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5 years ago

* I would like to thank Frank Dobbin, Christopher Marquis, Peter ...

* I would like to thank Frank Dobbin, Christopher Marquis, Peter ...

y Income logic private

y Income logic private equity firms as identified through a history of leveraged recapitalizations revealed in the prospectuses. The mean and median debt-to-capitalization levels are 0.89 and 0.44 for the sample of issuers under study, with a wide standard deviation of 7.23 (excluding Income logic issuers 0.53, 0.26, and 2.46, respectively). 19 Theoretically, elevated levels of debt could not explain why Income logic issuers experience lower first and second-stage returns as financial economics predicts the exact opposite outcome for high debt issuers. Control Variables From Alternative Hypotheses Private equity ownership (dichotomous variable indicating private equity investment in the issuer) serves as a proxy for lower agency and monitoring costs. However, private equity ownership could also proxy for information asymmetry, or for greater negotiating power vis-à- vis underwriters (Baker 1990). All three theories make the same directional prediction for return outcomes. I include additional measures of power (ties to underwriters and private equity fund size) in order to distinguish between agency and resource dependence predictions. Ties to underwriters are coded as zero for no identifiable ties to the underwriting syndicate based on the prospectus and publicly available information, one for normal relations, and two when the relationship is so close that it creates a conflict of interest requiring legal disclosure in the prospectus. An example of the latter are situations where the underwriters are also investors in the funds managed by the private equity firm, or private equity firms that are institutionally affiliated with the underwriters. For substitution costs, I include a dichotomous variable indicating if the issuer is especially exposed to litigation risk as identified in the prospectus by a lack of revenues, on-going or recent major litigation, or previous criminal record of the owners or management team. 24

For non-Bayesian investor models, I include the Shiller one-year confidence retail investor survey (percentage of respondents who believe the Dow Jones Industrial Average will increase over the next year). This survey is conducted monthly beginning in July 2001 and bi-annually (October and April) previously; I utilize linear extrapolation for the five months of missing data in 2001. Valuation, crash, and buy-on-dips confidence indices produce similar results, as do institutional investor surveys (available upon request). I also include the monthly Baker-Wurgler orthogonalized sentiment index (Baker and Wurgler 2006, 2007). This composite index of sentiment is based on the common variation in six underlying proxies that have been Winsorized (0.05 and 0.95 levels) and orthogonalized against four macroeconomic variables to remove business cycle covariation. Principal component analysis of the six residual proxies and their lagged counterparts results in a final composite index based on the first principal component. As one of the six proxies in the Baker-Wurgler index is average IPO first-day returns, the index could introduce endogeneity into both first and second-stage return models. I address this concern by replacing the index and with the five remaining monthly constituent proxies for sentiment: number of IPOs, the dividend premium, NYSE share turnover, closed-end fund discount, and equity share in new issues. The dividend premium is the log difference of the average market-to-book ratios of dividend payers and non-payers. NYSE share turnover is total share volume of trades divided by average shares listed from the NYSE Fact Book. The closed- end fund discount is the value-weighted average difference between the net asset value (NAV) of listed closed-end funds and their market prices. Finally, equity share is the gross equity issuance divided by the total gross issuance of equity and long-term debt for the month, using data from the Federal Reserve Bulletin. Of course, we could also reconstruct the composite index using principal component analysis of the five proxies, Winsorized and orthogonalized against 25

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