Evgeny Lyandres

A Theory of Merger-Driven IPOs

We propose a model that links a firm’s decision to go public with its subsequent takeover strategy. A private bidder does not know its true valuation, which affects its gain from a potential takeover. Consequently, a private bidder pursues suboptimal restructuring policy. An alternative route is to complete an initial public offering first. An IPO reduces valuation uncertainty, leading to more efficient acquisition strategy, therefore enhancing firm value. We calibrate the model using data on IPOs and M&As. The resulting comparative statics generate several novel qualitative and quantitative predictions, which complement the predictions of other theories linking IPOs and M&As. For example, the time it takes a newly public firm to attempt an acquisition of another firm is expected to increase in the degree of valuation uncertainty prior to the firm’s IPO and it is expected to decrease in the valuation surprise realized at the time of the IPO. We test these and other empirical predictions of the model and find strong support for them.

Strategic IPOs and product market competition

We examine firms’ incentives to go public in the presence of product market competition. As a result of their greater ability to diversify idiosyncratic risk in the capital market, public firms’ owners tolerate higher profit variability than owners of private firms. Consequently, public firms adopt riskier and more aggressive output market strategies than private firms, which improves the competitive position of the former visa-vis the latter. This strategic benefit of being public, and thus, the proportion of public firms in an industry, is shown to be positively related to the degree of competitive interaction among firms in the output market, to demand uncertainty, and to the idiosyncratic portion of this uncertainty. Additional empirical predictions concern the effect of a firm’s initial public offering on its market share and on its rivals’ valuations. We test the model’s predictions and find empirical support for most of them. & 2010 Elsevier B.V. All rights reserved.

Cash Holdings, Competition, and Innovation

In this paper we examine theoretically and empirically the determinants of cash holdings by innovating firms. Our model highlights an important strategic role that cash plays in affecting the development and implementation of innovation in the presence of competition in the market for R&D-intensive products. Firms’ equilibrium cash holdings are shown to depend on the degree of innovation efficiency in firms’ industries, on the intensity of competition in post-R&D output markets, on the structure of industries in which firms innovate, and on the interactions of these factors with the costs of obtaining external financing. In addition, the model provides a possible explanation for the temporal increase in cash holdings, particularly among R&D-intensive firms. Our empirical evidence demonstrates that financing costs, innovation efficiency, intensity of competition, and industry structure are indeed associated with firms’ observed cash-to-assets ratios in ways that are generally consistent with the model’s predictions.

A Theory of ICOs: Diversification, Agency, and Information Asymmetry

This paper develops a theory of financing of entrepreneurial ventures via crypto tokens, which is not limited to platform-based ventures. We compare token financing with traditional equity financing, focusing on agency problems and information asymmetry frictions associated with the two financing methods, as well as on risk sharing between entrepreneurs and investors. Token financing introduces an agency problem not present under equity financing -- underproduction, while mitigating an agency problem often associated with equity financing -- entrepreneurial effort underprovision. Our theory abstracts from all institutional and potentially transient differences between tokens and equity and is based on a single intrinsic characteristic of tokens -- they represent claims to a ventures output. We show that tokens are likely to dominate equity for ventures developing information goods or services, those for which entrepreneurial effort is crucial, and/or those with relatively low payoff volatility. In addition, tokens have can have an advantage over equity in signaling venture quality to outside investors.

Misvaluation of Investment Options

We study whether investment options are correctly priced. We build a real options model of optimal investment in the presence of demand uncertainty. We structurally estimate the model and classify stocks into undervalued and overvalued based on the difference between observed and model-implied firm values. A long-short strategy that buys undervalued and shorts overvalued stocks generates annualized alphas between 10% and 17%. This relation is only present in subsamples of firms with high proportions of investment options. We interpret these findings as evidence of misvaluation of investment options, leading to mispricing in equity markets that is gradually corrected over time.

Search Frictions and M&A Outcomes: Theory and Evidence

Many mergers involve firms with less-than-complementary products or technologies. This paper examines theoretically and empirically the factors that affect the expected complementarity in observed mergers. Our model demonstrates that the important determinants of expected complementarity in mergers are target’s bargaining power, as well as its visibility among potential bidders, expected growth in potential bidders’ profits, and the extent of competitive interaction among them. We test the model’s predictions using two separate datasets, which we use to define two types of merger complementarity. The first one is based on common vocabulary in bidder’s and target’s product descriptions. The second is based on the relatedness of merging firms’ technologies. Both sets of tests indicate that the degree of complementarity in observed mergers and acquisitions is systematically related to bidders’, targets’, and industry characteristics, in ways consistent with the model’s predictions.

Trade Credit and Supplier Competition

This paper examines how competition among suppliers affects their willingness to provide trade credit financing. Trade credit extended by a supplier to a cash constrained retailer allows the latter to increase cash purchases from its other suppliers, leading to a free rider problem. A supplier that represents a smaller share of the retailers purchases internalizes a smaller part of the benefit from increased spending by the retailer and, as a result, extends less trade credit relative to its sales. In consequence, retailers with dispersed suppliers obtain less trade credit than those whose suppliers are more concentrated. The free rider problem is especially detrimental to a trade creditor when the free-riding suppliers are its product market competitors, leading to a negative relation between product substitutability among suppliers to a given retailer and trade credit that the former provide to the latter. We test the model using both simulated and real data. The estimated relations are consistent with the models predictions and are statistically and economically significant.

Do Underwriters Compete in IPO Pricing

We propose and implement a direct test of the hypothesis of oligopolistic competition in the U.S. underwriting market against the alternative of implicit collusion among underwriters. We construct a simple model of interaction between heterogeneous underwriters and heterogeneous firms and solve it under two alternative assumptions: oligopolistic competition among underwriters and implicit collusion among them. The two solutions lead to different equilibrium relations between the compensation of underwriters of different quality on one hand and the time-varying demand for public incorporation on the other hand. Our empirical results, obtained using 39 years of initial public offering (IPO) data, are generally consistent with the implicit collusion hypothesis that banks, especially larger ones, seem to internalize the effects of their underwriting fees and IPO pricing on their rivals. This paper was accepted by Neng Wang, finance.