The Role of Insider Influence in Mutual‐to‐Stock Conversions

Abstract

Using a sample of 347 demutualizing thrifts from 1991 to 2004, we show that the level of inside participation is not a traditional signal of firm performance. We conclude that unanticipated inside participation reflects the incentives of insiders to reduce the size of the offer to influence the level of expected IPO returns. We find unanticipated inside participation is related to lower offer size and higher initial returns, but we do not find a relationship between inside participation and post-IPO performance.

Earnings management and initial public offerings: The case of the depository industry

“…As for demutualization thrifts, Masulis (1987) argues that investors transacting in the secondary market following the initial public offering will fully value the company's net worth plus the gains from conversion, resulting in positive returns to investors in the initial offering. 8 Masulis reports positive initial returns to investors for his sample of demutualizations from 1976 through 1983, and Carow et al (2007) provide evidence that managers influence the terms of the conversion offer and that greater levels of management participation in the offering are associated with smaller offer sizes and greater initial IPO returns.…”

“…The OTS limits stock option plans to 10%, ESOPs to 10%, MRPs to 4%, and the combination of ESOPs and MRPs to 12% of shares issued. Carow et al (2007) find that for prospectuses reporting these plans, stock option plans were 9.7%, ESOPs were 7.6%, and MRPs were 3.8% of shares issued.…”

“…37-40). Historically, insider purchases have averaged from 20% of the offering in the 1970s (Dunham, 1985) to just 8% in the 1990s (Carow et al, 2007). 4 All proceeds received by the institution from the sale of stock become equity for the demutualized thrift.…”

“…In addition, we control for factors shown by Carow et al (2007) to be related to insider participation in demutualizations, including firm size [Ln(ASSETS)], asset growth (GROWTH), performance (ROA), capitalization (CORE), industry performance during the demutualization process as measured by the thrift industry index returns in the six weeks prior to the IPO (INDEX), industry price-to-book ratio (IND_P/B), and a dummy equal to one if the firm is traded on an active exchange, zero Table 4 Two-stage regressions of discretionary loan loss provisions and discretionary loan loss reserves around the time of the IPO. Models 1 and 2 report the first-stage regressions estimating loan loss provisions (LLP) to average loans in percentage terms in model 1 and loan loss reserves (RESERVES) to average loans in percentage terms in model 2.…”

Do IPO Firms Manage Earnings?

“…Capital-raising events are a suitable motivation for earnings management, and Teoh et al, (1998aTeoh et al, ( , 1998b; and Erickson and Wang (1999) document that discretionary accruals are used to inflate earnings prior listing. Carow, Cox, and Roden (2006) provide evidence that manager influence the terms of their firms offer price for the IPO shares. Healy and Wahlen (1999) conclude that some managers inflate reported earnings before public equity offers in order to change investors' expectations of future performance and increase the offer price.…”