Tag: Equity capital

Angels and Venture Capitalists: A Match Made in Heaven?

Thomas Hellmann is Professor of Entrepreneurship and Innovation at Oxford University. This post is based on two recent articles authored by Mr. Hellmann, Veikko Thiel, Assistant Professor of Business Economics at Queen’s University; Paul Schure, Associate Professor of Economics at the University of Victoria; and Dan Vo, Research Fellow at the University of British Columbia. Related research from the Program on Corporate Governance includes Carrots & Sticks: How VCs Induce Entrepreneurial Teams to Sell Startups, by Jesse Fried and Brian Broughman (discussed on the Forum here) and Delaware Law as Lingua Franca: Evidence from VC-Backed Startups, by Jesse FriedBrian Broughman, and Darian Ibrahim (discussed on the Forum here).

Are angel investors and venture capitalists friends or foes? Are they synergistic partners in the process of funding entrepreneurial value creation? Or are they distinct funding mechanisms where entrepreneurs have to decide which camp they want to be part of? In a series of two recent papers (Friends or Foes? The Interrelationship between Angel and Venture Capital Markets; and Angels and Venture Capitalists: Substitutes or Complements?), we examine these questions both from a theoretical [1] and an empirical [2] perspective.


The Role of Academics and Industry in Improving Equity Market Structure

Michael S. Piwowar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Piwowar’s recent remarks at the University of Notre Dame, Mendoza College of Business, Center for the Study of Financial Regulation; the full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Piwowar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Today [March 13, 2015], I want to focus my remarks on the equities markets, and specifically equity market structure. Although it may be hard for some of you in this room to believe, in the 20 months since I began this job, some have suggested that I am a so-called “market structure expert.” While such comments are certainly flattering, I cannot accept the compliment. Of course, my academic research, my private and public sector experience, and my current role as a Commissioner at the Securities and Exchange Commission (“SEC” or the “Commission”) have all given me unique insights into the functioning of our equities markets. However, like many people in this room, I still consider myself a “student of markets.” With so many issues to examine and debate, and the continued evolution of the financial markets, I think we can agree there is more for all of us to observe and learn.

It has been fifteen months since I gave my first speech on equity market structure. Both before and since, my colleagues at the Commission have kept the issue of market structure in the forefront through their own public remarks. Congress also has been expressing keen interest in equity market structure, shining a bright light on the issue. And we have had some unsolicited prompting by a bestselling author, who, to put it lightly, does not have flattering things to say about the current state of the equity markets in what many refer to as simply “The Book.” Given all of this attention, I am frankly disappointed that we at the SEC have accomplished very little.


Does Group Affiliation Facilitate Access to External Financing?

The following post comes to us from Ronald Masulis, Peter Pham, and Jason Zein, all of the School of Banking & Finance at the University of New South Wales.

Across the world, difficulties in accessing external equity capital create a serious barrier to the development of new firms. In developed economies, this funding gap is bridged by angel investors and venture capitalists. In emerging economies however, contracting mechanisms and property rights protections are often insufficiently developed to support substantial venture capital activity. As a consequence, little is known about new venture funding in such economies and how external financing constraints are overcome.

In our paper titled “Does Group Affiliation Facilitate Access to External Financing? Evidence from IPOs by Family Business Groups,” which was recently made publicly available on SSRN, we investigate a major source of funding support for new firms—namely, internal equity investments by business groups, especially those controlled by families, and how this facilitates access to external equity markets. Our study is motivated by the pervasive nature of business group participation in international initial public offering (IPO) markets around the world: on average, 29 percent of new issue proceeds in each country is attributable to group-affiliated firms. This raises an important question regarding the role that business groups play in assisting new firms seeking to tap public equity markets. It also raises important questions about whether ignoring the existence of business groups creates serious biases in studies of international IPO activity.


FINRA To Propose Market Structure Actions

Annette Nazareth is a partner in the Financial Institutions Group at Davis Polk & Wardwell LLP, and a former commissioner at the U.S. Securities and Exchange Commission. The following post is based on a Davis Polk client memorandum.

On September 19, 2014, the Financial Industry Regulatory Authority (“FINRA”) announced that its Board of Governors (the “Board”) approved a series of regulatory initiatives primarily focused on equity and fixed income market structure issues. This is a direct response by FINRA to two important speeches this summer by SEC Chair Mary Jo White, in which she articulated an ambitious agenda of market structure reforms. [1]

The Board authorized FINRA staff to prepare Regulatory Notices soliciting comments or issuing guidance on the following:


Corporate Governance and the Erosion of Deutschland AG

The following post comes to us from Wolf-Georg Ringe, Professor of International Commercial Law at Copenhagen Business School.

The conventional view in comparative corporate governance research holds that German corporations are characterized by the prevalence of large blockholders, making it the typical example for a system of concentrated ownership. In my recent paper, Changing Law and Ownership Patterns in Germany: Corporate Governance and the Erosion of Deutschland AG, which has been made publicly available on SSRN, I show that the traditional ownership patterns in German corporations are currently undergoing a major change. The old “Deutschland AG”, a nationwide network of firms, banks, and directors, is eroding along three dimensions: the concentration of ownership is diffusing, the role of banks in equity participations is weakening, and the shareholder body is becoming increasingly international. It appears that these changes are more pronounced the larger the corporation. I present new data to support these developments and explore the consequences in governance and in law that have been taken or that need to be drawn from this finding.


Enhancing Our Equity Market Structure

Mary Jo White is Chair of the U.S. Securities and Exchange Commission. This post is based on Chair White’s remarks to the Sandler O’Neill & Partners, L.P. Global Exchange and Brokerage Conference; the full text, including footnotes, is available here. The views expressed in this post are those of Chair White and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

It is great to be here with you in New York to speak about our equity market structure and how we can enhance it.

While I know your views on particular issues may differ, you all certainly appreciate that investors and public companies benefit greatly from robust and resilient equity markets.

During my first year as Chair, not surprisingly, I have heard a wide range of perspectives on equity market structure, reflecting its inherent complexity, the relationships among many core issues, as well as the different business models of market participants. To frame the SEC’s review of these issues, I set out last fall certain fundamentals for addressing market structure policy. One of those is the importance of data and empirically based decision-making. At that time, we launched an interactive public website devoted to market structure data and analysis drawn from a range of sources. The website has grown to include work by SEC staff on important market structure topics, including the nature of trading in dark venues, market fragmentation, and high-frequency trading.


Equity Overvaluation and Short Selling

The following post comes to us from Messod Daniel Beneish, Professor of Accounting at Indiana University, Bloomington; Charles M. Lee, Professor of Accounting at Stanford University; and Craig Nichols, Assistant Professor of Accounting at Syracuse University.

In our paper, In Short Supply: Equity Overvaluation and Short Selling, which was recently made publicly available on SSRN, we use detailed equity lending data to examine the role of constraints on equity prices. We find that constrained stocks underperform, the short interest ratio (SIR) has a nonlinear association with constraints, constrained stocks have negative returns regardless of short interest ratio, high short interest yet unconstrained stocks do not underperform, yet low short interest unconstrained stocks outperform. Moreover, we show that limited supply is a key feature distinguishing constrained and unconstrained stocks, and that among constrained stocks, those with the lowest supply have the strongest negative returns. Our findings confirm that supply varies across firms (in contrast to SIR, which assumes supply is 100 percent of outstanding shares for all stocks) and short supply in the equity lending market has implications for the informational efficiency of equity prices.


2013 Private Equity Year in Review

Andrew J. Nussbaum is a partner in the corporate department at Wachtell, Lipton, Rosen & Katz. The following post is based on a Wachtell Lipton firm memorandum by Mr. Nussbaum, Steven A. Cohen, Amanda N. Persaud, and Joshua A. Feltman.

Private equity deal activity ebbed and flowed, often unexpectedly, in 2013. Despite some slow periods, strong debt and equity markets helped support first nine-months numbers that are well ahead of 2012, although Q4 2013 is unlikely to match Q4 2012, where activity was stimulated by anticipated changes in the tax laws. Successful sponsors again demonstrated their ability to perceive and exploit changing market conditions. Moreover, the private equity industry posted its best fundraising numbers in years. It was a year that showed that Semper Paratus may indeed be the industry’s new motto.


Focusing on Fundamentals: The Path to Address Equity Market Structure

Mary Jo White is Chair of the U.S. Securities and Exchange Commission. This post is based on Chair White’s remarks to the Security Traders Association 80th Annual Market Structure Conference; the full text, including footnotes, is available here. The views expressed in this post are those of Chair White and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

As market professionals, you obviously live the U.S. equity markets first hand, day in and day out. As an association, you have used your voice to focus attention on the value of our equity markets—an all-important engine for capital formation, job creation, and economic growth.

Like you, I believe that we must constantly strive to ensure that the U.S. equity markets continue to serve the interests of all investors. That mutual challenge must come fully of age and address today’s, not yesterday’s, markets. And today, I will speak about the path forward.


Executive Pay Disparity and the Cost of Equity Capital

The following post comes to us from Zhihong Chen of the Department of Accountancy at City University of Hong Kong, Yuan Huang of the School of Accounting and Finance at Hong Kong Polytechnic University, and K.C. John Wei, Professor of Finance at Hong Kong University of Science & Technology (HKUST).

In our paper, Executive Pay Disparity and the Cost of Equity Capital, forthcoming in the Journal of Financial and Quantitative Analysis, we investigate the association between executive pay disparity and the cost of equity capital. Understanding the association is important because the cost of capital is one of the key considerations for managers in their capital budgeting and corporate financing decisions. In fact, the cost of capital is a more direct yardstick of corporate investment and financing decisions than firm valuation. A higher cost of capital means fewer positive net present value (NPV) projects, leading to fewer growth opportunities. In addition, the cost of capital summarizes an investor’s risk-return tradeoff in his resource allocation decision (Pástor, Sinha, and Swaminathan (2008)).

In general, there are two perspectives on executive pay disparity. The tournament perspective views the large pay gap between the CEO and other executives as the prize for a tournament in which players compete for the CEO position (Lazear and Rosen (1981); Kale, Reis, and Venkateswaran (2009)). A large pay disparity motivates non-CEO senior executives to work hard and to invest in firm-specific human capital. This, in turn, helps build a large pool of skilled internal candidates for the CEO position. The availability of skilled internal candidates not only reduces the entrenchment of the incumbent CEO by increasing the bargaining power of the board, but also reduces CEO succession risk. Therefore, this perspective predicts a negative association between executive pay disparity and the cost of capital.


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