Wayne H. Mikkelson

Ownership and operating performance of companies that go public

Abstract Going public typically leads to a separation of managerial control and stock ownership, and potentially worsens managerial incentives. We document that the median ownership stake of officers and directors declines significantly from the year before going public to ten years later. Median operating return on assets also declines from the year before the offering to the end of the first year of public trading, but performance declines no further in ten years. In general, operating performance both within one year of the offering and during the first ten years of public trading is unrelated to ownership of officers and directors.

Convertible debt issuance, capital structure change and financing-related information: Some new evidence☆

This paper provides evidence on the valuation effects of convertible debt issuance. Common stockholders earn significant negative abnormal returns at the initial announcement of a convertible debt offering, and also at the issuance date. In contrast, the average valuation effect on common stock at the announcement of non-convertible debt offerings is only marginally negative, and is zero at issuance. The significant negative average effect on common stock value appears not to be systematically related to either the degree of leverage change induced by the convertible debt issuance or the extent to which the proceeds from issuance are used for new investment or to refinance existing debt. If, as appears likely, the issuance of convertible debt on average increases financial leverage, these results are inconsistent with evidence from other recent studies documenting common stock price effects of the same sign as the change in leverage. The evidence suggests that convertible debt offerings convey unfavorable information about the issuing firms, but the specific nature of such information remains unidentified.

Do Persistent Large Cash Reserves Hinder Performance

Conservative financial policies are often criticized as serving the interests of managers rather than the interests of stockholders. We test this argument by examining the operating performance and other characteristics of firms that for a five-year period held more than one-fourth of their assets in cash and cash equivalents. Following the five-year period, operating performance of high cash firms is comparable to or greater than the performance of firms matched by size and industry or by a measure of proclivity to hold substantial cash. In addition, proxies for managerial incentive problems, such as ownership and board characteristics, are not unusual and do not explain differences in operating performance among high cash firms. We find that high cash holdings are accompanied by greater investment, particularly R&D expenditures, and by greater growth in assets. For firms that persistently hold large cash reserves, we conclude that such policies support investment without hindering corporate performance.

THE MARKET VALUE OF CONTROL IN PUBLICLY-TRADED CORPORATIONS*

This paper tests the hypothesis that the future distribution of payoffs provided by a common stock depends upon whether ownership of the stock also conveys control over the firms activities. For 26 firms that had two classes of common stock outstanding, the class with superior voting rights traded at a premium relative to the other class. However, in four firms where the ownership structure of the firm also included a class of voting preferred stock, the class of common with superior voting rights traded at a significant discount relative to the class of common with inferior voting rights. The analysis suggests that there are both benefits and costs of corporate control.

The decline of takeovers and disciplinary managerial turnover

Abstract We compare top management turnover in unacquired U.S. industrial companies during an active takeover market (1984–1988) and a less active takeover market (1989–1993). For firms in the lowest quartile of performance (measured by operating income scaled by assets). 33% experience complete turnover of the president, CEO, and board chair during the active takeover period and only 17% experience complete turnover during the less active period. Controlling for various determinants of management turnover, we provide evidence that turnover and performance are related only in the active takeover period, and conclude that takeover activity affects the intensity of managerial discipline.

STOCK PRICE EFFECTS AND COSTS OF SECONDARY DISTRIBUTIONS

Abstract This study does not support the view that a large number of shares can be sold at the prevailing market price and at a small cost. A significant stock price decrease is observed at the initial announcement of secondary distributions. The price declines are greater for offerings by officers and directors and for larger offerings, but are significant for all types of sellers and for large and small offerings. There is no significant price decline at the offering when secondaries are announced in advance. Underwriting and other selling costs are substantial and are positively related to relative offering size.

Convertible calls and security returns

Abstract The study examines the impact of convertible security calls on securityholders wealth. On average common stock values fall by approximately two percent at the announcements of convertible debt calls, but common stockholders wealth is unaffected by convertible preferred stock calls. These findings are consistent with a corporate tax effect. A small average decrease in firm value is also found at the announcements of convertible debt calls. The study raises, but leaves unanswered, the interesting question of what motivates managers to make capital structure decisions that reduce stockholder wealth and firm value.

The Market Value of Differential Voting Rights in Closely Held Corporations

Recent advances in the theory of the firm suggest an important role for the market for corporate control. Along with competition in the managerial labor market, various monitoring and bonding mechanisms, and managerial compensation schemes, competition for the right to determine or influence investment and financing decisions can play a role in disciplining a firms managers or decision makers. Most notably, Manne (1965) and Fama (1978) view the market for corporate control as facilitating the allocation of corporate assets to their highest valued use. That is, tender offers, merger bids, and proxy contests enable outsiders to obtain control and capture gains from implementing an improved set of investment and financing decisions. Consequently, the theory of the corporation implies that the property rights associated with corporate control are valuable. Several previous studies have provided direct or indirect evidence on the value of control. These include Bradley (1980), Meeker and Joy (1980), Bradley, Desai, and Kim (1983), Dodd and Warner