Raymond Da Silva Rosa

The Sharemarket performance of Australian venture capital-backed and non-venture capital-backed IPOs

Abstract We assess the initial underpricing and long-run share performance of venture capital (VC)-backed IPOs. We find, as expected, that estimates of underpricing are less severe using Habib and Ljungqvist [Economics Letters 61 (1998) 381] inspired measures that more accurately estimate the true wealth loss to the entrepreneur. However, we find no statistically significant difference in the underpricing of VC backed and non-VC backed IPOs. Further, unlike Lee et al. [Journal of Banking and Finance 20 (1996) 1189], we find that Australian IPOs do not underperform in the after-market. Non-VC capital-backed and VC-backed firms earn normal returns in the 2 years following listing. Our results are inconsistent with the hypothesis that VC-backed IPOs are certified as high quality by mere virtue of being backed by venture capitalists.

Research Method and the Long‐Run Perfor Mance of Acquiring Firms

The long‐run perfor Mance of successful bidders in a takeover has been controversial. We assess their long‐run perfor Mance by controlling for survival, firm size, and measurement bias in return cumulation. Measures of the perfor Mance of acquiring firms relative to control firms are sensitive to survival constraints implicit in the sampling process and to share return characteristics empirically associated with trading frequency In the pre‐bid and bid periods, the strong share market perfor Mance of acquiring firms masks the bias; it is more salient after the bid. Controlling for survival mitigates the new‐listing and delisting biases in the pre‐ and post‐bid periods.

CEO Compensation from M&As in Australia

We investigate Australian CEO compensation following mergers and acquisitions (M&As). We find CEOs of acquiring firms receive higher compensation in the year of M&A completion and one year after. We also find a positive correlation between CEO compensation and firm performance, and some measures of CEO effort and skill in completing the deal. However, CEOs of bidding firms receive a lower bonus and other compensation if they wield more managerial power (that is, if the CEO sits on the nominating committee, has a higher level of share ownership, or the board has more executive directors). This result is in sharp contrast to the US where compensation is influenced by CEO power. Overall our findings are more consistent with the predictions of the incentive alignment theory rather than the managerial power theory.

The Impact of Director Reputation and Performance on the Turnover and Board Seats of Target Firm Directors

This study examines factors that explain the turnover and board seats held by target firm directors post-takeover. Following successful takeovers the proportion of the board replaced is lower when the target has better performance. In failed takeovers, executive directors have lower turnover and the rate of turnover is reduced after a hostile takeover. Inconsistent with ex-post settling-up, actions that advance target shareholder wealth during the takeover does not assist a director obtain an increase in future board seats. Confirming a reputation effect, directors with multiple directorships have a lower rate of turnover and a higher increase in future board seats.

Competition in the Market for Takeover Advisers

We investigate factors that motivate bidders to engage advisers, we model adviser selection and we test whether value-adding advisers gain market share. Our sample includes 801 attempted takeovers over 1989–1998 in Australia. Our results indicate advisers are likely to be engaged if the takeover deal is large, hostile, and includes non-cash compensation. We find deal completion is not as closely correlated with adviser rankings as does Rau (2000) but we confirm his finding that adviser ranked high on market value of deals advised do not have a comparative advantage in adding value to firms. However, we document some (limited) evidence that value-adding advisers achieve an increase in subsequent deal flow. Our results are consistent with specialization among takeover advisers.

Capital Gains Taxation and Shareholder Wealth in Takeovers

Before December 1999, the capital gains of shareholders who sold their shares into Australian takeovers have been taxable irrespective of payment method. Subsequently, shareholders can elect to rollover capital gains in equity takeovers. We examine the effect of this change on the association between target shareholder capital gains and bidder and target firm shareholder wealth. The results indicate that prior to the regulatory change, cash consideration results in higher target shareholder returns for non-taxation reasons. After the introduction of capital gains tax rollover relief, we find that target and acquiring firm shareholders earn lower returns when cash consideration is offered to shareholders with greater capital gains.

Australian Mergers and Acquisitions Since the 1980s: What Do We Know and What Remains to be Done?

hr re marke T ee studies published in the mid-nineteen-eighties heralded a surge of search on merger and acquisition (M&A) activity in Australia. The share t studies of Walter (1984) and Bishop, Dodd and Officer (1987) concluded that takeovers help allocate capital to more valued uses.1 In contrast, McDougall and Round (1986) found, using accounting measures, that merged firms perform worse than they did pre-merger and worse relative to matched non-merging firms. The divergent conclusions highlight the key issue in M&A research: does an active M&A market lead to a more efficient allocation of resources? This survey covers subsequent published work on the Australian M&A market.2 For convenience, studies are grouped by their relevance to the following four questions: What motivates M&As? How are gains/losses distributed among acquiring and target firms? What is the impact of takeover regulation on the distribution of gains and losses? And, are expectations realised? The aim is not to provide a comprehensive critique, space constraints preclude that, but to identify areas where progress has been substantial, to note issues that remain unresolved and indicate what appear to be under-researched questions that are capable of being addressed in future work. In short, we aim to provide a guide to current knowledge

ASIC Actions: Canaries for Poor Corporate Governance?

Purpose - The purpose of this study is to investigate whether companies subject to an Australian Securities and Investment Commission (ASIC) action have poorer corporate governance than other companies. Evidence from the USA suggests such a relationship but the issue has not been investigated for Australian firms. Design/methodology/approach - The paper considers a matched sample of 240 companies, including 120 which were subject to 143 actions relating to; interpretation of accounting standards; the continuous disclosure regime; and other governance matters during the period 1998-2004. Findings - We find that companies subject to ASIC actions are less likely to comply with the Australian stock exchange (ASX) best practice governance recommendations and that the main area of difference relates to separation of the roles of the CEO and board chair. Research limitations/implications - We were able to investigate only 3 of 10 items in the ASX recommendations due to data availability. The sample of ASIC companies is not randomly drawn, thus our results are not generalisable the wider population of listed companies. Capital market consequences of ASIC actions, such as effect on share price, bid-ask spread, analyst following and cost of capital, are not considered and could be investigated in future research. Practical implications - The results suggest that, in relation to publicised cases, ASIC is effective in targeting more poorly governed companies, a positive signal for Australian capital markets. Originality/value - Few papers investigate ASICs publicised cases and no prior study has linked ASIC cases and corporate governance practices. The findings will be of interest to Australian capital market participants, some of whom question the benefits of corporate governance recommendations.

Taxation of shareholder capital gains and the choice of payment method in takeovers

Abstract From December 1999, shareholders who disposed of shares in Australian takeovers in exchange for scrip could elect to defer capital gains taxation until the disposal of the shares received. We investigate payment method choice by acquiring firms before and after this regulatory change to assess whether target shareholder capital gains tax liabilities became an important factor considered in choosing the form of payment. The results show that, subsequent to the regulatory change, there is a significantly higher probability that equity will be offered as consideration where target shareholder capital gains are greater. This finding confirms the importance of shareholder level taxation in explaining corporate acquisition structure and adds to previous European and US evidence on factors associated with payment method choice in takeovers.

To scheme or bid? Choice of takeover method and impact on premium

In recent years there has been an increasing use of members’ schemes of arrangement to bring about a change in corporate control. This increasing use of schemes has been criticised in public quarters on the basis that unlike takeovers, schemes are not subject to the Eggleston principles and have arguably led to target shareholders receiving lower offer prices. This study provides the first large-sample empirical evidence on differences between schemes and takeovers. We find that the likelihood of the use of schemes significantly increases when target firm ownership concentration is higher and when the bidder has a lower toehold. Scheme usage is also more likely for larger targets and bidders with higher leverage. Consistent with public criticisms of schemes, we find that after controlling for self-selection premiums in schemes are significantly lower than those in takeovers.