The Center for Corporate Governance is recognized as a premier research center of effective and responsible corporate governance. The research conducted among our world-renowned faculty is the core focus of the Center. Our research is published in top academic journals and informs and influences thought leaders in the business community at a variety of high-level industry and academic events throughout the year.
For more information, please contact the Institute’s Academic Director, Michelle Lowry
Highlights of a few recent papers are shown below, along with links to the full papers.
- Mutual Fund Investments in Private Firms
- Venturing beyond the IPO: financing of newly public firms by pre-IPO investors
- The influence of creditors in corporate governance
- Symmetry in pay for luck
Mutual Fund Investments in Private Firms
forthcoming Journal of Financial Economics
By Sungjoung Kwon, Michelle Lowry, and Yiming Qian
An increasing number of private companies are raising money from mutual funds. In fact, 40% of venture capital-backed companies that had an IPO in 2016 had raised money from mutual funds prior to going public.
Companies benefit from this greater availability of capital, because it enables them to stay private longer. Mutual funds have also benefitted: over our sample period, their returns are 67% to 161% higher on these private firm investments, compared to those on broad public market indices.
While unicorn companies (commonly defined as companies with valuations of $1billion or more) receive much attention, the majority of mutual funds’ private firm investments are among smaller companies.
Venturing beyond the IPO: financing of newly public firms by pre-IPO investors
By Peter Iliev and Michelle Lowry
While venture capitalists (VCs) are commonly viewed as investing only in private firms, we document that they also frequently invest in firms that have recently gone public. Approximately 15% of VC-backed firms raise additional capital from venture capitalists in the one to five years after going public. These investments are concentrated in companies that have high demands for capital but whose true value is highly uncertain.
These financings are viewed as good news by the market; the companies’ stock prices increase approximately 6% when they are announced. Stock returns are even greater in cases where the VC has more inside information regarding true company value: when the VC is sitting on the company’s Board, average abnormal returns are 15%.
Our results highlight the extent to which VC financings of firms after they go public are value-increasing for both the VCs and for the underlying companies.
Read the full paper.
The influence of creditors in corporate governance
By David Becher, Tom Griffin, and Greg Nini
Creditors have substantial power over firms’ merger and acquisition activities. We document that nearly 75% of private credit agreements restrict companies’ acquisition decisions.
Following a covenant violation, creditors use their bargaining power to tighten these restrictions and limit acquisition activity. These effects are strongest among deals that are expected to earn negative announcement returns. The abnormal return around acquisitions by firms currently in violation of a covenant are 1.8% higher than the analogous returns around other firms’ acquisitions. Moreover, this difference is concentrated among firms with weak external governance.
We conclude that creditors provide valuable corporate governance that benefits shareholders by reducing managerial agency costs.
Symmetry in pay for luck
By Naveen Daniel, Lily Li, and Lalitha Naveen
Prior evidence suggests that CEOs are rewarded for good performance that is beyond their control – performance that arises due to ‘good luck’. Moreover, this evidence suggests that CEOs are not penalized to the same extent for negative performance that arises due to ‘bad luck’. Such a dynamic would be clearly troublesome, as it suggests that shareholders are paying top management to be lucky – rather than rewarding for them for hard work.
This paper provides robust evidence that this is not actually the case. Using a myriad of empirical specifications, the paper concludes that CEOs are equally likely to be penalized for ‘bad luck’ as they are to be rewarded for ‘good luck’. Given the recent and ongoing attention to high levels of CEO pay, combined with heightened regulatory attention to executive compensation, the finding is of obvious import.