Corporate Governance, Incentives, and Industry Consolidations

This article studies the determinants of the success of industry consolidations using a unique sample of firms established at the time of their initial public offering: roll-up IPOs. In these transactions, small, private firms merge into a shell company, which goes public at the same time. These fir...

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Bibliographic Details
Published in:	The Review of financial studies 2005-04, Vol.18 (1), p.241-270
Main Authors:	Brown, Keith C., Dittmar, Amy, Servaes, Henri
Format:	Article
Language:	eng
Subjects:	Accounting Acquisitions & mergers Business structures Capital market Chief executive officers Consolidation Corporate governance Correlation analysis Economic incentives Economic performance Enterprises Finance Financial performance Financial transactions Industrial market Industry Initial public offering Initial public offerings Mergers Organizational change P values Rates of return Sales operations Statistical median Stock prices Stock returns Studies
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Summary:	This article studies the determinants of the success of industry consolidations using a unique sample of firms established at the time of their initial public offering: roll-up IPOs. In these transactions, small, private firms merge into a shell company, which goes public at the same time. These firms deliver poor stock returns; their operating performance mimics that of comparable firms but does not justify their high initial valuations. However, if the managers and owners of the firms included in the transaction remain involved in the business as shareholders and directors, operating and stock price performance improve, and future acquisitions are better received by the market. Higher ownership by the sponsor of the transaction leads to a reduction in performance, consistent with the view that the sponsor's compensation is excessive. These findings highlight the impact of corporate governance on performance.
ISSN:	0893-9454 1465-7368