Imants Paeglis

Management Quality, Financial and Investment Policies, and Asymmetric Information

We develop measures of the management quality of firms and make use of a unique sample of hand-collected data to examine the relationship between the reputation and quality of a firm’s management and its financial and investment policies, a relationship that has so far received little attention in the literature. We hypothesize that better and more reputable managers are able to convey the intrinsic value of their firm more credibly to outsiders, thus reducing the information asymmetry facing their firm in the equity market. Given this, firms with better and more reputable managers will have more access to the equity market, so that we expect lower leverage ratios for these firms. In addition, they will have less need to signal using dividends, so that they will have lower dividend payout ratios. Further, since better managers are likely to select better projects (having a larger net present value (NPV) for any given scale) and to implement them more ably, higher management quality will also be associated with higher levels of investment. We present evidence consistent with the above hypotheses. Our direct tests of the relationship between management quality and asymmetric information also indicate that higher management quality leads to a reduction in the extent of information asymmetry facing a firm in the equity market.

Management Quality and Equity Issue Characteristics: A Comparison of SEOs and IPOs

We use a unique sample of hand-collected data on the management quality of firms making SEOs or IPOs to analyze the relationship between the management quality of a firm and its SEO characteristics, and to compare the effect of management quality on equity issue characteristics in SEOs and IPOs. We hypothesize that higher quality managers are more credible to outsiders, thereby reducing the information asymmetry facing their firm in the equity market and outsiders’ information production costs about the firm. Thus, equity issues of firms with higher management quality will be associated with more reputable underwriters, smaller underwriting spreads and other expenses, and smaller discounts (for SEOs). Further, since better managers are able to select better (larger NPV for a given scale) projects, higher management quality will also be associated with larger offer sizes. Finally, since we expect SEO firms to suffer from a smaller extent of information asymmetry compared to IPO firms, the above effects will be smaller for SEO firms compared to IPO firms. Our empirical results support the above hypotheses. Our direct tests of the relationship between management quality and information asymmetry, and our comparison of information asymmetry in SEOs versus IPOs, provide further support for the above hypotheses.

Causes and Consequences of Venture Capitalist Litigation

Sticking with an analysis of the situation postdeal, Liu, Paeglis, and Walker take us into the scary world of SEC lawsuits thrown at venture-backed public companies. Does the strong reputation of a venture firm appear to attract litigation due, perhaps, to the deep pockets of the organization? Thats a scary thought and these authors test it. Are the lawsuits frivolous or do they appear to have merit? Do firms continue to fund companies after the imposition of litigation? Do venture firms named in lawsuits tend to keep or lose their reputational rankings? Can you avoid lawsuits by monitoring your portfolio firms more intensively? We thought you might be interested in the answers to some of these provocative questions.

Founder as Steward or Agent? A Study of Founder Ownership and Firm Value:

This study addresses the relationship between founder ownership and firm value in young and entrepreneurial businesses. We argue that a stewardship effect prevails when founders have low or high levels of ownership while an agency effect prevails at intermediate levels. Using a dataset of 1,269 firms with 11,645 firm-year observations, we find support for our hypothesis that there is a convex relationship between founder ownership and firm value. The agency effect at intermediate founder ownership is consistent with evidence indicating that these firms display lower leverage, greater unrelated diversification, and higher disproportionate board representation.

Ownership Structure and Power: Evidence from US Corporations

Abstract We examine the influence of ownership structure on a blockholder’s power in a firm. We first describe the presence and ownership stakes of blockholders in a comprehensive sample of US firms. We develop a measure of the influence of the ownership structure on a blockholder’s power and show that an average blockholder loses 12% of her potential power due to the presence and size of the ownership stakes of other blockholders. Further, the influence of ownership structure varies systematically with a blockholder’s rank and identity, with the second and nonfamily manager blockholders experiencing the largest loss of power.

The External Monitoring Bodies’ View of the Board Independence in the New Public Family Firms

Some commentators suggest that the Wall Street views family firms with scepticism. The appointment of independent directors to form a majority on a firms board of directors should constitute a strong signal to the market of a family firms willingness to be monitored objectively and thus should alleviate Wall Streets scepticism. This is likely to be more important for the newly public family firms than for mature family firms since outsider-domination on the board pre-dates the involvement of other outsiders, such as underwriters, financial analysts, or institutional investors. Whether the presence of an independent board alleviates the markets scepticism may be evident in the responses of various external monitoring entities to the newly public family and non-family firms. Using a hand-collected sample of newly public firms, we cast brand-new light on whether an independent board provides any advantage to the newly public family firms in underwriter reputation, analyst coverage, and investment by institutional investors over newly public non-family firms. We find that independence of board of directors is overall a positive signal and that while the independence of board is more important than the independence of management for underwriters and financial analysts, the reverse is the case for institutional investors.