Nellie Liang

The Private Equity Market: An Overveiw

The private equity market is an important source of funds for start-up firms, private middle-market firms, firms in financial distress, and public firms seeking buyout financing. Over the past fifteen years it has been the fastest growing corporate finance market, by an order of magnitude over the public equity and public and private bond markets. Despite its dramatic growth and increased significance for corporate finance, the private equity market has received little attention. This study examines the economic foundations of the private equity market, analyzes its development and current role in corporate finance, and describes the markets institutional structure. It examines the reasons or the markets explosive growth over the past fifteen years and highlights the main characteristics of that growth. It provides data on returns to private equity investors and analyzes the major secular and cyclical influences on returns. It describes the important investors, intermediaries, issuers, and agents in the market and their interactions with each other. Drawing on data from trade journals, the study also estimates the markets size as of year-end 1995.

New resources and new ideas: Private equity for small businesses1

Abstract Private equity for rapidly growing small business is raised primarily from the organized venture capital market and the informal market, comprised of high-net worth individuals or “angel” investors. We discuss commercially and publicly available data on private equity, the research findings of studies that use these data, and some of the more important questions that the available data have been unable to address.

Geographic diversification and risk in banking

Abstract Tests of the hypothesis that geographic diversification affects bank risk are conducted on large samples of banking organizations (1976–1985) and focus on intrastate geographic diversification experience. Three composite measures of risk are included iin the tests along with the individual components of these measures. Results show that while composite measures of risk are reduced by geographic diverisification, some inidividual components of these measures increase. Importantly, the results show lower financial risk (the variation in earnings), which is predicted by portfolio theory. However, we also observe lower levels of earnings and capital with greater diversification implying, ceteris paribus, higher risk. This effect is not predicted by portfolio theory, but is predicted by our notion of operating risk. There is apparently more than pure financial risk involved with diversification by firms.

Bank profits, risk, and local market concentration

Abstract A simultaneous equation system of bank profits and bank risk is specified to examine the relationship between profits and risk and to test whether the estimated effect of market concentration on bank profits is biased when risk is ignored. Bank risk, measured by the standard deviation of profits, can be attributed to exogeneos local market uncertainty and endogenous risk-taking behavior. The empirical results show that bank risk reduces bank profits because a bank that maximizes expected profits recognizes expected costs, such as higher premiums on uninsured deposits demanded by risk-averse investors, that are associated with high risk. Furthermore, the effect of market concentration on bank profits becomes larger once risk is included, although the effect remains quantitatively small.

How did the 2003 dividend tax cut affect stock prices and corporate payout policy

We examine the effects of the 2003 dividend tax cut on U.S. stock prices and corporate payout policies. First, using an event-study methodology, we compare the performance of U.S. stocks to that of other securities that should not have benefited from the tax change. We find that U.S. large-cap and small-cap indexes do not outperform their European counterparts, nor REIT stocks, over the event windows, suggesting little if any aggregate stock market effect from the tax change. In cross-sectional analysis, high-dividend stocks outperformed low-dividend stocks by a few percentage points over the event windows. On the other hand, non-dividend paying stocks are found to have outperformed the overall market by a small margin, but this result does not appear specific to the event windows, suggesting that non-tax factors were at play. Second, the tax change did appear to induce an increase in dividends, especially at firms where executive compensation was weighted more heavily toward stock than options. However, the effect on total payouts was more muted, as many firms scaled back share repurchases.