Tag: Public firms


IRS Releases Final Regulations Under Section 162(m)

The following post comes to us from Edmond T. FitzGerald, partner and head of the Executive Compensation Group at Davis Polk & Wardwell LLP, and is based on a Davis Polk client memorandum by Kyoko Takahashi Lin.

The following post comes to us from Edmond T. FitzGerald, partner and head of the Executive Compensation Group at Davis Polk & Wardwell LLP, and is based on a Davis Polk client memorandum by Kyoko Takahashi Lin.

On March 31, 2015, the Internal Revenue Service published final regulations under Section 162(m) of the Internal Revenue Code. As it did when it proposed these regulations in 2011, the IRS has indicated that these regulations are not intended to reflect substantive changes to existing requirements of Section 162(m), but rather to clarify them.

The final regulations clarify two requirements for exceptions from the Section 162(m) tax deductibility limit:

  • the need for per-employee limits on equity awards in order to qualify stock options and stock appreciation rights (SARs) for the “qualified performance-based compensation” exception; and
  • the treatment of restricted stock units (RSUs) or phantom stock arrangements under the transition period exception for certain compensation “paid” by newly public companies.

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2015 IPO Study

The following post comes to us from Proskauer Rose LLP and is based on the Executive Summary of a Proskauer publication; the complete publication, including extensive analysis of multiple industry sectors and foreign private issuers, is available here.

The following post comes to us from Proskauer Rose LLP and is based on the Executive Summary of a Proskauer publication; the complete publication, including extensive analysis of multiple industry sectors and foreign private issuers, is available here.

We examined 119 U.S.-listed IPOs with a minimum deal size of $50 million in 2014, representing about half of the overall market for deals meeting those criteria. Our study covered a range of industries and included foreign private issuers and master limited partnerships, but excluded certain uncommon deal structures.

This edition expands on last year’s study (discussed on the Forum here) in several important ways. Collectively, these enhancements widen our perspective and, in the process, deepen our analysis.

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Corporate Investment and Stock Market Listing: A Puzzle?

The following post comes to us from John Asker, Professor of Economics at UCLA; Joan Farre-Mensa of the Entrepreneurial Management Unit at Harvard Business School; and Alexander Ljungqvist, Professor of Finance at NYU.

The following post comes to us from John Asker, Professor of Economics at UCLA; Joan Farre-Mensa of the Entrepreneurial Management Unit at Harvard Business School; and Alexander Ljungqvist, Professor of Finance at NYU.

Economists have long worried that a stock market listing can induce short-termist pressures that distort the investment decisions of public firms. Back in 1985 Narayanan wrote in the Journal of Finance that “American managers tend to make decisions that yield short-term gains at the expense of the long-term interests of the shareholders.” More recently, a growing number of commentators blame the sluggish performance of the U.S. economy since the 2008–2009 financial crisis on short-termism. For example, in a recent Harvard Business Review article, Barton and Wiseman, global managing director at McKinsey & Co. and CEO of the Canada Pension Plan Investment Board, respectively, argue that “the ongoing short-termism in the business world is undermining corporate investment, holding back economic growth.”

Yet, systematic empirical evidence of widespread short-termism has proved elusive, largely because identifying its effects is challenging. A chief challenge is the difficulty of finding a plausible counterfactual for how firms would invest absent short-termist pressures. In our paper, Corporate Investment and Stock Market Listing: A Puzzle?, which is forthcoming at the Review of Financial Studies, we address this difficulty by comparing the investment behavior of stock market-listed firms to that of comparable privately held firms, using a novel panel dataset of private U.S. firms covering more than 400,000 firm years over the period 2001–2011. Building on prior work, our key identification assumption is that, on average, private firms suffer from fewer agency problems and, in particular, are subject to fewer short-termist pressures than are their listed counterparts. This assumption is motivated by the fact that private firms are often owner managed and, even when not, are both illiquid and typically have highly concentrated ownership. These features encourage their owners to monitor management more closely to ensure long-term value is maximized.

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An IPO’s Impact on Rival Firms

The following post comes to us from Matthew Spiegel, Professor of Finance at Yale University, and Heather Tookes, Professor of Finance at Yale University.

The following post comes to us from Matthew Spiegel, Professor of Finance at Yale University, and Heather Tookes, Professor of Finance at Yale University.

An initial public offering (IPO) is a major event in the life of any firm. But what does an IPO imply for the industry’s future? In our paper, An IPO’s Impact on Rival Firms, which was recently made publicly available on SSRN, we take a structural approach that allows different industries to progress in different ways post IPO. If one is forced to make a sweeping generalization, then this paper finds an IPO augurs in an era of reduced profits and greater consumer mobility within an industry. Unlike a static model, a structural model’s parameters produce implications about magnitudes rather than just signs. This permits one to assess whether the estimates are economically “reasonable in a straightforward manner.”

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The Spotlight on Boards

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton.

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton.

The ever evolving challenges facing corporate boards prompts an updated snapshot of what is expected from the board of directors of a major public company—not just the legal rules, but also the aspirational “best practices” that have come to have almost as much influence on board and company behavior.

Boards are expected to:

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The JOBS Act and Information Uncertainty in IPO Firms

The following post comes to us from Mary Barth, Professor of Accounting at Stanford University; Wayne Landsman, Professor of Accounting at the University of North Carolina; and Daniel Taylor, Assistant Professor of Accounting at the University of Pennsylvania.

The following post comes to us from Mary Barth, Professor of Accounting at Stanford University; Wayne Landsman, Professor of Accounting at the University of North Carolina; and Daniel Taylor, Assistant Professor of Accounting at the University of Pennsylvania.

In our paper, The JOBS Act and Information Uncertainty in IPO Firms, which was recently made publicly available on SSRN, we examine whether the Jumpstart Our Business Startups Act (JOBS Act) increases information uncertainty in firms with initial public offerings (IPOs). The JOBS Act, which was signed into law in April 2012, creates a new category of issuer, the Emerging Growth Company (EGC), and eases regulations for EGCs to encourage initial public offerings of their shares. Specifically, the Act includes provisions that allow firms with EGC status to reduce the scope of mandatory disclosure of financial statement and executive compensation information, to file draft registration statements confidentially with the Securities and Exchange Commission (SEC), to delay application of new or revised accounting standards, and to delay compliance with Section 404(b) of the Sarbanes-Oxley Act (SOX), which relates to auditor attestation on internal controls. We find evidence consistent with the easing of these regulations increasing information uncertainty in the IPO market.

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2014 IPO Study

The following post comes to us from Julie M. Allen, Partner in the Corporate Department and co-head of the Capital Markets Group at Proskauer Rose LLP, and is based on the Executive Summary of a Proskauer publication; the complete publication, including extensive analysis of multiple industry sectors, is available here.

The following post comes to us from Julie M. Allen, Partner in the Corporate Department and co-head of the Capital Markets Group at Proskauer Rose LLP, and is based on the Executive Summary of a Proskauer publication; the complete publication, including extensive analysis of multiple industry sectors, is available here.

Our study provides a comprehensive analysis of the 2013 US IPO market.

We examined several key aspects of IPOs, including:

  • The JOBS Act
  • Financial profiles and accounting disclosures
  • SEC comments and timing
  • Corporate governance
  • IPO expenses
  • Deal structure
  • Lock-ups
  • Sponsor-backed companies

We reviewed 100 of the 136 IPOs that priced in 2013 and met our study criteria.

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Compensating for Long-Term Value Creation in U.S. Public Corporations

Joseph Bachelder is special counsel in the Tax, Employee Benefits & Private Clients practice group at McCarter & English, LLP. The following post is based on an article by Mr. Bachelder, with assistance from Andy Tsang, which first appeared in the New York Law Journal.

Joseph Bachelder is special counsel in the Tax, Employee Benefits & Private Clients practice group at McCarter & English, LLP. The following post is based on an article by Mr. Bachelder, with assistance from Andy Tsang, which first appeared in the New York Law Journal.

Three categories of performers are rewarded for value creation in U.S. public corporations. They are: (1) the executives who manage the corporations; (2) the directors who oversee the performance of these corporations; and (3) the individual asset managers and others who provide investment services to investors who own, directly or indirectly, these corporations.

The following post takes a look at the correlation between the long-term incentive compensation of these three categories of performers and long-term value creation in U.S. public corporations that is attributable to them. In fact, such correlation appears to be limited. In addition, the article will consider a definition of “long-term” value creation, the roles of these three categories of performers in creating “long-term” value and the methods of compensating these different categories of performers in their respective roles in “long-term” value creation.

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Do Going-Private Transactions Affect Plant Efficiency and Investment?

The following post comes to us from Sreedhar Bharath of the Department of Finance at Arizona State University, Amy Dittmar of the Department of Finance at the University of Michigan, and Jagadeesh Sivadasan of the Department of Business Economics and Public Policy at the University of Michigan.

The following post comes to us from Sreedhar Bharath of the Department of Finance at Arizona State University, Amy Dittmar of the Department of Finance at the University of Michigan, and Jagadeesh Sivadasan of the Department of Business Economics and Public Policy at the University of Michigan.

Are private firms more efficient than public firms? Jensen (1986) suggests that going-private could result in efficiency gains by aligning managers’ incentives with shareholders and providing better monitoring. In our paper, Do Going-Private Transactions Affect Plant Efficiency and Investment?, forthcoming in the Review of Financial Studies, we examine a broad dataset of going-private transactions, including those taken private by private equity, management and private operating firms between 1981 and 2005. We link data on going-private transactions to rich plant-level US Census microdata to examine how going-private affects plant-level productivity, investment, and exit (sale and closure). While we find within-plant increases in measures of productivity after going-private, there is little evidence of efficiency gains relative to a control sample composed of firms from within the same industry, and of similar age and size (employment) as the going-private firms. Further, our productivity results hold excluding all plants that underwent a change in ownership after going-private, alleviating the potential concern that control plants may undergo improvements through ownership changes.

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Financial Dependence and Innovation

The following post comes to us from Viral Acharya, Professor of Finance at NYU, and Zhaoxia Xu of the Department of Finance and Risk Engineering at NYU.

The following post comes to us from Viral Acharya, Professor of Finance at NYU, and Zhaoxia Xu of the Department of Finance and Risk Engineering at NYU.

While innovation is crucial for businesses to gain strategic advantage over competitors, financing innovation tends to be difficult because of uncertainty and information asymmetry associated with innovative activities (Hall and Lerner (2010)). Firms with innovative opportunities often lack capital. Stock markets can provide various benefits as a source of external capital by reducing asymmetric information, lowering the cost of capital, as well as enabling innovation in firms (Rajan (2012)). Given the increasing dependence of young firms on public equity to finance their R&D (Brown et al. (2009)), understanding the relation between innovation and a firm’s financial dependence is a vital but under-explored research question. In our paper, Financial Dependence and Innovation: The Case of Public versus Private Firms, which was recently made publicly available on SSRN, we fill this gap in the literature by investigating how innovation depends on the access to stock market financing and the need for external capital.

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