The Evolution of Corporate Ownership after IPO: The Impact of Investor Protection

C. Fritz  Foley; Robin  Greenwood

Journal Article | Review of Financial Studies | March 2010

The Evolution of Corporate Ownership after IPO: The Impact of Investor Protection

Abstract

We use firm-level data from 34 countries covering the 1995-2006 period to analyze how the characteristics of public markets shape the process by which firms become widely held. Firms in all countries in the sample tend to have concentrated ownership at the time they go public. Decreases in ownership concentration are more likely for firms in countries with stronger protections for minority shareholders, lower block premia, and more liquid stock markets. In these countries, firms are more likely to issue equity when investment opportunities are high, becoming widely held in the process. We find scant evidence, however, that changes in percentage blockholding forecast future returns, inconsistent with market timing theories. Our results suggest that liquidity-based theories of corporate ownership may have been underemphasized in previous cross-country studies.

Keywords: Financial Liquidity; Business History; Market Timing; Going Public; Business and Government Relations; Business and Shareholder Relations;

Format: Print

SSRN Find at Harvard

Citation:

Foley, C. Fritz, and Robin Greenwood. "The Evolution of Corporate Ownership after IPO: The Impact of Investor Protection." Review of Financial Studies 23, no. 3 (March 2010). (Formerly NBER Working Paper No. 14557.)

In June 2017, Legrand, a global specialist in electrical and digital building infrastructure which was a serial acquirer, announced it had signed an agreement to buy Milestone AV Technologies, a leading designer and manufacturer of branded audio-video products. This case describes Legrand's approach to screening, pursuing, and integrating targets as well as the criteria used to evaluate if a deal is successful.

In 2015, Elaine Paul, CFO of Hulu, and the rest of the senior leadership team, must decide if they should offer a new, advertisement-free subscription service. At the time Hulu distributed a wide variety of content including in season current programing and earned significant revenues from advertising. This choice had strategic implications and required formulating a view on how the video-on-demand industry would evolve. It also had value implications that can be analyzed in a subscriber-valuation model. The owners of Hulu, which included Disney and Fox, would ultimately need to approve whatever decision was made.

Reflexivity is the idea that investors' biased beliefs affect market outcomes, and that market outcomes in turn affect investors' beliefs. We develop a behavioral model of the credit cycle featuring such a two-way feedback loop. In our model, investors form beliefs about firms' creditworthiness, in part by extrapolating past default rates. Investor beliefs influence firms' actual creditworthiness because firms that can refinance maturing debt on favorable terms are less likely to default in the short run—even if fundamentals do not justify investors' generosity. Our model is able to match many features of credit booms and busts, including the imperfect synchronization of credit cycles with the real economy, the negative relationship between past credit growth and the future return on risky bonds, and "calm before the storm" periods in which firm fundamentals have deteriorated but the credit market has not yet turned.

Faculty & Research

The Evolution of Corporate Ownership after IPO: The Impact of Investor Protection

Abstract

Citation:

About the Authors

More from these Authors