Equity Dilution Research Articles

COP 26: Dilution of Equity by Global North

COP 26: Dilution of Equity by Global North

Research on Risk Management under Enterprise Financing

Financing is an indispensable process for the development and growth of enterprises, and there are various ways of financing enterprises. However, enterprise financing is accompanied by various risks, and enterprise risk management is a key factor in ensuring the continued operation of enterprises and enhancing their competitiveness. How to cope with these risks is crucial to the healthy development of enterprise financing and operations. Therefore, this paper discusses risk management under enterprise financing through theoretical analysis and a case study. Through the analysis, financing risks mainly include cash flow crises, capital structure changes, dilution of shareholders' equity, conflicts of interest, etc. In order to cope with the risks arising from financing, enterprises can usually take measures such as disclosing information and evaluating risks regularly, optimizing capital structure, and coordinating creditor-debt relationships. In addition, enterprises can ensure that their claimed technologies and products are in line with reality and ethical and legal requirements by establishing transparent technology verification and auditing mechanisms.

Research on Apples Financing Method and Its Enlightenment to Multinational Corporations

In the 21st century, the phenomenon of economic globalization is very common, many companies have begun to enter the global market, transnational business models have become popular, so that complex financing methods have become a topic that every enterprise that wants to enter the international market must study. Many experts and scholars in the world have studied this in depth, but for individual excellent enterprises, it is worthwhile to start from its perspective. This article uses Apple as an example to analyze the company's financing methods and inspiration for the development of other multinational companies in the world. This paper uses the method of case analysis to analyze the unique financing structure of Apple at various stages of development, and draws the following conclusions, first of all, it is necessary to establish a diversified financing model to avoid the shortage of funds caused by single financing. Second, it is necessary to flexibly adjust the financing structure according to the development stage of the enterprise. Finally, it should pay attention to the issue of equity dilution in the external financing process, which may involve the loss of control of the company.

Analysis of Motives and Influences of East Money Convertible Bond Financing

Convertible bonds are fully known as convertible corporate bonds. Since the CSRC issued new financing rules in 2017, convertible bonds have developed rapidly without relevant restrictions. As an important investment and financing tool in the financial market, the orderly development of convertible bonds is very important to maintain financial stability. It is necessary to pay attention to its current situation and study the Countermeasures for its healthy development. On the basis of the existing research, it is found that the motivation of issuance includes easing the conflict of interest, reducing the cost of financing, optimizing the capital structure, etc., and it will have an impact on the company's stock price, equity dilution and predatory behavior of major shareholders; Combined with the case analysis, it is found that there are some problems in the current convertible bond issuance, such as the slow progress of convertible bond investment and education, the inadequate supervision of the issuance market, and the imperfect regulations on the termination of convertible bond transactions. Therefore, this paper puts forward some suggestions for investors, original shareholders and relevant regulatory framework, so as to promote the healthy development of convertible bonds.

How do investors perceive convertible bond issuing decisions?

We survey institutional investors on the convertible bond issuance decision. Investors believe that convertibles are preferred over equity in order to avoid equity dilution. We also find support for traditional convertible bond issuing theories, such as the backdoor equity, sequential financing, risk shifting, and risk disagreement models. Investors attribute little importance to factors that make convertible bonds more attractive for hedge funds such as volatility and dividend payments on the underlying stocks. This latter result is likely related to the smaller role that convertible arbitrage activity started to play in this market.

Equity Crowdfunding: High-Quality or Low-Quality Entrepreneurs?

Equity crowdfunding (ECF) has potential benefits that might be attractive to high-quality entrepreneurs, including fast access to a large pool of investors and obtaining feedback from the market. However, there are potential costs associated with ECF due to early public disclosure of entrepreneurial activities, communication costs with large pools of investors, and equity dilution that could discourage future equity investors; these costs suggest that ECF attracts low-quality entrepreneurs. In this paper, we hypothesize that entrepreneurs tied to more risky banks are more likely to be low-quality entrepreneurs and thus are more likely to use ECF. A large sample of ECF campaigns in Germany shows strong evidence that connections to distressed banks push entrepreneurs to use ECF. We find some evidence, albeit less robust, that entrepreneurs who can access other forms of equity are less likely to use ECF. Finally, the data indicate that entrepreneurs who access ECF are more likely to fail.

The decentralization of race: tracing the dilution of racial equity in educational policy

This article examines California’s Student Equity Policy crafted by policymakers to “avoid an underclass of ethnic minorities” in higher education. We combine tenets from critical race theory, interest convergence, and color-evasiveness to qualitatively interrogate 17 policy documents including chaptered bills, legislative mandates, and implementation guidelines related to the reform effort. We highlight how revisions to the reform deliberately inoculated a race-conscious policy into an effort targeting all students. Over the policy’s 25-year history, we found that policymakers continuously diluted the role of race and opportunities to address racial disparities in legislative mandates. Implications for this research emphasize the significant role of policymakers in crafting legislation that explicitly draws attention to inequities faced by racially minoritized students in higher education. It considers practitioners’ ability to implement these policies in ways that can improve racial equity. We conclude by sharing recommendations for scholars seeking critical approaches to understand how racially minoritized students benefit, or not, from equity initiatives crafted by policymakers.

Do Growth Expectations Help Explain Characteristic-Sorted Portfolio Returns?

We find that accounting ratios (asset and sales growth, profitability, and equity dilution) that predict stock returns are associated with errors in analyst long-term growth forecasts. Specifically, accounting information that is associated with favorable long-term growth forecasts tends to predict negative analyst forecast errors and negative future excess returns. This and other evidence we present is consistent with the idea that biased long-term growth forecasts generate the observed return premia of popular characteristic-sorted portfolios.

Success is good but failure is not so bad either: Serial entrepreneurs and venture capital contracting

I analyze prior entrepreneurship as a determinant of financial contracting with venture capitalists and find more company-favorable contracts in startups founded by serial entrepreneurs. Repeat founders and other insiders retain greater board control and also suffer less equity dilution in their dealings with VCs. Second, serial founders retain their CEO positions more often. Third, startups founded by serial entrepreneurs obtain higher valuations at VC funding although this finding is confined to previously successful founders who also obtain the best contracts. Interestingly these results obtain despite poorer performance of such startups and VCs funding them sooner. Overall, even previously unsuccessful serial entrepreneurs receive better deal terms than novice founders, consistent with entrepreneurial learning being an important factor in fostering future entrepreneurship.

Hands off my Brand! The Financial Consequences of Protecting Brands through Trademark Infringement Lawsuits

Well-known brands are frequently imitated, misused, or tampered with. Firms facing these threats routinely turn to the legal system and file trademark infringement lawsuits in an attempt to prevent revenue losses and brand equity dilution. In this article, the authors address the largely unexplored issue of brand protection. First, they categorize all major types of trademark infringement. Second, using signaling and prospect theories, they present a conceptual model that outlines the financial consequences of defending a brand in court. The authors test the predictions of this framework using a large sample of trademark infringement lawsuits and find that although investors react negatively in the short term to firms’ filing and even to firms’ winning such cases, the long-term performance of firms that successfully leverage the legal system to protect their brands is positive.

Entrepreneurial management equity allocation and financing structure optimization of technology-based entrepreneurial firm

PurposeTo satisfy the demand of initial investor for above-average capital return and the expectation of entrepreneurial management to establish their own business, this paper aims to explore a dynamic equity allocation model in which the shareholding ratio of the technology-based entrepreneurial firm changes with its growth and profit. Based on the dynamic equity allocation model, the authors design a financing structure which not only ensures timely and adequately obtaining the fund but also avoids equity dilution and safeguards the integrity of equity.Design/methodology/approachThe paper selects high-tech companies listed in China as the sample for empirical research to identify the role of stock incentive and uses model deduction to find the equitable quantized benchmark for entrepreneurial management equity allocation. The study uses capital exclusivity as an entry point to perform theoretical analysis and demonstrates how the equity allocation of a technology-based entrepreneurial firm changes dynamically as the presentation speed of entrepreneurial management’s human capital exclusivity accelerates. The paper then constructs a conceptual model to design the financing structure of the technology-based entrepreneurial firm.FindingsThe study finds that stock incentive upwardly regulates debt financing and downwardly regulates equity financing. Based on characteristics of technology-based entrepreneurial firms, the paper suggests that the immediate surplus capital increment can signify the increasing presentation speed of human capital exclusivity, and it is proposed as an equitable quantized benchmark for equity allocation to entrepreneurial management. Based on the dynamic equity allocation model, the paper designs an internal equity and external debt financing structure.Originality/ValueThe conclusions enrich the theoretical foundation for entrepreneurial management to participate in residual claim and provide practical guidance for equity allocation and financing structure design in the context of mass entrepreneurship and innovation. The paper also sets up a conceptual framework for solving two major issues of the technology-based entrepreneurial firm: timely acquisition of external funding and lasting maintenance of entrepreneurial management stability.

Equity crowdfunding in Hong Kong: potential, challenges and investor protection

ABSTRACTEquity crowdfunding is a relatively new investment format that allows investors to purchase unlisted securities from a company that does not meet listing requirements for an initial public offering. Equity crowdfunding offers investment rewards but also has risks of fraud, herding, insolvency and dilution of shareholder equity. Regulation is a natural response to negative externalities like systemic risk caused by asymmetric information, adverse selection and lemon problems. While the US and the UK have extensive crowdfunding regulations, Hong Kong does not, although crowdfunding is not specifically banned under the Securities and Futures Ordinance. This article focuses on the current state of equity crowdfunding in Hong Kong but draws inspiration from legal requirements for equity crowdfunding in the US, the UK and Singapore, as well as the Korea Startup Market in South Korea. The author makes regulatory suggestions for consideration by Hong Kong’s law-makers and policy-makers.

Equity Issuance Methods and Dilution

We analyze rights offerings and public offerings when informed current shareholders strategically choose to subscribe. If all current shareholders have wealth to participate, rights offerings achieve the full information outcome and dominate public offerings. However, when some current shareholders are wealth constrained, rights offerings lead to more dilution of their stakes and lower payoffs, despite the income from selling these rights, thereby generating wealth transfers among shareholders. When firms can choose the flotation method, either all firms choose the same offer method or high and low quality firms opt for rights offerings while firms of intermediate quality select public offerings.

“Brand play” versus “Brand attack”: the subversion of brand meaning in non-collaborative co-creation by professional artists and consumer activists

PurposeThis paper aims to investigate the ways in which “non-collaborative co-creation” can affect brand equity as perceived by independent observers. It reports a study of the different effects on that perception attributable to non-collaborative co-creation that takes the form of either “brand play” or “brand attack” and is executed either by established artists or mainstream consumers.Design/methodology/approachA 2 × 2 between-subjects experiment (brand play versus brand attack; consumer versus artist) measured observers’ perception of brand equity before and after exposure to purpose-designed co-created treatments.FindingsNon-collaborative co-creation has a negative effect on observers’ perceptions of brand equity and brand attack, causing a stronger dilution of brand equity than brand play. Artists either mitigate the dilution or have a positive effect on those perceptions.Research limitations/implicationsFuture research could usefully investigate the relative susceptibility of brands to non-collaborative co-creation, the effects on brands of higher complexity than those in our experiment, exposed in higher-involvement media, and the effects of more diverse forms of co-creation.Practical implicationsBrand managers must recognise that co-creation carries considerable risks for brand equity. They should closely monitor and track the first signs of non-collaborative co-creation in progress. It could be beneficial to recruit artists as co-creators of controlled brand play.Originality/valueThis study offers a more complete insight into the effect of non-collaborative co-creation on observers’ perceptions of brand equity than so far offered by the existing literature. It connects the fields of brand management and the arts by investigating the role and impact of artists as collaborative or non-collaborative co-creators of brand equity.

Convertible bonds and bank risk-taking

Abstract We study how contingent capital affects banks’ risk choices. When triggered in highly levered states, going-concern conversion reduces risk-taking incentives, unlike conversion at default by traditional bail-inable debt. Interestingly, contingent capital (CoCo) may be less risky than bail-inable debt as its lower priority is compensated by a lower induced risk. The main beneficial effect on risk incentives comes from reduced leverage upon conversion, while any equity dilution has the opposite effect. This is in contrast to traditional convertible debt, since CoCo bondholders have a short option position. As a result, principal write-down CoCo debt is most desirable for risk preventive purposes, although the effect may be tempered by a higher yield. The risk reduction effect of CoCo debt depends critically on the informativeness of the trigger. As it should ensure deleveraging in all states with high risk incentives, it is always inferior to pure equity.

Financing From the Perspective of Mining Companies

The purpose of this thesis is to explain financing decisions from the perspective of mining companies. First, all of the major equity and debt financing instruments available to mining companies are presented and analyzed. Each financing method is assessed on a wide range of criteria. Next, these concepts are applied in case studies of four companies: BHP Billiton, Barrick Gold, Teck Resources, and Noront Resources. For each company, the overall choice of financing methods is shown and analyzed. The effect of financing choices on the weighted average cost of capital (WACC) is calculated. The final section deals with case studies of individual mine finance decisions during the past two years: Teck Resources’ $4.2 billion private debt placement to escape from the brink of bankruptcy, Barrick Gold’s $3.9 billion equity financing to eliminate hedges, Copper Mountain Mining’s Joint Venture with Mitsubishi, and Xstrata’s $5.9 billion rights issue in 2009. The financing options used by mining companies can be divided in 16 types, many of which are unique to the mining industry. Public equity is the dominant form of financing, followed by bonds and debentures, while many newer types of financing are growing in importance. Important considerations for selecting the type of financing include: time needed to arrange, typical interest rate, position in capital structure, effect on balance sheet, effect on credit rating and equity dilution. In many cases, the best form of financing is highly contentious. Large companies that are able to obtain good credit ratings are able to achieve a lower cost of capital than their junior counterparts, while gold companies currently enjoy the lowest cost of capital.

Roast, Grind, Brew, Kickstart

This case describes an entrepreneur who turns to Kickstarter to help launch a product and satisfy investor requests to prove the market. The case discusses the decisions that need to be made with regards to launching a campaign, and analyzes ways to increase the likelihood that the campaign will be successful. Accompanying datasets give students access to thousands of past campaigns, which can be used to determine the factors that impact campaign outcomes. This case can be used for first-year decision analysis with only excel or second-year data science by leveraging the accompanying Python starter code. (Please contact Customer Support for the Python file.) Students should be encouraged to bring past experiences with Kickstarter and launching new products to the classroom discussion. Excerpt UVA-QA-0900 Aug. 6, 2018 Roast, Grind, Brew, Kickstart Felix Artmann stared at the email in front of him. There was only one line in particular that caught his attention: “Unfortunately, until consumer interest is explicitly proven, we can't justify making any further investments in Bonaverde.” Artmann and his cofounder had been working on their innovative coffee start-up for the past two years and finally had a functioning prototype that they could take to manufacturers. Having survived bankruptcy once already, getting to this point was nothing short of a miracle. However, they still needed another $ 400,000 to cover the fixed costs of commercial manufacturing, which their investors were unwilling to provide. What the Bonaverde team needed was a platform for raising awareness of their product and gathering paid preorders, all without further investment or equity dilution. What the team needed was Kickstarter. What is Kickstarter? Kickstarter was an online crowdfunding platform. The term “crowdfunding” referred to the method by which projects (campaigns) could raise money. Crowdfunding worked by appealing not to a small, select group of investors, but to the “crowd” or public at large, soliciting many small donations in order to reach a goal. Although the internet enabled a number of online platforms to support crowdfunding efforts—such as Kickstarter, Indiegogo, GoFundMe, Patreon, and more—the practice predated modern technology by at least a few hundred years. A famous early example occurred in 1885, when Joseph Pulitzer used his newspaper to announce a fundraising drive to finish construction on the Statue of Liberty. In five months, Pulitzer had raised $ 102,000 (equivalent to $ 2.5 million in 2018), with over 80% of the donations coming in amounts less than $ 1 each, and construction was able to continue. . . .

Trademark dilution and its practical effect on purchase decision

This work aims to analyze the effect of unauthorized use of trademarks on its consumer-based brand equity and on the consumer purchase decision, through a mediation model with structural equations. An experiment was carried out with 618 participants, who were exposed to advertising of famous brand products or senior brands, and fictitious products with the same brands or junior brands. Participants were then asked to make some purchases with a real budget of US$5. The results show that exposure to junior brands reduces senior brand equity, i.e. results in trademark dilution, mediating a reduction in the purchase of senior brand products. In addition, similarity between junior and senior brands alleviates brand equity dilution, while consumer involvement with the product category of the famous brand has no moderating effect. The study aims to contribute to our understanding of trademark dilution, including the effect on purchase decision – a subject so far unexplored in the empirical literature. Moreover, the study pursues to highlight the importance of protecting well-known trademarks in order to avoid damage occurring not only in consumer perceptions, but also in firm's sales and brand financial value.

Asset Growth and Stock Performance: Evidence from REITs

AbstractIn this article, we examine the impact of asset growth rates on the future stock performance of 308 publicly traded real estate investment trusts (REITs). We observe that fast‐growing REITs tend to underperform slow growing REITs. However, we find evidence that the growth effect is significantly less negative for REITs selling at a premium to net asset value. In addition, we observe the asset growth effect only in the subsample of REITs that engages in equity issuance over the next 12 months. The combined evidence suggests contemporaneous equity dilution, which has not been considered in previous studies, may provide an explanation for the underperformance of fast‐growing firms.

The (Self-)Funding of Intangibles

In response to technological change, U.S. corporations have been investing more in intangible capital. This transformation is empirically associated with lower leverage and greater cash holdings, and commonly explained as a precautionary response to reduced debt capacity. We model how firms' payout and cash holding policies are affected by this shift. Our insight is that the creation of intangibles is largely achieved by human capital investment and requires lower upfront outlays. Firms can self-finance the retention of human capital by granting deferred equity compensation. Interestingly, retaining cash and repurchasing shares enhances the value of unvested equity, thereby facilitating retention and reducing equity dilution. Our empirical evidence confirms that firms with higher intangible investment have lower upfront investment needs. They make similar payouts as tangible investment firms, suggesting they are not on average more financially constrained. They also tend to grant more deferred equity and prioritize repurchases over dividends in particular when their stock volatility is high, in line with our model's predictions.