Stefano Bonini

The Effects of Venture Capitalists on the Governance of Firms

We test the impact of differential levels of capital injection and different regions of incorporation on the governance structure of portfolio companies.Using a unique hand-collected questionnaire-based dataset from 164 companies in 5 countries (US, UK, France, Germany, Spain and Sweden) we shed light on previously unexplored governance decisions. Our empirical results show that there is a strong and positive relationship between VCs’ funding and their influence on some factors like decisions on CEO hiring, executive compensation, board decisions and appointments. Employee incentives are also positively related to the proportion of VC funding. On the other hand, results show that the proportion of VC funding is only limitedly significant in explaining VC influence on strategy direction and investment planning. Our analysis though, offers strong evidence of remarkable regional differences between Europe and the US.

Corporate Scandals and Capital Structure

We analyze whether companies involved in a security class action suit (SCAS) exhibit differential capital structure decisions, and if the information revealed by a corporate scandal affects the security issuances and stock prices of industry peers. Our findings show that before a SCAS is filed, companies involved in a scandal show a greater amount of security offerings than their peers and, due to equity mispricing, are more likely to use equity as a financing mechanism. Following a SCAS filing, these companies exhibit a decreasing amount of total external finance raised and lower levels of book and market leverage. Industry peers’ issuance patterns exhibit significant contagion, with reduced debt and equity issuance following the SCAS filing. Corporate scandals also have meaningful negative effects on stock prices and bond ratings. Similar to capital structure, we document contagion at the industry level with peers’ share prices yielding negative returns as well.

A, B or C? Experimental Tests of IPO Mechanisms

Empirical research has provided extensive evidence on the inefficiency of bookbuilding in controlling underpricing. Both academics and practitioners have investigated this phenomenon proposing innovative offering methodologies. In this paper we explore the information revelation and underpricing properties of two baseline models, uniform auctions and bookbuilding, and two newly proposed mechanisms, Ausubel auction and Competitive IPO. Our findings confirm the empirical weaknesses of bookbuilding and provide hints that standard auctions may stimulate less bidding. However, (a) the Competitive IPO features increase competition both among banks and among investors resulting in more information revelation and less underpricing than standard bookbuilding; and (b) the Ausubel auction yields superior price discovery and underpricing outcomes than uniform clock auction and bookbuilding. Our experimental results provide novel insights into the ongoing debate on optimal equity offering mechanisms, suggesting that the solution to current issuing methodologies shortcomings may require the development of a ‘hybrid’ procedure blending properties of existing and new mechanisms.

The Effects of Private Equity Investors on the Governance of Companies

An increasingly important external control mechanism affecting the governance of young and fast growing companies worldwide is the emergence of institutional and private equity investors, as equity owners. Institutional investors have the potential to influence management’s activities directly through their ownership, and indirectly by trading their shares (Gillan and Starks, 2003). As a result, companies backed by private equity investors represent a fruitful environment to investigate the use and efficiency of a multitude of control mechanisms. However the surge over the last 30 years in investment activity by private equity investors at large, has given rise to an increased specialization that nowadays profoundly distinguishes business angels from venture capitalists and buyout specialists. While these investors share common traits such as a value maximization approach, risk-return informed decisions, and a finite investment horizon, the monitoring and control mechanisms associated with their stage focus and consequent risk-return profile are substantially different. In this paper we aim at presenting an up-to-date review of the main theoretical contributions and empirical results in this active and growing field of research.

On Long-Tenured Independent Directors

Recent surveys show that 24% of independent directors in Russel 3,000 firms have continuously served on their boards for fifteen years or more. Based on a sample of S&P 1500 firms over the period 1998-2012, we document strong positive effects on financial performance for firms with one, very long-tenured independent director. We show that long-tenured independent directors are highly skilled individuals, and over time they accumulate information and knowledge valuable to the companies they serve in, even when the cost of acquiring information is high. long-tenured directors also decrease the likelihood of (1) corporate scandals, and (2) motions by hedge funds requiring changes in board composition. Our results are robust to several endogeneity tests including instrumental variable and dynamic regressions.

The Causes and Financial Consequences of Corporate Frauds

Another wave of corporate scandals has hit the market in the last decade, reviving attention to the effect of these events on shareholder value, corporate governance and stock market reactions. Given this evidence a growing body of research has investigated the determinants of frauds, the effects of frauds on investors and stakeholders wealth and tried to identify channels and tools to early detect frauds and therefore reduce the loss in social welfare. This chapter provides a comprehensive view on the state of the current research on these issues and provides suggestions for future research.

The Performance of Angel-Backed Companies

We provide empirical evidence of the post-investment performance and survivorship profile of angel-backed companies, filling a long-standing gap within the entrepreneurial finance literature. Using a unique database of 111 angel-backed companies that received angel investments between 2008 and 2012 and at least 3 years of post-investment financial data, we develop an innovative performance metric and show that the performance and the probability of survival of investee companies are positively affected by the presence of angel syndicates and the hands-on involvement of business angels, while they are negatively related to the intensity of angel monitoring and the structure of equity provision. Our results are robust to several endogeneity tests and provide insights on the multifaceted contributions of angel investors to the performance and survival of new ventures.

Grandstanding and Spinning in VC Backed IPOs on AIM UK

We study a hand-collected dataset that includes 507 IPOs on the UK Alternative Investment Market (AIM) from FY2004 to FY2010. IPOs backed by venture capitalists registered an average underpricing of 25.8 percent; almost double that of non-venture-backed IPOs (14.6%). We provide new empirical evidence that grandstanding and spinning increase IPO underpricing. Conversely venture capitalists provide a certification role when they avoid moral hazard behaviors. Firms may strategically exploit these phenomena to accelerate growth while market regulators have to evaluate this evidence in light of stricter or more prone to laissez faire policies.

Subjective Valuation and Target Price Accuracy

How do analysts develop their forecasts? In this paper, we analyze how sell-side analysts estimate target prices and show that they consistently employ subjective adjustments to baseline models. For a panel of analyst reports, we show that target price forecasts that deviate significantly from simple multiple-based pseudo-target prices are (ex-post) more accurate. By controlling for various stock and broker characteristics, we also demonstrate that our results are not driven by the degree of sophistication of the valuation models. Furthermore, we show that investors know about this increased informativeness of forecasts as the abnormal market return around target price revisions is significantly higher if analysts deviate from simple pseudo-target prices when issuing their forecasts.

Chasing Forecasts: The Relative Timing of Equity and Debt Ratings

Both bond rating agencies and equity analysts evaluate publicly traded companies, offering their opinions as a service to investors. Yet, as the recent financial crisis has clearly shown, the quality and timeliness of rating agencies information is questionable. In this paper, we show that equity forecasts significantly anticipate rating actions. On a large, cross-country dataset of 2,286 rating actions and 75,689 target prices issued on Us and European listed companies, we show that when prior changes in the average equity price target are in excess of 20%, the probability of observing a rating action ranges from 80 to 100%. This anticipation effect is stronger for financial companies and is homogeneous across rating agencies. Additionally, we show that rating actions and watchlist are partially substitutes as equity price forecasts anticipation effect is almost identical to that of uncontaminated rating actions. Our results survive the financial-crisis test as albeit weakened, equity forecasts still significantly anticipate downgrades by rating agencies, suggesting a resilience of the agencies in delaying revisions.