McCarty, Daniel E.

The purpose of this study is to develop and empirically test theories on wealth effects surrounding acquisitions by investment bankers. The primary research objective deals with strong-form market efficiency. The test strives to determine if the results of information held by investment bankers are attributable to inside information or information that is available to anyone willing to research and analyze particular target firms. A second research objective is to examine why larger wealth effects are expected. Potential reasons examined include internal and external governance issues, as well as acquisition activity as a means of governance. Specific issues examined are (1) a change in the chief executive officer after acquisition, (2) a change in the board of directors after acquisition, (3) an increase in the debt ratio of the target firm after acquisition, (4) downsizing and/or exiting from an industry after acquisition, and (5) to stop the selection of poor acquisitions by the target firm. The relative size of the acquisitions is controlled for in both groups; economies of scale realized from horizontal or vertical acquisitions are controlled for in the case of the control group. A comparison of the wealth gains between the two groups reveals that investment bankers outperform non-investment bankers when the average holding period abnormal return is used as the wealth measure. However, when cumulative average abnormal returns are compared, the non-investment banker group realizes higher wealth gains than the investment bankers. In no case does either group outperform a market index, the S&P 500. The results of the wealth effect tests support strong-form market efficiency; investment bankers do not utilize private information to realize gains from closely-held information. Primarily, downsizing is associated with positive effects on the stock price returns of target firms in partial acquisitions by investment bankers. Non-investment banker partial acquisitions are characterized with a change in the chief executive officer of the target firm. This change, however, is negatively associated with the share price returns of the target firms.

The purpose of this study is to empirically test a number of hypotheses related to unit initial public offerings. Specifically, the following areas are examined: (1) the underpricing unit IPOs relative to a subset of NASDAQ straight-equity IPOs; (2) the impact of the size and value of the overallotment option on the degree of underpricing and the underwriter percentage spread; (3) the impact of the size and value of the underwriter warrants on the degree of underpricing and the underwriter; (4) certification effects of auditor type and bank and bridge loans; (5) the distribution function of the underwriter; (6) the levels of financing packaged in the unit as a signal of firm quality, as well as, factors affecting the probability of packaging multiple levels of financing; (7) factors influencing the probability that the units offered will be detached into their component securities and (8) factors influencing unit bid-ask spreads. In general, the results indicate that unit IPOs are more underpriced than a similar subset of NASDAQ straight-equity IPOs. The excessive underpricing is reflective of the high degree of uncertainty surrounding these offerings. Also, the findings indicate that the degree of underpricing associated with unit offerings is influenced by the size of the offering, higher prestige unit underwriters and lower aftermarket volatility. Additionally, the value and size of the explicit options (the overallotment option and the underwriter warrants) granted in these offerings do not significantly impact the degree of unit underpricing. Furthermore, the evidence indicates the existence of certification benefits for those unit firms using big six/eight auditors and bank loans. In addition, the results imply that the underpricing of unit issues increases as the distribution effort of the underwriter decreases. Also, those unit firms packaging two levels of financing at the IPO (A and B warrants) seem to have a greater degree of uncertainty in comparison to those firms packaging only a single level of financing (A warrants only). For these firms, the probability of packaging multiple levels of financing is higher if the firm is underwritten on a best efforts basis and insiders retain a larger percentage of voting control. Similarly, the probability of a unit offering being detached into its component securities is greater with higher expected market making costs and a greater perception of firm value by the marketplace. Lastly, adverse information risk is greatest for the warrant component of detachable units. Furthermore, the findings indicate that underwriter stabilization and flipping seem to be infrequent events for the unit component.

This dissertation has a twofold objective: to extend the Williamson asset specificity hypothesis and to empirically test both the asset specificity hypothesis and the extension. The Williamson asset specificity hypothesis asserts that the financial leverage used by firms is a function of the specificity of the assets owned by the firm when asset specificity is defined as the readiness with which assets can be re-deployed. This results from a governance argument whereby highly specific assets can only be governed by increased equity participation. This argument is extended with the assertion that increased specificity causes operating leverage to rise and that firms counter this increased operating leverage by decreasing the financial leverage they employ. Liquidation value is employed as a proxy measure for how readily assets can be converted to cash. Data was gathered for a sample of firms who have liquidated and include firms liquidated in bankruptcy and firms liquidated voluntarily. Using these data a model is developed to estimate the liquidation value of any firm. A cross-sectional time-series formulation is employed using data gathered for thirty-six firms over a twenty-two year period. A statistically significant positive relationship was found to exist between the estimated liquidation value and financial leverage which supports the Williamson asset specificity hypothesis. Neither the cross-sectional nor time series behavior of firms provides evidence of a trade-off between interest tax shields and non-debt tax shields. No significant relationship was found to exist between the value of the non-debt tax shield and financial leverage. No evidence was found indicating a relationship between operating leverage of firms and financial leverage. However, evidence was found that firms with higher percentage changes in sales from year to year, lower probabilities of failure, higher levels of financial slack, and lower values for interest tax shields use less financial leverage. Finally, evidence was found indicating that firms employed more financial leverage in the 1980's than in the 1970's.