Faculty & Research

Steven Neil Kaplan

Neubauer Family Distinguished Service Professor of Entrepreneurship and Finance

Phone :
1-773-702-4513
Address :
5807 South Woodlawn Avenue
Chicago, IL 60637

Steven Neil Kaplan conducts research on issues in private equity, venture capital, entrepreneurial finance, corporate governance, mergers and acquisitions, and corporate finance. He has published papers in a number of academic and business journals. He has testified to the U.S. Senate Finance Committee and the U.S. House Financial Services Committee about his research. Kaplan is a research associate at the National Bureau of Economic Research and an associate editor of the Journal of Financial Economics.

Kaplan teaches advanced MBA and executive courses in entrepreneurial finance and private equity, corporate financial management, corporate governance, and wealth management. BusinessWeek named him one of the top 12 business school teachers in the country.

Kaplan serves on the board or advisory board of Accretive Health, Columbia Acorn Funds, Morningstar, Sandbox Industries and the Illinois Venture Capital Association. He has been a member of the faculty since 1988.

He received his AB, summa cum laude, in Applied Mathematics and Economics from Harvard College and earned a PhD in Business Economics from Harvard University.

 

2014 - 2015 Course Schedule

Number Name Quarter
34101 Entrepreneurial Finance and Private Equity 2014 (Fall)
34104 Special Topics in Entrepreneurship: Developing a New Venture (New Venture Challenge) 2015 (Spring)

Research Activities

Private equity; venture capital; corporate governance; boards of directors; mergers and acquisitions; corporate finance.

With Mark Klebanov and Morten Sorensen, "Which CEO Characteristics and Abilities Matter," Journal of Finance (2012).

With Antoinette Schoar, "Private Equity Performance: Returns, Persistence and Capital Flows," Journal of Finance (2005).

With Per Strömberg, "Financial Contracting Theory Meets the Real World: Evidence From Venture Capital Contracts," Review of Economic Studies (2003).

With Bengt Holmström, "Corporate Governance and Takeovers in the U.S.: Making Sense of the '80s and '90s," Journal of Economic Perspectives (2001).

"The Effects of Management Buyouts on Operations and Value," Journal of Financial Economics (1989).

For a listing of research publications please visit ’s university library listing page.

REVISION: Do Private Equity Funds Game Returns?
Date Posted: Apr  01, 2014
By their nature, private equity funds hold assets that are hard to value. This uncertainty in asset valuation gives rise to the potential for fund managers to manipulate reported net asset values (NAVs). Managers may have an incentive to game valuations in the short-run if these are used by investors to make decisions about commitments to subsequent funds managed by the same firm. Using a large dataset of buyout and venture funds, we test for the presence of reported NAV manipulation. We find evidence that some managers boost reported NAVs during times that fundraising activity is likely to occur. Those managers, however, are subsequently unable to raise a next fund, suggesting that investors see through the manipulation. In contrast, we find that top-performing funds under-report returns. This conservatism is consistent with these firms insuring against future bad luck that could make them appear as though they are NAV manipulators. Our results are robust to a variety of ...

REVISION: Has Persistence Persisted in Private Equity? Evidence from Buyout and Venture Capital Funds
Date Posted: Mar  03, 2014
The conventional wisdom for investors in private equity funds is to invest in partnerships that have performed well in the past. This is based on the belief that performance in private equity persists across funds of the same partnership. We present new evidence on the persistence of U.S. private equity (buyout and venture capital) funds using a research-quality dataset from Burgiss, sourced from over 200 institutional investors. Relying on detailed cash-flow data for funds, we study the persistence of buyout and venture capital fund performance of the same general partners across different funds. We pay particular attention to persistence pre- and post-2000. Previous research, studying largely pre-2000 data, has found strong persistence for both buyout and venture capital firms. We confirm the previous findings on persistence in pre-2000 funds. There is persistence for buyout funds and, particularly, for venture funds. Post-2000, we find little evidence of persistence for ...

REVISION: Private Equity Performance: What Do We Know?
Date Posted: Jul  30, 2013
We study the performance of nearly 1400 U.S. buyout and venture capital funds using a new dataset from Burgiss. We find better buyout fund performance than has previously been documented – performance consistently has exceeded that of public markets. Outperformance versus the S&P 500 averages 20% to 27% over a fund’s life and more than 3% annually. Venture capital funds outperformed public equities in the 1990s, but underperformed in the 2000s. Our conclusions are robust to various indice

REVISION: The Effects of Stock Lending on Security Prices: An Experiment
Date Posted: Nov  12, 2012
We examine the impact of short selling by conducting a randomized stock lending experiment. Working with a large, anonymous money manager, we create an exogenous and sizeable shock to the supply of lendable shares by taking high-loan fee stocks in the manager’s portfolio and randomly making available and withholding stocks from the lending market. The experiment ran in two independent phases: the first, from September 5 to 18, 2008, with over $580 million of securities lent; and the second, fr

REVISION: Executive Compensation and Corporate Governance in the U.S.: Perceptions, Facts and Challenges
Date Posted: Sep  26, 2012
In this paper, I consider the evidence for three common perceptions of U.S. public company CEO pay and corporate governance: (1) CEOs are overpaid and their pay keeps increasing; (2) CEOs are not paid for their performance; and (3) boards do not penalize CEOs for poor performance. While average CEO pay increased substantially through the 1990s, it has declined since then. CEO pay levels relative to other highly paid groups today are comparable to their average levels in the early 1990s althou

REVISION: Which CEO Characteristics and Abilities Matter?
Date Posted: Dec  15, 2010
We exploit a unique data set to study individual characteristics of CEO candidates for companies involved in buyout and venture capital transactions and relate these characteristics to subsequent corporate performance. CEO candidates vary along two primary dimensions: one that captures general ability and another that contrasts communication and interpersonal skills with execution skills. We find that subsequent performance is positively related to general ability and execution skills. The findi

The State of U.S. Corporate Governance: What's Right and What's Wrong?
Date Posted: Oct  03, 2009
The U.S. corporate governance system has recently been heavily criticized, largely as a result of failures at Enron, WorldCom, Tyco and some other prominent companies. Those failures and criticisms, in turn, have served as catalysts for legislative change (Sarbanes-Oxley Act of 2002) and regulatory change (new governance guidelines from the NYSE and NASDAQ). In this paper, we consider two questions. First, is it clear that the U.S. system has performed that poorly; is it really that bad? Second,

How Do Legal Differences and Learning Affect Financial Contracts?
Date Posted: Sep  16, 2009
We analyze venture capital (VC) investments in twenty-three non-U.S. countries and compare them to VC investments in the U.S. We describe how the contracts allocate cash flow, board, liquidation, and other control rights. In univariate analyses, contracts differ across legal regimes. At the same time, however, more experienced VCs implement U.S.-style contracts regardless of legal regime. In most specifications, legal regime becomes insignificant controlling for VC sophistication. VCs who use U.

Private Equity Performance: Returns, Persistence and Capital
Date Posted: Feb  19, 2009
This paper investigates the performance of private equity partnerships using a data set of individual fund returns collected by Venture Economics. Over the sample period, average fund returns net of fees approximately equal the S&P 500 although there is a large degree of heterogeneity. Returns persist strongly across funds raised by individual private equity partnerships. Better performing funds are more likely to raise follow-on funds and raise larger funds than funds that perform poorly. This

Private Equity Performance: Returns, Persistence and Capital Flows
Date Posted: Feb  19, 2009
This paper investigates the performance of private equity partnerships using a data set of individual fund returns collected by Venture Economics. Over the sample period, average fund returns net of fees approximately equal the S&P 500 although there is a large degree of heterogeneity among fund returns. Returns persist strongly across funds raised by individual private equity partnerships. The returns also improve with partnership experience. Better performing funds are more likely to raise fol

Characteristics, Contracts and Actions: Evidence from Venture Capitalist Analyses
Date Posted: Sep  18, 2008
We study the investment analyses of 67 portfolio investments by 11 venture capital (VC) firms. VCs consider the attractiveness and risks of the business, management, and deal terms as well as expected post-investment monitoring. We then consider the relation of the analyses to the contractual terms. Greater internal and external risks are associated with more VC cash flow rights, VC control rights; greater internal risk, also with more contingencies for the entrepreneur; and greater complexity,

New: Leveraged Buyouts and Private Equity
Date Posted: Aug  28, 2008
We describe and present time series evidence on the leveraged buyout / private equity industry, both firms and transactions. We discuss the existing empirical evidence on the economics of the firms and transactions. We consider similarities and differences between the recent private equity wave and the wave of the 1980s. Finally, we speculate on what the evidence implies for the future of private equity.

New: Which CEO Characteristics and Abilities Matter?
Date Posted: Aug  28, 2008
We study the characteristics and abilities of CEO candidates for companies involved in buyout (LBO) and venture capital (VC) transactions and relate them to hiring decisions, investment decisions, and company performance. Candidates are assessed on more than thirty individual abilities. The abilities are highly correlated; a factor analysis suggests there are two primary factors with intuitive characterizations -- one for general ability and one that contrasts team-related, interpersonal skill

REVISION: Leveraged Buyouts and Private Equity
Date Posted: Aug  05, 2008
We describe and present time series evidence on the leveraged buyout/private equity industry, both firms and transactions. We discuss the existing empirical evidence on the economics of the firms and transactions. We consider similarities and differences between the recent private equity wave and the wave of the 1980s. Finally, we speculate on what the evidence implies for the future of private equity.

How Costly is Financial (not Economic) Distress? Evidence from Highly Leveraged Transactions that Be...
Date Posted: Apr  22, 2008
This paper studies twenty-nine highly leveraged transactions (HLTs) of the 1980s that subsequently become financially distressed. High leverage, not poor firm performance or poor industry performance, is the primary cause of financial distress for these firms -- all of the sample firms have positive operating income at the time of distress. These firms, therefore, are financially distressed, not economically distressed. We estimate the effects of this financial distress on value, the costs of fi

Top Executives, Turnover, and Firm Performance in Germany
Date Posted: Apr  22, 2008
This article examines executive turnover--for both management and supervisory boards--and its relation to firm performance in the largest companies in Germany in the 1980s. Turnover of the management board increases significantly with poor stock performance and particularly poor (i.e., negative) earnings, but is unrelated to sales growth and earnings growth. These turnover performance relations do not vary with measures of stock ownership and bank voting power. Supervisory board appointments and

The Valuation of Cash Flow Forecasts: An Empirical Analysis
Date Posted: Apr  22, 2008
This paper compares the market value of highly leveraged transactions (HLTs) to the discounted value of their corresponding cash flow forecasts. These forecasts are provided by management to investors and shareholders in 51 HLTs completed between 1983 and 1989. Our estimates of discounted cash flows are within 10%, on average, of the market values of the completed transactions. Our estimates perform at least as well as valuation methods using comparable companies and transactions. We also invert

Appointments of Outsiders to Japanese Boards: Determinants and Implications for Managers
Date Posted: Apr  22, 2008
This paper investigates the determinants of appointments of outsiders -- directors previously employed by banks (bank directors) or by other nonfinancial firms (corporate directors) -- to the boards of large nonfinancial Japanese corporations. Such appointments increase with poor stock performance; those of bank directors also increase with earnings losses. Turnover of incumbent top executives increases substantially in the year of both types of outside appointments. We perform a similar analysi

The Valuation of Cash Flow Forecasts: An Empirical Analysis
Date Posted: Apr  22, 2008
This paper compares the market value of highly leveraged transactions (HLTs) to the discounted value of their corresponding cash flow forecasts. For our sample of 51 HLTs completed between 1983 and 1989, the valuations of discounted cash flow forecasts are within 10%, on average, of the market values of the completed transactions. Our valuations perform at least as well as valuation methods using comparable companies and transactions. We also invertour analysis by estimating the risk premia impl

Do Investment Cash-Flow Sensitivities Provide Useful Measures of Financing Constraints?
Date Posted: Apr  22, 2008
This paper investigates the relationship between financing constraints and investment-cash flow sensitivities by analyzing the firms identified by Fazzari, Hubbard, and Petersen as having unusually high investment-cash flow sensitivities. We find that firms that appear less financially constrained exhibit significantly greater sensitivities than firms that appear more financially constrained. We find this pattern for the entire sample period, subperiods, and individual years. These results (and

Paramount Communications Inc. - 1993
Date Posted: Apr  22, 2008
SUBJECT AREAS: Valuation; mergers and acquisitions. CASE SETTING: 1993, Entertainment Industry. This case studies the takeover contest between Viacom and QVC for Paramount Communications. The Paramount 1993 case focuses on the events and situation leading up to the initial bid for Paramount by Viacom in September of 1993. Paramount 1993 has two primary roles. First, I have used Paramount 1993 successfully with MBAs and executives as a comprehensive valuation case. It should be tau

Paramount Communications, Inc. - 1994
Date Posted: Apr  22, 2008
SUBJECT AREAS: Valuation; mergers and acquisitions. CASE SETTING: 1994, Entertainment Industry. This case studies the takeover contest for Paramount Communications between Viacom and QVC. The case begins with Viacom's initial bid for Paramount in September 1993 and continues to the end of the contest between Viacom and QVC in February 1994. Paramount 1994 is a challenging case for MBAs. It has three primary roles. First, the case illustrates the issues involved in a takeover biddi

Those Japanese Firms with Their Disdain for Shareholders: Another Fable for the Academy
Date Posted: Apr  22, 2008
From time to time, observers argue that important facets of corporate governance are explicable only in path-dependent terms. Some buttress this claim with comparisons between U.S. and Japanese patterns of corporate governance. Using data that Kaplan has discussed in other contexts, we dispute the empirical foundation of this path-dependence claim. In fact, we find that U.S. and Japanese governance patterns are remarkably similar. We suggest that this similarity may imply that competitive produc

The Value Maximizing Board
Date Posted: Apr  22, 2008
This paper compares board and director characteristics of reverse leveraged buyout (LBO) firms controlled by LBO specialists to those of an industry- and size-matched comparison sample. We consider the boards of the reverse LBOs to be value-maximizing because of the strong incentives the LBO specialists have to structure those boards in a way that maximizes shareholder value. Relative to the comparison firms, we find that the boards of the reverse LBOs are smaller, control larger equity stakes

What is the Price of Hubris? Using Takeover Battles to Infer Overpayments and Synergies
Date Posted: Apr  22, 2008
This paper analyzes the amount of information that can be extracted from stock prices around takeover contests. The first part of the paper shows that it is not generally possible to use target and bidder stock price movements to infer the market's estimates of synergies, bidder overpayment, and changes in bidder and target values. In two generic cases, however, we show that it is possible to use bidder and target stock prices to obtain market estimates of overpayment. In the second part of the

The Effects of Business-to-Business E-Commerce on Transaction Costs
Date Posted: Apr  22, 2008
This paper studies transaction costs changes arising from the introduction of the Internet in transactions between firms. We divide transaction costs into coordination costs and motivation costs. We classify coordination efficiencies into three categories: process improvements, marketplace benefits, and indirect improvements. For motivation costs, we focus on informational asymmetries. We apply this framework to internal data from an Internet-based firm to measure process improvements, mark

The Value-Maximizing Board
Date Posted: Apr  22, 2008
This paper compares board and director characteristics of reverse leveraged buyout (LBO) firms controlled by LBO specialists to those of an industry- and size-matched comparison sample. We consider the boards of the reverse LBOs to be value-maximizing because of the strong incentives the LBO specialists have to structure those boards in a way that maximizes shareholder value. Relative to the comparison firms, we find that the boards of the reverse LBOs are smaller, control larger equity stakes,

New: Do Mutual Funds Time their Benchmarks?
Date Posted: Apr  22, 2008
We investigate whether mutual funds time their self-designated benchmark indexes. Using data on fund portfolio holdings, we consider two possible sources of timing attempts: variation in cash holdings and variation in the benchmark beta of the fund portfolio. The results are mixed. Inconsistent with timing, funds do not successfully time the benchmark by varying their cash holdings. If anything, funds are more likely to increase cash or maintain high levels of cash before positive, not negat

The State of U.S. Corporate Governance: What's Right and What's Wrong?
Date Posted: Apr  02, 2008
The U.S. corporate governance system has recently been heavily criticized, largely as a result of failures at Enron, WorldCom, Tyco and some other prominent companies. Those failures and criticisms, in turn, have served as catalysts for legislative change (Sarbanes-Oxley Act of 2002) and regulatory change (new governance guidelines from the NYSE and NASDAQ). In this paper, we consider two questions. First, is it clear that the U.S. system has performed that poorly; is it really that bad? Second,

Do Financing Constraints Explain Why Investment is Correlated with Cash Flow?
Date Posted: Mar  19, 2008
This paper investigates the sources of the correlation between corporate cash flow and investment by undertaking an in-depth analysis of the 49 low-dividend firms identified by Fazzari, Hubbard, and Petersen (1988) as having an unusually high investment-cash flow sensitivity. We find that in only 15% of firm-years is there some question as to a firm's ability to access internal or external funds to increase investment. Strikingly, those firms that appear less financially constrained exhibit a

The Staying Power of Leveraged Buyouts
Date Posted: Feb  25, 2008
This paper documents the organizational status over time of 183 large leveraged buyouts (LBOs) completed between 1979 and 1986. As of August 1990, 63% of the LBOs are private owned, 14% are independent public companies, and 23% are owned by other public companies. As time since the LBO increases, the percentages of LBOs that have returned to public ownership increases. The (unconditional) median time LBOs remain private equals 6.70 years. This evidence suggests that the majority of LBO organi

Top Executive Rewards and Firm Performance: A Comparison of Japan and the U.S.
Date Posted: Feb  25, 2008
This paper compares CEO and top management turnover and its relation to firm performance in the larges companies (by sales) in Japan and the U.S. Japanese top managers are older and have shorter tenures as top managers than their U.S counterparts. Overall, however, turnover-performance relations are economically and statistically similar: turnover is negatively related to stock, sales, and earnings performance in both countries. Turnover in Japan is particularly sensitive to low earnings. Ev

Effects of LBOs on Tax Revenues of the U.S. Treasury
Date Posted: Feb  25, 2008
In this report, the tax effects of leveraged buyouts (LBOs) based on the current tax law and data from LBOs during the period 1979 through 1985 are examined. The analysis challenges the argument that LBOs result in net losses of tax revenues to the U.S. Treasury. Five ways are shown in which LBOs can generate incremental revenues to the U.S. Treasury: increased capital gains taxes for shareholders; increased operating revenues; interest income earned by LBO creditors; more efficient use of capit

New: Wall Street and Main Street: What Contributes to the Rise in the Highest Incomes?
Date Posted: Oct  05, 2007
We consider how much of the top end of the income distribution can be attributed to four sectors -- top executives of non-financial firms (Main Street); financial service sector employees from investment banks, hedge funds, private equity funds, and mutual funds (Wall Street); corporate lawyers; and professional athletes and celebrities. Non-financial public company CEOs and top executives do not represent more than 6.5% of any of the top AGI brackets (the top 0.1%, 0.01%, 0.001%, and 0.0001%).

REVISION: Wall Street and Main Street: What Contributes to the Rise in the Highest Incomes?
Date Posted: Oct  01, 2007
We consider how much of the top end of the income distribution can be attributed to four sectors - top executives of non-financial firms (Main Street); financial service sector employees from investment banks, hedge funds, private equity funds, and mutual funds (Wall Street); corporate lawyers; and professional athletes and celebrities. Non-financial public company CEOs and top executives do not represent more than 6.5% of any of the top AGI brackets (the top 0.1%, 0.01%, 0.001%, and 0.0001%).

REVISION: Should Investors Bet on the Jockey or the Horse? Evidence from the Evolution of Firms from Early Bus
Date Posted: Sep  01, 2007
We study how firm characteristics evolve from early business plan to IPO to public company for 50 venture capital (VC) financed companies. We find that firm business lines remain remarkably stable while management turnover is substantial. Management turnover is positively related to the formation of alienable assets. We obtain similar results from an out-of-sample analysis of all 2004 IPOs indicating that our main results are not specific to VC-backed firms or to the time period. The results sug

New: Top Executives, Turnover and Firm Performance in Germany
Date Posted: Aug  08, 2007
No abstract is available for this paper.

New: 'Outside' Intervention in Japanese Companies: Its Determinants and Implications for Mangers
Date Posted: Jan  03, 2007
No abstract is available for this paper.

New: How has CEO Turnover Changed? Increasingly Performance Sensitive Boards and Increasingly Uneasy CEOs...
Date Posted: Nov  15, 2006
We study CEO turnover - both internal (board driven) and external (through takeover and bankruptcy) - from 1992 to 2005 for a sample of large U.S. companies. Annual CEO turnover is higher than that estimated in previous studies over earlier periods. Turnover is 14.9% from 1992 to 2005, implying an average tenure as CEO of less than seven years. In the more recent period since 1998, total CEO turnover increases to 16.5%, implying an average tenure of just over six years. Internal turnover is

New: How Well do Venture Capital Databases Reflect Actual Investments?
Date Posted: Oct  22, 2006
Researchers increasingly have used the two primary venture capital databases - VentureOne and Venture Economics - to study venture capital (VC) financings. These data are largely self-reported. In this paper, we compare the actual contracts in 143 VC financings to their characterizations in the databases. The databases exclude roughly 15% of the financing rounds. The Venture Economics database oversamples larger rounds and California companies while the financing rounds included in the VentureO

REVISION: What are Firms? Evolution from Early Business Plans to Public Companies
Date Posted: Oct  20, 2006
We study how firm characteristics evolve from early business plan to initial public offering (IPO) to public company for 50 venture capital (VC) financed companies. We describe the financial performance, line of business, point(s) of differentiation, non-human capital assets, growth strategy, top management, and ownership structure. The most striking finding is that firm business lines or ideas remain remarkably stable from business plan through public company. Within those business lines, no

Entrepreneurial Finance and Private Equity: Course Description and Course Syllabus
Date Posted: Mar  06, 2006
This course uses a combination of cases and academic articles to study entrepreneurial finance and, more broadly, private equity finance. The course is motivated by recent large increases in both the supply of and demand for private equity. The primary objective of this course is to provide an understanding of the concepts and institutions involved in entrepreneurial finance and private equity markets. To do this, the course explores private equity from a number of perspectives, beginning with

What are Firms? Evolution from Birth to Public Companies
Date Posted: Jan  10, 2006
We study how firm characteristics evolve from early business plan, to initial public offering, to public company for 49 venture capital financed companies. The average time elapsed is almost six years. We describe the financial performance, business idea, point(s) of differentiation, non-human capital assets, growth strategy, customers, competitors, alliances, top management, ownership structure, and the board of directors. Our analysis focuses on the nature and stability of those firm attribute

What Are Firms? Evolution from Birth to Public Companies
Date Posted: Oct  24, 2005
We study how firm characteristics evolve from early business plan to initial public offering to public company for 49 venture capital financed companies. The average time elapsed is almost 6 years. We describe the financial performance, business idea, point(s) of differentiation, non-human capital assets, growth strategy, customers, competitors, alliances, top management, ownership structure, and the board of directors. Our analysis focuses on the nature and stability of those firm attributes. F

What is the Price of Hubris? Using Takeover Battles to Infer Overpayments and Synergies
Date Posted: Jan  10, 2005
We present a framework for determining the information that can be extracted from stock prices around takeover contests. In only two types of cases is it theoretically possible to use stock price movements to infer bidder overpayment and relative synergies. Even in these two cases, we argue that it is practically difficult to extract this information. We illustrate one of these generic cases using the takeover contest for Paramount in 1994 in which Viacom overpaid by more than $2 billion. Our fi

The Holding Period Distinction of the Capital Gains Tax
Date Posted: Aug  19, 2004
No abstract is available for this paper.

How Do Legal Differences and Learning Affect Financial Contracts?
Date Posted: Jul  26, 2004
We analyze venture capital (VC) investments in twenty-three non-U.S. countries and compare them to U.S. VC investments. We describe how the contracts allocate cash flow, board, liquidation, and other control rights. In univariate analyses, contracts differ across legal regimes. However, more experienced VCs implement U.S.-style contracts regardless of legal regime. In most specifications, legal regime becomes insignificant controlling for VC sophistication. VCs who use U.S.-style contracts fail

The Evolution of Buyout Pricing and Financial Structure
Date Posted: Jul  09, 2004
No abstract is available for this paper.

The Success of Acquisitions: Evidence from Disvestitures
Date Posted: Jul  04, 2004
This paper studies a sample of large acquisitions completed between 1971 and 1982. By the end of 1989, acquirers have divested almost 44% of the target companies. Using the accounting gain or loss recognized by the acquirer, press reports, and the sale price, we characterize the ex post success of the divested acquisitions and consider only 34% to 50% of classified divestitures as unsuccessful. Acquirer returns and total (acquirer and target) returns at the acquisition announcement are signif

How Do Legal Differences and Learning Affect Financial Contracts?
Date Posted: Jan  30, 2004
We analyse venture capital (VC) investments in 23 non-US countries and compare them to VC investments in the US. We describe how the contracts allocate cash flow, board, liquidation, and other control rights. In univariate analyses, contracts differ across legal regimes. At the same time, however, more experienced VCs implement US-style contracts regardless of legal regime. In most specifications, legal regime becomes insignificant controlling for VC sophistication. VCs who use US-style contract

Corporate Governance and Merger Activity in the U.S.: Making Sense of the 1980s and 1990s
Date Posted: Nov  26, 2003
This paper describes and considers explanations for changes in corporate governance and merger activity in the United States since 1980. Corporate governance in the 1980s was dominated by intense merger activity distinguished by the prevalence of leveraged buyouts (LBOs) and hostility. After a brief decline in the early 1990s, substantial merger activity resumed in the second half of the decade, while LBOs and hostility did not. Instead, internal corporate governance mechanisms appear to have

What is the Price of Hubris? Using Takeover Battles to Infer Overpayments and Synergies
Date Posted: Oct  17, 2002
We present a framework for determining the information that can be extracted from stock prices around takeover contests. In only two types of cases is it theoretically possible to use stock price movements to infer bidder overpayment and relative synergies. The takeover contest for Paramount in 1994 illustrates one of these generic cases. We estimate that Viacom, the 'winning' bidder, overpaid for Paramount by more than $2 billion. This occurred despite the fact that Viacom's CEO owned roughly 3

The Effects of Business-to-Business E-Commerce on Transaction Costs
Date Posted: Sep  06, 2002
In this paper, we study the changes in transaction costs from the introduction of the Internet in transactions between firms (i.e., business-to-business (B2B) e-commerce). We begin with a conceptual framework to organize the changes in transaction costs that are likely to result when a transaction is transferred from a physical marketplace to an Internet-based one. Following Milgrom and Roberts (1992), we differentiate between the impact on coordination costs and motivation costs. We argue that

Characteristics, Contracts, and Actions: Evidence from Venture Capitalist Analyses
Date Posted: May  22, 2002
We study the investment analyses of 67 portfolio investments by 11 venture capital (VC) firms. VCs consider the attractiveness and risks of the business, management, and deal terms as well as expected post-investment monitoring. We then consider the relation of the analyses to the contractual terms. Greater internal and external risks are associated with more VC cash flow rights, VC control rights; greater internal risk, also with more contingencies for the entrepreneur; and greater complexity,

Characteristics, Contracts, and Actions: Evidence from Venture Capitalist Analyses
Date Posted: May  17, 2002
We study the investment analyses of 67 portfolio investments by 11 venture capital (VC) firms. VCs consider the attractiveness and risks of the business, management, and deal terms as well as expected post-investment monitoring. We then consider the relation of the analyses to the contractual terms. Greater internal and external risks are associated with more VC cash flow rights, VC control rights; greater internal risk, also with more contingencies for the entrepreneur; and greater complexity,

Characteristics, Contracts and Actions: Evidence from Venture Capitalist Analyses
Date Posted: Apr  10, 2002
We study the investment analyses of 67 portfolio investments by 11 venture capital (VC) firms. VCs consider the attractiveness and risks of the business, management, and deal terms as well as expected post-investment monitoring. We then consider the relation of the analyses to the contractual terms. Greater internal and external risks are associated with more VC cash flow rights, VC control rights; greater internal risk, also with more contingencies for the entrepreneur; and greater complexity,

Corporate Governance and Merger Activity in the U.S.: Making Sense of the 1980s and 1990s
Date Posted: Dec  26, 2001
This paper describes and considers explanations for changes in corporate governance and merger activity in the United States since 1980. Corporate governance in the 1980s was dominated by intense merger activity distinguished by the prevalence of leveraged buyouts (LBOs) and hostility. After a brief decline in the early 1990s, substantial merger activity resumed in the second half of the decade, while LBOs and hostility did not. Instead, internal corporate governance mechanisms appear to have pl

Berg Electronics Corporation
Date Posted: Aug  01, 2001
SUBJECT AREAS: Business Valuation, Financial Forecasting, Strategic Analysis. CASE SETTING: 1996, U.S. In the Spring of 1996 Berg Electronics is poised to become a publicly traded company after going through a "build-up" leveraged buyout by Hicks, Muse, Tate, and Furst (HMTF). HMTF purchased Berg from DuPont in 1993 for $370 million then added over $100 million in acquisitions between 1993 and 1995. In February 1996 Jack Furst, the HMTF partner in charge of the Berg acquisition, was contem

Financial Contracting Theory Meets the Real World: An Empirical Analysis of Venture Capital Contract...
Date Posted: Apr  09, 2001
In this paper, we compare the characteristics of real world financial contracts to their counterparts in financial contracting theory. We do so by conducting a detailed study of actual contracts between venture capitalists (VCs) and entrepreneurs. We consider VCs to be the real world entities who most closely approximate the investors of theory. (1) The distinguishing characteristic of VC financings is that they allow VCs to separately allocate cash flow rights, voting rights, board rights,

Investment-Cash Flow Sensitivities are not Valid Measures of Financing Constraints
Date Posted: Apr  01, 2001
Kaplan and Zingales [1997] provide both theoretical arguments and empirical evidence that investment-cash flow sensitivities are not good indicators of financing constraints. Fazzari, Hubbard and Petersen [1999] criticize those findings. In this note, we explain how the Fazzari et al. [1999] criticisms are either very supportive of the claims in Kaplan and Zingales [1997] or incorrect. We conclude with a discussion of unanswered questions.

Venture Capitalists As Principals: Contracting, Screening, and Monitoring
Date Posted: Mar  31, 2001
Theoretical work on the principal-agent problem in financial contracting focuses on the conflicts of interest between an agent / entrepreneur with a venture that needs financing, and a principal / investor providing funds for the venture. Theory has identified three primary ways that the investor / principal can mitigate these conflicts - structuring financial contracts, pre-investment screening, and post-investment monitoring and advising. In this paper, we describe recent empirical work and

How Costly is Financial (not Economic) Distress? Evidence from Highly Leveraged Transactions that Be...
Date Posted: Sep  06, 2000
This paper studies thirty-one highly leveraged transactions (HLTs) of the 1980s that subsequently became financially distressed. At the time of distress, all sample firms have operating margins that are positive and in the majority of cases greater than the median for the industry. Therefore, we consider these firms financially distressed, not economically distressed. The net effect of the HLT and financial distress is a slight increase in value -- from pre-transaction to distress resolution,

Financial Contracting Theory Meets The Real World: An Empirical Analysis Of Venture Capital Contract...
Date Posted: Jul  23, 2000
In this paper, we compare the characteristics of real world financial contracts to their counterparts in financial contracting theory. We do so by conducting a detailed study of actual contracts between venture capitalists (VCs) and entrepreneurs. We consider VCs to be the real world entities who most closely approximate the investors of theory. (1) The distinguishing characteristic of VC financings is that they allow VCs to separately allocate cash flow rights, voting rights, board rights,

How Costly is Financial (Not Economic) Distress? Evidence from Highly Leveraged Transactions that ...
Date Posted: Jul  20, 2000
This paper studies thirty-one highly leveraged transactions (HLTs) of the 1980s that subsequently become financially distressed. At the time of distress, all sample firms have operating margins that are positive and in the majority of cases greater than the median for the industry. We argue that these firms, therefore, are financially distressed, not economically distressed. The net effect of the HLT and financial distress is a slight increase in value -- from the pre-transaction to distress re

A Clinical Exploration of Value Creation and Destruction in Acquisitions: Organizational Design, Inc...
Date Posted: Jul  06, 2000
This paper presents clinically-based studies of two acquisitions that received very different stock market reactions at announcement one positive and one negative. Despite the differing market reactions, we find that ultimately neither acquisition created value overall. In exploring the reasons for the acquisition outcomes, we rely primarily on interviews with managers and on internally generated performance data. We compare the results of these analyses to those from analyses of post-acquisi

The Valuation of Cash Flow Forecasts: An Empirical Analysis
Date Posted: Jun  11, 2000
This paper compares the market value of highly leveraged transactions (HLTs) to the discounted value of their corresponding cash flow forecasts. These forecasts are provided by management to investors and shareholders in 51 HLTs completed between 1983 and 1989. Our estimates of discounted cash flows are within 10%, on average, of the market values of the completed transactions. Our estimates perform at least as well as valuation methods using comparable companies and transactions. We also inv

A Clinical Exploration of Value Creation and Destruction in Acquisitions: Organization Design, Incen...
Date Posted: Jan  31, 2000
This paper presents clinically-based studies of two acquisitions that received very different stock market reactions at announcements one positive and one negative. Despite the differing market reactions, we find that, ultimately, neither acquisition created value overall. In exploring the reasons for the acquisition outcomes, we rely primarily on interviews with managers and on internally generated performance data. We compare the results of these analyses to those from analyses of post-acquisi

Top Executive Rewards and Firm Performance: A Comparison of Japan and the U.S
Date Posted: Oct  24, 1999
This paper studies top executive turnover and compensation, and their relation to firm performance in the largest Japanese and U.S. companies. Japanese executive turnover and compensation are related to earnings, stock return, and sales performance measures. The fortunes of Japanese top executives, therefore, are positively correlated with stock performance and with current cash flows (or with factors contributing to such performance). The relations for the Japanese executives are generally econ

Do Investment-Cashflow Sensitivities Provide Useful Measures of Financing Constraints?
Date Posted: Jun  25, 1998
This paper investigates the relationship between financing constraints and investment-cash flow sensitivities by analyzing the firms identified by Fazzari, Hubbard, and Petersen [1988] as having unusually high investment-cash flow sensitivities. We find that firms that appear less financially constrained exhibit significantly greater sensitivities than firms that appear more financially constrained. We find this pattern for the entire sample period, sub-periods, and individual years. These resul