Kristian Rydqvist

Initial public offerings: International insights

Abstract This paper discusses evidence on the short-run and long-run performance of companies going public in many countries. Differences in average initial returns are analyzed in terms of binding regulations, contractual mechanisms, and the characteristics of the firms going public. The evidence suggests that the move in recent years by most East Asian countries to reduce regulatory interference in the setting of offering prices should result in less short-run underpricing in the 1990s than in the 1980s. Evidence is presented that companies successfully time their offerings for periods when valuations are high, with investors receiving low returns in the long-run. Implications for investors, issuers, and regulators are discussed.

Takeover bids and the relative prices of shares that differ in their voting rights

Abstract The relative prices of shares that differ only in their voting rights are modelled. In our model, voting rights become valuable when a control contest is decided through takeover bids for outside votes. The study shows how the value of the voting right depends on the initial ownership distribution, the share structure, and the ability of the incumbent manager versus a rival for control. Empirical support for the model is provided using Swedish stock market data.

Ex-day behavior with dividend preference and limitations to short-term arbitrage: the case of Swedish lottery bonds ☆

Abstract Swedish lottery bonds offer a unique opportunity to study ex-day effects in an environment where cash distributions are tax-advantaged relative to capital gains. Thus, in the lottery bond market, we observe a reversal of the preference for capital gains that researchers have cited as an explanation for the ex-day behavior of U.S. equities. Further, in this market there are barriers to short-term arbitrage when prices do reflect the tax preferences of individual investors. We find the bonds are priced around the ex-day to reflect differential tax rates on income and capital gains consistent with the prevailing tax regimes. The bonds consistently experience negative returns over the coupon payment period, and in fact often sell at negative yields prior to the cash distribution, as one would expect given tax-motivated trading between high-tax investors, who buy prior to the distribution, and low-tax investors, who buy after the distribution.

Bidder Behavior in Multiunit Auctions: Evidence from Swedish Treasury Auctions

We analyze a unique data set on multiunit auctions, which contains the actual demand schedules of the bidders as well as the auction awards in over 400 Swedish Treasury auctions. First, we document that bidders vary their prices, bid dispersion, and the quantity demanded in response to increased uncertainty at the time of bidding. Second, we find that bid shading can be explained by a winner’s curse–driven model in which each bidder submits only one bid, despite the fact that the bidders in our data set use much richer bidding strategies. Third, we explore the extent to which the received theories of multiunit auctions are able to offer insights into the bidder behavior we observe. Our empirical evidence is consistent with some of the predictions of the models of auctions that emphasize private information, the winner’s curse and the champion’s plague. While the models of multiunit auctions serve as useful guideposts, our empirical findings also point to several new areas of research in multiunit auctions that are of policy and theoretical interest.

OWNERSHIP OF EQUITY IN DUAL-CLASS FIRMS*

Abstract The paper investigates the hypothesis that large shareholders use shares with differential voting rights for the purpose of expropriating minority shareholders. Consistent with several theoretical arguments but inconsistent with the expropriation hypothesis, we find that large shareholders own much more equity than required for control. We also show how the law can construct a regulation which reduces the opportunity for expropriation and at the same time allows for the possible benefits of differential voting rights.

The determinants of corporate ownership: An empirical study on Swedish data

Abstract This paper provides empirical evidence about the determinants of corporate ownership structure. In Swedish listed corporations, ownership concentration decreases with firm size and increases with firm-specific risk. We also find that dual classes of shares create vote concentration but that the presence of differential voting rights have limited impact on equity concentration. Our results indicate that the ambition to control a firm is not motivated by a ‘pure demand for power’. Furthermore, the value of control does not derive from the possibility to expropriate the fringe of minority shareholders. The value of control has to be motivated by some other economic motives including ownership of equity.

Differentiated bids for voting and restricted voting shares in public tender offers

Abstract This paper develops a model for takeover bid premiums of voting and restricted voting shares when the bidder wants 100% of the target firm. For this special case, a higher bid premium may be offered either to the voting or to the restricted voting shareholders. We also analyze consequences of the equal offer and one share/one vote principles and investigate the models explanatory power on Swedish data.

The Stock Market as a Screening Device and the Decision to Go Public

We argue that many firms become publicly traded on a stock exchange as the first stage of a longer term divestment plan. Making a direct sale of unlisted stock may be associated with great adverse selection costs. The publicly listed stock price reduces adverse selection by aggregating the information of several investors, and this market valuation, rather than the cash infusion, could be the main benefit of an initial public offering. This theory provides a unified treatment of a whole range of empirical observations, in particular why initial owners frequently exit completely subsequent to an initial public offering (IPO) and why the number of stock market introductions increases with the stock price level. The model also reformulates the ”sweet taste” explanation of IPO underpricing in a way which is consistent with recent evidence. Finally, we argue that the number of firms which go public is inefficiently large.

IPO underpricing as tax-efficient compensation

Abstract In a sample of 251 Swedish IPOs, evidence is provided that employees, customers, suppliers, and others with non-arm length connections with the issuing firm and the investment bank are favored investors. The allocation suggests that underpricing serves as indirect compensation. The hypothesis is supported by the significant drop in average initial return from 41% to 8% around a regulatory tax change which reduced the incentive to favor employees of the issuing firm and of the investment bank. The paper concludes that the tax wedge between ordinary income and capital gains contributed to a portion of the underpricing before the regulatory change.

Government Policy and Ownership of Equity Securities

Since World War II, direct stock ownership by households across the globe has largely been replaced by indirect stock ownership by financial institutions. We argue that tax and retirement policies are among the factors behind these changes. We develop empirical measures of two tax incentives of holding stocks inside tax-deferred plans, tax-free investment income and the smoothing benefit. Using long time-series from eight countries, we show that the fraction of household ownership decreases with these measures of the tax benefits. This finding contributes to policy debates on effective taxation and to financial economics research on the long-term effects of taxation on corporate finance and asset prices.