Jerry Cao

Creditor Rights and LBOs

This paper examines the relation between legal conditions and leveraged buyouts (LBOs) in 49 countries. The data indicate that sophisticated PE fund managers carrying out large international LBOs can only partially mitigate costs associated with inefficient legal protections. LBOs are more active in countries with strong creditor rights. Club deals are more likely to occur in countries with weak creditor rights. Cross-border LBO investment is more common from strong creditor rights countries to weak creditor rights countries. Premiums offered to shareholders are on average negatively correlated with creditor rights for both domestic and cross-border LBOs.

The Impact of Investor Protection Law on Takeovers: The Case of Leveraged Buyouts

This paper examines the impact of investor protection on the value creation of LBOs. We find that target shareholders’ wealth gain is higher in countries with better investor protection. The impact of investor protection on takeover premium is larger for LBO than non-LBO transactions. We also find evidence suggesting that club LBOs are not priced lower than non-club deals after accounting for endogeneity problem. These results suggest that investor protection law may act as an important safeguard for minority shareholders in LBO transactions.

Political Capital vs. Constraint: Evidence from CEO Turnovers in Chinese Private Firms

Previous theoretical and empirical studies suggest that CEOs’ political connections are valuable to firms. We examine whether such connections become constraints if the expected political capital fails to materialize and the firm lacks other type of political power in place. Using a sample of listed firms in China, we show that politically connected CEOs in privately controlled (i.e., not state-owned) firms have longer tenure, lower turnover, and weaker turnover-performance sensitivity than non-politically connected CEOs. Further identification tests show that these turnover patterns are not consistent with alternative explanations for turnover patterns such as superior managerial ability or reduction in managerial myopia. The turnover patterns are less pronounced in firms that have alternative political power, such as connected boards or state ownership. Following the turnover of politically connected CEOs, performance improves only for the state-owned firms. Our results call for new theories that comprehend both values and costs of political connection.

Disproportional Ownership Structure and IPO Long-Run Performance of Entrepreneurial Firm in China

This paper examines the relationship between ownership structures and IPO long-run performance in China. Although entrepreneurial firms underperform the market in general after IPO but the poor performance is mainly caused by the IPOs with ownership control wedge. Entrepreneurial firms with one share one vote structure outperform those with ownership control wedge by 30% for 3 years post-IPO in either buy-and-hold or cumulative monthly returns. Entrepreneurial firms with excess ownership control wedge have higher frequency of undertaking value-destroying related party transactions. These findings suggest that entrepreneurial firms need to improve corporate governance such as disproportional ownership structure to better safeguard the interest of long-run shareholders.