Jacqueline L. Garner

An Examination of Board Stability and the Long-Term Performance of Initial Public Offerings

We study the long-term stock performance of initial public offerings (IPOs). We examine how past performance affects the board of directors’ stability and how changes in boards affect subsequent performance. We introduce a dynamic, scale invariant stability metric to measure such changes. Our results indicate that among IPO firms, those with poorer initial performance experience greater board instability and that greater board stability is associated with improvement in subsequent performance. These results indicate that board members leave poorly performing firms, rather than shareholders replacing ineffective boards. Retaining boards that experience initial good performance is associated with continued success.

Determinants of corporate growth opportunities of emerging firms

Abstract Recently, several questions have been raised about how the market capitalization of young technology firms is determined, even as they continue to generate negative earnings. In this paper we present an empirical analysis of a real options valuation model of intangible assets. Using a sample of 243 Internet and biotech firms, we examine the determinants of growth opportunities of emerging firms. We show that the speed of innovation is a critical determinant of a firm’s market value. We also establish a differential impact of volatility on real growth options. In particular, we find that the value of an at-the-money real growth option rises with higher volatility, whereas the value of a deep in-the-money real growth option is less sensitive to volatility changes.

The influence of underwriter reputation, keiretsu affiliation, and financial health on the underpricing of Japanese IPOs

Abstract This research examines initial public offering (IPO) underpricing in Japan between 1980 and 1998. Consistent with prior research, we find no evidence that underwriter reputation influences the level of mispricing. Keiretsu-affiliated firms are more fully priced, though healthy firms and healthy keiretsu-affiliated firms are significantly more underpriced, than are other firms. The mispricing of healthy firms occurs prior to implementation of the discriminatory price auction system and is consistent with a high demand for these IPO firms. Reduced mispricing of keiretsu firms during the post-auction period is consistent with the notion that they have more stable earnings than other firms.

A Paper Tiger? An Empirical Analysis of Majority Voting

Majority voting in board elections has emerged as a dominant theme in recent proxy seasons. Analysis of majority voting is important: first, the impact is controversial yet scant empirical evidence exists. Second, Congress is still considering mandating this practice. Third, there has been a tectonic shift in adoptions of majority voting, from 16% to over 67% of S&P 500 firms in just two years. Fourth, the vast majority of shareholder proposals for majority voting are sponsored by unions with little shareholdings. Proponents argue that majority voting aligns shareholder–director interests. Opponents argue that the practice will be disruptive and could result in the failure of boards to meet exchange and SEC requirements. Others assert that majority voting is a paper tiger, amounting to form over substance, particularly since many adoptions are non-binding. We provide an empirical analysis of the wealth effects, characteristics, and efficacy of majority voting. Our results are consistent with the paper tiger hypothesis.

Exploitation of the Internal Capital Market and the Avoidance of Outside Monitoring

Internal capital markets (ICMs) provide firms an alternative to costly external financing; however, they also provide an avenue to avoid the monitoring associated with issuing external capital. We argue that firms operating inefficient internal capital markets will avoid outside financing. Consistent with this view, conglomerates that cross-subsidize divisions or engage in value-destroying investment avoid external capital market oversight by refraining from issuing both debt and equity. We further show that firms issuing bonds while engaging in value-destroying investment experience yield spreads that are, on average, 46 basis points higher than those of other diversified firms. They similarly experience yield spreads that are 18 basis points higher when they issue syndicated loans. Value-destroying conglomerates also witness SEO announcement returns that are, on average, 1% more negative than firms operating more efficient internal capital markets.

Are foreign investors really beneficial? Evidence from South Korea

We examine whether foreign investors impact corporate governance by analyzing the relation between foreign share ownership and pay-performance sensitivity. While the extant literature has examined the impact of foreign ownership, the evidence for emerging markets is limited. We test our hypotheses using a sample of Korean firms, an emerging market with unique characteristics. We find that firms with higher foreign share ownership demonstrate significant pay-performance sensitivity while their low foreign share counterparts do not, suggesting that foreign investors may be good monitors. We control for the potential self-selection bias that foreign investors may only invest in firms that have already exhibited good governance practices, and our results are unchanged. Our results suggest that foreign shareholders are able to promote improved corporate governance in an emerging market.

Unit IPOs: What the Warrant Characteristics Reveal about the Issuing Firm*

In this paper, we test Chemmanur and Fulghieris (1997) predictions regarding a unit IPO firms choice of signaling mix as a function of firm riskiness. We find evidence that both the proportion of firm value sold as warrants and the percentage of underpricing is increasing in firm riskiness. Although we find some evidence at extreme levels of ownership that the fraction of equity retained is decreasing in firm riskiness, we can neither confirm nor reject this prediction. Our results provide evidence of a trade-off between the signaling choices modeled by Chemmanur and Fulghieri.

Boards, Executive Excess Compensation, and Shared Power: Evidence from Nonprofit Firms

We investigate how executives, the board, and excess compensation jointly affect the performance of nonprofits. Since the common measure of nonprofit performance often includes salaries, we also use expenses that directly benefit the targeted population. Our results suggest that above average compensation for executives is associated with poor firm performance. However, the negative relation of CEO pay to performance occurs for firms with only one executive, the CEO. We conclude that a powerful CEO with autonomy can harm firm performance, but other executives can mitigate these agency problems. The board also appears to monitor direct community benefits more than indirect benefits.

Does a Salary Cap Really Work

Limiting executive compensation through a salary cap has emerged as one of the latest global governance initiatives. We investigate the effectiveness of a form of an executive salary cap system and find that only firms with a high level of effective external monitors set their salary cap significantly sensitive to firm performance (cap-performance sensitivity). The difference between the salary cap and actual pay (the gap) varies by the level of monitoring. Therefore, the existence of an efficient external monitoring system may be critical for a salary cap system to be successful. We also find evidence suggesting that incentive structures created by a salary cap may properly work only in the presence of an effective external monitoring system by improving better pay-performance sensitivity. Since it is almost impossible to determine an optimal level for a salary cap, we conclude that improving firm-level governance may be more important to thwart highly excessive compensation than legalizing the upper limit.

Underwriter Compensation Structure: Can It Really Bond Underwriters?

Underwriter compensation can be structured as all cash or a combination of cash and warrants. Using a sample of small initial public offerings (IPOs), we find that underwriter compensation contracts that include warrants in exchange for cash can serve as certification for IPO firms by substituting for reputation capital. When underwriters accept warrants when they could have received more cash compensation, the IPOs avoid the well documented long-run underperformance. However, when underwriters receive warrants after maximizing cash compensation, the IPO experiences higher underpricing and poorer long-run performance. The findings are consistent with a motivation by the underwriters to circumvent regulatory constraints.