Preliminary
Creating Value
Winter 2007/08
Josef Zechner1
Course Contents
This course focuses on how value can be created within a corporation where ownership and
control are separated. The basic problem has already been addressed by Adam Smith (1776):
“The directors of [joint stock] companies, however, being the managers rather of other
people’s money than of their own, it cannot well be expected, that they should watch over it
with the same anxious vigilance [as owners…] … Negligence and profusion, therefore, must
always prevail, more or less, in the management of the affairs of such a company”2
The last few decades were a time of fundamental change in corporate activity around the
world. Corporate control activities emerged to mitigate the above problem, creating enormous
momentum for change. These transactions included improved internal corporate governance
standards, takeovers, mergers, leveraged buyouts, shareholder activism and changes in
executive compensation. This course will analyse each of these mechanisms and their
potential effects on value creation.
We start by discussing various reasons for the increased importance of value-oriented
management. We continue by analysing different measures of value creation, beginning with
measures of stock price performance and then turning to measures of intrinsic value, various
financial indicators and value drivers.
In the following block, the course focuses on initial public offerings (IPOs) and their role in
creating value for investors. In particular we will discuss why an IPO may be value enhancing
for the original firm owners, why IPOs seem to be “underpriced” and what the empirical
stylized facts are on IPOs.
Next we analyse the relationship between executive compensation and value creation. We will
give detailed empirical evidence on the structure of executive compensation and the scientific
evidence on the effects on corporate performance.
Then we focus on companies` internal control systems and analyse how they ensure value
creation. In this context we will give an overview over the main corporate governance codes.
In particular we will focus on the role of boards as important element of the internal control
system.
1
Prof. Josef Zechner, University of Vienna, Faculty of Business, Economics and Statistics, Department of
Finance.
2
See Smith, Adam (1776), An Inquiry into the Nature and Causes of The Wealth of Nations. The Modern
Library: New York.
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We also investigate the role of takeovers and leveraged buyouts as a mechanism to create
shareholder value. Finally we will analyse the phenomenon of shareholder activism.
Throughout the world especially institutional investors have started to take a more activist
approach, seeking to actively influence management decisions. In this last part of the course
we will review the evidence on shareholder activism.
Readings
We will use the following readings as a basis for this course:
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Lecture notes “Creating Value”.
Koller T., M. Goedhart and D. Wessels (KGW), 2005, Valuation, Measuring and
Managing the Value of Companies, 4th edition, John Wiley & Sons, Inc.
Journal articles and working papers.
Course evaluation
There will be a midterm and a final exam. The midterm is scheduled for October 22nd. It will
make up 40% of the total grade. The final exam will take place on November 19th. It will
make up 55% of the total grade. In addition there is a case study to be discussed and solved in
class. In teams of up to 5 students you will have to prepare an analysis and solution for each
case. These solutions must be handed in electronically before the relevant deadline given in
class to the following email address: arne.westerkamp@univie.ac.at. These solutions will not
be graded in detail. Instead it will only be checked that a consistent solution has been turned
in on time. Solutions turned in after the deadline will not be considered. Consistently turned in
solutions will make up 5% of the maximum grade. There will be bonus points given for
classroom participation. For active classroom participation you can receive extra “bonus
marks”, up to an additional 10% of the total. To be able to evaluate your classroom
participation, I will ask you to put up a sign with your name written on it on your desk in front
of you during class.
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Table of contents
Part I:
The Concept of Value-based Management
1. The increasing importance of value-oriented strategy
2. Some basic principles of value creation
Part II: Implementing Value-based Performance Measures
1. Traditional performance measures
2. Value-based measures
Part III: Havard Case: Vyaderm Pharmaceuticals
Part IV:
1.
2.
3.
Creating Value and Going Public
Overview
Motives for IPOs
Stylized facts
Part V:
1.
2.
3.
Executive Compensation
Stylized facts
EVA-based compensation
Option-based compensation
Part VI:
1.
2.
3.
Board of Directors
International comparison
Potential problems
Empirical findings
Part VII:
1.
2.
3.
4.
Takeovers
Value creation/destruction in takeovers
Cash offer vs. stock offer
Empirical evidence on takeover gains
Empirical evidence on the disciplinary function of takeovers
Part VIII: Shareholder Activism
1. The rise of shareholder activism
2. Views about shareholder activism
3. Empirical evidence
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Readings in Detail
Main Readings:
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Lecture Notes
Koller, Goedhart and Wessels, 2005, Valuation, 4th edition, John Wiley & Sons, INC.
Martin and Petty, 2000, Value Based Management, Harvard Business School Press.
Part I: The Concept of Value-based Management
Books, journal articles and working papers:
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Koller, Goedhart and Wessels 2005, Valuation, 4th edition, John Wiley & Sons, INC.:
Part One, Chapters 1-3.
Martin and Petty, 2000, Value Based Management, Harvard Business School Press:
Chapters 1-2.
Austrian Code of Corporate Governance
http://www.wienerboerse.at/corporate/pdf/CorporateGovernanceKodexengl_2.pdf
Arbeiterkammer, 2004, Corporate Governance Kodex. Die praktische Anwendung des
Kodex an der Wiener Börse 2004.
http://wien.arbeiterkammer.at/pictures/d16/Corporate_Governance_Studie_2004.pdf
Additional Readings:
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Drobetz, Wolfgang, Andreas Schillhofer, and Heinz Zimmermann, 2004, Corporate
Governance and Expected Returns: Evidence from Germany, European Financial
Management 10, 267-293.
Drobetz, Wolfgang, Klaus Gugler, and Simone Hirschvogl, 2005, The Determinants of
the German Corporate Governance Rating, Working Paper, University of
Basel/Vienna.
http://www.wwz.unibas.ch/cofi/publications/papers/2004/02-04.pdf
Part II: Implementing Value-based Performance Measures
Books, journal articles and working papers:
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Koller, Goedhart and Wessels, 2005, Valuation, 4th edition, John Wiley & Sons,
INC.: Chapters 4 and 5.
Martin and Petty, 2000, Value based Management, Harvard Business School Press:
Chapters 3-5.
Part III: Harvard Case: Vyaderm Pharmaceuticals
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CASE: Harvard Case: Vyaderm Pharmaceuticals
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Part IV: Creating Value and Going Public
Journal articles and working papers:
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Benveniste, L.M . and P.A. Spindt, 1989, How investment bankers determine the offer
price and allocation of new issues, Journal of Financial Economics 24, 343-362.
Ljungqvist, A., 2004, IPO Underpricing: A Survey, Handbook in Corporate Finance:
Empirical Corporate Finance, B. Espen Eckbo, ed., Forthcoming, Available at SSRN:
http://ssrn.com/abstract=609422
Ritter, J.R., 1998, Initial Public Offerings, Contemporary Finance Digest 2(1), 5-30.
Ritter, J.R. and I. Welch, 2002, A Review of IPO Activity, Pricing, and Allocations,
Journal of Finance 57(4), 1795-1828.
Rock, K., 1986, Why new issues are underpriced, Journal of Financial Economics 15,
187-212.
Stoughton, N. and J. Zechner, 1998, IPO-Mechanisms, Monitoring and Ownership
Structure, Journal of Financial Economics 49, 45-77
Stoughton, N. Wong, K.P. and J. Zechner, 2001, IPOs and Product Quality, Journal of
Business 74, 375-408.
Welch, I., 1992, Sequential sales, learning, and cascades, Journal of Finance 47, 695732.
Part V: Executive Compensation
Books, journal articles and working papers:
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Abowd, J. M. and D. S. Kaplan, 1998, Executive Compensation: Six Questions That
Need Answering, working paper
http://instruct1.cit.cornell.edu/~jma7/ak-jep_revised_05-02.PDF
Bebchuck, L.A., J.M. Fried and D. I. Walker, 2002, Managerial Power and Rent
Extraction in the Design of Executive Compensation, Harvard Law School Discussion
Paper No. 366
Core, John E., Wayne R. Guay, and David F. Larcker. 2003. “Executive Equity
Compensation and Incentives: A Survey”. Federal Reserve Board New York
Economic Policy Review.
Evans, J., Evans, R. and D. Todesco, 2002, An Examination of Economic Value
Added and Executive Compensation, working paper.
Gillian, S. I., 2001, Option-Based Compensation: Panacea or Pandora’s Box? Bank of
America, Journal of Applied Corporate Finance, Vol 14, 2, pp115-128.
Hall, B., 2002, Incentive strategy II: Executive compensation and ownership structure,
working papar, Harvard business school.
Martin and Petty 2000, Value based Management, Chapter 8, Harvard Business
School Press.
Murphy, K., 1999, Executives compensation, in Handbook of labor economics,
Ashenfelter and Card ed., vol. 3. New York: North Holland.
Additional Readings:
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Acharya, V., K. John, and R. Sundaram, 2000, On the Optimality of Resetting
Executive Stock Options, Journal of Financial Economics 57, 65-101.
Brickley, James A., Sanjai Bhagat and Ronald C. Lease, 1985, The impact of longrange managerial compensation plans on shareholder wealth, Journal of Accounting
and Economics, Volume 7, Issues 1-3, Pages 115-129.
Chance, D., R. Kumar, and R. Todd, 2000, The Repricing of Executive Stock Options,
Journal of Financial Economics 57, 129-154.
Morck, Randall, Andrei Shleifer and Robert W. Vishny, 1988, Management
ownership and market valuation : An empirical analysis, Journal of Financial
Economics, Volume 20, Pages 293-315.
Yermack, D., 1997, Good Timing: CEO Stock Option Awards and Company News
Announcements, Journal of Finance 52, 449-476.
Part VI: Boards of Directors
Books, journal articles and working papers:
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Adams, R. B., 2001, The Dual Role of Corporate Boards as Advisors and Monitors of
Management: Theory and Evidence, working paper.
Bebchuk, L., C. Coates, 2002,The powerful antitakeover force of staggered boards:
theory, evidence, and policy, NBER Working paper 8974.
http://www.nber.org/papers/w8974.pdf
Bhagat, S. and B. Black, 2001, The Non-Correlation Between Board Independence
and Long-Term Firm Performance, Journal of Corporation Law, 231-274.
Corporate Governance Codes
Gugler, K., A. Stomper and J. Zechner, 2000, Corporate Governance, Ownership an
Board Structure in Austria, Zeitschrift für Betriebswirtschaft, pp. 23-43.
Hermalin, B. E. and M. S. Weisbach, 2000, Boards of Directors as an Endogenously
Determined Institution: A Survey of the Economic Literature working paper.
Monks, R, and N. Minow 1995, Corporate Governance, chapter 3, 5. Blackwell
Publisher Ltd.
Additional Readings:
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Baker, M. and P. Gompers, 2000, The Determinants of Board Structure and Function
in Entrepreneurial Firms, Working Paper, Harvard Business School.
Brickley, J. and C. James 1987, The Takeover Market, Corporate Board Composition,
and Ownership Structure, Journal of Law and Economics 30, pp. 161-180.
Byrd, J. and K. Hickman, 1992, Do Outside Directors Monitor Managers? Evidence
from Tender Offer Bids, Journal of Financial Economics 32, pp. 195-207.
Cotter, J., A. Shivdasani, and M. Zenner, 1997, Do Independent Directors Enhance
Target Shareholder Wealth during Tender Offers? Journal of Financial Economics 43,
pp. 195-218.
Hermalin, B. and M. Weisbach, 1988, The Determinants of Board Composition, The
RAND Journal of Economics 19 (4), pp. 589-606.
Mayers, D., A. Shivdasani, and C. Smith 1997, Board Composition and Corporate
Control, Evidence from the Insurance Industry, Journal of Business 70.
Perry, T., 2000, Incentive Compensation for Outside Directors and CEO Turnover,
Working paper, Arizona State University.
http://papers.ssrn.com/sol3/Delivery.cfm/000718303.pdf?abstractid=236033&mirid=1
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Shivdasani, A., 1993, Board Composition, Ownership Structure, and Hostile
Takeovers, Journal of Accounting and Economics 16 (1/2/3), pp. 167-98.
Shivdasani, A. and D. Yermack, 1999, CEO Involvement in the Selection of New
Board Members: An Empirical Analysis, Journal of Finance 54, pp. 1829-1854.
Weisbach, M., 1988, Outside Directors and CEO Turnover, Journal of Financial
Economics 20, 431-460.
Wu, Y., 2000, Honey, I Shrunk the Board, Working Paper, University of Chicago.
http://papers.ssrn.com/sol3/Delivery.cfm/000706305.pdf?abstractid=235295&mirid=1
Yermack, D.,1996, Higher Valuation of Companies with a Small Board of Directors,
Journal of Financial Economics, 40, pp. 185-212.
Part VII: Takeovers
Books, journal articles and working papers:
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Agrawal and Jaffe 2003, The Disciplinary Motive for Takeovers:A Review of the
Empirical Evidence, working paper.
http://bama.ua.edu/~aagrawal/review.pdf
Bild, M., A. Cosh, P. Guest and M. Runsten, 2002, Do takeovers create value? A
residual income approach on U.K. data, working paper.
http://scholar.google.com/url?sa=U&q=http://www.cbr.cam.ac.uk/pdf/WP252.pdf
Franks, J., C. Mayer and L. Renneboog, 2001, Who disciplines management in poorly
performing companies?, Journal of Financial Intermediation.
Grinblatt and Titman 2002, Financial Markets and Corporate Strategy, chapter 20.
Kaplan, S. N., M. Mitchell and K. Wruck, 1997, A clinical exploration of value
creation and destruction in acquisitions: organisational design, incentives and internal
capital markets.
Additional Readings:
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Agrawal, A. and J. F. Jaffe, 1995, Does Section 16b Deter Insider Trading by Target
Managers? Journal of Financial Economics 39, 295-321.
Agrawal, Anup, Jeffrey F. Jaffe, and Gershon N. Mandelker, 1992, The Post-merger
Performance of Acquiring Firms: A Re-examination of an Anomaly, Journal of
Finance 47, pp. 1605-1621.
Agrawal, Anup, and Ralph Walkling, 1994, Executive careers and compensation
surrounding takeover bids, Journal of Finance 49, 985-1014.
Andrade, Gregor, Mark Mitchell, and Erik Stafford, 2001, New Evidence and
Perspectives on Mergers, Journal of Economic Perspectives 15, 103-120.
Asquith, P., 1983, Merger Bids, Uncertainty and Stockholder Returns, Journal of
Financial Economics 11.
Franks, Julian, Robert Harris, and Sheridan Titman, 1991, The postmerger share-price
performance of acquiring firms, Journal of Financial Economics 29, pp. 81-96.
Franks, J. R., and C. Mayer, 1996, Hostile Takeovers in the UK and the Correction of
Management Failure, Journal of Financial Economics 40, 163-181.
Hasbrouck, J., 1985, The Characteristics of Takeover Targets: q and Other Measures,
Journal of Banking and Finance 9, 351-362.
Healy, Paul M., Krishna G. Palepu and Richard S. Ruback, 1992, Does Corporate
Performance Improve after Mergers? Journal of Financial Economics 31, 135-176.
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Kini, O., W. Kracaw; and S. Mian, 1995, Corporate Takeovers, Firm Performance and
Board Composition, Journal of Corporate Finance 1, 383-412.
Malatesta, P. H., 1983, The Wealth Effect of Merger Activity and the Objective
Functions of Merging Firms, Journal of Financial Economics 11, 155-182.
Martin, K. J., and J. J. McConnell, 1991, Corporate Performance, Corporate
Takeovers, and Management Turnover, Journal of Finance 46, 671-688.
Mitchell, Mark, and Erik Stafford, 2000, Managerial Decisions and Long-Term StockPrice Performance, Journal of Business 73.
Ravenscraft, David and F.M. Scherer, 1987, Mergers, Sell-offs and Economic
Efficiency, The Brookings Institution, Washington, D.C.
Safieddine, Assem and Sheridan Titman, 1999, Leverage and Corporate Performance:
Evidence from Unsuccessful Takeovers, The Journal of Finance 54, pp. 547-580.
Part VIII: Shareholder Activism
Books, journal articles and working papers:
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Gillian, S. L. and L. T. Starks, 2000, Corporate governance proposals and shareholder
activism: the role of institutional investors, Journal of Financial Economics, pp. 275305.
Goldman, M.D. and E.M. Filliben, 2000, Corporate governance: current trends and
likely developments for the twenty-first century, Delaware Journal of Corporate Law,
Vol. 25, pp. 683-713.
Karpoff, J., 2001, The Impact of Shareholder Activism on Target Companies: A
Survey of Empirical Findings, working paper.
http://finance.bi.no/~governance/conference_2001/Karpoff.PDF
Anat Admati, Paul Pfleiderer and Josef Zechner, „Large Shareholder Activism, Risk
Sharing, and Financial Market Equilibrium“, Journal of Political Economy, December
1994, 102, 1097-1130.
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