Value creation through corporate finance decisions

This thesis analyzes how companies create value through three types of corporate finance actions: the allocation of initial public offerings, the issuance of preferred stock, and mergers and acquisitions.;In the first chapter, we use a unique sample of 175 Spanish equity offerings from 1985 to 2002 to test who benefits from IPO underpricing and why. Institutions receive nearly 75% of the profits in underpriced issues, while they have to bear only 56% of the losses in overpriced offerings. Superior information regarding first day underpricing cannot completely explain the institutional abnormal profits. Underwriters are better informed about the companies they take public, and use that information to favor their long term clients. The preferential treatment of institutional investors, however, does not come at the expense of retail investors. Retail investors earn positive profits from participating in the new issues market. The driving factor behind the relative retail large allocation in overpriced issues when compared to underpriced offerings is not the underwriter allocation bias in favor of institutional investors. Retail investors subscribe more heavily to underpriced issues, consistent with individuals being partially informed.;The second chapter demonstrates that preferred stock may arise as an optimal security in a tax-induced equilibrium. This result is driven by graduated tax schedules and by uncertainty. In a more general sense, our results can be interpreted as a template for including any security with a different tax treatment in a firm's capital structure. The first part of the paper demonstrates that the Miller (1977) equilibrium framework can accommodate more than two securities if different investor classes are taxed differently on each security and the tax schedule for each investor group is upward sloping. We then simplify the tax schedule, but introduce uncertainty, which implies the possibility of bankruptcy and the possible loss of tax shelters. The interaction of tax rates and seniority now affects the contribution of each security to after-tax firm value, as in some states the firm may not be able to pay either interest (or dividends) or even principal to its various claimholders. It is shown why and how these features, i.e. the various tax rates and seniority, determine the financing equilibrium, which is obtained by equating the expected marginal tax benefit of all securities. We demonstrate that non-profitable firms will tend to issue preferred shares whereas profitable firms will not find preferred stock advantageous in our framework. Comparative statics with respect to various tax rates are derived as well. These predictions are tested using a large sample of firms for the last twenty-five years. The empirical testing broadly confirms the theoretical predictions.;In the third chapter, using a large sample of 7.282 completed mergers between 1979 and 2002, we analyze the operating performance of the merging firms following the acquisition, under different earnings and cash flow measures. We find that whether performance improves after the merger is metric specific; different measures lead to different conclusions. We present new evidence on the impact of geographic location and corporate governance on merger returns. Those mergers with the poorest governed targets are the ones that experience the largest returns, consistent with the idea that takeovers of poorly managed targets by well-managed bidders have higher bidder, target, and total gains. Merger returns are negatively related to the distance between acquiring and target firms. The superior performance of intrastate mergers is information based, not due to familiarity.