Equity Investment Research Articles

Private Loan Issuance and Risk Factor Disclosure

ABSTRACT This study provides evidence that private loan issuance offers opportunities for borrowers to learn new information about their own risks and subsequently disclose such information in their risk factor disclosures (RFDs) to satisfy lenders’ demand for transparency about borrowers’ risks. This loan issuance effect on risk disclosures is more pronounced when greater learning opportunities are present and when lenders have a stronger demand for borrowers’ risk information transparency. Further analyses suggest that the enhanced risk disclosures following loan issuance not only benefit lenders by reducing the costs of accessing the secondary credit markets, but also create spillover benefits for equity investors by increasing risk information about the borrower and reducing uncertainty about the borrower’s risk. Taken together, these findings suggest that borrowers’ private interactions with lenders provide new opportunities for managers to generate and reflect fresh information in corporate risk disclosures, ultimately benefiting a wide range of capital market participants. Data Availability: Data are available from the sources identified in the paper. JEL Classifications: G21; G32; M41.

Debt and Duration: Why You Should Rethink Your Mix of Short-term Debt

Financing of a business involves several choices and tradeoffs: a key choice that CFOs often make is: “How much debt should we take on to finance our business?” A related question, often neglected is: “What kind of debt?” All forms of lending are not the same and one key dimension of debt is its maturity period. Short-term debt and long-term debt have different impacts on the profitability and valuation of a firm. Do investors demand higher returns on equity if the composition of debt includes more of certain kind of debt? The question has long bothered corporate finance as well as scholars. Recent research by Friewald, Nagler, & Wagner has uncovered an insight that should help CFOs, as it found a clear link between the level of debt, the maturity (ranging from short to long term) of debt and equity returns.1 The essence of their finding is: “… Equity returns increase in short-term leverage but not in long-term leverage”. Meaning that your equity investors expect higher returns on capital, the more your mix of short-term debt increases. In this essay, we explain why this happens, and we outline takeaways for managers of corporate finance. We illustrate how the nature of the industry in which your business operates, impacts your debt financing – both the level, as well as the mix of short- and long-term debt

How AI shapes greener futures: Comparative insights from equity vs debt investment responses in renewable energy

This paper offers insights regarding the potential of AI software development to narrow the financing gap in renewables. By employing a panel of 49 economies covering 2011–2020, we estimate a two-way fixed effects model and reveal that AI software development significantly promotes equity investments in renewables while imposing no substantial effect on debt investments in the same field. Such results are robust to extra controls, outlier consideration, and the endogeneity concern. Moreover, it is found that AI software development's enhancing effect on equity investments in renewables manifests when the stringency of environmental policies, especially the intensity of public funding support for environmental-related R&D, is sufficiently high. Furthermore, AI software development has a more profound positive impact on equity investments in renewables in economies with more equal business opportunities and lower age dependency.

California Bill Would Tighten Oversight on Private Equity Hospital Purchases

No abstract available. Article truncated after 150 words. According to Medscape California lawmakers are considering a bill that would tighten oversight of private equity and hedge fund buyers of hospitals and healthcare facilities (1). Private equity investment in hospitals and physician groups has been under scrutiny in recent months after a slew of high-profile failures, including bankruptcies and hospital closures. California lawmakers have drafted a bill that would require private equity firms and hedge funds to give the state attorney general written notice before purchasing a healthcare facility or provider group. The attorney general would have to approve the transaction. Buyers would also be required to submit written notice to any federal or state agency as required by law within 90 days of the transaction, and the attorney general could extend that period. The bill gives the attorney general the power to halt an acquisition if there is a "substantial likelihood of anticompetitive effects" or if it would …

Competing for private investments in public equity in China: The role of corporate philanthropy

AbstractThis study examines whether corporate philanthropy improves firms' competitiveness in the market for private investments in public equity (PIPEs). Adopting a Chinese PIPE sample between 2007 and 2019, corporate donations have been observed to increase the likelihood of issuers' PIPE applications being approved by the Chinese Securities Regulatory Commission (CSRC). It is also shown that CSRC spends less time reviewing PIPE applications of donating firms. Consistent with the signalling argument, we find that firms with corporate donations may be unlikely to act opportunistically in PIPE issuing. Further, the effect of corporate donations is stronger in competitive industries and large‐scale PIPEs. Finally, short‐run post‐issuance abnormal returns tend to be higher for PIPE issuers with corporate philanthropy. Overall, our findings indicate that corporate philanthropy can serve as a differentiation strategy to compete for PIPEs.

Crafting effective regulatory policies for psychedelics: What can be learned from the case of cannabis?

AbstractThe turn of the century brought a resurgence of interest in psychedelics as a treatment for addiction and other psychiatric conditions, accompanied by extensive positive media attention and private equity investment. Government regulatory bodies in Australia, Israel, Canada and the United States now permit use of psychedelics for medical purposes. In the United States, citizen action and corporate financing have led to petitions and ballot initiatives to legalize psilocybin and other psychedelics for medical and recreational use. Given this momentum, policymakers must grapple with important questions that define whether and how psychedelics are made available to the public, as well as how companies produce and promote them. The current push to broaden the production, sale, and use of psychedelics bears many parallels to the movement to legalize cannabis in the United States and other nations—most notably, the use of poorly‐evidenced therapeutic claims to create a de facto recreational market via the health care system. Experience with cannabis highlights the value of debating the question of legalization for nonmedical use as such rather than misrepresenting it as a medical issue. The lessons of cannabis policy also suggest a need to challenge hyping of psychedelic research findings; to promote rigorous clinical research on dosing and potency; to minimize the influence of for‐profit industry in shaping policies to their economic advantage; and to coordinate federal, state, and local governments to regulate the manufacture, sale and distribution of psychedelic drugs (regardless of whether they are legalized for medical and/or recreational use).

Influence of information processing bias on investment decision of equity investors at Nairobi securities exchange in Kenya

The goal of the study was to established the influence of information processing bias on investment decision of equity investors at Nairobi Securities Exchange. The study improved the existing finance literature, which increased the body of general knowledge. Researchers and aspiring academics would utilize the findings as a future source of reference for expanding their understanding of behavioral finance. This study employed regret aversion theory, descriptive research design applied in this research and the stratified random sampling technique. In this study, primary data was also employed. SPSS version 26 (Statistical Package for Social Science) was used for data analysis. Descriptive, correlation as well as regression analysis were undertaken and outcome was offered in tables followed by pertinent interpretation and discussion. The most influential variable was Market’s competition-related information with a regression coefficient of 0.502 (p-value = 0.027) and lastly Product’s market potential-information with a coefficient of 0.403 (p-value = 0.041). The study concludes that information processing bias holds a significant and influential role in shaping investment decisions among equity investors at the Nairobi Securities Exchange. Thus, it can be concluded that understanding and leveraging product market potential can positively impact investment decisions. It is crucial for investors to carefully assess market competition dynamics to maximize investment returns. This study also implies that by analyzing investor behavior, company management Can further evaluate capital markets' performance of stocks and adjust policies and strategies appropriately.

Performance and investment styles of international multi-asset funds during market crises

This paper presents a comprehensive investigation into the performance of multi-asset funds investing internationally. Based on a custom-built conditional multi-factor model, which includes several bond and equity-related factors, along with time-varying betas and alphas, we show that funds in our dataset significantly underperform from 2004 to 2021. This evidence holds even on a before-fee basis, with funds investing predominantly in bonds exhibiting significantly higher alphas than funds investing predominantly in equities. Since multi-asset funds may better hedge against market downturns than equity or bond funds, given their higher asset class diversification, we also evaluate performance for crisis and non-crisis phases separately. The results show that, during market crises, international multi-asset funds perform significantly better than in non-crisis times, achieving neutral performance. However, while funds that favour bond investments perform similarly across different market phases, funds that prioritize equity investments perform significantly better during crises. Consequently, multi-asset funds with higher bond holdings can be a better option during non-crisis periods, while funds with higher equity holdings should be preferred during market downturns. This somewhat puzzling finding seems to be related to funds’ cash holdings. By providing a better understanding of the asset allocation decisions of international mutual fund managers, as well as of their impact on fund performance, this work has meaningful implications for investors.

Importance of Financial Econometric Models in Analyzing the Performance of Equity Investments in the Capital Market : A Study

Importance of Financial Econometric Models in Analyzing the Performance of Equity Investments in the Capital Market : A Study

Private Equity in India Fintech: A Lifecycle Analysis

Over the past two and a half decades, India's venture capital and private equity industry have undergone significant growth, driven by the liberalization of the Indian economy and the emergence of a dynamic start-up ecosystem. While the Fintech sector has been preferred for VCPE investments, research on private equity activity in this industry has been limited. This study aims to address this research gap by providing comprehensive insights into the lifecycle of private equity investments in the Fintech industry in India. The study examines private equity investment and exit activity in the Indian Fintech industry between 1998 and Q1 2023. Our research findings indicate that the Fintech industry in India has attracted considerable investments at notably higher entry valuation multiples. Moreover, a few sectors within the industry have garnered higher investments and valuation multiples. Private equity investors have generated significant returns from exits in the Fintech industry, with M&As being the preferred exit route during the study period. However, our analysis indicates that exit valuation multiples were lower than entry multiples. This research provides valuable insights for investors and entrepreneurs seeking to understand the Indian Fintech industry and its potential for private equity investments.

Do government-guided funds "guide" the transregional mobility of capital? Evidence from cross-city equity investments

The study tries to evaluate and explain the influence of government-guided funds (GGFs) on the transregional mobility of equity capital. We employ spatial econometrics to investigate the spatial effects of GGFs on the mobility of equity capital. Using data on cross-city equity investments of A share listed companies in 335 Chinese cities from 2007 to 2021, we first develop a novel measure of Chinese capital mobility. We find a V-shaped correlation between GGFs and the flow of equity capital. Notably, reducing market segmentation and enhancing native identity are two important mechanisms by which GGFs facilitate the influx of equity capital into local regions. Also, GGFs show a significant spatial spillover effect on neighboring cities. The results still hold after a series of robustness tests and heterogeneity tests.

Digital vs. Traditional Advertising and the Recognition of Brand Intangible Assets

This paper examines how different advertising categories are associated with attributes of brand asset recognition arising in the context of acquisitions. Prior research documents that aggregate advertising is positively associated with firm sales and brand values, but it fails to consider major recent shifts in advertising from traditional channels (such as TV) to digital advertising (such as paid search and online display). Using proprietary data, I decompose advertising expenditures into the categories of traditional, online display, and paid search. Consistent with expectations, results confirm that target firms’ traditional and online display advertising exhibit a higher likelihood of brand asset recognition and higher recognized brand values as compared with paid search advertising. Confirming the economic substance of the recognized brands, additional results reveal positive investor equity market reactions to brand value, which are driven by firms investing more in traditional and online display advertising. Overall, these results confirm that certain advertising channels exhibit stronger associations with the recognition and characteristics of the underlying brand asset, consistent with their heterogeneous properties. This paper was accepted by Suraj Srinivasan, accounting. Funding: I acknowledge the financial support from my advisor, Eddie Riedl, as well as from the UNH Paul College of Business and Economics Summer Research Support Award. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2022.00387 .

The Skewed Playing Field between Private Equity and Family Ownership Hemmed in by Intra- and Inter-Country Tax Non-Neutralities

This article investigates the ownership and management dynamics of private equity investments and family-controlled holdings in the United Kingdom and Italy, and reveals a tax imbalance in their pursuit of corporate control over publicly listed firms. By employing an interdisciplinary approach and a quantitative case study analysis applied to corporate and tax planning, this article illustrates that whereas UK taxation favours private equity, Italy leans towards controlling families, highlighting its implications for the private equity industry’s competitiveness and family inter generational succession, both domestically and across borders. Hence, with no ex ante preference for a specific form of ownership model (family or private equity), the article sheds light on the impact of tax considerations on corporate control decisions, and therefore advocates for tax neutrality to level the playing field between family and private equity control. Last, the article observes a greater reliance on leverage in private equity corporate governance models compared to controlling families, suggesting that it is not the legal availability of a tax shelter (interest deductions) per se that prompts its use, but rather the controlling investor's profile that weighs on borrowing preferences.

The role of existing shareholders in private equity placements in China

AbstractIn this article, we investigate how the participation of firms’ existing shareholders affects the pricing and valuation of private investments in public equity (PIPEs). Using a large sample of PIPEs issued by Chinese listed firms from 2006 to 2019, we find that the effective discount and long‐term buy‐and‐hold abnormal stock returns of PIPEs with existing shareholder participation are significantly higher than those with only new investor participation, after controlling for heterogeneous types of PIPE investors. However, the superior post‐PIPE stock performance of deals with existing shareholders is not driven by improved operating performance but by tunneling activities such as frequent dividend announcements, related‐party transactions, and positive earnings management during the lock‐up period. Our findings suggest that the effect of existing shareholders’ participation in private equity placements is more consistent with the tunneling hypothesis than the certification hypothesis. We document that the tunneling incentives are stronger when firms face greater financial constraints and can be mitigated when the firm's corporate governance is stronger.

Navigating Real Estate Investment Trust Performance Dynamics: The Role of Style (Equity vs. Mortgage Real Estate Investment Trusts) and Diversification Amidst the COVID-19 Pandemic

In this paper, we investigate the impact of COVID-19 on different performance measures and the risk of US Real Estate Investment Trusts (REITs) with different styles. Our findings suggest a phenomenon with compelling evidence of reduced performance without any significant changes in risk profile amidst the COVID-19 pandemic. Particularly, mortgage REITs (MREITs) appear to be more adversely affected compared to equity REITs (EREITs). We further explore and analyze the performance of specialized REITs in contrast to diversified REITs in the distinctive conditions presented by COVID-19. We find that diversification creates value for the entire sample period, whereas, during the COVID-19 pandemic, property type specialization helps, although the results are weakly significant. The findings on risk suggest investors’ short-run outlook on market reaction. These results remain robust to additional tests. The implications provide insight for investors as a reference to reallocate assets in their portfolios during uncertain times.

Private Equity-Backed Steward Healthcare Files for Bankruptcy

No abstract available. Article truncated after 150 words. Arizona Attorney General Kris Mayes (1) has launched an investigation into what led to Dallas-based Steward Health Care filing for Chapter 11 bankruptcy protection on May 6. The health system also recently shared that it is $9 billion in debt and has plans to sell all 31 of its hospitals, four of which are in Arizona and have a proposed auction date of June 28, according to a May 10 news release from Ms. Mayes (1). Steward relied on backing from private equity investors to quickly acquire dozens of community hospitals, including facilities in Massachusetts, Texas, Florida, and Arizona. Steward has been the focus of a year-and-a-half-long CBS News investigation revealing how private equity investors have siphoned hundreds of millions of dollars from community hospitals with devastating public health consequences (2). Records reviewed by CBS News showed Steward hospitals around the country left a trail of unpaid bills, at times …

Corporate pension funds’ search for yield with private equity investment: Its determinants and consequences

AbstractThis study examines corporate pension funds’ search for yield through investments in private equity (PE). Using pension asset allocation data from 10‐K filings, we find that corporate pension funds significantly increase the PE share within their risky assets following underperformance relative to their expected return. This risk‐taking behavior is more pronounced for sponsoring firms that were more financially constrained with poorly funded plans in the previous year. Furthermore, we discover that pension asset allocation to PE does not significantly increase pension returns but does lower pension return volatility and tracking error relative to the expected return.

Geopolitical risk and the cost of capital in emerging economies

We posit that geopolitical events that elevate investor risk prompt equity investors to shift capital from emerging markets to safer mature markets, raising the cost of equity capital for firms in emerging economies. Using a sample of 55,900 observations spanning 19 economies from 1987 to 2018, we find that higher geopolitical risk increases the cost of equity capital, on average. We further find that this effect is moderated by country-level institutional context (constraints on the executive branch of government and regulatory arrangements) and firm-level factors (cross-listing in the U.S. and foreign sales).

Financial Development and the Capital Flow Allocation Puzzle in Developing Asia

ABSTRACT Using a panel regression approach across 13 developing Asian economies from 1996Q1 to 2019Q4, this paper examines the extent of financial development as a transmission channel for mediating the “allocation puzzle” in capital flows. This puzzle pertains to why capital seems to flow to economies with lower rather than higher productivity growth. We find that while portfolio equity and debt investment flows are negatively related to total factor productivity (TFP) in developing Asia, thereby contradicting the predictions of traditional neoclassical growth models, financial development significantly mitigates this effect. This is particularly the case at earlier stages of financial development and convergence towards a frontier. For foreign direct investment, although we find that there is no direct allocation puzzle in developing Asia, financial development can hamper the stimulatory effect of TFP for highly financially developed economies given diminishing marginal returns.

The Risks and Benefits of Physician Practice Acquisition and Consolidation: A Narrative Review of Peer-Reviewed Publications Between 2009 and 2022 in the United States.

The objective of this narrative review was to assess current literature regarding acquisition and consolidation of physician practices in the United States (US). The acquisition and consolidation of physician practices is a trend affecting patient care, quality of services, healthcare economics and the daily practice of physicians. As practices are acquired by fellow physician groups, private equity investors and entities such as hospitals or large healthcare systems, it is important to better understand the underlying forces driving these transactions and their effects. This is a narrative review of peer-reviewed publications to determine what current literature has covered regarding the acquisition and consolidation of physician practices in the US regarding risks and benefits of this trend. Sources included the SCOPUS, Medline- PUBMED and Web of Science databases. Peer reviewed publications from 2009 to 2022 were included for initial review and curation for relevance using the search terms "physician" and "practice" with either "acquisition" or "consolidation". Synthesis conducted after narrowing down of relevant articles did not use quantitative measurements, but instead examined overall trends, as well as risk and benefits of ongoing acquisition and consolidation in a narrative format. Journal articles focused on physician consolidation in the US often reported increases in physician numbers with decreases in numbers of individual practices. Private equity quantitative analyses reported rapidly accelerating acquisitions driven by these investors, and vertical integration scholarly work reported frequent geographic consolidation of nearby practitioners. Risks associated with these transactions included such items as decreased physician autonomy and higher cost of care. Benefits included practice stability, improved negotiation with insurers and improved access to resources.