Ownership Dilution Research Articles

Subscription price discounts of stock warrants and cost of potential ownership dilution

We examine two important views in the literature of warrants: the undervaluation signal of firm value associated with out-of-the-money warrants and the usage of warrants as multistage financing instruments. Based on our sample of Hong Kong standalone warrants from 1999 to 2022, our results show that stock prices of the issuers fall following warrant issuances and, without persuasive warrant attributes, the likelihood of warrant exercises is low. The two views are not supported. We argue that subscription price discounts reflect the cost of potential ownership dilution to existing shareholders, and we find that firms with greater financing needs set higher price discounts as a persuasive warrant attribute to increase the likelihood of warrant exercises.

Subscription price discounts of stock warrants and cost of potential ownership dilution

Subscription price discounts of stock warrants and cost of potential ownership dilution

Special Challenges and Opportunities in the (Equity) Financing of Protech Start-Ups

This paper analyzes the difficulties that PropTech start-ups face in raising capital by utilizing equity financing as a source of finance. PropTech is an intrinsic marriage of technology and real estate in a single platform, making this platform very demanding and hugely capital-intensive for procurement, adaptation to new ideas, and intensification. Current research fails to provide in-depth information on the financial circumstances of the PropTech startups, presenting a gap for research. Several startups have succeeded in striking a balance by exploring opportunities in smart partnerships and using advanced technology to accelerate processes and investor networks. Government grants and tax concessions are useful tools that can be used to lighten the financial stress and the promoting of innovations. Looking at digital trends, investments like Airbnb, WeWork, and Compass companies can guide to efficiently adapt to challenges and conserve leadership in the global markets. While equity financing presents significant opportunities and challenges for PropTech start-ups, those that effectively leverage these strategies can achieve sustainable growth and success in a competitive market. Through the implementation of the literature review, case studies, and expert opinion techniques, this research closely explores the topic of equity financing for PropTech companies. The findings suggest introducing investors into strategic partnerships they need, promoting credibility among stakeholders, providing a means of raising funds, and ease of exit strategies. Still, on the contrary, it also brings to light the challenges of ownership dilution risk, complex valuations, and high investor expectations.

Equity in capital raising? Empirical evidence from structured private placements

Packaged private placements (PPP) in Australia allow all eligible shareholders to purchase shares at the same price as offered to institutions in the private placement component of the offering. Announcement returns for PPPs are negative on average but are positive for offers with large placements to institutions. Returns also exhibit higher sensitivity to private placement size in PPPs than in traditional private placements, consistent with larger certification benefits accruing to PPP issuers. Retail shareholders experience 3.9 % ownership dilution in PPPs as compared to 8.6 % dilution in equivalent traditional private placements, and their participation is positively related to the size of the private placement component. Long run wealth related benefits associated with participation are present in all PPPs. Our results provide insights for regulators who wish to encourage companies to consider raising capital from small shareholders by utilizing offer structures that have been typically only accessible to sophisticated investors.

Financial constraints, ownership dilution, and the method of payment in M&A transactions

The method of payment choice in merger and acquisition (M&A) transactions has been the subject of much research in the finance literature. But significant changes in the economic environment of acquirers in the U.S. call into question whether known stylized facts are still valid and motivate us to undertake new empirical analyses. Using a large sample of M&A transactions spanning the last two decades, we investigate the financial constraints versus ownership dilution tradeoff that potentially drives negotiations about the method of payment (i.e., stock or cash), controlling for an extensive list of other potential determinants. The main takeaway from our analyses is that financial constraints are a dominant factor motivating acquirers to include stock (at least partially) in the method of payment package in M&A transactions in the recent period.

Raising capital amid economic policy uncertainty: an empirical investigation

This paper investigates how economic policy uncertainty affects firms’ frequency and their choice of financial instruments to raise capital. By applying a three-step sequential framework over a sample of 6834 publicly listed US non-financial firms, we find that during periods of high economic uncertainty, firms raise capital more frequently with a preference toward debt financing. The empirical findings suggest that firms prefer debt financing over equity financing to avoid ownership dilution and high equity premia. The rise in leverage during periods of high economic uncertainty highlights the importance of scrutinizing policy tools used to stabilize the economy during such times.

Is R&D spending influenced by disinvestment and local political corruption? The case of Indian central public sector enterprises

The current study examines the effect of disinvestment (dilution of state ownership) and local political corruption on R&D spending in enterprises owned by the central government of India. Based on certain characteristic features of innovation as a strategy available to state-owned enterprises, I build two sets of hypotheses formalising the channels of how these variables may affect the possibility and amount of R&D. Data is drawn from multiple sources to compile a dataset that covers all manufacturing central government-owned enterprises in India over a period of ten years from 2007 to 2016. The study employs an instrumental variable technique to reduce the endogeneity between disinvestment and R&D decisions. We find that, while disinvestment and local political corruption have strong negative effects on whether a firm invests in R&D or not, it has no effect on the amount of R&D. In fact, the amount is driven by a host of firm-specific factors such as size, profit and proficiency of the share of skilled labor, managerial strength and non-unionisation of labor. We also find that the effects are strongly driven by the size of firms, special status awarded to firms and the ideology of the state where the enterprise operates.

Family business succession roadblock model based on fuzzy linguistic preference relations

This study investigates how to reduce future barriers to succession and other problems related to family governance by constructing a succession roadblock map. The study explores succession roadblocks in family businesses and provides a succession planning tool that is based on empirical data from 42 director members of the Taiwan Institute of Directors. An analytical hierarchy of family business succession and succession roadblocks are divided into three categories: family roadblocks, institutional roadblocks, and market roadblocks. Next, this study calculates the weights and rankings of the severity of such roadblocks and the likelihood of their occurrence. Specifically, this study constructs a succession roadblock matrix that categorizes succession roadblocks into four categories: the ownership dilution model, sell or withdraw model, ownership management model, and dispersive ownership model. This study also establishes a roadblock strategy matrix for successor positioning and proposes suggestions for practical strategic planning to overcome the challenges of succession roadblocks.

Going public through mergers with special purpose acquisition companies

AbstractIn this study, we find that private operating firms with larger controlling shareholders' ownership merge with special purpose acquisition companies (SPACs) rather than take the conventional initial public offering (IPO) route to go public in Korea. This finding indicates that compared to U.S. SPACs, the controlling shareholders' motive to avoid their ownership dilution makes SPAC mergers popular in Korea. In addition, we document that the merged firms do not reveal difference in stock and operating performance over the long run compared to conventional IPO firms. However, SPAC mergers incur higher direct cost and do not generate marketing benefits for the listing firms.

Ownership dilution and earnings management: evidence from Indian IPOs

PurposePrior research on earnings management largely assumes that newly public firms manage earnings opportunistically around IPOs. However, only a few studies have empirically examined the real motives behind newly public firms’ earnings management. The purpose of this paper is to examine the impact of ownership dilution on earnings management among IPO firms. The authors chose the setting of security offerings in an emerging market, which is characterised by unique ownership structure, to examine the possible incentive of owners or pre-IPO shareholders to engage in earnings management.Design/methodology/approachThe study employs accrual and real transactions measures to check the presence of earnings management among 409 IPO firms from India during the period 2000‒2018. Subsequently, using ordinary least squares regression models with heteroscedasticity-robust standard errors, this paper examines the relationship between earnings management and selling or dilution incentives of pre-IPO shareholders.FindingsThe study finds that the degree of earnings manipulation by issuer firms is positively associated with the ownership dilution at the time of IPO as well as around lockup expiration.Practical implicationsThe findings of this study will help the investors and regulators to understand the practice of earnings management among IPO firms and how it is linked to the ownership dilution of pre-IPO shareholders.Originality/valueThe paper contributes to the limited stream of research that investigates the motives of earnings management among IPO firms. It empirically establishes an association between the selling incentive of pre-IPO shareholders and earnings management.

THE IMPACT OF STATE AFFILIATED DIRECTORS ON THE CAPITAL STRUCTURE SPEED OF ADJUSTMENT IN AN EMERGING MAKRET

This study analyses a unique aspect of the speed of adjustment to optimal debt levels in an emerging market by accounting for the impact of State Affiliated Directors (SAD) on internal governance mechanisms. The paper is motivated based view where firms adjust to reach an optimal level of debt ratio as well as the agency problem arising from the separation of ownership and control leading to conflicting interests between managers and shareholders in order to maximize firm value, which could ultimately impede shareholders wealth maximization. Furthermore, the potential for conflict between controlling and minority shareholders are also captured in the appointment of directors linked to the state. The authors, therefore, evaluate the presence of state affiliated directors and their potential to compromise board independence, which may lead to sub-optimal financing decisions. Analyzing firms below target levels, the study finds that the presence of SAD allows firms below target levels to adjust at more rapid rates given the potential for favorable treatment while obtaining credit financing from financial institutions. Contrastingly, the findings, however, show that firms which exceed target leverage levels tend to adjust at more rapid rates in the absence of SAD on boards. The study results point towards the reluctance of these firms to raise financing in equity markets given the possible dilution of ownership of controlling shareholders as well as the reluctance to reduce debt levels. The findings are consistent regardless of measuring debt based on book or market values and across randomized measures of board composition implying that the presence of SAD alters the dynamics of the cost of capital and thus managerial financing decisions.

The factors influencing the decision to list on Abu Dhabi securities exchange

The Abu Dhabi Securities Exchange is established to fund corporates, investments and economic growth. However, many companies operating in Abu Dhabi do not take the opportunity and list in the market. In this paper we survey a sample 145 chief executive officers and deputies of the CEO’s in order to explain why firms refrain from going public and float their equity in the market. Our findings indicate that the poor quality of the Abu Dhabi equity market in terms of its inefficiency and inadequate liquidity plays a crucial role in discouraging firms to list in the market. Moreover, management do not list in order to avoid dilution of ownership as well as to retain control of the company. Finally, we find that knowledgeable managers in big companies are more likely to list in the market particularly when they operate in a competitive industry.

The Role of Ownership and Governance Structure in Raising Capital: An International Study

This paper investigates whether the ownership and the governance structure of firms affects the decision to raise funds, and subsequently the choice of the capital instrument. We hypothesize that the choice of capital instrument depends on the relative riskiness of the source of funds ranging from equity to debt finance including bonds, sukuk or bank loans. Using a sample from 2000-2015 of 1,565 firms from countries including Malaysia, Indonesia, Singapore and Pakistan, we find the evidence that ownership concentration is associated with higher control motives and restricts equity financing to avoid ownership dilution. CEO-Chair duality also coincides with fewer instances of raising external funds and relative risk sharing. On the other hand, lower information asymmetry, observed by analyst coverage and firm size, generally accompanies more issuances of debt-like products, such as bank loans and bonds. Finally, some of the prominent financial ratios such as market-to-book value, leverage and macroeconomic factors significantly drive firms in their decision to raise funds and share risk.

Pre IPO and Post Ipo Operating Performance Evaluation on Indian Select Companies

This paper investigates the relationship between pre IPO factors over post IPO operating performance and whether there is a change in operating performance of companies after IPO. The study involves 25 companies listed on Indian stock exchanges (BSE and NSE) listed during 2013–2015. Pre IPO factors involve dilution of ownership and pre IPO profitability and operating performance indicators are Return on Assets, Return on Equity/Net worth. Findings confirmed that there is no significant change in return on assets, return on net worth/equity and asset turnover ratio of the companies after IPO. Pre IPO profitability had an impact on return on assets and return on equity while pre IPO profitability and dilution of ownership does not have any impact on asset turnover ratio.

Efficiency and internal, external governance and control mechanisms of Tunisian banks

This paper aims at determining the role of banking governance mechanisms in banking operational efficiency. To this end, we reviewed agency theory literature and its effects on banking efficiency in view of determining conflicts of interests between shareholders and managers. In particular, we aim at determining the role of majority shareholders and that of the Board of Directors. These actors govern under a context of financial liberalization known by increased competition. Accordingly, two main theories are distinguished. While the "Quiet Life" theory stipulates that competition leads to banking efficiency, the "Information-Generation" theory, on the contrary, asserts the opposite trend and argues for an imperfect competition in the market. Our empirical study focused on a sample of 10 Tunisian banks observed during the 1999 to 2016 period. This paper is the first in the Tunisian banking market, which aims to study the particularities of internal and external governance mechanisms of Tunisian banks and more particularly the mechanisms that act on the banking efficiency by introducing the index of IHH and the bank concentration ratio. The results show that Tunisian banks operate under a rather perfect competition reflected in ownership dilution, product homogeneity, capital fluidity and information transparency. This market has reinforced the beneficial role of competition in banking efficiency. As for the role of the internal and external governance mechanisms, all Tunisian banks allocate their resources in the same way, and their capitalization and institutional dimensions support more banking efficiency in terms of their productivity.

From IPO to M&A: Further Evidence

This study investigates the determinants of mergers and acquisitions (M&A) for firms in the five years following their initial public offerings (IPOs). Specifically, the authors focus on the role of venture capital (VC) and the effect of asymmetric information on the probability of post-IPO M&A. The results indicate that VC reputation positively influences the likelihood that an IPO firm will engage in acquisition. They also find that a high extent of information asymmetry faced by both the acquirer and the target affects the choice of payment in a post-IPO M&A. Furthermore, they find that IPO firms with higher underpricing and proceeds, larger insider ownership dilution, and backed with reputable venture capitalists are more likely to be frequent acquirers after the IPO. Overall, the authors’ new findings confirm that an IPO represents an opportunity for new issuers to become single and even frequent acquirers.

Corporate governance and private placement issuance in Australia

AbstractIn this study, we examine the effectiveness of corporate governance in mitigating dilution in the economic and voting interests of existing nonparticipating (retail) shareholders in private placements. Based on a sample of 2420 private placements in Australia from 2001 to 2012, we find support for this proposition through the influence of corporate governance on pricing negotiation and firms’ choice of issuing method in private placements. Specifically, firms with better corporate governance offer private placements with a smaller discount, and are more likely to include a share purchase plan, which protects nonparticipating shareholders from ownership dilution in the placement.

The Choice between QIP and Rights Issue: Evidence from India

This article intends to study the market reaction to qualified institutional placements (QIPs) by Indian firms and the motivations of Indian firms behind issuing shares through QIP route vis-à-vis the rights issue route. In India, a large number of businesses are controlled by families. Therefore, rights issue would apparently seem to be a good avenue to raise additional capital and avoid the dilution of ownership. In this backdrop, using the data of firms issuing QIPs in India from 2007 to 2013, we examine the factors determining the decision for a company to go for a QIP or a rights issue. We examine the role of firm-level factors, such as, the concentration of promoter’s shareholdings, several proxies, such as, size, age and book-to-market for information asymmetry and a number of other firm-level variables in determining such choice. We find that market reacts positively to QIP announcements for companies having low promoter holdings before the QIP. However, we do not find any evidence of certification role played by institutional investors for QIPs in India.

Executive Stock Options and Performance of IPO Firms

This paper examines determinants and consequences of the adoption of executive stock options (ESOs) for initial public offering (IPO) firms. IPO firms with substantial ownership dilution are predicted to adopt ESOs to align the interests of management and shareholders, and as a result, the adoption of ESOs is expected to lead to improved post-IPO operating performance. Using a sample of Japanese IPO firms between 2002 and 2007, I find that dilution of a CEO ownership can explain the adoption of ESOs after an IPO. I also find that ESOs lead to increased post-IPO operating performance.

The Role of Corporate Governance and Information Asymmetry in Private Placement in Australia

In a private sale of equity, the issuing firm sells a block of securities to an individual or a small group of investors at a discounted price. Non-participating shareholders suffer from ownership dilution and are also deprived of the discount. We provide the first evidence on whether and how corporate governance can protect non-participating shareholders’ interests in private placements. Based on a sample of 329 private placements issued by the top 250 Australian listed firms between 2002 and 2009, we find firms with a higher governance index, a larger proportion of independent directors, and a larger board are more likely to issue private placements with a share purchase plan (SPP), which protects non-participating shareholders from ownership dilution. However corporate governance has no impact on private placement discounts. There is also evidence that private placement discounts compensate investors for information asymmetry. Our findings are robust to corrections for endogeneity and self-selection bias.