Securities Issuance Business Resource Materials
Entrepreneurship Law Editorial Team
Stuart R. Cohn, SECURITIES COUNSELING FOR NEW AND DEVELOPING COMPANIES (1993).
Nicola Gennaioli, Andrei Shleifer & Robert Ward Vishny, Financial Innovation and Financial Fragility (2010).
Abstract (from National Bureau of Economic Research website):
This text presents a standard model of financial innovation, in which intermediaries engineer securities with cash flows that investors seek, but modify two assumptions. First, investors (and possibly intermediaries) neglect certain unlikely risks. Second, investors demand securities with safe cash flows. Financial intermediaries cater to these preferences and beliefs by engineering securities perceived to be safe but exposed to neglected risks. Because the risks are neglected, security issuance is excessive. As investors eventually recognize these risks, they fly back to safety of traditional securities and markets become fragile, even without leverage, precisely because the volume of new claims is excessive.
Amitrajeet A. Batabyal, Project Financing, Entrepreneurial Activity, and Investment in the Presence of Asymmetric Information (RIT Economics Department, Working Paper No. 11-07, 2011), available at http://ssrn.com/abstract=1953467.
(adapted from author):
The authors analyze a two-period signaling model in which a representative entrepreneur in a regional economy has a project that generates a random cash flow and that requires investment that the entrepreneur raises from a competitive market. The project’s type is known to the entrepreneur but not to the investors. Further, the entrepreneur is restricted to issuing debt only or equity only. The authors first show that there is no separating perfect Bayesian equilibrium (PBE) contract involving the issuance of equity only, that there exists a pooling PBE contract involving the issuance of equity only, and that a debt contract is preferred to an equity contract by the entrepreneur. Next, they suppose that the entrepreneur incurs a non-pecuniary cost of financial distress F>0 whenever he is unable to make a repayment at time t=1. The authors provide conditions on F under which a pooling PBE contract with debt exists and a separating PBE contract with debt and equity exists. Finally, the authos examine whether a high type entrepreneur will prefer a setting with a cost of financial distress (F>0) or a setting in which there is no such cost (F=0).
William S. Blatt, Minority Discounts, Fair Market Value, and the Culture of Estate Taxation, 52 Tax L. Rev. 225 (1997).
Cécile Carpentier & Jean-Marc Suret, Entrepreneurial Equity Financing and Securities Regulation: An Empirical Analysis, 30 Int’l Small Bus. J. 41 (2012).
(adapted from journal):
To protect investors, securities regulation generally restrains entrepreneurial ventures from entering the stock market. Scholars and regulators contend that strong rules and requirements for listing are essential to prevent the market from failing. However, these constraints can also unduly impede the growth of new ventures. The authors use the Canadian case to examine the effects of the relaxation of the regulatory constraints. Unlike in other countries, firms in Canada can list at a very early stage, without revenues, with a minimal size and even without writing a prospectus using the reverse merger technique. This provides a unique opportunity to examine entrepreneurial ventures listed on a public market. The quality of firms, their post-listing operating performance and strategy, and their fate largely support the opinion that strong listing requirements are essential to prevent the emergence of a lemon market. Investors involved in this market obtain very poor returns. This indicates that they are neither able to set correct prices in this market nor deal with the high level of information asymmetry therein. The reluctance of most regulators to relax the requirements for small business finance can, therefore, be justified.
K. Thomas Chandy & Nagaraj Sivasubramaniam, Post-IPO Actions and Firm Survival: More than Signaling? (Santa Clara University Leavey Sch. Of Bus. Research Paper No. 11-01, 2011), available at http://ssrn.com/abstract=1743706.
Abstract (adapted from author):
Entrepreneurial firms, at their birth, have a high probability of failure due to the “liability of newness.” Even firms that surmount the initial challenges and get to the stage of issuing an initial public offering (IPO) still face a significant hazard rate. This paper examines whether, in the post-IPO stage, strategic choice matters. It also examines whether management actions following an IPO enhance the firm’s survival and, second, if they do, which actions really make a difference. The authors analyzed a sample of 104 internet-related firms that issued IPOs between 1995 and 1999, and find that management action in three areas — market expansion, entry into alliances, and expansion or reconfiguration of the top management team and/or board of directors — significantly enhance firm survival.
James C. Spindler, IPO Liability and Entrepreneurial Response, 155 U. Pa. L. Rev. 1187 (2006).
Abstract (from author):
This Article explores how legal liability in the IPO context can affect an entrepreneur's decision of whether and how to take a firm public. Liability under the Securities Act of 1933 effectively embeds a put option in an IPO security, forcing the entrepreneur to insure shareholders against poor firm performance, inflating the price of the security, and exposing the entrepreneur to risk. This may cause IPO firms to appear to underperform relative to non-IPO firms as the option value decays, and may lead the entrepreneur to undertake strategic (but destructive) responses to minimize the put value and his exposure to risk. Because of the value-destroying characteristics of these responses - which include initial underpricing, entrenchment, lower net present value projects, asset partitioning, and reduced disclosure - the present state of affairs is inefficient compared to a system where the entrepreneur can simply allocate the risk to shareholders.
Qin Yang et al., An Empirical Study of the Impact of CEO Characteristics on New Firms' Time to IPO, 49 J. Small Bus. Mgmt. 163 (2011).
Abstract (from author):
An initial public offering (IPO) is one of the most critical events in the life of a firm. As the IPO market continues to attract attention from both entrepreneurs and investors, research examining the relationship between the firm's characteristics and its IPO performance is growing. In this paper, we use the upper echelon perspective to empirically examine the relationship between the firm's chief executive officer (CEO) and the firm's time to IPO, a relationship that has so far received little attention. Using data obtained from 237 IPOs in the U.S. software industry, we found that the CEO's prior executive experience, network, and age are significantly related to the new firms time to IPO. This study extends the understanding of the important role of the CEO in the IPO and provides investors greater insight into those variables that influence the speed with which firms go public.
Securities and Exchange Commission, Internet Fraud: How to Avoid Internet Investment Scams