Richard B. Carter

Underwriter Reputation, Initial Returns, and the Long‐Run Performance of IPO Stocks

We find that the underperformance of IPO stocks relative to the market over a three-year holding period is less severe for IPOs handled by more prestigious underwriters. Consistent with prior studies, we also find that IPOs managed by more reputable underwriters are associated with less short-run underpricing. Among the various existing proxies for underwriter reputation, the Carter-Manaster measure is the most significant in the context of initial returns and also in the context of the three-year performance of IPOs. The study also provides an updated list of the Carter-Manaster measure for various underwriters. Copyright The American Finance Association 1998.

Small Firm Bankruptcy

From the results of a survey we compare the demographics and potential problem situations of 57 bankrupt firms to 55 nonbankrupt firms in an attempt to identify root causes of bankruptcy. Results indicate that the most serious problems of bankrupt firms can be condensed into three categories: lack of knowledge, inaccessibility to debt, and economic climate. Bankrupt firms also appear to be older, more likely to be in the retail industry, and organized as proprietorship or partnership than nonbankrupt firms. They are also less likely to use the Internet in their business operations than the nonbankrupt firms. One surprising finding is that while both subsamples found knowledge important, the nonbankrupt sample found it significantly more important than the bankrupt firms. This evidence provides insights for governments and academic institutions in their efforts to provide resources that may help reduce the incidence of bankruptcy, especially during times of declining economic health.

Bootstrap financing and owners’ perceptions of their business constraints and opportunities

In this paper we present the results of a regional survey of small business entrepreneurs that asked about the use of and motivation for bootstrap financing – employing resources other than traditional financing to fund operations. Extending the work of Winborg and Landstrom (2000) our results indicate that perceived risk is highly associated with owners’ assessment of the importance of bootstrap financing techniques. We also find that owners who see themselves as having limited ability are more likely to use private owner financing techniques that tend to squeeze all available funds from the owner and those close to him/her. Alternatively, bootstrap financing techniques involving the delay of payments are preferred when risk levels appear highest, while owners in business environments with the most opportunity are more likely to try to minimize accounts receivable. The results of this research can be used by consultants and agencies that assist small firms by acquainting owners with the myriad techniques for funding their companies as well as understanding the factors that often motivate the use of particular techniques. Owners should recognize that they should explore various funding alternatives rather than simply using what they are familiar with or what is readily available.

Security analysis and portfolio management: A survey and analysis

T his research has two objectives. The first is to present the findings of a survey of investment managers concerning their current practices in the areas of securities analysis and portfolio management. The second is to identify changes in these practices that may have occurred as a result of the October 1987 stock market crash. In the first case, we use our findings to identify relationships between the use of particular investment techniques and the size of the investment firm. Veit and Reiff [1983] argue that larger banks enjoy economies of scale in the area of trading operations and can afford greater specialization of investment personnel. If this analysis is generalizable, it suggests that larger investment firms are more likely to employ a wider variety of investment techniques and strategies. There are a limited number of surveys of investment professionals. Bing [1971] surveyed 34 investment firms and found that analysts use a number of techniques in appraising equity, with price/earnings analysis the most popular. More recently, in a Block and Gallagher [1988] survey of 230 bank trust departments (BTDs), only 6% of the respondents were found to use stock index futures and options. A related study (Block and Gallagher [1990]) found that 41% of non-trust money managers use index futures and options strategies. Anecdotal evidence appears to indicate that the crash has made individual investors apprehensive about the stock market and altered their security preferences (Siconolfi [1988]). Moreover, there is evidence to suggest that institutional investors have remained cautious, allocating a larger portion of their portfolios to liquid assets (Alcorn [1988] and Dorfman [1988]). While these observations are interesting, a more formal assessment of changes in investmentrelated behavior is necessary in order to evaluate the total impact of the crash. Block and Gallagher [1988], for example, find that the reluctance of BTD money managers to use derivative strategies has increased since the crash.

Explaining the NYSE Listing Choices of NASDAQ Firms

Traditionally, financial theory has offered little guidance to managers who must choose whether to list their stock on an exchange or allow it to continue trading over-the-counter. Recent developments in market microstructure theory allow a more careful analysis of the exchange listing decision. Market microstructure theory implies that firms list their stocks on exchanges to reduce transaction costs to their investors. A major component of the cost of trading common stocks is the bid-ask spread. Several differences exist between the trading arrangements, or microstructure, of the New York Stock Exchange and NASDAQ that may contribute to differences in bid-ask spreads for a given stock depending on where it is traded.

Personal Equity Investment and Small Business Financial Difficulties

Theory suggests that entrepreneurs’ private information about the likelihood of the success of their enterprise is revealed by their personal equity investment in the firm. This paper tests this argument using the occurrence and severity of the first years financial difficulties as an indication of the entrepreneurs assessment of the likelihood of the firms success. We find support for the theory through the identification of a significant negative relation between first year financial difficulties and the percent of start-up capital represented by the entrepreneurs personal funds.

An examination of the efficiency of proprietary hospital versus non-proprietary hospital ownership structures

Abstract As the health care industry evolves, communities will be faced with the choice of ownership structure for their local hospitals. Unfortunately, the evidence concerning which structure is most efficient, proprietary or non-proprietary, is mixed (e.g., Sloan and Vraciu 1983, pp. 25–37 and Clarkson 1972, pp. 374–377). Many of these studies, however, have not adequately controlled for the scope and scale of the hospitals they have examined. In addition, there is little, if any, evidence regarding cross-sectional differences in employee salaries, a measure often used in the study of operational efficiency and managerial behavior. In our study, we compared the operating efficiency of proprietary and non-proprietary hospitals, using the level of expenses, including a separate assessment of administrative salaries as a function of ownership structure. We included variables to control for differences in scope and scale across hospitals, as well as any variation in the financial and demographic environment. As in previous studies (e.g., Pattison and Katz 1983, p. 348), we found that administrative expenses are greater for proprietary hospitals than for non-proprietary, but we do provide some evidence that these expenses decline in areas where competition is more acute. However, we found that administrative salaries, the number of employees and operational expenses are less for proprietary hospitals than other ownership structures. Our findings support public policy which encourages a competitive health care environment and does not restrict organizational form.

Management Ownership and Firm Compensation Policy: Evidence From Converting Savings and Loan Associations

We examine the relationship between management ownership and compensation for a sample of savings and loan associations which have recently converted to stock organizations. Previous expense preference literature has indicated that the stock form of organization lessens the potential for non-value-maximizing behavior that may be manifested in the payment of employee compensation. Our results confirm those of Morck, et al, which suggest that support for the convergence of interests hypothesis (management acts in the interests of the owners) and the entrenchment hypotheses (management acts in its own interests) is conditional on the magnitude of management ownership in the firm.

Home–based businesses in the rural United States economy: differences in gender and financing

This paper reports the findings of a survey of 172 home–based businesses located in the rural midwestern USA. The results indicate that, unlike US businesses in general, rural home–based businesses are primarily owned by females and are primarily sole proprietorships. The pre–dominant industry is the production of crafts. Personal savings account for more of the initial financing than small businesses in general and most of the businesses surveyed began to earn profits within their first three years of operation. In an examination of the relationship between personal start–up capital and profits, we found that, like other small firms, home–based businesses financed from the owner&s personal funds outperform those that primarily sought outside financing. Finally, we show that the home–based businesses owned by females are larger than those owned by males. However, for most of the characteristics examined, there were few significant differences between the firms owned by females and those owned by males.

Effects of differential information on the after-market valuation of initial public offerings

Abstract This paper examines the after-market for initial public offerings (IPOs), particularly the security valuation effects of structural differences in available information. There is a diversity of information among issuing firms at the time of their offering and particularly under certain market conditions. Because this diversity decreases with time and after-market trading, the IPO market provides an ideal setting for testing errors due to differential information levels in early after-market valuation of IPO firms. We find evidence that during “hot” market conditions and for firms characterized by low levels of available information, the market values of issuing firms are more likely to be overestimated in the immediate after-market. We also find positive overestimation of market values to be more likely for larger IPOs and for those marketed by the less prestigious underwriters.