Agency Cost, Mispricing And Ownership Structure Case Study

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Register to read the introduction… See Stein (1996) and Shleifer and Vishny (2003) for examples. Like these papers, our focus is on the consequences of mispricing. 6 Nanda (1991) models the parent firm’s decision to sell its own equity versus equity in a subsidiary. In his model, the relative valuation of parent and subsidiary equity play an important role; however, he does not consider the agency conflicts created by listing subsidiary shares. Therefore, our model focuses on the tradeoff between mispricing and agency costs, a tradeoff that has not been explored in the …show more content…
We identify subsidiary listings by scanning volumes from 1980, 1985, 1987, 1990, 1995, 2000, and 2005 for firms with corporate owners.9 We define a newly listed firm to be a subsidiary if a publicly listed Japanese corporate parent owns at least 20% of the equity before and after listing. The 20% cutoff corresponds to the definition of effective control used by La Porta, Lopez-deSilanes, Shleifer, and Vishny (1999).10 In the vast majority of cases we are able to determine prelisting ownership stakes from the firm’s first appearance in the handbooks. In a few cases, we rely on handbook descriptions stating that firms are subsidiaries. In the cases for which we have ownership data for subsidiaries before and after listing, parent ownership typically falls by a substantial margin at the time of listing. From our initial list, we exclude firms with more than one blockholder that owns at least 20% of the equity at the time of listing, subsidiaries in regulated sectors (utilities and financials), and subsidiaries for which we do not have stock returns after listing. Our account of how subsidiary listings are motivated by mispricing would make little sense if the owners of the newly listed subsidiary were also the owners of the parent. …show more content…
There are three periods: 0, 1, and 2. At time 0, a controlling shareholder owns all equity in a firm that will generate $1 of cash flow in periods 1 and 2. The controlling shareholder considers selling fraction  of firm equity to dispersed outside investors. The firm generates gross cash flow of $1 in periods 1 and 2 irrespective of whether the controlling shareholder raises external capital. Once the equity has been listed, an agency problem arises – the controlling shareholder prefers to divert cash flow to himself instead of receiving only his pro rata share. Diverting
2 fraction  of cash flow costs the controlling shareholder C    k each period. Parameter k

can be interpreted as the inverse of the scope for agency problems. In period 0, the controlling shareholder chooses fraction  of the firm to sell to the public at price P per share. In periods 1 and 2, the firm produces $1 of cash flow, the controlling shareholder diverts fraction  of this cash flow, and the remaining 1   dollars of cash flow are distributed pro rata. The controlling shareholder’s decisions at t = 1 and t = 2 are identical. That is, each period he diverts  to maximize

max | 1 1    k 2

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