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The impact of intermediaries in activism and IPOs

Pezier, Emmanuel (2020). The impact of intermediaries in activism and IPOs. (Unpublished Doctoral thesis, City, University of London)

Abstract

This thesis explores the role and impact of financial intermediaries in shareholder activism and initial public offerings (IPOs).

The first chapter examines the risks and returns to shareholder activism in small-cap stocks. Activists appear to play an important governance role, but identifying it empirically remains challenging. We examine a private dataset of engagements in small UK companies in the 2008-15 period. Our activist receives a blind portfolio; has low incentives and financial resources; engages alone, behind-the-scenes; and deals in illiquid under-researched firms. These features help us to focus on the treatment (as compared to the selection) effect. Consistent with a positive governance effect of shareholder activism, we find that the engagements generate positive annual returns for the period (+1.4%), especially in confrontational situations (+4.9%), and have persistent impacts on firms’ operating performance.

The second chapter examines whether advisory firms improve outcomes for issuers in IPOs. Issuers increasingly employ advisers in IPOs. We examine advisers’ incentives and effects on first-day returns, withdrawals and underwriting spreads in Europe. We find advisers in aggregate have no impacts despite charging significant fees and claiming they add value. Decomposing the null result, we find differences between advisers consistent with their heterogeneous incentives: generalist firms (offering IPO and other services) are associated with a 91-percentage point increase in first-day returns amongst deals priced at the top of the filing range; specialist firms (primarily IPO services) have no such effect. Since advisers’ incentives are not transparent, issuers may be making uninformed choices.

The third chapter examines whether early investors reduce risks and/or add value to issuers in IPOs. IPOs increasingly involve early investors who commit to buying shares before the offering is launched. Using a European sample, we examine whether banks underprice strongly-demanded IPOs to satisfy the limit prices of early investors, and whether such investors salvage weakly-demanded IPOs in equilibrium. We find early investors are associated with a 52-percentage point increase in underpricing in IPOs where their limit prices are likely to have been binding. However, we find no evidence that they salvage weakly-demanded IPOs, reduce gross spreads or IPO withdrawals, or provide value-added or informational services. Instead, we find support for agency-based explanations for the underpricing.

Publication Type: Thesis (Doctoral)
Subjects: H Social Sciences > HG Finance
Departments: Bayes Business School > Finance
Doctoral Theses
Doctoral Theses > Bayes Business School Doctoral Theses
[img] Text - Accepted Version
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