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SESSION I-2 : CAPITAL STRUCTURE (20/12/2007 à 08h30)

Frédéric Lobez (Université de Lille 2)

The Choice between Private and Public Capital Markets: The Importance of Disclosure Standards and Auditor Discipline to Countries Divesting State-owned Enterprises

Auteurs : GUEDHAMI Omrane (Univ. South Carolina) and PITTMAN Jeffrey (Hong Kong Univ.) Email :

Intervenants : GUEDHAMI Omrane (University of South Carolina)

Rapporteurs : HOMBERT Johan (Ensae)

For a sample of 1,866 privatizations from 37 countries, we estimate the impact of
disclosure standards and legal institutions that discipline auditors on the method
chosen to divest state-owned enterprises. The agency conflict between minority
and controlling shareholders can impede a government from privatizing by selling
its stake to diffuse investors in the public capital market with a share-issue privatization
(SIP) that typically generates important spillover economic benefits, rather than
an asset sale to a small group of buyers. However, prior research implies that
accounting transparency plays a natural role in preventing controlling shareholders
from siphoning corporate resources by helping minority investors identify any diversionary
practices. After controlling for firm-level and other country-level characteristics, we find
that SIPs become more likely when countries mandate strict disclosure standards,
although this result is sensitive to model specification. In comparison, we provide strong,
robust evidence that SIPs are more likely in jurisdictions that relax the burden of proof in
civil lawsuits and criminal prosecutions against auditors, leading to more credible financial
statements. These core results remain after controlling for other aspects of the auditing
environment and liability standards in securities laws. From a policy perspective, our
cross-country research suggests that investors value reforms that subject auditors to more
severe private and public enforcement over several other legal determinants, including
enhancing disclosure standards.

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Law, Finance, and Venture Capital: The Cost of Capital for High-Tech Firms

Auteurs : HALL Thomas (Christopher Newport University) Email :

Intervenants : HALL Thomas (Christopher Newport University)

Rapporteurs : VILANOVA Laurent (Université de Lyon 2)

We use data from a professionally-conducted survey of high-technology managers to
examine international variation in private equity contracting and cost of capital. Employing
new variables and analyzing hundreds of financing rounds in the U.S., Europe, and Israel,
we find that the sophistication of investors and the number of nonpecuniary services they
provide are significantly associated with the ownership ratio (amount raised/valuation), but
that funding rounds in the United States do not receive lower ownership ratios than elsewhere.
We also find that useful patents are associated with a lower cost of capital, and that the
institutional environment for entrepreneurial finance is related to exit strategy and valuation.

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The Liquidation Dilemma of Money Losing Investments – The Impact of Investment Experience and Window Dressing of Private Equity and Venture Capital Funds

Auteurs : KROHMER Philipp (Goethe University Frankfurt and CEPRES Center of Private Equity Research) Email :

Intervenants : KROHMER Philipp (Goethe University Frankfurt and CEPRES Center of Private Equity Research)

Rapporteurs : SAMET Anis (Hec Montréal)

This study examines the investor’s decision on the exit of loss making projects. The investor
faces a liquidation dilemma: follow-on financing versus terminating a loss making investment,
and thereby giving up the turn-around option. I examine the role of investment experience on
solving this liquidation dilemma. Evidence from a sample of 712 realized Private Equity and
Venture Capital investments confirms that young and inexperienced fund managers (i) hold
loss-making investments longer, (ii) invest a higher share of the fund’s portfolio capital into
these losers, and (iii) provide relatively more financing rounds to these deals before the exit
compared to more experienced funds. The results are robust to controlling for potential
reputational concerns.

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Why privatize? A competition for ownership approach

Auteurs : ROSA Jean-Jacques & PERARD Edouard (IEP Paris) Email :

Intervenants : PERARD Edouard (IEP Paris)

Rapporteurs : KOLE Erik (Erasmus School of Economics - Erasmus University Rotterdam)

Theories of privatization or nationalization typically compare the economic or political
efficiency of private and state ownership, either in general, or for a list of specific goods
and services. They aim at defining, once and for all, what a normative allocation of
ownership should be, i.e. the desirable scope of government. Such attempts however can
hardly account for the “big reversal” of post WWII nationalization policies, which gave
way to the current privatization wave, initiated in the 1980s. Since what is to be explained
is the fluctuating allocation of property rights over firms between private investors and the
state, we model a competitive bidding for these rights in which the private investors value
shareholders wealth, and the state values political survival, obtained through the transfer
of the firm cash flow to various political clienteles. The investors who value the firm most
get the rights of control, a privatization or a nationalization, according to which type of
investor has the lowest cost of funds. Recent data on privatization amounts in eight countries
lend support to our theory.

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