A Property Rights Analysis of Newly Private Firms: Opportunities for Owners to Appropriate Rents and Partition Residual Risks

2011 ◽  
Vol 21 (3) ◽  
pp. 445-471 ◽  
Author(s):  
Marguerite Schneider ◽  
Alix Valenti
Keyword(s):  
Property Rights ◽  
Shareholder Value ◽  
Private Firm ◽  
Residual Risk ◽  
Private Firms ◽  
Public Firms ◽  
Going Private ◽  
Key Factor ◽  
Owned Company ◽  
Do So

ABSTRACT:A key factor in the decision to convert a publicly owned company to private status is the expectation that value will be created, providing the firm with rent. These rents have implications regarding the property rights of the firm’s capital-contributing constituencies. We identify and analyze the types of rent associated with the newly private firm. Compared to public firms, going private allows owners the potential to partition part of the residual risk to bond holders and employees, rendering them to be co-residual risk bearers with owners. We propose that new promotion-based contracts with bond holders and employees, reflecting their particular investments, be negotiated as the firm migrates from public to private status. These contracts should acknowledge the firm’s intent to maximize shareholder value and its need to take the risks necessary to do so, but support that the firm’s survival not be undermined due to its possibly opportunistic owners.

scholarly journals CEO turnover in public and private organizations: analysis of the relevance of different performance horizons

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Esteban Lafuente ◽  
Miguel A. García-Cestona
Keyword(s):  
Path Dependency ◽  
Ceo Turnover ◽  
Private Firms ◽  
Turnover Rates ◽  
Short Term ◽  
Past Performance ◽  
Public And Private ◽  
Content Type ◽  
Public Firms ◽  
Going Private

PurposeThis paper investigates how past performance changes, prior CEO replacements and changes in the chairperson impact CEO turnover in public and large private businesses.Design/methodology/approachWe analyze 1,679 CEO replacements documented in a sample of 1,493 Spanish public and private firms during 1998–2004 by computing dynamic binary choice models that control for endogeneity in CEO turnovers.FindingsThe results reveal that different performance horizons (short- and long-term) explain the dissimilar rate of CEO turnover between public and private firms. Private firms exercise monitoring patience and path dependency characterizes the evaluation of CEOs, while public companies' short-termism leads to higher CEO turnover rates as a reaction to poor short-term economic results, and alternative controls—ownership and changes in the chairperson—improve the monitoring of management.Originality/valueOur results show the importance of controlling for path dependency to examine more accurately top executives' performance. The findings confirm that exposure to market controls affects the functioning of internal controls in evaluating CEOs and shows a short-term performance horizon that could be behind the recent moves of public firms going private or restraining shareholders' power.

Private Firm Investment and Public Peer Misvaluation

2019 ◽  
Vol 94 (6) ◽  
pp. 31-60 ◽  
Author(s):  
Brad A. Badertscher ◽  
Devin M. Shanthikumar ◽  
Siew Hong Teoh
Keyword(s):  
Mutual Fund ◽  
Private Firm ◽  
Data Availability ◽  
Private Firms ◽  
Fund Flows ◽  
Economic Competition ◽  
Common Input ◽  
Public Firms ◽  
Public Markets ◽  
Firm Investments

ABSTRACT We study how public firm misvaluation affects private peer firm investments. An economic competition hypothesis predicts a negative relation because misvaluation-induced new investment by public firms crowds out investment by private peers that share common input or output markets. An alternative shared sentiment hypothesis predicts a positive relation because private firm stakeholders share in the sentiment associated with misvaluation in public markets. Misvaluation is proxied using both the price-to-fundamental ratio and an exogenous instrument obtained from mutual fund flows. The evidence is consistent with the shared sentiment hypothesis, and robust to alternative treatments for growth opportunities. Private firms finance misvaluation-induced investment primarily internally or externally with debt, not equity. Finally, misvaluation-induced investment increases future return on investment for private firms, in contrast with public firms. Overall, these findings suggest that overvaluation in public markets increases private firm investments and has beneficial effects on private firm investments by relaxing financing constraints. JEL Classifications: G32; M41. Data Availability: Data are available from sources identified in the paper.

Public versus Private Firm Responses to the Tax Rate Reduction in China

2013 ◽  
Vol 36 (1) ◽  
pp. 137-163 ◽  
Author(s):  
Kenny Z. Lin ◽  
Lillian F. Mills ◽  
Fang Zhang
Keyword(s):  
Private Firm ◽  
Private Firms ◽  
Rate Reduction ◽  
Short Term ◽  
Public And Private ◽  
Tax Rate ◽  
Public Firms ◽  
Public Versus Private ◽  
Statutory Tax Rate ◽  
Firm Responses

ABSTRACT This study examines how public and private firms in China respond to the 2008 statutory tax rate reduction from 33 percent to 25 percent. Using a proprietary dataset of private firms, we find that private firms report significantly more income-decreasing current accruals than do public firms in 2007, the year prior to the tax rate reduction. These negative accruals were substantial and material, both compared with public firms and compared with 2008 accruals. By shifting their taxable income from a high- to a low-tax year, private firms save about 8.58 percent of their total tax expenses in 2007. Our results suggest that countries contemplating tax rate changes should expect material inter-temporal income shifting by private firms when they predict the short-term effects of changes in the tax rate on revenue. JEL Classifications: H25; M41.

scholarly journals The firm lifecycle as a determiant of going private decisions

2017 ◽  
Vol 1 (1) ◽  
pp. 74-96
Author(s):  
Robert Gutsche ◽  
Lucia Schroeter
Keyword(s):  
Private Firm ◽  
Private Firms ◽  
Firm Characteristics ◽  
Going Private ◽  
Young Firms ◽  
The Impact ◽  
Retained Earnings

We examine the impact of corporate lifecycle on the likelihood of becoming a voluntary going private firm. We apply the firm’s capital mix as a measure for the stage in a firm’s lifecycle. In doing so, we provide a framework and evidence on firm characteristics of going private firms. We find that the decision to go private depends on the firm’s lifecycle. Young firms, with low retained earnings are more likely to go private than mature or old firms. We also find that relative firm characteristics of going private and non-going private firms are consistent with the findings on relative firm characteristics in M & A activity research for acquirers (bidders, non-targets) vs. non-acquirer (non-bidders, and targets) and that these relative firm characteristics of going private and non-going private firms stay constant throughout all stages of the corporate lifecycle. Keywords : going private, public to private, voluntary delistings, corporate lifecycle

Private firm performance: do women directors matter?

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Mahnoor Sattar ◽  
Pallab Kumar Biswas ◽  
Helen Roberts
Keyword(s):  
Firm Performance ◽  
Performance Measures ◽  
Small Firm ◽  
Gender Diversity ◽  
Private Firm ◽  
Private Firms ◽  
Women Directors ◽  
Content Type ◽  
Firm Profitability ◽  
Board Gender Diversity

Purpose This paper aims to examine the relationship between board gender diversity and private firm performance. Design/methodology/approach The authors test the association between board gender diversity and private firm performance by estimating pooled multivariate regressions using an unbalanced panel data set of 115,253 firm-year observations. Findings The authors find that younger, less busy and local women directors enhance private firm performance. Firms with 40% or more women directors report triple the economic benefits compared to boards with at least 20% women directors. Considering firm size, women directors significantly increase small firm profitability, and the effect is more pronounced for high-risk firms. Greater board gender diversity enhances small firm performance as the monitoring role of women directors benefits the firm even in the presence of busy men directors. Consistent with the agency theory framework, the authors find that women directors improve small firm profitability in the presence of agency costs. Research limitations/implications Due to the lack of availability of data about private firms, many factors are not directly observable. The analysis uses accounting-based performance measures that may be subject to managerial discretion. Nevertheless, the authors report highly significant results using cash-based performance measures that substantiate the overall findings. Practical implications The results of the present study point to the need for private firms to increase board gender diversity and consider women director busyness, age, nationality and firm size when making board director appointments. Originality/value This study adds to the scarce existent literature investigating private firms. The results contribute to the understanding of gender-diverse boards as well as the attributes of women directors that enhance private firm performance.

To Sue or Not to Sue: How Afghan Merchants Strategically Choose to Use or Avoid Courts

2019 ◽  
Vol 14 (2) ◽  
pp. 211-244
Author(s):  
Haroun RAHIMI
Keyword(s):  
Property Rights ◽  
Dispute Resolution ◽  
Original Data ◽  
Formal Property ◽  
Business Climate ◽  
Complex Picture ◽  
The Common ◽  
Do So

AbstractThis article explores how and why Afghan merchants choose to use courts or informal dispute resolution methods. It goes beyond the common corruption and inefficiency arguments, which maintain that Afghans do not use courts because they are corrupt and inefficient. It leverages rich, original data on variation of dispute resolution practices across provinces and types of disputes to gain insights into Afghan merchants’ dispute resolution decisions. In so doing, I reveal a more complex picture of commercial dispute resolution in Afghanistan. In this article, I demonstrate that Afghan merchants do choose courts when courts enforce the parties’ expectations and courts’ judgments are necessary and effective. Moreover, while Afghan merchants do prefer informal dispute resolution methods, they do so because informal methods hold important advantages over courts in the context of Afghanistan where the formal property rights system is a failure, and the business climate is highly volatile.

scholarly journals Innovation Strategy of Private Firms

2017 ◽  
Vol 53 (1) ◽  
pp. 1-32 ◽  
Author(s):  
Huasheng Gao ◽  
Po-Hsuan Hsu ◽  
Kai Li
Keyword(s):  
New Technology ◽  
Equity Markets ◽  
Life Cycles ◽  
Innovation Strategy ◽  
Private Firms ◽  
Investment Horizon ◽  
Public And Private ◽  
Public Firms ◽  
Innovation Strategies ◽  
Public Equity

We compare innovation strategies of public and private firms based on a large sample over the period 1997–2008. We find that public firms’ patents rely more on existing knowledge, are more exploitative, and are less likely in new technology classes, while private firms’ patents are broader in scope and more exploratory. We investigate whether these strategies are due to differences in firm information environments, CEO risk preferences, firm life cycles, corporate acquisition policies, or investment horizons between these two groups of firms. Our evidence suggests that the shorter investment horizon associated with public equity markets is a key explanatory factor.

scholarly journals CEO Turnover–Performance Sensitivity in Private Firms

2017 ◽  
Vol 52 (2) ◽  
pp. 583-611 ◽  
Author(s):  
Huasheng Gao ◽  
Jarrad Harford ◽  
Kai Li
Keyword(s):  
Chief Executive ◽  
Ceo Turnover ◽  
Private Firms ◽  
Board Structure ◽  
Turnover Rates ◽  
Public And Private ◽  
Public Firms ◽  
Performance Improvements ◽  
Performance Sensitivity ◽  
Quality Of Accounting Information

We compare chief executive officer (CEO) turnover in public and large private firms. Public firms have higher turnover rates and exhibit greater turnover–performance sensitivity (TPS) than private firms. When we control for pre-turnover performance, performance improvements are greater for private firms than for public firms. We investigate whether these differences are due to differences in quality of accounting information, the CEO candidate pool, CEO power, board structure, ownership structure, investor horizon, or certain unobservable differences between public and private firms. One factor contributing to public firms’ higher turnover rates and greater TPS appears to be investor myopia.

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