This chapter examines the potential discrepancies in the regulation applied to overseas issuers, as opposed to domestic issuers, of four leading financial centers. They are New York, London, Hong Kong, and Singapore. It consists of three substantive sections. The first section will reviews existing literature and empirical evidence concerning the motivations and current state of cross-listing. The second section examines the listing route for an overseas issuer and inquires how it might differ from a domestic listing in the host country. This chapter particularly concerns the potential discrepancies of rules between a foreign listing and a domestic listing and asks if those discrepancies would lead to better or inferior investor protection. The third section examines the continuing regulation of foreign-listed companies, reviewing some regulatory concerns involving cross-listed companies and discussing what can be done to curb the problems, for instance, through regulatory cooperation between home and host regulators.
C.A. Knox Lovell and Emili Grifell-Tatjé
We study various analytical frameworks relating productivity change to change in the cost structure and cost efficiency of the firm. We begin by motivating a focus on the cost side, and not the revenue side, of the profit objective of the firm. We continue by relating the cost accounting tool of standard cost variance analysis to the economics tool of cost efficiency analysis. We focus on managerially controllable drivers of cost efficiency, including productivity change and its components. We conclude by noting some significant empirical applications of the analysis, by recommending cost efficiency analysis as a valuable tool for benchmarking against the best, and by suggesting some new directions for research.
All Ties Are Not Created Equal: Institutional Equity Ties, IPO Performance, and Market Growth of New Ventures
Yong Li and Beiqing Yao
This chapter examines whether and how different types of institutional ties affect new venture performance at different organizational stages. The authors propose that equity ties to government agencies will enhance the speed and returns of initial public offerings (IPOs) but hinder post-IPO market growth. By contrast, equity ties to research institutes will contribute positively to both IPO performance and post-IPO market growth. The authors build their arguments on how the two types of institutional ties meet new ventures’ need to be legitimate and competitive pre- and post-IPO. They test their hypotheses with new ventures in the pharmaceutical and chemical industries that went public in China and find supportive evidence.
Armin Schwienbacher and Benjamin Larralde
This article discusses crowdfunding as an alternative way of financing projects, with a focus on small, entrepreneurial ventures. It first provides a description of crowdfunding and discusses existing research on the topic. The next section looks at crowdfunding in the context of entrepreneurial finance and thereby describes factors affecting entrepreneurial preferences for crowdfunding as a source of finance. Thereafter it elaborates different business models used to raise money from the crowd, in particular with respect to the structure of the crowdfunding process. Building on this discussion, the article presents and discusses extensively a case study, Media No Mad (a French start-up). It concludes with recommendations for entrepreneurs seeking to make use of crowdfunding and with suggestions for researchers about yet-unexplored avenues of research.
Liang Han and Song Zhang
This article reviews literature on the important role played by asymmetric information in entrepreneurial finance from two perspectives: asymmetric information and relationship lending, and the theoretical modeling of asymmetric information. Then it examines the relationship between capital market conditions and entrepreneurial finance and attempts to answer two questions: Why is the capital market condition important for entrepreneurial finance? and What are the effects of capital market conditions on entrepreneurial financial behavior in terms of discouraged borrowers, cash holding, and the availability and costs of finance?
This chapter focuses on the selection of an audit firm by UK initial public offering (IPO) firms. It documents that many IPO firms switch to an audit firm in a different segment (big, midsize, or small), which suggests that IPO firms carefully select an audit firm of a particular quality level before they go public. It examines whether the selection of an auditor by IPO firms is driven by the demand for certification or insurance. The authors find that IPO firms are more likely to choose a high-quality auditor when the uncertainty of the firm’s future prospects is higher and they want to signal quality (certification driven by signaling). In addition, they find that firms with riskier IPO offerings select higher-quality auditors, in line with the insurance hypothesis. They find mixed results for the certification hypotheses when testing for the effect of auditor reputation on initial returns.
Markus Ampenberger, Morten Bennedsen, and Haoyong Zhou
This article has two parts. The first part provides a brief literature review on existing theoretical and empirical research in the capital structure of family firms. It argues that there are several important aspects of being a closely held family firm that have opposing impacts on the optimal choice of debt leverage. One important feature is that families are typically nondiversified investors that not only have most of their wealth tied to the company but also often their human capital. Another salient feature is that families want to have control over their company. This control objective restricts the willingness to raise new capital outside the family and therefore often results in a stronger dependence on banks and various forms of debt instruments. The second part provides an empirical analysis of the leverage structure of family firms in Denmark. Using a unique data set the family can be tracked behind each of the 200,000 Danish firms and the firms categorized into family or nonfamily firms. Three definitions of family firms are used in the analysis: multiple family members owning the firm; a family owner is also CEO; and there has been at least one family succession in the firm.
David Porter, Stephen Rassenti, and David Munro
Traditional auctions struggle to achieve efficient allocations in multi-resource environments where individual resources are complements (the value of obtaining a package of items is worth more than the sum of the unbundled individual values) or they are substitutes. For this reason, Combinatorial Auctions are valuable resource allocation mechanisms in a host of environments. These environments include, but are not limited to, spectrum auctions, procurement of transportation services, exchange of pollution credits, and the allocation of space shuttle resources. This chapter provides a summary of several important combinatorial auction mechanisms. For each mechanism examined we highlight the strengths, weaknesses, and the environments for which they are well suited. In addition, the chapter provides examples of how these mechanisms have been used by business and government to gain efficiency and revenue in these complex resource allocation environments.
Anup Agrawal and Charles R. Knoeber
This paper reviews the literature on corporate governance and firm performance in economies with relatively dispersed stock ownership and an active market for corporate control, such as the US and the UK. Section 1 outlines a framework of the basic agency problem between managers and shareholders and the corporate governance mechanisms that have evolved to address this problem. Section 2 deals with the relation between firm performance and inside ownership. Section 3 pertains to the relation between firm performance andmonitoring by large shareholders, monitoring by boards, and shareholder rights regarding takeover of the firm. Section 4 considers the relation between governance regulation and firm performance. Section 5 deals with the relation between governance and firm performance in family firms, and section 6 provides a summary and identifies some remaining puzzles and unresolved issues for future research.
This chapter explores the link between corporate governance and transparency. It begins by discussing definitions of corporate governance and transparency and goes on to review the literature on their relationship, covering also research on information disclosure. It then introduces a stylized model for the interrelationship between corporate governance and transparency. In key position is the board which is assumed to safeguard maximization of the long-run value of the firm’s equity in shareholders’ interests. Transparency is analyzed from shareholders’ point of view. The chapter highlights why increased transparency may reduce shareholder value and thus to a varying degree will be substituted with corporate governance mechanisms.
Fabio Bertoni, Michelle Meoli, and Silvio Vismara
Establishing effective corporate governance is most important at the time of an initial public offering (IPO), because the IPO represents a significant step by a company toward moving to the public arena. This chapter focuses on three characteristics that help describe structure of the board of directors at the time of IPO: board size (i.e., the number of members on a board), board independence (i.e., the proportion of non-executive members on the board), and board leadership (i.e., the choice to overlap the roles of CEO and chairman of the board). The chapter presents empirical evidence from a sample of 969 companies that went public between 1995 and 2011 in France, Germany, and Italy that shows how these companies differ from their US and UK counterparts.
Crowdfunding is a way of raising money through small contributions from a large number of investors, i.e. a “crowd.” Crowdfunding constitutes a common denominator for a number of financing methods, from donations through lending up to venture capital, all taking place online. Therefore, there are numerous legal challenges, namely use of copyright, distribution of loans and credits, or possible sale of securities. This chapter focuses on the development of equity crowdfunding, which shows many similarities with classical initial public offering (IPO) as a financing tool, yet on a smaller scale. The chapter analyzes the existing regulatory framework of equity crowdfunding in the United States and in the European Union.
The Dark Side of Venture Capital Syndication and IPO Firm Performance: The Impact of Different Institutional Environments
Salim Chahine, Igor Filatotchev, Robert E. Hoskisson, and Jonathan D. Arthurs
This chapter integrates agency research with an institutional perspective and investigates multiple agency conflicts in venture capital (VC) syndicates and their effect on stock-market performance of initial public offerings (IPOs) in the United States and the United Kingdom. Using a matched sample of 402 IPOs, the authors show that the size and diversity of a VC syndicate have a negative impact on performance, but this impact is higher in the United States. Ownership concentration within a syndicate improves performance, but this effect is stronger in the United Kingdom. Results indicate that the extent of multiple agency conflicts and their potential remedies are not universal and depend on formal and informal institutions.
A large, mature and robust economics literature now provides a useful framework for understanding incentives. This chapter uses the lessons of that literature to discuss how to design and implement pay for performance in practice. A unified treatment of properties of numeric performance measures is provided, including how performance measures relate to employee knowledge and decision making. Subjective performance evaluation, and the tie of evaluations to rewards, are analyzed. Practical implementation issues, such as matching of pay for performance to job design, motivating creativity, and links between incentives and employee selection, are considered. The chapter concludes with suggested directions for future research.
Thomas Boulton, Scott Smart, and Chad Zutter
From 1998 to 2014, average IPO underpricing at the country level ranged from 1.2% in Argentina to 69.7% in China. What factors account for the high variability of IPO underpricing in the international cross section? This chapter reviews research attempting to answer that question. The chapter begins by providing current evidence on the extent to which IPO underpricing varies internationally. It then focuses on research that ties international underpricing differences to disclosure regulations and practices around the world. Next, the authors evaluate studies that attribute cross-country variation in underpricing in part to differences in corporate governance practices and legal institutions. The chapter concludes with some thoughts about directions for future research in this field.
Dispersed Ownership: The Theories, the Evidence, and the Enduring Tension between “Lumpers” and “Splitters”
John C. Coffee Jr.
This article argues that dispersed ownership resulted less from inexorable forces and more from private ordering. Neither legal nor political conditions mandated or prevented the appearance of dispersed ownership. Rather, entrepreneurs, investment bankers, and investors—all seeking to maximize value—sometimes saw reasons why selling control into the public market would maximize value for them. But when and why? That is the article's focus. It argues that law played less of a role than specialized intermediaries—investment banks, securities exchanges, and other agents—who found it to be in their self-interest to foster dispersed ownership and who compensated for weak legal protections. Initially, relying on reputational capital, self-regulatory institutions, and contractual mechanisms, entrepreneurs found ways to assure investors that they would not be exploited if they invested in their companies as minority shareholders. This resulted in a localized dispersion of ownership with control remaining with the founder/entrepreneur.
Robert Maness and Steven N. Wiggins
This chapter examines the role played by firms in allocating resources in a modern economy, explaining when firms are superior to markets and the limits to firm size. The analysis begins by carefully examining what distinguishes firm allocation from markets. We then review the various theoretical approaches to determining the size of firms and the types of transactions that occur within firms versus within markets. These models can be grouped into four broad categories: transaction cost models, property rights models, adaptation models, and incentive system models. We review the distinctive predictions of these models regarding the size and scope of firms, and numerous empirical tests. We discuss these tests, their results and limitation, and current research challenges. We conclude with a discussion of directions for future research.
This article discusses the contribution of small and medium-size enterprises to the economy and the kind of financial environment they face, the notion of the finance gap faced by small business, and the type of capital structure they have. It then introduces the importance of the working capital management process and the role of cash management in achieving growth for small firms, and the way to enhance liquidity by financing accounts receivable. It provides an overview of the factoring and invoice financing market, the possible determinants that have contributed to the growth of this form of financial service to businesses, and the potential costs and benefits to the entrepreneurial firm. An analysis is then provided to evaluate whether factoring and invoice financing could be a short-term or long-term financing choice for small and medium-size enterprises.
Robert W. Fairlie and Alicia Robb
This article examines the financing patterns of minority-owned businesses. It first reviews findings from the previous literature on financing constraints and related constraints faced by minority firms. Next it conducts an extensive empirical analysis of the barriers to financing faced by minority-owned firms using data from three sources: the Survey of Business Owners (SBO), the Kauffman Firm Survey (KFS), and the Survey of Small Business Finances (SSBF). These are the most commonly used and respected sources of data on the financing of minority-owned businesses. The analysis explores the potential barriers to financing among minority-owned firms from the earliest stages of business creation to the financing of successful older firms. The goal is to provide a comprehensive analysis of the use of financial capital among minority-owned firms and the causes of constraints in financing.
Leonce Bargeron and Kenneth Lehn
This chapter reviews the literature on the determinants of firms’ financing decisions and suggests fruitful areas for future research. We describe the tradeoff, pecking order, and market timing theories of capital structure and assess the extent to which these theories are supported by empirical evidence. Although parts of the three theories are supported by empirical evidence, the totality of the evidence does not provide compelling support for any of the three theories. Hence, to a large extent, the determinants of firms’ financing policies remain a major puzzle in financial economics.