Essays on corporate acquisitions and stock market introductions

Abstract

The essays in this thesis have the general objective to empirically explore the consequences of asymmetric information that lead to possible conflicts of interest between managers and outside investors in the Swedish corporate sector. More specifically, the first two essays focus on the divergence of incentives between managers and shareholders with respect to corporate diversification and risk reduction. The third essay and the final note focus on the problem of asymmetric information when an entrepreneur wants to sell his firm.During the 1980s Swedish firms employed strategies that either diversified across actors or focused within a narrow product group. In the first essay it is documented that focused investment strategies are positively related to shareholder value and operating performance and that relatively risky investments enhance shareholder value and operating performance. These findings suggest that investment strategies aiming at diversification and corporate risk reduction stem per se from agency problems between managers and shareholders.In the second essay, the interaction between the share of managerial ownership and the firm's performance in the context of diversifying orrisk-reducing acquisitions is examined. Managerial ownership is hypothesized to act as a control mechanism for agency problems. Managers with personal wealth invested in the firm will experience losses on this investment if they engage in value reducing activities. Consistent with this hypothesis, the discount associated with risk-reducing acquisitions significantly diminishes with managerial ownership. Moreover, the results suggest that managers with too much of their wealth invested in the firm engage in corporate risk-reduction in order to reduce the risk of their personal portfolios. They experience a net benefit from reducing the corporate risk level even if the value of their shares decreases.In the third essay, the ownership and performance of closely held Swedish firms going public are followed from the initial public offering (IPO) to the secondary and takeover markets. A manager, who has all his wealth invested in his firm, has incentives to sell some of his shares and invest in other assets. For a privately held firm, this may result in an IPO. The results suggest that entrepreneurs sell a minimum amount of shares at the IPO and then decrease their holdings by secondary market trade or tender offers. The probability of receiving the premium associated with a successful tender offer and thereby firm value decrease with the entrepreneur's vote-to-equity ratio. Thus,entrepreneurs, who want to maximize the proceeds from relinquishing control, have incentives to keep a controlling block at the IPO andbalance their vote-to-equity ratios in the secondary market in such a way that the control rights can be sold in a tender offer.In the final note it is argued that the framework in Kyle's (1985) model of insider trading resembles secondary market trade in IPO firms.Kyle derives linear strategies under risk neutrality assumptions. The contribution of this note is that the implications of risk-aversion areexamined and it is documented that risk-aversion implies non-linear strategies in the potential volume of liquidity trade. This suggests that the optimal divestment strategy of a risk-averse entrepreneur, who wants to sell his firm, depends on the secondary market micro structure.