Timothy R. Burch

Locking Out Rival Bidders: The Use of Lockup Options in Corporate Mergers

Traditionally defined, a lockup option gives the negotiated acquirer in an impending merger the right to purchase treasury shares of the target if a third party bidder interferes. Conventional wisdom suggests that lockup options are granted by self-interested target managers to discourage competition and hand-select an acquirer for personal reasons at the expense of target shareholder wealth. Alternatively, the ability to grant a lockup option can enhance target managements bargaining power on behalf of shareholders. Sensing the death of lockup options, many hailed a 1994 Delaware Supreme Court decision that invalidated a lockup option granted to Viacom by Paramount Communications. Lockup options have far from disappeared, however -- five of the ten largest merger deals in 1998 were reported to include lockup options. I study over 2,000 completed and failed merger deals announced during 1988-1995 and confirm that lockup options do discourage competition for targets. However, deals with lockup options have higher average target announcement and overall returns and lower bidder announcement returns. This holds even after controlling for deal completion rates, shareholder anticipation of a lockup option, and a variety of other deal characteristics. An examination of 100 merger proxies suggests that lockup options are no more prevalent when target management avoids an auction by privately negotiating a preemptive deal, and average returns for the preemptive deals are higher when a lockup option is present. The overall evidence is more consistent with target managers using lockup options to enhance bargaining power than with lockup options benefiting target managers at the expense of shareholder wealth. A copy of this paper is available at the authors University of Miami (Business Administration, Finance Department) web site.

Does it Pay to Be Loyal? An Empirical Analysis of Underwriting Relationships and Fees

We examine underwriting fees for repeat issuers of new securities to determine the relation between loyalty to an underwriting bank and the fees charged. For a sample of offers over the 1975–2001 period, we find that loyalty is associated with lower fees for common stock offers, consistent with valuable relationship capital being built through loyalty. For debt offers, however, we find the opposite pattern, consistent with relationship capital not being as valuable. For both offer types, firms that graduate to higher-quality banks face lower fees. Firms that are more likely to be switching banks to improve analyst coverage face higher fees for common stock offers, but not for debt offers. r 2005 Elsevier B.V. All rights reserved. JEL classification: G20; G24; L14

Do Institutions Prefer High Value Acquirers? An Analysis of Trading in Stock-Financed Acquisitions

If owners of target shares in a stock-for-stock merger perceive the acquirer as overvalued, they should sell their holdings more aggressively to profit before such overvaluation dissipates. We study institutional owners of targets and find that slightly more than half liquidate their shares in stock mergers, consistent with high institutional-share turnover rates found in the prior literature. However, share retention is higher when valuation measures suggest greater acquirer overvaluation, regardless of whether institutional owners generally prefer growth or value stock. Institutions that prefer large-cap, growth stock are most enthusiastic about bids from large, high-valuation acquirers, and substantially increase their stakes in such deals. JEL Classification: G34

A Practical Anti-Bubble Prescription

We argue that coordinated mass dissemination of information about asset fundamentals should make asset markets less prone to bubbles. The key idea is to establish a centralized and popular information source to make key information common knowledge across as many market participants as possible. This realistic, micro-level anti-bubble policy faces fewer challenges than monetary policy and macro-prudential tools.

The pricing of U.S. IPOs by seasoned foreign firms

Abstract We examine the pricing of U.S. initial public offerings (IPOs) by foreign firms that are already seasoned in their domestic countries. Presumably, these equity offers have less downside risk for investors than typical IPOs since domestic share prices can be used to help establish a preoffer value for the firms equity. In spite of the presumed diminished downside risk, we find that offers by firms from countries that impose foreign ownership restrictions and capital controls are on average underpriced, experiencing an average first-day return in the United States of 12.7%. This result stems in part from the underwriters failure to price the issue to fully reflect the postoffer premium that often arises for the U.S. shares. In contrast, offers by firms from countries without ownership restrictions have an average first-day return of 0.0%.

Who Moves Markets in a Sudden Marketwide Crisis? Evidence from 9/11

We compare reactions in the prices and trading patterns of common stocks and closed-end funds (CEFs), securities with substantially different investor clienteles, to the Sept. 11, 2001 terrorist attacks. When the market reopened 6 days later, retail investors sold and there were sharp price declines, even in assets with net institutional buying. In the subsequent 2 weeks, price reversals were substantially security specific and thus not simply due to improved systematic sentiment. Consistent with microstructure theory, comparisons between CEFs and common stocks show the speed of these reversals depended significantly on the relative quality and availability of information about fundamental values.

The Rights Offer Puzzle: Clues from the 1930s and 1940s

We study the offer choice between rights and firm commitments for a sample of industrial firms issuing equity in the 1930s and 1940s. Unlike existing studies, our sample is drawn from a time period when rights were as common an offer method for industrial firms as were firm commitments. This sample allows us to perform out-of-sample tests of existing theories of offer choice. Our analysis indicates that firms choosing rights were larger, healthier firms with lower leverage and higher cash flow liquidity. Firms electing the firm commitment method experienced significantly negative size-adjusted returns during the 12 months following the offer, consistent with recent evidence for SEOs. In striking contrast, firms issuing equity through rights were not subject to negative post-offer returns, suggesting that firm commitments were timed to exploit overvaluation while rights offers were not. Finally, we investigate a number of long term factors that could have contributed to the decision to migrate from rights issues to firm commitment.