Advanced Corporate Finance
Research Papers Summary
MSc Finance – Block 1
Vera Scholten
Week 1 M&A
Shleifer & Vishny (2003) – Stock Market Driven Acquisitions
Main point Stock-for-stock mergers are done by acquirers who are overvalued and want to sell
stock (=an incentive for firms to get their equity overvalued so that they can make
acquisitions with stock)
Hypothesis Transactions are driven by stock market valuations of merging firms (assumption:
financial markets inefficient, so firms are valued incorrectly)
Contribution Helps explain who acquires who in M&A, the medium of payment, valuation
consequences of mergers and merger waves.
Main result Overvalued equity firms are more likely to acquire while undervalued firms are
more likely to become targets.
Eckbo (2014) – Corporate Takeovers and Economic Efficiency
Main point Provides information on text-based definitions product market links between
bidders and targets in takeovers.
Hypothesis Multiple – see main result
Contribution Advances understanding of who buys who in the drive for productive efficiency
(M&A) and how firms are sold (transaction efficiency)
Main result Almost 50% of takeovers involving public targets are initiated by the seller + bidder
shares are NOT systematically overpriced in all-stock bids + bidder synergy gains
are much larger than previously thought.
Week 2 Private Equity
Phalippou (2007) – Investing in Private Equity Funds: A Survey
Main point Investors need to become more familiar with the industry they want to invest in
(e.g. through being more selective in choosing PE funds to invest in)
Hypothesis Increased familiarity will improve the sustainability of the private equity industry.
Contribution Contributes to research on LP-GP relationships.
Main result The average investor obtained poor returns from investment in PE funds because:
- Fees are higher than most investors realize
- Investors are unfamiliar with industry actual risk, industry past return and
specific PE fund features.
Thus, investors should select the right funds + design more investor friendly
contracts – so that the PE industry does not collapse. VC (growth catalysts) and BO
(healthy arbitrageurs) funds are essential to the market economy.
Degeorge, Martin & Phalippou (2016) – On Secondary Buyouts
Main point Shows consequences for PE firms of investing in late SBOs
Hypothesis Money burning incentives cause worse SBO investment performance
Contribution Contributes to literature on investment performance of SBOs under pressure.
Main result SBOs underperform and destroy value for investors when they are made by buyers
under pressure to spend. But they perform as well as other buyouts when made
under no pressure to spend. When buyer and seller have complementary skills
, sets, SBOs outperform other buyouts.
Week 3 Equity Offerings
Lowry (2003) – Why Does IPO Volume Fluctuate So Much?
Main point See result + companies time their IPO’s to take advantage of industry-wide
overvaluations, rather than financing future growth
Hypothesis IPO volume is determined by capital demand, investor sentiment and adverse
selection costs.
Contribution Explains fluctuations in IPO volume + why firms go public.
Main result Firms demands for capital (capital demands hypothesis: business cycles – econ ↑ =
IPO ↑) and investor sentiment (investor sentiment hypothesis: inv sent ↑ = IPO ↑)
are important determinants of IPO volume. Adverse selection costs (information
asymmetry hypothesis: investor uncertainty regarding true value of a firm causes
adv sel costs = IPO ↓) effects are small.
Jenkinson, Jones & Suntheim (2018) – Quid Pro Quo? What factors influence IPO
allocations to investors?
Main point Defines determinants of IPO allocations – see results.
Hypothesis IPO allocations are related to information revelation by investors. Additionally,
there is a quid pro quo between IPO allocations and revenues
Contribution Provides proof of quid pro quo in IPO market + suggests increased IPO regulation.
Main result Evidence of quid pro quo! Banks make favourable IPO allocations to investors who
- provide them with information likely to be useful in pricing the IPO
- submit price-sensitive bids
- attend meetings with the issuer during the IPO process
- bookrunners can generate the greatest revenue from
Gao, Ritter & Zhu (2013) – Where have all the IPOs gone?
Main point Since 2000 there has been a significant drop in IPOs due to regulatory overreach
hypothesis (roH) = SOX act (more compliance costs) + decline in ecosystem of
underwriters. It has become more important to get big fast than grow organically.
Hypothesis The economies of scope hypothesis (eosH): the advantages of selling out to a larger
organization, which can speed a product market and realize economies of scope,
have increased relative to the benefits of operating as an independent firm.
Both the roH and eosH state the decrease in IPOs is due to low market prices w.r.t.
valuation in a trade sale (which in turn is caused by higher compliance costs)
Contribution Regulatory changes will not make IPOs popular again.
Main result IPO ↓ is not due to increased regulation but due to the fact that M&A is more
profitable than IPO (small independent companies). IPOs will never be as popular
as the 80s again.
Week 4: Planning and funding corporate Investment
Peters & Taylor (2017) – Intangible capital and the investment-q relation
Main point Measurement error in Tobin’s Q can be fixed by including intangible assets
(measured through R&D value)
Hypothesis Investment has a stronger relationship with Q when you put intangibles in the
denominator
Contribution Shows support for Q theory when measurement error is fixed
Main result Investment has a stronger relationship with Q when you put intangibles in the
Research Papers Summary
MSc Finance – Block 1
Vera Scholten
Week 1 M&A
Shleifer & Vishny (2003) – Stock Market Driven Acquisitions
Main point Stock-for-stock mergers are done by acquirers who are overvalued and want to sell
stock (=an incentive for firms to get their equity overvalued so that they can make
acquisitions with stock)
Hypothesis Transactions are driven by stock market valuations of merging firms (assumption:
financial markets inefficient, so firms are valued incorrectly)
Contribution Helps explain who acquires who in M&A, the medium of payment, valuation
consequences of mergers and merger waves.
Main result Overvalued equity firms are more likely to acquire while undervalued firms are
more likely to become targets.
Eckbo (2014) – Corporate Takeovers and Economic Efficiency
Main point Provides information on text-based definitions product market links between
bidders and targets in takeovers.
Hypothesis Multiple – see main result
Contribution Advances understanding of who buys who in the drive for productive efficiency
(M&A) and how firms are sold (transaction efficiency)
Main result Almost 50% of takeovers involving public targets are initiated by the seller + bidder
shares are NOT systematically overpriced in all-stock bids + bidder synergy gains
are much larger than previously thought.
Week 2 Private Equity
Phalippou (2007) – Investing in Private Equity Funds: A Survey
Main point Investors need to become more familiar with the industry they want to invest in
(e.g. through being more selective in choosing PE funds to invest in)
Hypothesis Increased familiarity will improve the sustainability of the private equity industry.
Contribution Contributes to research on LP-GP relationships.
Main result The average investor obtained poor returns from investment in PE funds because:
- Fees are higher than most investors realize
- Investors are unfamiliar with industry actual risk, industry past return and
specific PE fund features.
Thus, investors should select the right funds + design more investor friendly
contracts – so that the PE industry does not collapse. VC (growth catalysts) and BO
(healthy arbitrageurs) funds are essential to the market economy.
Degeorge, Martin & Phalippou (2016) – On Secondary Buyouts
Main point Shows consequences for PE firms of investing in late SBOs
Hypothesis Money burning incentives cause worse SBO investment performance
Contribution Contributes to literature on investment performance of SBOs under pressure.
Main result SBOs underperform and destroy value for investors when they are made by buyers
under pressure to spend. But they perform as well as other buyouts when made
under no pressure to spend. When buyer and seller have complementary skills
, sets, SBOs outperform other buyouts.
Week 3 Equity Offerings
Lowry (2003) – Why Does IPO Volume Fluctuate So Much?
Main point See result + companies time their IPO’s to take advantage of industry-wide
overvaluations, rather than financing future growth
Hypothesis IPO volume is determined by capital demand, investor sentiment and adverse
selection costs.
Contribution Explains fluctuations in IPO volume + why firms go public.
Main result Firms demands for capital (capital demands hypothesis: business cycles – econ ↑ =
IPO ↑) and investor sentiment (investor sentiment hypothesis: inv sent ↑ = IPO ↑)
are important determinants of IPO volume. Adverse selection costs (information
asymmetry hypothesis: investor uncertainty regarding true value of a firm causes
adv sel costs = IPO ↓) effects are small.
Jenkinson, Jones & Suntheim (2018) – Quid Pro Quo? What factors influence IPO
allocations to investors?
Main point Defines determinants of IPO allocations – see results.
Hypothesis IPO allocations are related to information revelation by investors. Additionally,
there is a quid pro quo between IPO allocations and revenues
Contribution Provides proof of quid pro quo in IPO market + suggests increased IPO regulation.
Main result Evidence of quid pro quo! Banks make favourable IPO allocations to investors who
- provide them with information likely to be useful in pricing the IPO
- submit price-sensitive bids
- attend meetings with the issuer during the IPO process
- bookrunners can generate the greatest revenue from
Gao, Ritter & Zhu (2013) – Where have all the IPOs gone?
Main point Since 2000 there has been a significant drop in IPOs due to regulatory overreach
hypothesis (roH) = SOX act (more compliance costs) + decline in ecosystem of
underwriters. It has become more important to get big fast than grow organically.
Hypothesis The economies of scope hypothesis (eosH): the advantages of selling out to a larger
organization, which can speed a product market and realize economies of scope,
have increased relative to the benefits of operating as an independent firm.
Both the roH and eosH state the decrease in IPOs is due to low market prices w.r.t.
valuation in a trade sale (which in turn is caused by higher compliance costs)
Contribution Regulatory changes will not make IPOs popular again.
Main result IPO ↓ is not due to increased regulation but due to the fact that M&A is more
profitable than IPO (small independent companies). IPOs will never be as popular
as the 80s again.
Week 4: Planning and funding corporate Investment
Peters & Taylor (2017) – Intangible capital and the investment-q relation
Main point Measurement error in Tobin’s Q can be fixed by including intangible assets
(measured through R&D value)
Hypothesis Investment has a stronger relationship with Q when you put intangibles in the
denominator
Contribution Shows support for Q theory when measurement error is fixed
Main result Investment has a stronger relationship with Q when you put intangibles in the
