Notice Board: Risk of losses in new issues

The following is the first in a new series of columns devoted to emerging business research. The material is compiled by Dylan Thomas of City University Business School, who welcomes submissions.

INVESTORS who put money into new issues rather than the shares of existing similar- sized companies incur a loss of 15 to 30 per cent over five years, according to research from the United States.

But the survey of more than 4,700 companies that went public, and 3,700 rights issues in the period 1970 to 1990 also shows that investors in the latter suffer even more than those in initial public offerings - losing an average of 30 cents in the dollar over the next five years.

The reasons for the poor performance are unclear, but the report, 'The Timing and Subsequent Performance of New Issues: Implications for the Cost of Equity Capital', by Tim Loughran of the University of Iowa and Jay Ritter of the University of Illinois, suggests in the case of new issues that it could be the fault of optimistic forecasts or over-optimistic investors.

With rights issues, the decline is attributed partly to managers timing the issues to take place just before downward revisions in earnings, and partly to the market failing to anticipate fully such falls.

JAPANESE companies that have higher-than-average levels of participation and amounts per worker invested in employee share option plans also enjoy higher levels of 'value-added', or return on resources employed.

However, where the Esop owns a higher percentage of the company's equity, the value declines because of the reduction in the power of senior executives and an associated drop in their incentive to perform, equivalent to shirking.

Derek Jones and Takao Kato, in a study of 543 listed Japanese companies published in last September's issue of the British Journal of Industrial Relations, found that the introduction of the average Esop is associated with a 6.8 per cent increase in value-added; this suggests that the schemes encourage a stronger link between the interests of senior management and employees.

THE higher the level of institutional shareholdings in a company, the lower the chief executive's pay is likely to be, according to a paper presented to a recent conference on corporate accountability and governance at Nottingham University.

The finding is published in a study of 100 of the largest US companies by Robert Mangel and Harbir Singh of the Wharton School at the University of Pennsylvania.

It supports the idea that institutions act as a form of control, monitoring the performance of managers. But the study, 'Ownership Structure, Board Relationships and CEO Compensation in Large US Corporations', finds that neither the proportion of non- executive directors on the board nor the existence of a dominant outside shareholder seem to affect chief executive pay. Similar research among 220 of the United Kingdom's largest companies found that the most highly-paid director of a company would earn more in a company that had set up a remuneration committee than in one that had not.

However, the authors of 'Remuneration Committees and Corporate Governance', Brian Main and James Johnson of Edinburgh University, suggest this may just reflect the fact that when the survey was carried out in 1990 only the larger, more progressive companies were likely to have such committees.

The two aforementioned reports are printed in the Corporate Governance Special Issue of Accounting and Business research (No 91A) 1993, and published by the Institute of Chartered Accountants in England and Wales.