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RFS Advance Access published online on April 2, 2004
Review of Financial Studies, doi:10.1093/rfs/hhh009
Review of Financial Studies © The Society for Financial Studies 2004; all rights reserved
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The Review of Financial Studies © The Society for Financial Studies 2004; all rights reserved.

Original Articles

Corporate Governance, Incentives, and Industry Consolidations

Keith C. Brown 1, Amy Dittmar 2*, and Henri Servaes 3
1 McCombs School of Business, University of Texas, Austin, TX 78712-1179
2 University of Michigan, 701 Tappan Street, Ann Arbor, Michigan 48109
3 London Business School and CEPR, Sussex Place - Regent's Park, London NW1 4SA, United Kingdom

* To whom correspondence should be addressed. E-mail: adittmar{at}bus.umich.edu.


  Abstract

This paper studies the determinants of the success of industry consolidations using a unique sample of firms established at the time of their initial public offering: roll-up IPOs. In these transactions, small, private firms merge into a shell company, which goes public at the same time. These firms deliver poor stock returns; their operating performance mimics that of comparable firms, but does not justify their high initial valuations. However, if the managers and owners of the firms included in the transaction remain involved in the business as shareholders and directors, operating and stock price performance improve, and future acquisitions are better received by the market. Higher ownership by the sponsor of the transaction leads to a reduction in performance, consistent with the view that the sponsor's compensation is excessive. These findings highlight the impact of corporate governance on performance.


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