Firms' Access to External Capital Markets by Michele Dathan a Thesis
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Firms' Access to External Capital Markets by Michele Dathan A thesis submitted in conformity with the requirements for the degree of Doctor of Philosophy Department of Rotman School of Management University of Toronto c Copyright by Michele Dathan 2021 Abstract Firms' Access to External Capital Markets Michele Dathan Doctor of Philosophy Department of Rotman School of Management University of Toronto 2021 This thesis examines external forces that impact firms’ willingness and ability to raise external funds in the capital markets. Chapter 1 introduces the research topics that the thesis addresses and briefly outlines their findings. Chapter 2 examines a regulation that was designed to increase the number of private firms choosing to go public in the United States, but which actually resulted in fewer firms completing initial public offerings. Specifically, the Jumpstart Our Business Startups Act was enacted to reduce the costs of going public for small firms by reducing the amount of required disclosure and allowing these firms to test the waters before filing public documents. This Chapter argues that these changes exacerbated information asymmetry in favour of firms over investors, discouraging all but the best firms from going public. Chapter 3 examines the impact of passive investors on firms' bond issuance decisions. This Chapter hypothesizes that firms take advantage of the presence of passive demand by issuing index-eligible bonds with features that favour firms. It shows empirically that firms care whether their bonds are index-eligible, and that as the level of passive demand increases, firms are more likely to issue bonds and the bonds they issue are larger and have lower spreads. By focusing on changes in index thresholds, the Chapter then shows that while bonds become larger, bond issuance decreases, consistent with some firms `reaching' to be included in the index while other firms opt out of the bond market. Chapter 4 examines two forms of seasoned equity offerings, which differ in terms of risk taken by financial intermediaries. Specifically, the Chapter compares bought deals, where underwriters buy shares from an issuer at a fixed price and then find buyers or risk holding the shares as inventory, to marketed deals, where underwriters build a book of interested buyers but do not take on any price or inventory risk. This Chapter examines why underwriters choose one form of intermediation over the other, and how bought deals change the way surplus is divided among firms, investors and underwriters and can result in inefficient seasoned equity offerings. ii Acknowledgements It is a pleasure to gratefully acknowledge the help and support of the many people who have made this thesis possible. I am forever grateful to my supervisor, Sergei Davydenko, who has been as much a personal support as an academic advisor, and with whom one of the Chapters of this thesis is co-authored. His encouragement through the toughest times of the doctoral program is the main reason that I continued on the academic path. I will cherish our hours working in his office where we discussed everything from high-level research topics, to how to best word an introduction, to detailed coding advice. I will use the tools that Sergei imparted on me, especially his ability to elegantly communicate important ideas, in all my future work. I am also deeply indebted to my committee members, Alexander Dyck and Andrey Golubov, for their guidance and wisdom. Alexander always emphasized the importance of asking research questions that address first order issues and remembering economic primitives. Andrey has been an inspiration as a young scholar who has developed an incredible repertoire of knowledge in our field. I would like to thank Yan Xiong, my cohort-mate in the doctoral program and with whom one of the Chapters is co-authored. Yan became a friend first and foremost, but is also a fantastic theorist with whom I am lucky to have worked. I also acknowledge the support of many faculty members and classmates at the Rotman School of Management with whom I have had the pleasure of exploring research ideas, such as Pat Akey, Olivier Dessaint, Tetyana Balyuk, Susan Christoffersen, Redouane Elkamhi, Christoph Schiller, and Mikhail Simutin. Finally, I would like to acknowledge those people who, in addition to my committee members, have provided invaluable feedback that has improved the quality of the Chapters in this thesis. Chapter 2 has benefited from comments from Pat Akey, Ling Cen, Craig Doidge, David Goldreich, Nicolas Inostroza, Charles Martineau, Jay Ritter, and seminar participants at Hong Kong University of Science and Technology and the University of Toronto. Chapter 3 has been improved by comments from Pat Akey, Ian Appel (AFA discussant), Susan Christoffersen, Gianpaolo Parise (EFA discussant), Melina Papoutsi (SFS discussant), Stuart Turnbull, seminar participants at the University of Toronto, and participants at the 2019 American Finance Association and European Finance Association Meetings and 2020 SFS Cavalcade. Chapter 4 has received helpful comments and suggestions from Pat Akey, James Barltrop, Matt Billett, seminar participants at the University of Toronto, and participants at the 2017 Canadian Law and Economics Association Conference. All errors are my own. I gratefully acknowledge financial support from the Canadian Securities Institute (CSI) Research Foundation and the Ontario Graduate Scholarship. iii This work is dedicated to my dad, John Dathan, who inspires me every day with his work ethic and capacity to take care of others, and to my husband, Andrew Akkawi, without whose love and support I would have not been able to complete this thesis. Finally, I dedicate this work to my two year old daughter, Ada Dathan Akkawi, who was really more of a hindrance than a help (but who will always be my favourite distraction). iv Contents Acknowledgements iii Table of Contents v 1 Introduction 1 2 Too much information? Increasing firms’ information advantages in the IPO process 5 2.1 Introduction . 5 2.2 Institutional Background . 8 2.2.1 JOBS Act . 8 2.2.2 Testing the Waters (TTW) . 8 2.3 Theoretical Framework . 10 2.3.1 Implications of Testing the Waters . 10 2.3.2 Implications of Reduced Disclosure . 15 2.3.3 Discussion . 16 2.4 Empirical Results . 17 2.4.1 Data . 17 2.4.2 Empirical Design . 19 2.4.3 Examining Theoretical Implications . 21 2.5 Concluding Remarks . 27 2.6 Tables . 28 Appendix . 40 2.7 Appendices . 40 Appendix A Proofs . 40 Appendix B Description of Variables . 42 Appendix C Sample TTW and Written TTW Language . 45 Appendix D Further Examination of Parallel Trends Assumption . 46 Appendix E Cattaneo et al. Density Test for Manipulation of EGC Status . 48 3 Debt issuance in the era of passive investment 49 3.1 Introduction . 49 3.2 Hypothesis development . 52 3.2.1 Model setup and the demand for bonds . 52 3.2.2 Model predictions . 53 3.3 Data description . 56 3.3.1 Sample selection . 56 v 3.3.2 Measuring passive demand . 57 3.3.3 Descriptive statistics . 59 3.4 Passive investment, bond characteristics, and issuance . 60 3.5 Index eligibility thresholds . 62 3.5.1 Threshold clustering . 62 3.5.2 Threshold changes . 63 3.5.3 Difference-in-difference regression analysis . 64 3.5.4 Other financing decisions . 67 3.6 Conclusions . 67 3.7 Figures and Tables . 69 3.8 Appendices . 85 Appendix A Variable definitions . 85 Appendix B Tracked bond indices . 87 Appendix C Aggregate passive demand . 89 4 SEO underwriters: The choice between matchmaking and market making 90 4.1 Introduction . 90 4.1.1 Contribution to the Literature . 92 4.2 Forms of Offering . 93 4.2.1 Matchmakers: Traditional Marketed Offerings . 93 4.2.2 Matchmakers: Accelerated Marketed Offerings . 94 4.2.3 Market Makers: Bought Offerings . 95 4.2.4 Comparing Bought and Marketed Offerings . 95 4.3 Deal Origination Process and Hypothesis Development . 96 4.4 Data . 97 4.4.1 Sample of New Issues . 97 4.4.2 Key Input: Announcement Dates . 98 4.4.3 Variable of Interest: Offering Type . 98 4.4.4 Empirical Proxies for Hypotheses . 99 4.4.5 Variables of Interest: Returns Around Key Dates . 101 4.5 Empirical Findings . 102 4.5.1 Likelihood of Doing a Bought Deal . 102 4.5.2 Effect of Underwriter Market Conditions . 102 4.5.3 Inefficient Transactions: Withdrawn and Hung Deals . 103 4.5.4 Returns Across Offering Types . 104 4.5.5 Bought Deals Change the Split of Surplus in SEOs . 104 4.6 Conclusion . 105 4.7 Tables . 108 Appendix . 114 4.8 Appendix . 114 Appendix A Description of Variables . 114 Bibliography 117 vi Chapter 1 Introduction When firms hold positive net present value investment opportunities but lack the resources to fund these investment, they must turn to external sources of financing. There is a long literature that examines the issues when firms sell claims on their assets given the information asymmetry between firms and potential investors. In many theoretical frameworks, the act of selling securities itself is considered a signal of management's assessment of the value of assets in place (e.g. Akerlof (1970) and Myers and Majluf (1984)). Despite a decades-old literature examining firms’ equity and debt issuance decisions, there is still debate on important issues, such as the ideal design of the capital raising process. Furthermore, there are emerging market factors that can impact if and how firms raise external funds. This thesis explores several forces that can affect firms’ willingness and ability to access external capital markets for funding. Chapter 2 theoretically and empirically examines the impact of a regulatory change in the initial public offering (IPO) process that was designed to increase the number of private firms going public, showing that the change actually.