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Press reports have indicated that firms frequently underprice restricted stock and employee stock options. I test for underpricing of stock and options.

I examined a sample of 5,333 private firm stock and option issuances between 1985 and 2017. I tested for underpricing using two approaches: assuming investors have no special market-timing ability and assuming instead they have perfect market-timing ability.

I find evidence of widespread stock and option underpricing by private firms before they go public reflecting large discounts that exceed reasonable compensation for lack of marketability. Unreported underpricing is more frequent in the last pre-IPO private equity transactions that offer the last opportunity to give such discounts before the stock is publicly traded, but the discounts are greater in the earlier pre-IPO transactions where unreported discounts are presumably tougher for the SEC to detect. Underpricing is still detected even when the actual DLOMs are tested against a benchmark that assumes investors have perfect market-timing ability.

Firms frequently underprice restricted stock and employee stock options. Firms tend to underprice stock options more frequently than restricted stock, but restricted stock tends to be priced at deeper discounts when recipients are assumed not to have any special market-timing ability.

Private firms issue restricted stock and options as incentive compensation. Lowballing the valuation transfers wealth from outside stockholders to employees/insiders. Wealth transfers take place through the issuance of equity claims to employees/insiders before firms go public. I found that more than a quarter of the DLOMs exceed the theoretical maximum by, on average, between 16% (median) and 20% (mean). This finding raises two questions worthy of investigation. First, to what extent do the frequency and magnitude of DLOMs above the theoretical maximum depend on whether a board of directors obtains an independent appraisal of a stock’s fair market value? Second, if DLOMs above the theoretical maximum are observed even when the stock is independently appraised, how do appraisers justify such large DLOMs?

The wealth transfers that take place through the issuance of equity claims to employees/insiders before firms go public benefit employees/insiders at the expense of outside shareholders.

My paper is the first to furnish evidence of widespread stock and option underpricing by private firms before they go public; demonstrate that the unreported underpricing is more frequent in the last pre-IPO private equity transactions that offer the last opportunity to give such discounts before the stock is publicly traded and show that the discounts are greater in the earlier pre-IPO transactions where unreported discounts are presumably tougher for the SEC to detect.

More than 80 percent of S&P 500 firms that issue ESOs use the Black-Scholes-Merton (BSM) model and substitute the estimated average term for the contractual expiration to calculate ESO expense. This simplification systematically overprices ESOs, which worsens as the stock's volatility increases. The purpose of this paper is to present a modification of the BSM model to explicitly incorporate the rates of forfeiture pre- and post-vesting and the rate of early exercise.

The paper demonstrates the model's usefulness by employing historical exercise and forfeiture data for 127 separate ESO grants and 1.31 billion ESOs to calculate the exercise and forfeiture parameters and value ESOs for nine firms.

The modified BSM model is just as accurate but easier to use than the more computationally intensive utility maximization and trinomial lattice models, and it avoids the ASC 718 BSM model's overpricing bias.

If firms prefer the BSM model over more mathematically elegant alternatives, they should at least use a BSM model that is free of overpricing bias.

It is now common for finance textbooks to discuss the concepts of the CAPM, diversification benefit, and systematic risk, as measured by beta. The purpose of this paper is to clarify aspects of these concepts and make the textbooks readers aware of them. In particular, this paper seeks to: (1) clarify the notion that “diversification reduces risk,” (2) provide geometric expositions and algebraic expressions of portfolio benefits in the context of both total risk and market risk, and (3) improve the interpretation of beta.

The purpose of this paper is to examine the hypothesis that a period of sustained supernormal firm performance (for up to five years before fraud commission) creates financial pressure on actors/agents so they have a propensity to behave fraudulently to keep the good times (apparently) rolling.

Applying the Fama and French (1993) three-factor model using a range of calendar time portfolio methodologies, the authors measure abnormal drifts in stock performance in periods up to five years before alleged fraud commission dates. The authors examine a sample of 561 US firms subject to enforcement actions initiated by the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) over 1968-2009.

The authors find that sustained firm-specific positive stock price performance for up to five years followed by the almost inevitable adverse shock, which eventually brings the good times to an end, generally precedes corporate fraud. Fraud occurs when firm managers engage in misconduct in a misguided attempt to keep the good times (apparently) rolling despite the negative shock.

The sample is restricted to firms with trading histories on the stock market prior to the misconduct, and to firms contained in the Federal Securities Regulation database of US firms subject to enforcement actions initiated by the SEC and the DOJ over 1968-2009.

The desire to keep the good times rolling appears to be a very important driver of fraudulent behavior, even after controlling for the executive compensation incentive effects and business cycle effects emphasized in prior studies. The robust findings of positive abnormal returns for up to five years preceding initial fraud commission suggest that regulators and investors would be well-advised to scrutinize the behavior of firms that exhibit surprisingly persistent superior performance over an extended period. If the financial results appear too good to be true, a closer examination might just reveal that they indeed are.

While most investors generally like to see the “good times keep rolling” this pressure can create ethical dilemmas for managers.

Unlike most other papers in this area of the literature, which concentrate on the pre-fraud disclosure, the authors investigate the firm’s performance in the pre-fraud commission period. The authors find that the commission of the alleged fraud is preceded by a sustained period of surprisingly good performance of up to five years in length. The authors believe that the paper provides empirical evidence that supports the hypothesis that a period of sustained supernormal firm performance (for up to five years before fraud commission) creates financial pressure on actors/agents so they have a propensity to behave fraudulently to keep the good times (apparently) rolling.

Corporate takeovers have become a prominent feature of global business. Merger and acquisition activity in the United States alone climbed from $32 billion in 1980 to $300 billion in 1988, an annual rate of increase of 32 percent. The individual size of these transactions has reached an all‐time high. Any company, whatever its size, may be vulnerable as a target.

In 1989, the Walt Disney Company financed its major European theme park and real estate development using a variety of financing tools and techniques that, when bundled together, amounted to a project financing. The case recounts the details of this financing and invites students to evaluate the financing from various standpoints, including those of the Walt Disney Company, the government of France, European equity investors, and European banks. The resulting opinion about the attractiveness of the project ultimately hinges on beliefs about European market demand for an American-style theme park. The case may be used to exercise students' skills in valuation analysis, to illustrate techniques for financing major real-property projects, and to explore the creation and transfer of wealth in such projects.

It is a well known problem the interactions between the market value of cash flows and the discount rate (usually the weighted average cost of capital, WACC) to calculate that value. This is mentioned in almost all text books in corporate finance. However, the solution adopted by most authors is to assume a constant leverage D%, and hence assume that the leverage gives raise to an optimal capital structure and the discount rate is constant. On the other hand, most authors use the definition of the Ke, the cost of leveraged equity for perpetuities even if the planning horizon is finite. Among these authors we find the work of Wood and Leitch W&L 2004. In this article we wish to analyse the claim made by W&L 2004 in the sense to have found an iterative solution to the problem of circularity that results in a “near” matching with the Adjusted Present Value APV, proposed by Myers, 1974. They use as the basic principle the fact that there is a “near” constant relation between Ke the cost of equity and Kd the cost of debt. They consider as well that the cost of debt Kd is not constant and changes proportionately with the leverage D%. We propose a very simple and precise approach to solve the above mentioned circularity problem.

This case considers the unusual terms under which Rhone-Poulenc, the large French chemicals producer, acquired the U.S.-based Rorer Group, Inc., in August 1990. Set a year later, in August 1991, the case reviews the terms of the merger and the experience of the new entity in its first year, and invites the student to evaluate the “contingent value right” (CVR) issued by Rhone-Poulenc in the merger.

The current study integrates self-enhancement and social exchange theories to construct hypotheses in which team-level narcissism is expected to negatively influence team-level task performance ratings and team-level organizational citizenship behaviors directed at team members (OCB-Is). Additionally, individual-level narcissism is expected to negatively influence peer performance ratings. Based on longitudinal data collected from 89 study participants constituting 29 project teams, results indicate (a) team-level narcissism influences task performance, (b) team-level narcissism influences changes in OCB-Is over time, and (c) individual-level narcissism influences peer performance ratings. Our findings suggest the necessity for practitioners to consider individual differences in the strategic formation of work groups.