividends payout on SOEs, but little discusses the effect of the “Administration Ordinance” on SOEs, and even more rare about the influence on the profit of SOEs. This paper uses the Difference-in-Differences method to evaluate the impact of the implementation of the “Administration Ordinance” on the profit of SOEs, which will enrich the study in this area. （2） Although some scholars have suggested that forced gains payout may increase the profit shifting behavior of management, thus leading to the decline in the profit of SOEs, there is no empirical evidence to support this mechanism. This paper takes the degree of real activity earnings management as the measure of the profit shifting behavior of management, and empirically tests this mechanism.

Investors' Assessment of the Dilution and Solvency Effects of Hybrid Instruments

The current financial reporting model requires dichotomous classification of financial claims as either liabilities or equity. Classifying financial claims is challenging when instruments have attributes of both liabilities and equity (i.e., hybrid instruments). In this study, we examine under what conditions that common equity investors assess one class of hybrid instruments – preferred stock – similar to liabilities or equity. Preferred stock is similar to liabilities because it is senior to common equity and thus reduces the claims of common shareholders on the net assets of the firm (a dilution perspective). Preferred stock also is similar to equity because it cannot cause insolvency (a solvency perspective). We extend capital structure theory to identify entity-level economic characteristics important to determining when the dilution or solvency perspective is most consistent with investors’ assessments of preferred stock. We predict and find that investors assess preferred stock similar to liabilities when expected financial distress costs are low. We predict and find that investors assess preferred stock similar to equity when expected financial distress costs are high. Further, our results indicate that investors do not assess preferred stock instruments consistent with current U.S. GAAP classifications that are based on instruments’ contractual provisions.

Price Pressure Indices, Innovation and Mergers Between Commonly Owned Firms

The potentially anticompetitive effects of common ownership are being discussed controversially. While the US agencies still display reluctance, the Commission has already invoked common ownership has part of a theory of harm in Dow/DuPont and Bayer/Monsanto. In our paper we focus on how common ownership can bear on the application of price pressure indices in unilateral effects analysis of horizontal mergers between portfolio companies. We do not assess whether the underlying premise of common ownership to lead to an internalization of shareholders’ expectations of high overall market returns is convincing. Rather, we hypothesize such common shareholder influence. Our main conclusion is that common ownership should still not be considered a general circumstantial factor indicating competitive harm with respect to post-merger price increases or effects on innovation competition. Rather, it calls for case-by-case analysis.

Impact of Contractual Rights on Preferred Stock Valuations in Delaware

The rights and the value of preferred stock have been the subject of several Delaware court decisions. These decisions are particularly significant for understanding the importance of contractual rights as the defining attribute affecting the valuation of preferred stock. Directors' fiduciary duties are primarily to common shareholders, while obligations to preferred shareholders are primarily contractual. Preferred stocks' contractual rights, as interpreted in these decisions, directly affects the value of the preferred and the common. When common shareholders control the board, the impact on the preferred can be negative. The common may be adversely impacted when preferred shareholders, particularly venture capitalists, control the board. Some commentators have argued that, when going-concern value is less than the preferred's preference, common stockholders should be entitled to the option value of their shares.

One Duty to All: The Fiduciary Duty of Impartiality and Stockholders’ Conflict of Interest

Delaware precedent, primarily Trados and ODN, holds that corporate boards of directors owe fiduciary duties to holders of corporation common stock and not to holders of preferred stock. This precedent, however, fails to address a broad range of complex but commonly occurring potential conflicts between and among holders of common stock and multiple classes of preferred stock. Rarely analyzed or applied in an intra-corporate context, the fiduciary duty of impartiality allows a fiduciary to exercise discretion while having a duty to act bona fide in the best interests of the beneficiaries as a whole. Mostly derived from U.S. common law of trusts, this duty requires a fiduciary to act in the best interests of the beneficiaries but recognizes that beneficiaries have competing economic interests. It is a balancing test that provides a corporation’s board of directors a flexible tool with which to weigh various, and often conflicting, stockholders’ interests to reach a resolution that maximizes the value of the enterprise as a whole. As such, the fiduciary duty of impartiality provides an analytical framework that allows for the discipline and consistent resolution of many of these unexplored conflicts.

A Review of the Risk Premium Method for Regulated Electric Utility ROEs

In utility financial economics, the cost of capital, or rate of return, is the cost of an electric utility's invested funds, both debt and equity. The cost of equity capital is the rate of return that common shareholders require on their investment, commensurate with the risks they assume and the expected returns from other similar investments (opportunity cost).

A Property Theory of Corporate Law

The dominant view of the corporation in legal scholarship is contractarian, one that sees the corporation as a “nexus of contracts” among the various suppliers of inputs to the business, such as investors, creditors, and employees. According to this view, the holders of common stock—those who are traditionally the primary focus of corporate law—are not the owners of the corporation, but just one of many contractual claimants. As a result, the corporation is a free-floating nexus of contracts with no property interests in the corporation itself or its assets. Thus, corporate law is seen as essentially a specialized branch of contract law. The contractarian metaphor has largely persuaded the academy and much of the corporate law bench, evidenced by the regularity in which Delaware courts interpret charter documents as “contracts.” Courts and commentators alike regard corporate law as essentially a set of “off-the-rack” contractual default rules provided by the state. Yet the contractarian metaphor has struggled to account for some of the most fundamental features of corporate law. For example, the nexus of contracts view fails to adequately explain why fiduciary duties attach uniquely to shareholders and not to other contractual claimants on the corporation. Equally important, the nexus of contracts approach also fails to account for the many in rem features of the corporation that contract law could not easily replicate. There is a piece missing in the contractarian account of the corporation. This Article argues that property law provides the missing piece of the contractarian puzzle in demarcating the boundaries of corporate law and explaining the distinctive features of it. In the property theory, the corporation is an ownership structure—a device for turning a messy set of in personam claims into an orderly package of in rem property rights, called “shares.” The in rem structure depersonalizes these rights, allowing them to be divided and transferred without contractual assent and without entangling the personal attributes of the holder. The key to the proprietary nature of this ownership interest is the residual control—voting rights—that solidify the status of common stock as a property interest rather than a contractual interest. The property theory’s assertion that claims on the corporation are a mix of property and contract rights provides traction in otherwise slippery areas of corporate law. If there is a line to be drawn between contract and property, this dividing line identifies the boundaries of distinctively corporate law from contract law. Accordingly, the rationale for shareholder-only fiduciary duties is not primarily that shareholders are the residual claimants in the economic sense, but that they have a residual control right constituting an ownership interest unique among corporate claimants. The property theory of corporate law best explains many features of corporate law and clarifies otherwise murky line drawing exercises in defining the scope of fiduciary duties.

The Causal Mechanisms of Horizontal Shareholding

Although empirical studies show that common shareholding affects corporate conduct and that common horizontal shareholding lessens competition, critics have argued that the law should not take any action until we have clearer proof on the causal mechanisms. I show that we in fact have ample proof on causal mechanisms, and that anyway antitrust enforcement should focus on anticompetitive market structures, rather than on causal mechanisms. I rebut claims that every type of causal mechanism that might produce anticompetitive effects is either empirically untested or implausible. I also show that critics are mistaken in claiming that common shareholders lack incentives to influence corporations to increase portfolio value by lessening competition. Finally, I show that preventing anticompetitive horizontal shareholding need not restrict diversification and would encourage, not discourage, desirable institutional investor influence on the efficiency of corporate conduct.

Influence of Market Value-To- Book Value (MV/BV) and Return on Equity (ROE) Ratios on Investment Decisions of Common Stockholders in Quoted Manufacturing Companies in North-West Nigeria

This research work aimed at determining the influence of Market Value-to-Book-Value (MV/BV) and Return on Equity (ROE) ratios on investment decisions of common stockholders in quoted manufacturing companies in North-West Nigeria. Two research questions and two null hypotheses were raised for the study. Descriptive survey design was adopted for the study. The population for the study consisted of 230,898 respondents, made up of 230,638 common stockholders registered with 33 accredited stockbrokerage firms in North-West Nigeria and 260 accountants from 84 quoted manufacturing companies as at 31 st December 2017. The proportionate stratified and purposive sampling techniques were employed to select a sample size of 465 respondents made up of 95 accountants in manufacturing companies and 370 common stockholders registered with accredited stockbrokerage firms in manufacturing companies in North-West Nigeria. The data collected were analyzed using mean to answer the two research questions while t-test analysis was employed in testing the two null hypotheses at 0.05 level of significance. The findings obtained include: market-to-book value ratio is used as a measure of deviations between book and market values of shares and stockholders do not extensively analyse this ratio and Return on Equity ratio is used by stockholders to compare dividend at the end of the financial year for consistency and with returns from other companies in the same industry to a moderate extent. It was, therefore, recommended that Common stockholders should always analyse the firms’ Market Value-to-Book-Value (MV/BV) and Return on Equity ratios at the end of every financial year to understand it to a great extent as MV/BV enables them to know the market value of their shares, determine their stock’s performance, while ROE ratio reveals the earning power of a company on stockholders’ book value investment and how much returns the stockholders have been receiving for better investment decisions. Keywords : Market value to book value, return on equity, ratios, common stockholders, investment decisions DOI : 10.7176/RJFA/10-6-05 Publication date :March 31 st 2019