Published Paper by Thomas J Chemmanur
Management Science, 2017
We model a corporate board evaluating a chief executive officer (CEO) of uncertain management abi... more We model a corporate board evaluating a chief executive officer (CEO) of uncertain management ability. Each director receives a noisy private signal about CEO ability, after which directors discuss this ability and vote to retain or replace the CEO. Directors care about true CEO ability since it affects their equity holding values; however, a CEO may impose costs of dissent on a director who votes to fire but fails to oust her. We relate the equilibrium CEO firing decision to board size, board composition, the effect of an imprecise public signal, and the cost and probability of finding a good replacement CEO.
Journal of Financial Economics, 2016
Using various centrality measures from social network analysis, we analyze how the loca- tion of ... more Using various centrality measures from social network analysis, we analyze how the loca- tion of a lead initial public offering (IPO) underwriter in its network of investment banks affects various IPO characteristics. We hypothesize that investment banking networks allow lead IPO underwriters to induce institutions to pay attention to the firms they take pub- lic and to perform two information-related roles during the IPO process: an information dissemination role, in which the lead underwriter uses its investment banking network to disseminate noisy information about various aspects of the IPO firm to institutional investors; and an information extraction role, in which the lead underwriter uses its invest- ment banking network to extract information useful in pricing the IPO firm equity from institutional investors. Based on these two roles, we develop testable hypotheses relating lead IPO underwriter centrality to the IPO characteristics of firms they take public. We find that more central lead IPO underwriters are associated with larger absolute values of offer price revisions, greater IPO and after-market valuations, larger IPO initial returns, greater institutional investor equity holdings and analyst coverage immediately post-IPO, greater stock liquidity post-IPO, and better long-run stock returns. Using a hand-collected data set of pre-IPO media coverage as a proxy for investor attention, we show that an important channel through which more central lead IPO underwriters achieve favorable IPO characteristics is by attracting greater investor attention to the IPOs underwritten by them.
Journal of Business Venturing, 2016
We find that entrepreneurial firms in emerging nations backed by syndicates composed of inter- na... more We find that entrepreneurial firms in emerging nations backed by syndicates composed of inter- national and local venture capitalists have more successful exits and higher post-IPO operating performance than those backed by syndicates of purely international or purely local venture cap- italists. We control for the potential endogenous participation and syndication by international VCs using instrumental variables analyses and a natural experiment and find a causal effect of in- ternational VC participation on successful outcomes. International VCs face disadvantages in their investments due to the lack of proximity to the entrepreneurial firm. Using air service agreements between countries as an exogenous change in effective proximity, we find that entrepreneurial firms backed by international VCs are more successful when travel becomes easier between the two countries. Overall, our results indicate that the greater venture capital expertise of interna- tional venture capitalists and the superior local knowledge and lower monitoring costs of local venture capitalists are both important in obtaining successful investment outcomes.
Journal of Corporate Finance, 2016
We use a large sample of transaction-level institutional trading data to analyze, for the first t... more We use a large sample of transaction-level institutional trading data to analyze, for the first time in the literature, the role of institutional investors as producers of information around corporate spin-offs. Our results may be summarized as follows. First, there is a significant im- balance in post-spin-off institutional trading between the equity of new parent firms versus subsidiaries, suggesting that spin-offs increase institutional investors' welfare by relaxing a trading constraint. This imbalance in institutional trading is driven by differences in informa- tion asymmetry across the two spun-off firm divisions. Second, institutional trading around spin-offs has significant predictive power for the announcement effect of a spin-off and for post-spin-off long-run stock returns. Third, institutional investors are able to realize significant abnormal profits by trading in the subsidiary firm equity in the first quarter post-spin-off. Overall, we show that spin-offs enhance information production by institutional investors, who profit from this enhanced information production.
Journal of Finance, 1993
This paper presents an information-theoretic model of IPO pricing in which insiders sell stock in... more This paper presents an information-theoretic model of IPO pricing in which insiders sell stock in both the IPO and the secondary market, have private information about their firm's prospects, and outsiders may engage in costly information production about the firm. High-value firms, knowing they are going to pool with low-value firms, induce outsiders to engage in information production by underpricing, which compensates outsiders for the cost of producing information. The information is reflected in the secondary market price of equity, giving a higher expected stock price for high-value firms.
The Review of Financial Studies, 1994
We model firms’ choice between bank loans and publicly traded debt, allowing for debt renegotiati... more We model firms’ choice between bank loans and publicly traded debt, allowing for debt renegotiation in the event of financial distress. Entrepreneurs, with private information about their probability of financial distress, borrow from banks (multiperiod players) or issue bonds to implement projects. If a firm is in financial distress, lenders devote a certain amount of resources (unobservable to entrepreneurs) to evaluate whether to liquidate the firm or to renegotiate its debt. We demonstrate that banks’ desire to acquire a reputation for making the “right” renegotiation versus liquidation decision provides them an endogenous incentive to devote a larger amount of resources than bondholders toward such evaluations. In equilibrium, bank loans dominate bonds from the point of view of minimizing inefficient liquidation; however, firms with a lower probability of financial distress choose bonds over bank loans.
Journal of Finance, 1994
We model reputation acquisition by investment banks in the equity market. Entrepreneurs sell shar... more We model reputation acquisition by investment banks in the equity market. Entrepreneurs sell shares in an asymmetrically informed equity market, either directly, or using an investment bank. Investment banks, who interact repeatedly with the equity market, evaluate entrepreneurs' projects and report to investors, in return for a fee. Setting strict evaluation standards (unobservable to investors) is costly for investment banks, inducing moral hazard. Investment banks' credibility therefore depends on their equity-marketing history. Investment banks' evaluation standards, their reputations, underwriter compensation, the market value of equity sold, and entrepreneurs' choice between underwritten and nonunderwritten equity issues emerge endogenously.
Journal of Financial Intermediation, 1996
We analyze the interrelationships among the corporate organization structure, the capital structu... more We analyze the interrelationships among the corporate organization structure, the capital structure, and the ownership structure of a firm with multiple projects, when incumbent management derives control benefits. The choices made by firm management are: (1) Whether to set up projects as a joint firm or as separate firms (spin-off), (2) the amount of debt financing to use, (3) the structure of the debt contract (e.g., straight debt on the joint firm, limited-recourse project financing, or spin-off with straight debt), and (4) the fraction of equity to hold in each firm (ownership structure). Differences in managerial ability across projects, benefits of control, and the probability of loss of control through a takeover or through bankruptcy are driving factors in this model. We relate the project characteristics to the optimality of spin-offs and limited-recourse project financing arrangements, and derive implications for the allocation of debt and the ownership structure across projects.
Journal of Financial and Quantitative Analysis, 1997
We develop a theory of unit IPOs in which the firm going public issues a package of equity with w... more We develop a theory of unit IPOs in which the firm going public issues a package of equity with warrants. We model an equity market where insiders have private information about the riskiness as well as the expected value of their firm's future cash flows. We demonstrate that, in equilibrium, high risk firms issue underpriced “units” of equity and warrants; lower risk firms, on the other hand, issue underpriced equity alone. In contrast to the existing literature, underpricing arises as a signal in our model in the context of a one-shot equity offering. Though developed in the context of IPOs, our model can also explain the issuance of seasoned equity offerings packaged with warrants. Further, the intuition behind the model generalizes readily to provide a new rationale for packaging call-option-like claims with risky securities other than equity, including convertible debt and debt with warrants.
The Review of Financial Studies, 1999
We address the question: At what stage in its life should a firm go public rather than undertake ... more We address the question: At what stage in its life should a firm go public rather than undertake its projects using private equity financing? In our model a firm may raise external financing either by placing shares privately with a risk-averse venture capitalist or by selling shares in an IPO to numerous small investors. The entrepreneur has private information about his firm's value, but outsiders can reduce this informational disadvantage by evaluating the firm at a cost. The equilibrium timing of the going-public decision is determined by the firm's trade-off between minimizing the duplication in information production by outsiders (unavoidable in the IPO market, but mitigated by a publicly observable share price) and avoiding the risk-premium demanded by venture capitalists. Testable implications are developed for the cross-sectional variations in the age of going-public across industries and countries.
Journal of Financial Intermediation, 1999
We develop a model of corporate myopia in which the interaction between asymmetric information an... more We develop a model of corporate myopia in which the interaction between asymmetric information and short-term trading by equity holders induces firms to undertake short-term rather than long-term projects, which are intrinsically more valuable. We study the effectiveness of alternative policy prescriptions in eliminating myopia. We show that a capital gains tax cut for long-term equity holders induces optimal project selection; an across-the-board tax cut has no such impact. We characterize the long-term capital gains tax rate which eliminates corporate myopia. Further, we show that a long-term capital gains tax cut does not induce a bias toward inefficient long-term projects when it is, in fact, short-term projects which are more valuable. In contrast, an investment tax credit directed at long-term projects leads to such a bias. Finally, we show that reducing the long-term capital gains tax rate to the level required to eliminate myopic investment behavior may also lead to an increase in government tax revenues.
Journal of Applied Corporate Finance, 2001
he issuance of tracking stock is a relatively new form of corporate restructuring in which a comp... more he issuance of tracking stock is a relatively new form of corporate restructuring in which a company issues new shares whose cash flows are tied to the performance of a particular subsidiary. Nevertheless, holders of tracking stocks own an interest in the consolidated company; they do not have direct ownership of the subsidiary to which their cash flows are tied. The number of tracking stock issues has increased steadily since 1991, after a quiet period that followed the issuance of two General Motors tracking stocks in the mid-1980s. As of February 2000, 18 companies had issued tracking stocks in a total of 22 subsidiaries. In 1999 alone, 17 companies announced their intention to issue tracking stocks and eight new subsidiary tracking stocks started trading. 1 Even with the increase in the issuance of tracking stocks, the reasons for their adoption are not entirely clear. There are two main rationales that have been offered for the issuance of tracking stocks as well as for two other closely related forms of restructuring, namely spin-offs and equity carve-outs. The first and most frequently mentioned is that issuing tracking stock helps the firm to "unlock hidden value." In other words, the separation of the parent and subsidiary for valuation purposes (while continuing to reap the synergistic benefits of joint operation) somehow increases the combined firm value. One reason for such a value increase may be that the issuance of tracking stock unlocks "hidden value" by reducing the information gap (academics refer to it as an "asymmetry") between firm insiders and outside investors. Clearly, this "unlocking hidden value" argument would not hold water if all information available to firm insiders were also available to all equity market participants. A related rationale often given by practitioners for issuing tracking stock is that it gives the parent firm a "currency" for acquisitions. However, this is a direct implication of the *We would like to thank IBES for permission to use their database, Gayane Hovakimian for providing equity carve-out data, and Susan Shu for helpful comments.
Journal of Financial Intermediation, 2002
By most accounts, the Internet and other technological advances are having a significant effect o... more By most accounts, the Internet and other technological advances are having a significant effect on financial markets and intermediaries. If history can serve as a guide, financial markets will proceed down a path over which advances in information technology challenge existing property rights over information and in doing so shape financial innovation and intermediary functions . From this perspective, we see potential for understanding how intermediaries, their regulators, and the parties they serve might best respond to these technological shocks. It was in this spirit that the Journal of Financial Intermediation and Boston College hosted in May 2000 the symposium from which the four articles in this special issue were drawn. The purpose of this article is to place these articles in perspective and outline an agenda for future research.
Journal of Financial Economics, 2004
We develop a new rationale for corporate spin-offs, and for the performance and value improvement... more We develop a new rationale for corporate spin-offs, and for the performance and value improvements following them, based on corporate control considerations. We consider a firm with multiple divisions, with incumbent management having different abilities for managing these divisions. If the incumbent loses control to a more able rival, it benefits all shareholders (including the incumbent) by increasing equity value, but involves the incumbent losing his private benefits of control. We show that a spin-off increases the incumbent's chance of losing control to such a rival. This, in turn, motivates the incumbent either to work harder at managing the firm (in order to avoid any loss of control), or to relinquish control of one of the firms resulting from the spin-off (either immediately following the spin-off, or subsequently in a control contest). We show that spin-offs will be associated with positive announcement effects and increases in long-term operating performance. Further, certain categories of spin-offs will exhibit long-term positive abnormal stock returns.
Journal of Financial Economics, 2005
We empirically examine the relationship between the quality and reputation of a firm's management... more We empirically examine the relationship between the quality and reputation of a firm's management and various aspects of its IPO and post-IPO performance, a relationship that has so far received little attention in the literature. We hypothesize that better and more reputable managers are able to convey the intrinsic value of their firm more credibly to outsiders, thereby reducing the information asymmetry facing their firm in the equity market. Therefore, IPOs of firms with higher management quality will be characterized by lower underpricing, greater institutional interest, more reputable underwriters, and smaller underwriting expenses. Further, if higher management quality is associated with lower heterogeneity in investor valuations, firms with better managers will have greater long-term stock returns. Finally, since better managers are likely to select better projects (having a larger NPV for any given scale) and implement them more ably, higher management quality will also be associated with larger IPO offer sizes and stronger post-IPO operating performance. We present evidence consistent with the above hypotheses.
Journal of Financial Economics, 2006
We analyze firms’ choice of exchange to list equity and exchanges’ choice of listing standards wh... more We analyze firms’ choice of exchange to list equity and exchanges’ choice of listing standards when insiders have private information about firm value, but outsiders can produce (noisy) information at a cost. Exchanges are populated by two kinds of investors, whose numbers vary across exchanges: sophisticated (low information production cost) investors and ordinary (high–cost) investors. While firms are short-lived, exchanges are long-lived, value-maximizing agents whose listing and disclosure standards evolve over time. The listing standards chosen by exchanges affect their “reputation,” since outsiders can partially infer the rigor of these standards from the post-listing performance of firms. We show that, while exchanges use their listing standards as a tool in competing for listings with other exchanges, this will not necessarily lead to a “race to the bottom” in listing standards. Further, a merger between two exchanges may result in a higher listing standard for the combined exchange relative to that of either of the merging exchanges. We develop several other implications for firms’ listing choices and resulting valuation effects, the impact of competition and co-operation among exchanges on listing standards, and the optimal regulation of exchanges.
Journal of Applied Corporate Finance, 2008
Journal of Corporate Finance, 2009
We present a direct test of the choice of the medium of exchange in acquisitions when both acquir... more We present a direct test of the choice of the medium of exchange in acquisitions when both acquirers and targets possess private information about their own intrinsic values. We test three hypotheses: first, whether acquirers are more likely to choose a stock offer as their equity is more overvalued; second, whether acquirers facing a greater extent of information asymmetry in evaluating targets are more (or less) likely to use a stock versus a cash offer; and third, whether a cash offer deters competing bids. Our findings are as follows. First, acquirers choosing a stock offer are overvalued and those choosing a cash offer are correctly valued. Second, the greater the extent of acquirer overvaluation, the greater the likelihood of it using a stock offer; further, the greater the extent of information asymmetry faced by an acquirer in evaluating its target, the greater its likelihood of using a cash offer. Third, the extent of an acquirer's under- or overvaluation significantly affects the abnormal returns to its equity upon the acquisition announcement. Finally, the use of cash by an acquirer deters competing bids. We conclude that private information held by both acquirers and targets together determine the medium of exchange.
Journal of Banking & Finance, 2010
We analyze the relation between antitakeover provisions (ATPs) and the performance of spin-off fi... more We analyze the relation between antitakeover provisions (ATPs) and the performance of spin-off firms. We find that firms protected by more ATPs before spin-offs have higher abnormal announcement returns and greater improvements in post-spin-off operating performance than firms with fewer ATPs. Further, firms that reduce the number of ATPs after spin-offs have greater improvements in operating performance than firms that do not reduce the number of ATPs. Finally, CEOs of pre-spin-off firms tend to retain more ATPs in parent firms and assign fewer ATPs to the spun-off units if they remain as the CEOs of the parents but not the spun-off units. Overall, our results indicate a positive relation between ATPs and the value gains to spin-offs.
Journal of Financial and Quantitative Analysis, 2009
We develop measures of the management quality of firms and make use of a unique sample of hand-co... more We develop measures of the management quality of firms and make use of a unique sample of hand-collected data to examine the relationship between the reputation and quality of a firm’s management and its financial and investment policies, a relationship that has so far received little attention in the literature. We hypothesize that better and more reputable managers are able to convey the intrinsic value of their firm more credibly to outsiders, thus reducing the information asymmetry facing their firm in the equity market. Given this, firms with better and more reputable managers will have more access to the equity market, so that we expect lower leverage ratios for these firms. In addition, they will have less need to signal using dividends, so that they will have lower dividend payout ratios. Further, since better managers are likely to select better projects (having a larger net present value (NPV) for any given scale) and to implement them more ably, higher management quality will also be associated with higher levels of investment. We present evidence consistent with the above hypotheses. Our direct tests of the relationship between management quality and asymmetric information also indicate that higher management quality leads to a reduction in the extent of information asymmetry facing a firm in the equity market.
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Published Paper by Thomas J Chemmanur