John W. Peavy

The Role of Venture Capital in the Creation of Public Companies: Evidence from the Going-Public Process

Explores the nature of the venture capital investment through examination of initial public offerings (IPOs). Venture capitalists are often active investors who participate in management of the firms. The venture capital investment can be ended in a variety of ways, with the sale of the companys shares through a public offering being the most prevalent. Data used in the analysis includes 433 IPOs that were backed by venture capitalists from 1978 to 1987 and 1,123 IPOs without such backing. Results show that venture capitalists tend to focus on certain industries, in order to develop an expertise. In this case, the focus was on computer equipment, electrical and electronic components, instrumentation, and business services. The median offering size of firm IPOs backed by venture capitalists was larger than the size of those not backed. Based on analysis of the full sample, it appears that venture capitalists are able to bring public the firms they back earlier than would have otherwise been possible. This likely occurs because of the industries in which the venture capitalists focus. Venture capitalists take a monitoring role, demonstrated by serving on the board, maintaining the investment beyond the IPO, and holding a large equity position in a portfolio firm. Finally, it is determined that investor uncertainty is reduced with the quality of the venture capitalists monitoring skill. A decrease in investor uncertainty was found to decrease IPO underpricing. These findings support the notion that venture capitalists play an important role in new enterprise. (SRD)

The Penn Square Bank failure: Effect on commercial bank security returns — a note

Abstract In this paper, we apply standard event methodology to test the effect of the Penn Square Bank failure on the daily returns of three groups of bank holding companies. During the 75-day event period, upstream banks which had Penn Square loan participations faced nearly continual declines in daily returns; banks in the same economic region followed a pattern of less severe but continuously declining returns; while returns for banks outside the region were not significantly affected. We conclude that the market viewed the Penn Square failure as an isolated event which did not significantly affect banks away from regional economic influences.

A multiple discriminant analysis of BHC commercial paper ratings

Abstract The finance literature contains many examples of attempts to classify bond issuers into agency rating categories and to identify the key variables that contribute to bond rating differences. This study extends the classification literature to include bank holding company (BHC) commercial paper issuers. A multiple discriminant model is developed that effectively classifies paper issuers into their respective Moodys rating groups. An additional discriminant model is derived that classifies these issuers into more detailed ‘market’ rating groups.

Long-run implications of industrial bond ratings as risk surrogates

Abstract The financial quality of industrial bonds is observed at two different times (1968 and 1976). Discriminant models, using pertinent financial ratios as input variables, are able to replicate approximately 70 percent of Moodys ratings for both years, thus indicating that ratings remain appropriate risk proxies for long periods, However, average levels of key ratios changed. Ratios measuring leverage, coverage, and profitability deterioriated over time, indicating increased absolute risk. But, since these deterioriations were fairly uniform across groups, there appears to be little change in the relative degree of riskiness across rating groups.

Fundamental Analysis, Stock Prices, and the Dennise of Miniscribe Corporation

JOHN W. PFAW III is chairman of Founders Trust Company in Dallas (TX 75225). lthough won at the hands of notorious at:torney Joseph D. Janiail, the staggering

Returns on Initial Public Offerings of Closed-End Funds

550 million award (including about

The significance of P/Es for portfolio returns

530 million A in punitive damages) by a Texas jury to owners of Miniscribe Corporation convertible bonds came as a huge surprise.’ After all, the bondholders had p r chased only about

Modern Financial Theory, Corporate Strategy, and Public Policy: Another Perspective

20 million of a IVIiniScribe offering in June 1987. The verdict is another example of the geneirosity of Texas juries. More than that, however, it reflects the jury’s disgust with a massive financial fraud perpetrated to inflate the inventories, sales, and profits of the former d s k drive manufacturer. For more than two years, Miniscribe employees shipped bricks and recorded them as sales of computer disks, broke into locked trunks to change audtors’ work papers, and recorded damaged and obsolete items as active inventory. Miniscribe provides a textbook example of unsound business practices -a highly autocratic leadershp style with an absentee CEO, intense pressure to maximize short-term sales and profits with :little attention to long-term objectives, numerous autonomous divisions without proper controls, frequent transfers of employees among the various divisions, financial judgments and decisions made by &vision managers with limited or no input from the fin.ance department, and large bonuses based on short-term performance results. So blatant was the fraud that the company even created a computer program it called “Cook Book” to inflate its operating and financial results.