Equity Transactions Research Articles

Charity begins at the office: issuing cheap stock and stock options to employees and insiders before going public

PurposePress reports have indicated that firms frequently underprice restricted stock and employee stock options. I test for underpricing of stock and options.Design/methodology/approachI examined a sample of 5,333 private firm stock and option issuances between 1985 and 2017. I tested for underpricing using two approaches: assuming investors have no special market-timing ability and assuming instead they have perfect market-timing ability.FindingsI find evidence of widespread stock and option underpricing by private firms before they go public reflecting large discounts that exceed reasonable compensation for lack of marketability. Unreported underpricing is more frequent in the last pre-IPO private equity transactions that offer the last opportunity to give such discounts before the stock is publicly traded, but the discounts are greater in the earlier pre-IPO transactions where unreported discounts are presumably tougher for the SEC to detect. Underpricing is still detected even when the actual DLOMs are tested against a benchmark that assumes investors have perfect market-timing ability.Research limitations/implicationsFirms frequently underprice restricted stock and employee stock options. Firms tend to underprice stock options more frequently than restricted stock, but restricted stock tends to be priced at deeper discounts when recipients are assumed not to have any special market-timing ability.Practical implicationsPrivate firms issue restricted stock and options as incentive compensation. Lowballing the valuation transfers wealth from outside stockholders to employees/insiders. Wealth transfers take place through the issuance of equity claims to employees/insiders before firms go public. I found that more than a quarter of the DLOMs exceed the theoretical maximum by, on average, between 16% (median) and 20% (mean). This finding raises two questions worthy of investigation. First, to what extent do the frequency and magnitude of DLOMs above the theoretical maximum depend on whether a board of directors obtains an independent appraisal of a stock’s fair market value? Second, if DLOMs above the theoretical maximum are observed even when the stock is independently appraised, how do appraisers justify such large DLOMs?Social implicationsThe wealth transfers that take place through the issuance of equity claims to employees/insiders before firms go public benefit employees/insiders at the expense of outside shareholders.Originality/valueMy paper is the first to furnish evidence of widespread stock and option underpricing by private firms before they go public; demonstrate that the unreported underpricing is more frequent in the last pre-IPO private equity transactions that offer the last opportunity to give such discounts before the stock is publicly traded and show that the discounts are greater in the earlier pre-IPO transactions where unreported discounts are presumably tougher for the SEC to detect.

Business and Corporate Models for Interventional Radiology in the Office Based Lab and Ambulatory Surgical Center Setting

The landscape of healthcare is shifting towards outpatient settings such as Office-Based Labs (OBLs) and Ambulatory Surgery Centers (ASCs). This transition, driven by the Centers for Medicare & Medicaid Services (CMS), presents various business and corporate models for interventional radiologists seeking to practice outside traditional hospital environments. The role of private equity and management services in facilitating these transitions is highlighted, offering opportunities for growth, efficiency, and enhanced control over practice operations. The document also discusses the financial aspects of establishing an OBL or ASC, the benefits of outpatient procedures, and the adaptability of private equity deals to the specific needs of medical practices. It concludes by emphasizing the potential for long-term wealth creation and the adaptability of these models to individual physician needs.

Liquid stock as an acquisition currency

We examine how stock liquidity affects acquisitions. We hypothesize that liquidity enhances acquirer stock as an acquisition currency, especially when the target is relatively less liquid. As hypothesized, we find that more liquid firms have a greater likelihood of making stock acquisitions. Further, the difference in stock liquidity between acquirer and target firms increases payment with stock, reduces acquisition premiums, and improves acquirer announcement returns in equity deals. Consequently, firms take steps to improve stock liquidity prior to stock acquisitions. We use policy initiatives as exogenous shocks to firm liquidity to show that liquidity effects on acquisitions are plausibly causal.

Informed trading by hedge funds

AbstractUsing daily equity transactions, we create a hedge fund informed trading measure (ITM) that separates concentrated information‐related trades from liquidity‐driven basket trades. We find that stocks with higher ITM are associated with higher future stock performance. The long–short portfolio delivers 4% annual alpha after controlling for size, value, momentum, and illiquidity factors. We attribute informed trading to hedge funds' ability to identify and correct stock underpricing. The results are robust to several ways of constructing and sorting the measure, and we do not find a return reversal in four quarters, indicating that the measure is information related.

Determinants of the performance of private equity backed SMEs: an empirical analysis at the European level

This paper extends previous research to investigate the determinants of the operating performance of small and medium-sized enterprises (SMEs) backed by private equity (PE). The paper is based on a sample of 208 unique private equity-backed firms operating at the European level. A multivariate linear regression model is estimated, in which the private equity-backed firms’ operating performance—as measured by ROA, Revenues/Total Assets, and EBIT/Total Assets—is a function of a variety of factors. These include whether or not the firm is an SME, the presence of family shareholders, and various features specific to the expertise of the private equity investor, as well as the industry, country, and years covered. The analysis is limited to private equity deals that occurred in the European Region between 2005 and 2017. According to the results, the effectiveness of private equity in improving the operating performance of target companies in the three years post-investment is impacted by whether or not the backed firm is an SME. This research paper aims to further existing publications on the link between the involvement of the private equity investor and the status of the backed firm as an SME.

Untangling Employee Morale in Private Equity Deals

Untangling Employee Morale in Private Equity Deals

Accounting for goodwill in China: a case study of two-step acquisitions

ABSTRACT We use a case study to illustrate how different acquisition methods can result in different amounts of goodwill recognised on financial statements in China. China Merchants Bank adopted a two-step acquisition method: first, it acquired 53% of the shares of Hong Kong’s Wing Lung Bank to gain corporate control in 2008; second, it acquired the remaining 47% of shares in 2009. Using this method, China Merchants Bank recognised the acquisition premium as goodwill only in the first step and recognised the acquisition premium in the second step as a decrease in additional paid-in capital. This two-step acquisition method significantly reduces the amount of goodwill shown on financial statements and lowers the likelihood and amount of subsequent goodwill impairment. Different acquisition methods can lead to different amounts of goodwill initially recognised when accounting standards permit the partial goodwill method and regard the transactions between the parent and non-controlling shareholders as equity transactions.

Real Estate Consolidation Tax 2.0: Discussion on the Constitutionality of the Acquisition Time of Equity and Real Estate under Specific Equity Transactions

Real Estate Consolidation Tax 2.0: Discussion on the Constitutionality of the Acquisition Time of Equity and Real Estate under Specific Equity Transactions

The role of financial covenants in pricing private investments in public equity

Our study examines the pricing of private placements for issuing firms subject to outstanding loan covenants. Using Private Investments in Public Equity (PIPE) deals from 2001 to 2018, we find that issuing firms restricted by loan covenants offer a discount of 3.9% larger than those without covenants. We corroborate the positive impact of financial covenants on discounts through channel tests that assess covenant violation history, covenant strictness, and the identities of lead PIPE investors. The increased probability of technical default and costly renegotiation in covenants potentially incentivizes borrowing firms to transition from the loan market to the PIPE market. To minimize endogeneity concerns, we use a matched sample, a Heckman selection model, and a two-stage least squares instrumental variable analysis, all of which present consistent results. Based on our findings, we conjecture that PIPE investors are concerned about the transfer of control rights to lenders and, as a result, demand deeper discounts in PIPE offerings.

Research on Tax Controversies Regarding Equity Transactions of Companies Not Listed on the Stock Exchange or Traded on Over-The-Counter Markets

未上市、上櫃且非興櫃公司股權在證券交易所得停徵的情況下，很容易被用來規避房地合一稅或其他所得稅，故於2021年起對這類型的股權交易開始課稅。除了是否課稅的問題外，然而如何計算課稅的所得，更是個極具爭議性的問題，本文除了介紹目前的法規內容外，更以具體案例說明其中的爭議性。

Private Equity Firm Performance: An Empirical Evidence From India Using Benchmark Index

The present study attempted to examine the comparative return performance of private and non-private equity firms in India. For this purpose, we have used deal-level data retrieved from venture intelligence for the period ranging from 2009 to 2019. To measure the return of private equity, we applied Return multiple, internal rate of return (IRR) and extended internal rate of return (XIRR). We have used the Nifty 50 benchmark index as a proxy for investigating the return generated by public market returns. Study findings revealed that private equity firms outperformed the benchmark Index return and open-up routes for global and domestic investors for further investment. We identified that most private equity deals exited via the M&A route; some also followed the IPO route to exit privately held firms. Results differ from prior studies advocating IPO as the prime mechanism private equity managers use for exiting. Further, returns measured under both routes outperformed the public market index Nifty 50. The study found that 84% (277 Deals) of deals provided a positive cash multiple in the last decade and outperformed the benchmark index. These findings are helpful for private equity firms and fund managers to make investment decisions in the Indian private equity market.

The Credit Suisse CoCo wipeout: Facts, misperceptions, and lessons for financial regulation

The Credit Suisse CoCo wipeout: Facts, misperceptions, and lessons for financial regulation

Private Equity Partnerships with Orthopedic Groups: 2022 Trends and Strategic Insights for 2023 Including Insights from Special Feature: Survey of Orthopedic Surgeons on “Life After Closing” in Private Equity Deals

Orthopedics still very much remains an attractive area of investment for private equity because the demand for orthopedic care is high, yet the supply of orthopedic surgeons in the U.S. is relatively low. This supply and demand imbalance provides for long-term sustainable growth of orthopedic services within what remains a highly fragmented clinical specialty, thus bolstering investment interest from private equity firms seeking to form strategic partnerships with best-in-class orthopedic providers. Further, data from a recent survey of orthopedic surgeons who have partnered with private equity noted that “growth and long-term success of the clinical enterprise” were the main drivers of independent orthopedic groups pursuing private equity partnerships.

Shaking hands with common foes: Clique premium and information diffusion in private equity networks

The fastest growing segment of private equity deals is secondary buyouts (SBOs) sales from one private equity (PE) firm to another. We operationalize a novel FactSet database to map the network structures of secondary buyouts between PE firms. We offer three contributions. First, after controlling for economic covariates, we find that PE firms are almost three times more likely to transact if they share a partner, that is both firms belong to the same clique. Second, we find that the profitability of such transactions is unambiguously higher relative to the baseline only if these are the result of repeated interaction between firms belonging to the same cliques. In other words, a clique premium exists under repeated interaction. Third, we provide evidence that the economic incentive at the core of clique premium may be related to access to information. In fact, we show that information related to transactions diffuses through the network, with 23% and 16% of the information going one and two steps beyond transacting parties, respectively.

Debt in Private Equity Deals: A Role Play

Debt in Private Equity Deals: A Role Play

Legal distance moderation in the inter-partner technology distance on cross-country equity investments: A multilevel analysis of the information & communication technology sector

The ICT (information & communication technology) sector has increased inter-firm equity investment across countries, and scholars have explicated the role of technological distance or institutional distance to explain the equity size. This study extends the framework to integrate the legal distance (institutional) as a moderator between the technological distance (orientation) and the equity size in cross country investment decisions. Empirically, little is known about whether the legal distance between the home and host countries of high technology firm influences its equity decisions. This study addresses this question using equity deals in the ICT sector during a critical period (2007–2009). Multilevel analysis is based on 51,198 inter-firm equity deals, 120 home countries, 154 host countries, 19,712 equity investing firms and 32,987 equity target firms. This robust analysis offers sever insights. First, the inter-firm technological proximity predicts higher equity than the inter-firm technological distance. In other words, the technology strategy firm invests equity more than a non-technology firm. Second, the inter-legal distance (home-host) between partners predicts lower equity than the inter-legal proximities between the investor and target. Third, the inter-legal distance moderates the technological orientation, predicting that the effect of technological distance decreases the coefficient by 49%, and the effect of the legal distance coefficient increases by 49%. This study contributes to the international business equity investment decision in the high technology sectors to manage uncertainty. The study contributes to institutional contingencies in this field by integrating them with technological contingencies. In addition, it rests on a robust methodology (multilevel) for the academic audience and managerial implications for the business audience.

Conflict of Interest between Subjects of Corporate Legal Relations in Shares Transactions

Considering transactions in the authorized capital of a joint-stock company, it is necessary to differentiate them according to the degree of influence on the corporate legal status of the participant. We believe that transactions that give rise to a conflict of interest at its highest stage have a complex structure and are associated with the acquisition of corporate control. The presence of a large number of initially and subsequently interested parties in the process of transactions with shares, especially those affecting control in society, is in itself characterized by a certain universality, which, in turn, predetermines the need to consider the issue raised in a comprehensive and multifaceted way. The category of conflict of interest in the plane of joint-stock relations traditionally manifests itself in disagreements between majority and minority participants, which take various legal forms. Equity transactions, whatever forms they may take, certainly fulfill the most important task of optimizing and regulating the modern economic system. The paper defines legal approaches to conflicts of interest between subjects of corporate legal relations when conducting transactions with shares, identifies the most essential and urgent problems, and suggests ways to solve them.

Structural importance and evolution: An application to financial transaction networks

A fundamental problem in the study of networks is the identification of important nodes. This is typically achieved using centrality metrics, which rank nodes in terms of their position in the network. This approach works well for static networks, that do not change over time, but does not consider the dynamics of the network. Here we propose instead to measure the importance of a node based on how much a change to its strength will impact the global structure of the network, which we measure in terms of the spectrum of its adjacency matrix. We apply our method to the identification of important nodes in equity transaction networks and show that, while it can still be computed from a static network, our measure is a good predictor of nodes subsequently transacting. This implies that static representations of temporal networks can contain information about their dynamics.

Financial support to innovation: The role of European development financial institutions

We analyse the role of European development financial institutions (DFIs) in supporting innovation by empirically investigating the impact of their participation as investors in equity deals on target firms' patenting activity. We build a unique international data set of deals and firm-level data in the years 2007–2019. Econometric results highlight the positive contribution of DFIs in mobilizing finance to support innovation, and the magnitude of this effect is amplified when DFIs act in partnership with other investors. This represents novel evidence on the innovative-oriented mission driving their activity. These new findings point to the recent role of DFIs in sharing the management of EU financial instruments, implementing programmes to strengthen the longer-term support of finance for enterprises, and boosting innovation and growth.

Barbarians at the Store? Private Equity, Products, and Consumers

ABSTRACTWe investigate the effects of private equity firms on product markets using price and sales data for an extensive number of consumer products. Following a private equity deal, target firms increase retail sales of their products 50% more than matched control firms. Price increases—roughly 1% on existing products—do not drive this growth; the launch of new products and geographic expansion do. Competitors reduce their product offerings and marginally raise prices. Cross‐sectional results on target firms, private equity firms, the economic environment, and product categories suggest that private equity generates growth by easing financial constraints and providing managerial expertise.