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o rK m g
r a p e r s e rie s
Pricing IP O s of Mutual Thrift
C o n versio n s: The Jo int Effect of
Regulation and Market Discipline
Elijah Brew er III, Douglas D. Evanoff and
Ja ck y So
D
W orking P a p e rs S eries
R esearch D epartm ent
F ederal R eserv e Bank of C hicago
D ecem ber 2001 (W P-01-25)
FEDERAL R£SERVE BANK
OF CHICAGO
P r ic in g I P O s o f M u tu a l T h r ift C o n v e r s io n s : th e J o in t
E ffe c t o f R e g u la tio n a n d M a r k e t D is c ip lin e
by
Elijah B r e w e r III
Research Department, 11th Floor
230 S. LaSalle Street
Federal Reserve Bank ofChicago
Chicago, Illinois 60604-1413
(312) 322-5813
(312) 322-5214-FAX
ebrewer@frbchi.org
D o u g l a s D. Evanoff
Research Department, 11th Floor
230 S. LaSalle Street
Federal Reserve Bank ofChicago
Chicago, Illinois 60604-1413
(312) 322-5814
(312) 322-5214-FAX
devanojf@frbchi.org
and
Jacky So
Department ofFinance and Economics
School ofBusiness
3145 Alumni Hall
Southern Illinois University-Edwardsville
Edwardsville, Illinois, 62026
(618) 650-2980
(618) 650-3047-FAX
jso@siue.edu
JEL Classification Numbers: G1, G2, G 21, G28
[PleaseDo not Quote withoutpermissionfrom Authors]
______________________________ December 2001______________________________
*W e thank Todd Houge and Daniel E. Page for valuable comments and suggestions; John
Yeoman for discussing the procedures used to implement the "spread regressions.” The authors
are also indebted to the professional staffof SNL Securities, L.P., especially Christopher Smith,
for spending significant time and effort to explain the data structure and issues related to thrift
conversions. W e thank Eugene Fama and Kenneth French for providing the Fama-French monthly
time series of factor realizations. The research assistance of Simon Galed, Syed Hussain, and
Susan Yuska is greatly appreciated. The views expressed are those of the authors and do not
necessarily reflect those of the Federal Reserve Bank of Chicago or the Board of Governors of
the Federal Reserve System.
P r i c i n g I P O s o f M u t u a l T h r i f t C o n v e r s io n s : T h e J o i n t E f f e c t o f
R e g u la tio n a n d M a r k e t D is c ip lin e
ABSTRACT
A large number of mutual savings and loan associations (MSLs) converted their charters into
stock ownership between the mid-1980s to mid-1990s. Because these conversions tended to
generate windfall profits for insiders and investors, new conversion guidelines and regulations
were proposed by the FDIC to make sure that prices of the conversion IPO were rig h t a n d
fa ir . As pointed out by Mr. Henry B. Gonzales, former chairman of the House Banking
Committee, "conversion regulations of the Office of Thrift Supervision have ensured that insiders
and acquirers don't benefit at the expenses of the institutions and its account holders."
This study examines the price behavior of the mutual-to-stock conversions from 1985 to
1996. We show that if the thrift members exercised their rights to subscribe the new shares
allotted to them or were allowed to sell their rights, whether the conversion IPOs were underor over-priced would not create any wealth transfer. Given the absence of wealth transfers, in
order to guarantee full subscription, price discounts might be necessary. Empirically, we find that
under-pricing was common for the thrift conversions, but not as significant as found in non
banking industries. We also examine the relationship between insider subscriptions and aftermarket price movements and find that insider-subscriptions have a positive correlation with
after-market performance. We believe that insider-subscriptions can therefore be used as a
"signal" to encourage unsophisticated mutual depositors to exercise their in-the-money rights.
Finally, using options-pricing theory, we find that the underwriters' spreads can be explained by
volatility but not by the relationship between the offering price and the estimated market price.
Therefore, the use of uninsured rights, instead of rights with standby underwriting, appears to be
a more cost-effective method of equity flotation for thrift conversions. This occurs because the
“insurance premium” associated with the latter does not reflect the discount that would increase
the probability of the offer's success.
2
P r ic in g I P O s o f M u tu a l T h r ift C o n v e r s io n s : T h e J o in t E f f e c t o f
R e g u la tio n a n d M a r k e t D is c ip lin e
During the early 1980s, most savings and loan associations (S&Ls) were mutual
associations. Of the 3,126 S&Ls in 1983,2,404, or about 77 percent, were mutual institutions.
At the end of 1996, there were 565 mutual S&Ls, representing 42 percent of the total number
of institutions. Over this fourteen-year period, a large number of mutual savings and loan
associations (MSLs) converted their charters into stock ownership. The reasons for mutual
associations’ conversion to stock form have changed over the years. During the 1980s, many
thrifts were undercapitalized and economically insolvent 1980s (see Barth, 1991; Brewer, 1989
and 1995; and Kane, 1989). A mutual to stock conversion was a way to encourage private
capital to flow into the thrift industry, re-capitalizing troubled thrifts. During the 1990s mutual-tostock conversions have been undertaken to finance expansion and to take advantage of the
benefits available to a public company. These benefits include the establishment of stock benefit
plans for management and employee and the ability to merge with other firms.
An S&L that is mutually owned by depositors can become a joint stock institution by
offering its accumulated mutual equity for sale. A conversion from a mutual to a stock
association allows firms to raise equity capital, reducing the probability of insolvency by
providing a cushion against failure. Between 1983 and 1988, 571 S&Ls converted and raised
$10.1 billion in new equity (Maksimovic and Unal, 1993). While mutual-to-stock conversions
provide an opportunity for an institution to raise capital, they could potentially generate windfall
profits for insiders and investors. Before a conversion, a mutual association’s depositors have
3
legal claims to the net worth of the institution, but these claims are not negotiable and therefore
depositors cannot benefit from increased firm value. When a mutual converts, conversion
investors, including participating managers and depositors, obtain claims whose value reflects
their respective contributed capital plus a share of the mutual association’s existing net worth.
Thus, the proceeds from the conversion are not distributed to the existing depositors, but
instead they become an addition to the association’s assets. As a class, the investors who
purchase the equity of a converting mutual association acquire the equity of the entire
organizatioa This claim per share will be greater than the conversion subscription price per
share. Because of this, mutual-to-stock conversions are closely regulated by Office of Thrift
Supervision and the Federal Deposit Insurance Corporation to make sure, in part, that prices of
conversion initial public offerings are rig h t a n d fa ir . As pointed out by Mr. Henry B. Gonzales,
former chairman of the House Banking Committee, "conversion regulations of the Office of
Thrift Supervision have ensured that insiders and acquirers don't benefit at the expenses of the
institutions and its account holders."
One regulation of particular interest differentiating mutual-to-stock conversions from
other initial public offerings is the requirement that conversions must involve the public sale of
stock in a manner similar to a standby rights offering to depositors and management with an
underwriting agreement signed only at the expiration of the subscription rights (Masulis, 1987).
These rights are non-transferable and designed to protect the proportionate interest of
depositors. Conventional rights offerings can take one of three forms: uninsured (those involving
no underwriter), rights-with-standby underwriting, and firm-commitment underwriting. Based
on a non-conversion sample of firms, Eckbo and Masulis (1992) found that the choice between
4
uninsured rights, rights-with-standby underwriting, and firm-commitment underwriting depends
on information asymmetries, shareholder characteristics and direct flotation costs. Smith (1977)
has shown that uninsured rights offerings have lower flotation costs than rights offerings with
standby underwriting. Flotation costs were 2.45 percent of the amount raised for uninsured
rights offerings compared to 6.05 percent for rights offerings with standby underwriting (see
Smith, 1977). Presumably, the higher cost is related to the underwriter’s ability to market the
issue at a higher price than otherwise (see Brealey and Myers, 2000). Eckbo and Masulis
(1992) recommend rights-with-standby underwriting if current-stakeholder take-ups are
expected to be low. Otherwise, the least expensive method, uninsured rights underwriting, is
recommended.
We address the following questions concerning mutual-to-stock conversions between
1985 and 1996. Were the distributional concerns associated with thrift conversions justified?
Did windfall profits occur in mutual-to-stock conversions? Were these profits related to
management stake in the conversion shares? If the answer is yes, can this information be used
to develop a policy to protect the welfare of small thrift depositors? Is the underwriter’s spread,
a measure of the flotation cost, related to the ratio of the offer price to the estimated price, a
ratio that reflects the success of the offer? If the answer is no, then the right issuing thrifts did
not benefit from paying the extra insurance premium to the underwriter.
We also examine the long-run post-offering performance of mutual-to-stock
conversions. Hogue and Loughran (1999) document that bank initial public offerings (IPOs)
from 1983 to 1991 underperformed several market indexes. However, their bank sample
includes all types of financial institutions and thus, it does not allow them to distinguish between
5
the long-run performance of thrifts, banks, or bank holding company IPOs. Analyzing the longrun performance of only thrift conversions would add to the literature.
We demonstrate in Appendix A of this paper that as long as the thrift account holders
exercise their rights, or are allowed to sell the rights allotted to them, wealth transfers will not
occur irrespective of whether the conversions are under- or over-priced. In fact, we show that
under-pricing may be an effective means to encourage small depositors to subscribe to the new
shares, without inducing wealth transfers from the current account holders to new investors. Our
findings have implications for the current debate in the international forum regarding the
preferred method to sell IPOs: i.e., determining whose welfare should be paramount in
determining the placement method. Great Britain recently established a policy that allows
citizens to benefit directly from the IPOs of privatization by giving them priority in the allocation
of issues and, in many cases, at promotional prices (see Benveniste and Busaba, 1997).
If depositors are to realize their appropriate claim to the value of the firm, they need
adequate information about the potential of a conversion. Due to asymmetric information,
however, this information may not be readily available to thrift account holders. We propose a
simple mechanism to address this problem; a mandate that the subscriptions of thrift officers and
directors be disclosed to the mutual deposit members. Based on the percentage of the
conversion subscribed by insiders, the current account holders could decide whether to exercise
their rights. This disclosure recommendation is based on the work of Leland and Pyle (1977)
and is consistent with the Securities and Exchange Commission’s position that full disclosure,
rather than "fairness", is most important when setting IPO regulations (Ibbotson et al., 1994).
6
Leland and Pyle (1977) show that when die possibility of adverse selection exists,
insiders may attempt to signal their firms’ value to investors by increasing their holdings of the
firm’s securities. In a signalling equilibrium firm value is revealed by changes in management
stockholdings. This theory argues that management is typically better informed about the
expected future cash flows of the firm and, therefore, has an incentive to hold large stock
positions only if they expect die future cash flows to be high relative to the firm's current value.
Rational investors will consider managers' stock ownership decisions to be a credible signal of
firm value. Downes and Heinkel (1982) find evidence consistent with this argument1 To further
analyze this potential effect, we test whether insiders’ subscriptions are positively correlated with
the rate of return of the post-conversion stocks of the converted thrifts. Indeed, for various time
horizons, we find a statistically significant relationship for the thrifts in our sample.
Also, we examine whether the subscription price discount is large enough to guarantee
the offers success (that is, a 100% subscription rate). If so, then the rights-with-standbyunderwriting required by the regulators should be replaced by uninsured rights offering. We
relate underwriter spread to, among other things, the ratio of the offering price to the estimated
price. We hypothesize that total dollar underwriter spread (including legal fees and other
transactions costs) as a fraction of the total estimated gross proceeds of the securities being
offered is unrelated to the actual total gross proceeds from the offering relative to the estimated
total gross proceeds. Our empirical results support this conjecture. Therefore, the issuing thrifts
did not benefit from paying the extra insurance premium as measured by spread.
1Ritter (1984), however, demonstrates that the results obtained by Downes and Heinkel
(1982) may be due to the "agency hypothesis." He also points out the possibility of simultaneous
7
The paper is organized as follows. Section I discusses the conversion regulations and
procedures. Section II provides a review of the literature on thrift conversions. Section El
presents a set of hypotheses examined in this paper. Section IV provides a discussion of the
data and methodology Section V reports our empirical results. Section VI offers some
concluding remarks.
I.
Thrift conversion regulations and procedures
Although there have some adjustments made to the rules governing mutual-to-stock
conversions, the sales-of-stock method proposed by the now defunct Federal Home Loan
Bank Board (FHLBB) in 1974 and the associated appraisal process remain the core of the
current mutual-to-stock conversion rules administrated by the Office of Thrift Supervision
(OTS).2 Williams (1994) described the guidelines as follows:
1. The stock of the institution must all be sold at itsf a i r
m a rk et v a lu e ;
2 . mutual members of the institution must be given n on -tran sferable righ ts to subscribe to the
stock on a priority basis. Purchases by officers and directors are limited in aggregate to
25% of the total conversion stock offering. Moreover, no person, alone or acting in concert
with others, may purchase more than 5% of the conversion stock;
3. the members’ rights to receive residual net worth in the event of a liquidation of the
institution are carried forward in a “liquidation account’;
4. windfall profits are limited by restricting the number of shares that can be acquired by any
person or group, limiting dividends and distribution with respect to the stock, and limiting the
equation bias if one of the right-side variables is causally affected by the dependent variables.
8
ability of any party or group, particularly insiders, to acquire control of the converted
institutioa
While much of the concern surrounding conversions deals with potential wealth
transfers, the ‘non-transferable rights’ restriction may actually induce such transfers. Because
smaller depositors may not have sufficient capital to acquire the new shares, even if die shares
are priced below die fair market price, they may have to let their in-the-money options expire.
This is consistent with Bohren, Eckbo, and Michaelsen (1997) who find that the take-up rate is
exogenously determined by individual shareholder characteristics, which include personal wealth
constraints, demand for diversification, and control benefits.
II.
Literature review
The mutual-to-stock conversion process has been evaluated from various perspectives.
Rasmusen (1988), Dunham (1985), and Simons (1992) examined die economic and policy
implications of mutual-to-stock conversions. Mester (1989) and Esty (1998) examined the
performance of companies before and after conversions. Masulis (1987) evaluated the factors
influencing die decision for S&Ls to convert from mutual to stock ownership and found that
changes in technology and government policies put market pressure on mutual S&Ls to convert
Barth, Page, and Jahera (1999) examined price appreciation and the under-pricing of mutualto-stock conversions. Pettigrew, Page, Jahera, and Barth (1999) analyzed the abnormal returns
associated with mutual-to-stock conversions during 1992 and 1993 and to determine whether
these returns are related to the dollar subscription of managers.2
2 For a discussion of the changes see Williams (1994) and The Mutual Bank Conversion Act
S.1801.
9
The S&Ls’ financial and operating characteristics, which affect the success of the
conversion effort, have also been explored. Maksimovic and Unal (1993) show that managerial
holdings and the offer price do not act as dissipative signals of value in thrift conversions. Using
an event-study method, Jordan et al. (1988) find "a one-time wealth transfer from depositors
not exercising their rights to initial shareholders." The regulatory and procedural effects on the
under-pricing of initial public offerings, however, are not covered by these studies. Similar to
Affleck-Graves and Miller (1989), this paper argues that in addition to other feasible
explanations of the under-pricing phenomenon, such as compensation to uninformed investors,
insurance against legal liability, certification, and signaling, regulatory and procedural factors
contribute significantly to the underpricing of IPOs.3 Unlike Affleck-Graves and Miller, we also
focus on the wealth-transfer issue and use "signaling theory" to make policy recommendations.
Using event study methodology, Barth, Page, and Jahera (1999) find that thrift IPOs
have a significant higher abnormal return than non-thrift IPOs. Pettigrew, Page, Jahera, and
Barth (1999) show that the abnormal returns increase with the dollar subscription of managers.
III.
Hypotheses
A thrift conversions involve two major components: a rights offering to the cunenl
stakeholders, such as depositors and management; and an initial public offerings to die broader
market, if the shares are not fully subscribed. In return for contributing capital, the equity
holders obtain claims to both the original mutual equity and to die capital they have contributed.
Windfall profits, if they exist, are therefore larger for outside investors. Before conversions, the
mutual shareholders have legal claims to the net worth of the institution but these claims are not
3See Ibbotson et al. (1994) for an excellent review of these theories.
10
negotiable and therefore they cannot benefit from increased firm value. Conversions relax these
restrictions. The rather complex notification and approval procedures described above can be
seen as a form of insurance against possible future legal challenges from the members of mutual
thrifts (Durham, 1985). For example, to protect depositors’ ownership rights during the
conversion, regulatory agencies require that converting firms give depositors non-transferable
rights. Because depositors could not sell the rights, they had to exercise them or lose their
value. A rational, value-maximizing depositor-investor should buy into the conversion
However, only about 5 percent of all mutual association depositors ever participate in the stock
offerings. Thus, while a rights issue gives depositors priority over other investors in a
conversion, its non-transferable feature does not allow depositors-investors to take full
advantage of the rights offering, leading to under-subscription and forcing a public offering. On
the other hand, if the rights offerings is fully subscribed, it could lead to more concentrated
ownership (Kothare, 1997), which may not be desirable. It has been argued that thrift
depositors often are not sophisticated investors and will therefore not have fire expertise to
monitor the management of the company. This may exacerbate any agency problems existing in
the industry (see Rasmusen, 1988; and Mester, 1989).
By applying the adverse selection effects (ASE) proposed by Eckbo and Masulis
(1992) and the contingent claims method of Smith (1977), we argue that a deep discount rights
offering can be a mechanism to prevent wealth transfers, especially when the expected
subscription rates are low. Eckbo and Masulis (1992) extend the Myers-Majluf (1984)
mechanism to allow the current shareholders to participate in the sale of the issue and give
underwriters an informational role to play. Unlike industrial companies that finance their
11
investments by either issuing rights to their current shareholders o r by initial public offerings,
mutual to stock conversions involve both financing methods, and therefore must be analyzed
simultaneously. Moreover, similar to the utility industry, mutual and stock thrifts are regulated
and therefore the risk of adverse-selection may be lower as documented by Smith (1986) and
Eckbo and Masulis (1992). Beatty and Ritter (1985) argued that security under-pricing is a
result of ex ante uncertainty, and rational investors will demand that more money be left on the
table. The 1980s were characterized by a significant number of financially distressed thrifts.
Mutual-to-stock conversions were one method to draw private capital into the industry in order
to re-capitalize troubled thrifts. However, file 1990s were characterized by relatively less
financial distress on thrifts. Thus, the average under-pricing should be more during the financial
distressed period of the 1980s than in the financially healthy period of the 19901. This leads to
our first hypothesis:
H y p o th e sis 1: The "under-pricing hypothesis"- Thrift m u tu al-to-stock co n version s
a re u n d er-p riced a n d this u n der-pricin g w ill b e m ore se v e re du rin g p e r io d s o f fin an cial
distress.
A rights discount, however, is not sufficient to prevent wealth transfers. For that reason,
in addition to under-priced stock offerings, we propose another mechanism based on Leland
and Pyle (1977). In Leland and Pyle, changes in management stockholdings may signal firm
quality. Because management of a mutual thrift is better informed about the expected future
cash flows of the converted firm, managers have an incentive to hold large stock positions only if
they expect the future cash flows to be high relative to the firms' current value. By sharing
12
management’s subscription rates with the mutual thrift depositors, they will be able to make
more informed decisions about their own subscription. This leads to our second hypothesis:
H y p o th e sis 2: The "sig n a lin g hypoth esis" - A fter-m a rk et p e rfo rm a n c e o f m utualto -sto ck con version s is p o s itiv e ly co rre la te d w ith in siders ’ su bscription .
Finally, we also consider whether the underwriter spread is related to, among other
things, the ratio of the offering price to the estimated price. We hypothesize that total dollar
underwriter spread (including legal fees and other transactions costs) as a fraction of the total
estimated gross proceeds of the securities being offered is unrelated to the actual total gross
proceeds from the offering relative to the estimated total gross proceeds. We hypothesize that
lower expected rights take-up from the depositors may explain why thrifts and regulators prefer
rights with standby underwriting or firm commitment underwriting to uninsured rights, which has
been found to be less costly. Under-pricing can be viewed as a premium to encourage exercise
of the rights and thus enhances ownership protection. However, since under-pricing reduces
the risk of under-subscription, uninsured rights may be a more cost-effective method in raising
capital for thrifts, unless the insurance premium, measured by spreads or underwriters'
discounts, of the standby agreement is reduced to reflect the price discount. We conduct an
empirical examination to test whether the spreads are affected by the under-pricing. Specifically,
we analyze the relationship between spreads, the volatility of daily stock returns, and an
indicator of the discount: the ratio of the offer price to the estimated price. Therefore, our third
hypothesis:
13
H y p o th e sis 3: The "floatation c o st hypothesis"- The sp re a d s/u n d e rw riters'
d isco u n ts o f the th rift IP O s w e re n o t affected b y th e under-pricing, a s m ea su red b y the
ra tio o f offer p r ic e a n d estim a te d p r ic e .
IV.
Methodology and data
A. Sample and Data Sources
For our analysis we collect mutual-to-stock conversion data from SNL Securities
(SNL) from 1985 to 1996 for 512 thrifts. For each conversion, SNL provides the name of the
thrift, ticker symbol, the IPO date, type of conversion (standard conversion, merger conversion,
or supervisory conversion), the number of shares offered, the total shares issued, the offering
price, gross proceeds, percent of subscription, insider subscription rate, offering expenses,
percentage sold in subscription, over-allotments, name of the underwriter, underwriter
discounts, and the name of the appraiser. Conversion assets and several items listed in the pro
forma statement such as total equity, book value, and earnings per share are also available.
Market data such as stock price one day, one week, one month, and three months after issue
are also provided. Additional daily price information for the conversion stocks are collected
from CRSP Daily NYSE and AMEX tapes, or the CRSP Daily OTC tapes. After adjusting for
missing data, our total sample size is 399 companies. We divided the sample period into two
sub-periods: 1985-1991 and 1992-1996. Year-end 1991 was selected as the ending year for
the 1980s financial distress period, in part, because the passage of Federal Deposit Insurance
Corporation Improvement Act of 1991 introduced prompt correction action and imposed more
stringent capital requirements on depository institutions. Of the 399 conversions in our final
14
dataset, 200 observations were over the 1985 to 1991 period, while the remaining 199 were
over the 1992-1996 period.
B. Methodology
We examine the “under-pricing hypothesis” using descriptive statistics and Z-tests. The
“signaling hypothesis” and the “floatation cost hypothesis” are examined using regression
analysis. To examine the correlation between after-market returns of converting thrifts and
insider subscription, we use the following model:
R j,t = Po +
A (In sid e r) j
+
£ .,
(1)
where Rjit is the after-market return on the j conversion in period t; In sider is the insidersubscription rate; and ejit is an error term. In a signaling equilibrium, firm value is revealed to
depositors-investors through the portfolio decisions of insiders (management and directors).
The greater is the insiders’ stake, the greater is the after-market price performance. To control
for variation in the overall stock market, we include a market index (Index) in some of the
specifications. Barth, Page, and Jahera (1999) found that abnormal returns were positively
correlated with the size of the offering proceeds. We use the natural logarithm of total gross
proceeds (SIZE) to capture the proceeds effects. In some of our empirical specifications, we
use the ratio of market value of capital divided by the book value of capital (M arket/B ook) to
capture future investment opportunities. If the insider-subscription rate captures insiders’
perceptions of future investment opportunities, then In sider and M a rket/B ook would be
positively correlated. We report results using these variables separately in the regression
equation.
15
We use the three-factor market model of Fama and French (1993) to examine the longrun stock market performance of converting thrifts. The model takes die following form:
(2)
(R p , —RFt ) = a + l 3 ( R Mj - R F t ) + SpSMBt +hpH M Lt + e Pj
where
(R p l - RF t)
is the return on portfolio p in excess of the risk-free rate;
excess return on a broad market portfolio;
SM B
(R U l - RF t) is the
is the difference between return on a portfolio
of small stocks and the return on a portfolio of large stocks;
HML
is the difference between the
return on a portfolio of high-book-to-market stocks and the return on a portfolio of low-bookto-market stocks; and
e P t is an error term.
This equation is estimated using monthly data from
August 1985 to December 2000. The test is to determine whether a is significantly different
from zero. A positive a would indicate that portfolio p outperform the market, while a negative
a would indicate that portfolio p underperform the market To test hypothesis 2, we divided
the sample of thrift conversions into two groups: high and low subscription. A conversion is
labeled high subscription if the insider subscription rate is greater than the median rate for the
sample. If the insider subscription rate is below the median, a conversion is labeled low
subscription. Equation (3) is estimated by weighted least-squares, where the weights are the
square root of the number of conversions in each month.4
To further examine long-run performance, we calculate the average annual returns for
each post-conversion event year and compare the results against three benchmarks: the CRSP
value-weighted portfolio of the firms on the New York Stock Exchange, American Stock
Exchange, and Nasdaq; die CRSP value-weighted portfolio of firms only on the Nasdaq; and
4 See Houge and Loughran for a discussion of this point
16
an equally-weighted bank index. Annual buy-and-hold returns (including all distributions) start
on the second CRSP-listed day after the conversion date and end (at the lower limit) on the
five-year anniversary date of die conversion or the firm’s delisting date.5 The benchmark buyand-hold annual returns (including all distributions) are calculated over an identical time period
as for the conversions.
The flotation cost hypothesis is examined using a model presented in Yeoman (1993)
who extended the work of Smith (1977). In this model the total dollar underwriter spread
(including legal fees and other transactions costs) as a faction of the total estimated gross
proceeds of the securities being offered is related to daily stock return volatility, a measure of
the risk-free interest rate, and the ratio of the offering price to the estimated price using the
following empirical specification:
(3)
where Ej/Ej is the total dollar underwriter spread (including legal fees and other transactions
costs) as a fraction of the total estimated gross proceeds of the securities being offered; a, (a*2)
is standard deviation (variance) of daily stock returns; r is the risk-free rate of interest; and
Qj/Ej is the actual total gross proceeds from the offering relative to the estimated total gross
proceeds; and T|j is an error term.
If the thrift manager maximizes the net proceeds from the rights offering, the total
spread, as a fraction of the total estimated market price of the securities being offered, will be
5 There was one exception to this rule. We only use four years of data for the 1996
conversions.
17
positively correlated with the total optimal offering price. Using seasoned and unseasoned equity
offerings from 1977 to 1988, Yeoman finds that (X4 is highly significant statistically. For our thrift
samples, we hypothesize that the same coefficient will n ot be significant so that the spreads paid
to the underwriter are not a function of offer price/estimated price, a ratio that also reflects the
success of the new issues. The larger is the discounts (i.e., offer prices are lower relative to the
estimated price), the smaller die ratio, and hence the more potential the IPOs’ subscription.
V.
Empirical results
1. Descriptive statistics and characteristics of mutual-to-stock conversions
Table 1 shows the distribution of stock and mutual thrifts over the 1980-1996 period.
At year-end 1980, about 15 percent of all thrifts were stock associations. At year-end 1996,
stock associations accounted for about 58 percent of all thrifts. Table 2 shows die distribution
of our 399 conversions over 1985 to 1996. The total gross proceeds of these offers are about
$14,470 millions. The largest number of offers and shares both occur in die 1986-1987 period.
The characteristics of conversion are reported in Table 3. The table reveals that die median
offer price is approximately $10.0 and the median one-day after-market return of about 19
percent This initial return is above the 15.8 percent reported in Ritter (1998), the 6.4 percent
reported in Houge and Loughran (1999), and the 5% to 9% initial one-day return from thrift
mutual-to-stock conversions reported by Maksimovic and Unal (1993) for the 1980-88 period.
Over the 1985-1991 period, the mean one-day after-market return was 63.6 percent,
compared to 31.5 percent over the 1992-1996 period. The difference is statistically significant
at the 1 percent level or better (t-ratio=-3.53). Based on these results, we conclude that the
"under-pricing" hypothesis is strongly supported by die one-day after-market returns.
18
The average offering expense is about 6 percent and the percentage sold in subscription
is very high (the mean is 72.27 percent, the median value is 100 percent). Therefore, under
subscription may not be a serious problem. The percentage of conversions sold to insiders, 8.60
percent, is much lower than that allowed by law.6 Finally, die median of the underwriter'
discount is 7 percent, exactly the same documented by Chen and Ritter (1998). The "price
fixing" issue raised by the authors may therefore be also relevant for the IPOs of thrift
conversions.
2. Insider Subscription and Signaling
Was management of the mutual-to-stock conversions better informed about the
expected cash flows as predicted by the signaling theory? Can die subscription rate of the
officers and directors of the mutual thrifts be used to predict the after-market price movement?
The results in Table 4 indicate that the answers to these questions are affirmative.
Panel A of Table 4 reports the results for the entire sample period; panel B reports the
results for the 1985-1991 sub-period; and panel C reports the results for the 1992-1996 sub
period. In each panel, the results for one-day-after-market, one-week-after-market returns,
one-month-after-market returns, and three-month-after-market returns are provided. The first
row reports the associated simple regression results of after-market returns, defined as the
6 The maximum IPO sold to insiders, 37%, is not an error. While this appears to exceed the
regulatory limit and we do not know the precise reason for this, we offer one possibility. The
conversion regulations state that"... .purchases by officers and directors in the aggregate are
limited to between 25% and 35% of the total conversion stock offering........ In addition to the
individual and aggregate management purchase limits, a converting institution may establish one
or more tax-qualified ESOPs that may purchase, in the aggregate, up to 10% of the conversion
stock on a first-priority basis......." (H.R. 3615; The Mutual Bank Conversion Act, Jan., 26,
1994, p.52). We speculate that the 37% maximum may include an ESOPs account.
19
differences between market price and offer price as a percentage of die offer price, and insidersubscription. The slope coefficients range from 0.0315 (one-day-after-market returns) to
0.0386 (three-month-after-market returns). The t-statistics of die one-day-after-market returns,
one-week-after-market returns, one-month-after-market returns, and three-month-after-market
returns are 4.49,4.52,4.20 and 3.74, respectively. Insider-subscription is therefore statistically
significant in explaining after-market returns. These results, however, are based on the
assumption that insider-subscription is the only important variable in predicting after-market
returns. Other variables, such as size, market to book ratio, market index, may also be critical.
These results are provided in the next three rows for each of the after-market return series.
Once these factors are included in the empirical specification, the insiders-subscriptions
variable continues to be significandy correlated with after-market returns. The overall results in
Table 4 support the "signaling hypothesis" that insider-subscription and after-market returns are
highly correlated, suggesting that insider-subscription can be used to send creditable signal to
small account holders of converting thrifts.
Kroszner and Strahan (1996) point out that during the 1980s, insolvency of individual
thrifts and the thrifts deposit insurer created severe incentive problems that led institutions to
take excessive risk. One way to address the under-capitalization problem in the thrift industry
was to permit associations to convert from a mutual form of organization to a stock form. Thus,
the 1980s conversions were done to encourage private capital to flow into the industry through
mutual-to-stock conversions. Growth, on the other hand, might be the main motivation for thrift
conversions during the 1990s [Houge and Loughran (1999), Peristiani and Wizman (1999)].
The results reported in Table 5 therefore may be affected by a "structural change". To examine
20
whether the relationship between after-market returns and insider subscription rate has changed
over time, we divided the sample period into two sub-periods: 1985 to 1991 and 1992 to
1996. The results are reported in Panel B and Panel C. The 1985-1991 results are quite
different from the 1992-1996 results: in all of the empirical specifications, insider subscription is
statistically significant for all of the after-market returns over the 1985-1991 sub-period, while
insider subscription variable is statistically significant on several of the empirical specifications.
We perform a F-test on the restricted model (the whole period regression that requires all the
parameters to be the same for both sub-periods) with the unrestricted models (the regressions
for the two sub-periods. Since we run the regression separately, we did not place any
restrictions on the coefficient estimates.) The results in Panel D of Table 4 indicate that the
determinants of the 1980s and the 1990s indeed are significantly different from each other at the
5% and 1% level. The results are consistent with the previous literature that finds that
conversions were driven by different motivation: conversion during the 1980s allowed insolvent
thrifts to return to solvency by acquiring new equity from the capital markets. During the 1990s,
conversions allowed thrifts, that were mostly financially sound, to acquire new capital to finance
their activity.
3. Long-run performance
Table 5 provides time-series regressions of the returns of thrift conversions on market,
size, book-to-market Fama-French (1993) realizations. The abnormal return measure a is not
statistically significant for the entire 1985-1996 conversions. However, the 1992-1996
conversions, a is statistically significant, suggesting that the thrift conversions in this period out
performed the market by over 0.4 percent per month or 4.8 percent per year. When we
21
separate the sample into low and high insider subscription conversions (see Table 6), we find
that over the long-run, high insider subscription conversions out-performed the market by more
than low insider subscription conversions.
Tables 7 and 8 provide calculations of the average annual returns for each post
conversion event year and comparisons of the results against several benchmarks. The
conversions out-perform the market in the first year after going public. The full sample (see
Panel A Table 7) beat the return on the value-weighted NYSE-Amex-Nasdaq, Nasdaq, and
bank indexes by 7.65,10.84, and 5.49 percent, respectively, in the first year. Starting in the
second year, the conversions significantly under-perform the equally-weighted bank index, and
by the third year, the conversions are under-performing all of the three benchmarks. This same
pattern is evidence in Panels B and C of Table 7 for the two sub-periods. When we separate
the sample into low and high insider subscription conversions (Table 8), we find that high insider
subscription conversions out-performed the market by more than the low insider subscription
conversions. For instance, in Panel A of Table 9, the five-year market-adjusted buy-and-hold
returns for low subscription conversions was -34.41 percent, while that for high subscription
conversions was 21.89. The difference is statistically significant at 1 percent level or better (tratio=-3.38).
Our overall results are consistent with those reported in Houge and Loughran (1999)
who found that bank IPOs experienced significantly positive abnormal returns over the first two
years following the offering, while experiencing significantly negative abnormal returns starting
with the third year after the offering.
22
In summary, we find that file average converting institution under-performs the several
benchmarks. However, during the first year and in some cases the second year, the average
converting institution actually report positive abnormal returns. In addition, we find that high
insider subscription is associated with conversions that out-perform the market both over the
short- and long-run.
4. Equity Flotation and Underwriter Spreads
Table 9 reports the regression results from estimating equation (8). Because of data
limitations our sample size was reduced to 103 conversions.7 Based on these conversions, we
find that percentage spreads are significantly influenced by the standard deviation of the daily
stock returns. This is consistent with option pricing theory. The significant and negative
coefficients of the variance, however, are not. It is possible that the model we use is misspecified and we may have also introduced a multi- collinearity problem by using both the
standard deviation and variance of daily stock returns. Since the ratio of the offering price to
the estimated market price is not significant statistically, spreads and under-pricing are therefore
not correlated. As discussed before, a lower subscription price will guarantee the offering's
success and prevent wealth transfers. Given this constraint, there is no need for mutual thrifts to
pay an extra premium associated with rights-with-standby underwriting or firm commitments.
Therefore, uninsured rights, that are the least expensive equity flotation method, are
recommended.
23
VI.
Concluding remarks
In this study we find that, similar to the non-financial IPO literature, after-market prices
of converted thrifts were generally higher than the subscription prices. The abnormal returns,
however, were more than the manufacturing industry. Although we believe that the underpricing can be treated as a sufficient condition to encourage share subscription from the thrift
account holders, we demonstrate that the total wealth of the depositors is not affected by setting
the "right price" or "fair price" as long as depositors exercise their in-the-money rights or have
the ability to transfer the rights. In other words, with rather limited adjustments to the current
restrictions on thrift conversions, the commonly raised concerns about wealth transfers from the
small depositors would be moot. However, it is possible that, because of budget constraints,
small depositors may still not subscribe the under-priced shares. To prevent this from
happening, we propose to signal the potential positive after-market returns to small depositors
through the release of the insider subscription rate. Our empirical results show that this method
is a feasible signal because the after-market returns and insider-subscription rates are highly
correlated, especially for larger offerings. Finally, we document that underwriters' spreads are
not affected by the under-pricing of IPOs. The insurance premium for under-subscription is not
reduced even if the mutual thrifts under-price their shares to guarantee the success of the rights
offering. Uninsured rights instead of rights with standby underwriting or firm commitment should
therefore be recommended. Note that the evidence obtained by Houge and Loughran (1999)
indicates that the long term performance of most bank IPOs lagged behind three benchmarks7
7 SNL did not have all the information regarding "estimated price" or mid-offer price (that we
used as an estimate of the after-market price). In addition initial daily returns are not available
24
and the poor performance was concentrated among larger institutions with more aggressive loan
growth.
Our empirical test of the "floatation cost" hypothesis is based on a model developed by
Yeoman (1993). Adding an additional constraint to the model, using an approach similar to
Benveniste and Busaba (1997) may be fruitful for future research. Finally, comparing the thrift
conversions in the USA with the conversions of mutual building societies in the United Kingdom
[see Valnek (1999), Haynes and Thompson (1999)] may shed light on the transferable-rights
issue discussed earlier. In the United Kingdom, cash, instead of rights, were offered to the
account holders of the building societies during demutualization. Moreover, the building societies
appear to have outperformed stock retail banks, suggesting that the benefits of mutual
organization may outweigh those of stock organization- a finding in conflict with the U.S.
literature.
for all conversions. As a result, we have to reduce our sample size to 103 institutions.
25
Appendix A
The wealth transfers and pricing of rights
In this appendix, we demonstrate that the wealth of thrift members will not be affected if
they exercise their rights to subscribe new shares. According to Smith (1977), “since issuing
rights is costly, it is in the firm's interest to insure the success of the offering. A lower
subscription price for the rights provides this insurance... There is a corresponding fall in the
market value of the stock, but this fall is like a stock split. It does not affect the wealth of the
owners of the firm" (p.438). We demonstrate this in the following framework.
Assume that each depositor is given one right for a fixed amount of deposits in the
mutual thrift during a specific time period and N rights are required to subscribe one new share
at a subscription price S. If the market price of the share with right is Pw, then Biealey and
Myers (2000) indicate that the value of the right is given by:
(Al)
If the market price of the share after the issue is Pa, Brealey and Myers also have shown that the
value of the right is given by:
(A2)
R = ^
Setting equation (Al) equal to equation (A2) and solving for Pa yields:
Pa = T & r(N x P w + S )
(A3)
If the subscription price S is set equal to the Pw(i.e., rights are not under-priced), then:
Pa
=
(A4)
Pw
In order for rights to have value S < Pw, so that:
26
(A5)
Pa < P w
Equation (A5) shows that the value of each share originally held by a mutual thrift member
would be less after the issue if they were under-priced. However, despite the decline in share
price, the total wealth per share (TWPS) of the member will not change if the rights are
transferable or if the right holder exercises her rights:
(A6)
T W P S = R + Pa
From tiie above discussion, TWPS is equal to Pw.
Our analysis requires that rights offerings not be under-subscribed. Hansen et al.
(1986), however, find that underwritten rights offerings are seldom fully subscribed despite the
fact that the subscription rights have value throughout the subscription period. They contribute
the under-subscription to high subscription costs. Weston and Brigham (1982) believe that it is
“shareholder forgetfulness” and Brealey and Myers (2000) use an “investors-on-vacation”
argument to explain the same phenomenoa To avoid the "under-subscription" problem, we
propose that regulators release management’s subscription to mutual thrift depositors to
encourage them to purchase their allotted shares. A necessary condition for this
recommendation to be valuable is that insiders' subscriptions must contain a credible signal, i.e.
insiders' subscriptions are positively correlated with the after-market price changes.
27
Appendix B
The development of equation (2)
Yeoman (1993) shows that if managers maximize the net proceeds of IPOs:
NP = Q - A,
(B l)
where NP = the net proceeds,
Q = total offering price = gross proceeds, and
A = underwriter’s total spread.
The optimal offering price is 3NP/9 Q = 0 or when the change in the spread equals the change
in the offering price: d A /d Q =1. Note that the spread is analogous to the insurance premium
paid to the investment bank for underwriting an offering and die underwriting contract is
equivalent to a portfolio consisting of a long position in die securities (yV), a cash payment to
the company (NP - y (NP - E)), and a short position in a European call option (C):
U = ertY V -N P- y(N P -E )- l/(e rt)C ,
(B2)
where U = the value of the underwriting contract;
y = company’s shares outstanding after the offering;
V = investment bank’s estimate of the market price of the old shares;
E = the offering expenses;
r = the risk-free interest rate;
t = time to expiration of the option.
Using put-call parity, equation (Bl) becomes
U = Q - NP - p,
(B3)
p = (Q - y (NP - E) ) N(-d2) - yV N(-d,),
(B4)
where
28
and
N( ) is the cumulative normal density function,
di = {Ln {yV/[(Q - y (NP - E)]}+ o 2/2}/ a , and
d2= di - a , where
a = the instantaneous volatility.
Equation (B4) is simply the Black-Scholes (1975) option pricing formula for a put
option (p) on securities with an expected price of yV, an exercise price of (Q - y (NP - E)), r
is set equal to zero and a 2is measured in units of time such that t, the time to maturity of the
option, equals one.
Combining equation (B3) with the optimal offering price condition from equation (Bl),
Yeoman shows that the natural logarithm (ln) of the total optimal offering price (Q) as a fraction
of the total estimated market price of the new shares (X) can be expressed as:
In [(Qj/Xj) + (A + Ej)/Vi] = y0 + yi Oj + y2 o
2
+ y3 r
(B5)
We modify this equation to study the IPOs of thrift conversions:
(Ej/Xi) = a 0 + a i
+ a 2 <s2 + a 3 r + a 4 exp(Q/Xj) + T|i
29
(B6)
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33
Table 1. Dramatic growth of stock associations over the hist two decades
Year
1980
1981
1982
1982
1984
1985
1986
198?
1988
1989
1990
1991
1992
1993
1994
1995
1996
Number olPinstiMfons
Mutual
3371
3109
2652
2404
2442
2440
2325
2217
2018
2022
1531
2159
1208
892
723
631
565
Stock
604
631
625
722
852
1023
1135
1213
1229
1147
1008
912
680
841
823
803
769
Source: Thrift Call Reports, various years, Office of Thrift Siqjervfeioa
34
Table 2. Sample mutual-to-stock conversion IPOs by year: 1985-1996
1985
5
Gross
Proceeds
(in Millions)
154.9
1986
95
3,918.0
391,484,184
4,247
1987
72
1,966.0
244,707,114
2,184
1988
13
200.9
49,842,525
213
1989
3
60.1
15,178,501
64
1990
7
280.2
45,586,744
334
1991
5
85.3
22,706,015
98
1992
21
516.9
67,829,056
604
1993
40
1,400.7
135,744,936
1,787
1994
45
3,004.7
250,270,134
3,682
1995
58
1,566.1
159,767,355
1,890
1996
35
1,316.1
122,276,503
1,482
Year
Number of offers
35
Total Shares
Market value
(in Millions)
20,646,000
191
Table 3. C haracteristics of conversion IPO s: 1985-1996
Gross
proceeds
Shares offered
Shares issued
Offering Price
<$)
Initial return
(%)
Offering
expenses (%)
Percentage
sold to
subscription
(%)
overallotm en^)
Underwriter
Discount (%)
IPO sold to
insiders (%)
Mean
36,265,582.24
Median
18,687,500
Standard
deviation
60,416,988.35
Maximum
804,750,000
Minimum
1,552,500
3,679,256.82
3,824,659.32
9.11
2,182,125
2,300,000
10.00
4,698,682.78
4,861,919.98
2.98
53,650,000
53,650,000
28.125
135,000
155,250
0.886
47.40
18.75
92.16
6.62
5.90
5.04
68.25
0.0042344
72.27
100.00
36.56
100.00
0.00
13.23
15.00
3.56
15.14
0.4
6.79
6.90
0.81
8.60
2.50
8.60
7.20
6.43
37.10
0.50
36
-57.11
918.58
Table 4. Insider-subscription and after market rate of returns of mutual thrift conversions: 1985-1996
*** Statistically significant at the 1% level; ** statistically significant at the 5% level; and *
statistically Significant at the 10% level.
Panel A: Entire period
One Day After
Constant
0.2055**
(0.0752)
Insider
0.0315***
(0.0070)
2.2677***
(0.2781)
1.9027***
(0.3046)
0.0192***
(0.0068)
0.2092
(0.2054)
0.0319***
(0.0070)
One week After
0.2035**
(0.0797)
0.0336***
(0.0074)
2.4261***
(0.2957)
2.0767***
(0.3237)
0.0201***
(0.0073)
0.2494
(0.2185)
0.0334***
(0.0075)
One Month After
0.2209**
(0.0935)
0.0366***
(0.0087)
2.7835***
(0.3569)
2.4002***
(0.3800)
0.0204***
(0.0085)
0.2491
(0.2567)
0.0362***
(0.0088)
Market/Book
Index
Size
Adj. R-Sq.
0.0460
F
20.17
-2.2201***
(0.2734)
10.3830*
(5.7597)
-0.0283**
(0.0127)
0.1474
23.94
-2.0170***
(0.2804)
11.1158*
(5.7157)
-0.0233*
(0.0127)
0.1622
20.26
14.3063
(6.0534)
-0.0013
(0.0131)
0.0454
8.65
0.0465
20.40
-2.3551***
(0.2907)
2.1705
(2.2544)
-0.0322**
(0.0135)
0.1405
22.68
-2.1447***
(0.2982)
2.2675
(2.2359)
-0.0270**
(0.0135)
0.1547
19.21
3.1844
(2.3713)
-0.0028
(0.0139)
0.0462
7.42
0.0401
17.63
-2.7749***
(0.3406)
0.6001
(1.2952)
-0.0358**
(0.0158)
0.1404
22.67
-2.5630***
(0.3498)
0.5408
(1.2877)
-0.0305*
(0.0158)
0.1507
18.65
1.2690
(1.3668)
-0.0030
(0.0164)
0.0374
6.16
37
Table 4. Insider-subscription and after market rate of returns of mutual thrift conversions: 1985-1996,
continued
Panel A: Entire period
Three Months After
Constant
0.2684**
(0.1108)
Insider
0.0386**
(0.0103)
3.2086***
(0.4123)
2.8208***
(0.4544)
0.0201**
(0.0101)
0.2632
(0.3080)
0.0392***
(0.0104)
Market/Book
Index
Size
Adj. R-Sq.
0.0315
F
13.95
-3.2358***
(0.4014)
0.7968
(0.8134)
-0.0421**
(0.0187)
0.1395
22.51
-3.0224***
(0.4139)
0.9064
(0.8122)
-0.0367*
(0.0188)
0.1459
18.00
1.3530
(0.8618)
-0.0032
(0.0194)
0.0328
5.50
38
Table 4. Insider-subscription and rate of returns of mutual thrift conversions: 1985-1996, continued
Panel B: 1985-1991 IPOs
One Day After
Constant
0.8343*
(0.5021)
Insider
Market/Book
-1.3857***
(0.4318)
Index
15.1122*
(8.8953)
Size
0.0582**
(0.0278)
Adj. R-Sq.
0.1058
F
8.85
0.1450
(0.5280)
0.0405***
(0.0117)
-1.1085**
(0.4279)
17.9519**
(8.6970)
0.0732***
(0.0127)
0.1529
9.98
-0.9307***
(0.3308)
0.0462***
(0.0117)
20.2475**
(8.7769)
0.1005***
(0.0257)
0.1282
10.76
-1.5140***
(0.4639)
1.6391
(3.3505)
0.0542*
(0.0300)
0.0853
7.19
-1.2347***
(0.4604)
2.5323
(3.2804)
0.0692**
(0.0296)
0.1292
8.38
3.0542
(3.3259)
0.0995***
(0.0278)
0.1017
8.51
-1.9031***
(0.5533)
0.5019
(1.8714)
0.0608*
(0.0355)
0.1896
7.53
-1.6257***
(0.5522)
0.4066
(1.8389)
0.0763**
(0.0353)
0.1213
7.87
1.0096
(1.8628)
0.1158***
(0.0333)
0.0869
7.32
-2.4119***
(0.6666)
1.1075
(1.1730)
0.0536
(0.0432)
0.0886
7.45
-2.1115***
(0.6701)
1.2484
(1.1602)
0.0704
(0.0432)
0.1107
7.19
1.7671
(1.1743)
0.1243***
(0.0406)
0.0701
6.00
One Week After
0.9941*
(0.5392)
0.2921
(0.5676)
0.0417***
(0.0126)
-0.9025
(0.3572)
0.0480***
(0.0126)
One Month After
1.2288*
(0.6426)
0.5174
(0.6791)
0.0428***
(0.0151)
-1.0541**
(0.4290)
0.0506***
(0.0151)
Three Months After
1.6864**
(0.7871)
0.9283
(0.8381)
0.0441**
(0.0182)
-1.1538**
(0.5273)
0.0548***
(0.0183)
39
Table 4.Insider-subscription and rate ofreturns ofmutual thriftconversions: 1985-1996, continued
Panel C: 1992-1996 IPOs
One Day After
Constant
2.6736***
(0.5155)
Insider
Market/Book
-3.2378***
(0.2617)
Index
2.8085
(5.1646)
Size
-0.0210
(0.0311)
Adj. R-Sq.
0.4515
F
55.33
2.8199***
(0.6555)
-0.0022
(0.0060)
-3.2725***
(0.2791)
2.8254
(5.1763)
-0.0273
(0.0356)
0.4490
41.34
0.6741
(0.8207)
0.0221***
(0.0074)
3.2728
(6.7484)
-0.0330
(0.0464)
0.0635
5.48
-3.4287***
(0.2675)
3.1971
(2.1927)
-0.0229
(0.0317)
0.4755
60.84
-3.4938***
(0.2847)
3.3598
(2.2091)
-0.0347
(0.0363)
0.4741
45.62
3.6375
(2.9363)
-0.0412
(0.0482)
0.0707
6.02
-3.8211***
(0.2897)
1.9577
(1.3848)
-0.0260
(0.0344)
0.4844
63.01
-3.8730***
(0.3093)
1.9927
(1.3893)
-0.0352
(0.0393)
0.4824
47.14
0.8187
(1.8593)
-0.0433
(0.0527)
0.0688
5.88
-4.2306***
(0.3222)
2.3364**
(0.9690)
-0.0066
(0.0387)
0.4804
62.02
-4.2335***
(0.3396)
2.3292**
(1.0042)
-0.0073
(0.0456)
0.4777
46.27
1.2856
(1.3394)
-0.0305
(0.0610)
0.0642
5.53
One Week After
2.8254***
(0.5257)
3.1017***
(0.6674)
-0.0042
(0.0062)
0.8158
(0.8519)
0.0217***
(0.0078)
One Month After
3.1239***
(0.5699)
3.3404***
(0.7236)
-0.0033
(0.0067)
0.8370
(0.9328)
0.0256***
(0.0084)
Three Months After
3.0493***
(0.6412)
3.0647***
(0.8436)
-0.0002*
(0.0046)
0.6110
(1.0981)
0.0290***
(0.0096)
40
Table 4.Insider-subscription and rate ofreturns ofmutual thriftconversions: 1985-1996, continued
Panel D: Test of Structural Change between 1980s and 1990s using the empirical specification that
includes all of the right hand side variables.
SSEOtV
SSEfUl)2
SSEOJ2)3
F-STATISTICS
One-day
280.46
216.39
36.28
8.56**
One-Week
318.04
252.26
37.75
7.52**
One-Month
436.60
359.62
44.34
6.29**
Three-month
611.43
525.34
53.34
4.40**
1. Error sum of squares of restricted model: 1983-1996.
2. Error sum of squares of unrestricted model- 1980s.
3. Error sum of squares of unrestricted model- 1990s.
41
Table 5.Time-series regression ofequally-weighted monthly returns ofthriftIPO portfolioon market,
size,and book-to-market Fama-French (1993) realizations.
The table reports the weighted least squares results for the following three factor model:
(R p t —RF t) —oc + P
~~
) + spSMBt
+hpFIMLt
where ( R pjt —RFt ) is the return on portfolio p in excess of the risk-free rate; ( R M t —RFt ) is the
excess return on a broad market portfolio; SM B is the difference between return on a portfolio of small
stocks and the return on a portfolio of large stocks; H M L is the difference between the return on a
portfolio of high-book-to-market stocks and the return on a portfolio of low-book-to-market stocks; and
£p t is an error term. This equation is estimated using monthly data from August 1985 to December
2000.
Panel A. 1985-1996 IPOs
a
S
H
Adj. R-Sq.
F
0.0775
(0.2368)
0.9025***
(0.0585)
0.7151***
(0.0763)
1.0133***
(0.0984)
0.6201
101.10
0.0008
(0.3149)
0.9028***
(0.0748)
1.0560***
(0.1261)
1.0556***
(0.0682)
0.6467
83.97
0.4414*
(0.2399)
0.7589***
(0.0692)
0.4851***
(0.0704)
0.7869***
(0.0943)
0.5582
46.06
Panel B. 1985-1991 IPOs
Panel C. 1992-1996 IPOs
42
Table 6.Time-series regression ofequally-weighted monthly returns ofthriftIPO portfolio on market,
size,and book-to-market Fama-French (1993) realizations by insidersubscriptions
The table reports the weighted least squares results for low and high insider subscription using the
following three factor model:
(R Ptl- R F t ) = a + P ( R u , - R F t ) + SpSMBt +hpHML, + e Pj
where ( R pjt —RFt ) is the return on portfolio p in excess of the risk-free rate; ( R M t —RFt ) is the
excess return on a broad market portfolio; SM B is the difference between return on a portfolio of small
stocks and the return on a portfolio of large stocks; H M L is the difference between the return on a
portfolio of high-book-to-market stocks and the return on a portfolio of low-book-to-market stocks; and
£p t is an error term. This equation is estimated using monthly data from August 1985 to December
2000. Low insider subscription conversions are those in which the share of the initial public offering is
below the median share for the sample, and the high insider subscription conversions are the ones in
which the share is above the median share.
Panel A. 1985-1996 IPOs
a
P
S
H
Adj. R-Sq.
F
Low
-0.1327
(0.2896)
1.0466***
(0.0697)
0.7636***
(0.0899)
1.1136***
(0.1172)
0.6002
91.57
High
0.2996
(0.2212)
0.7429***
(0.0559)
0.6786***
(0.0745)
0.9423***
(0.0950)
0.5701
82.34
Low
-0.2361
(0.3559)
1.0770***
(0.0923)
1.1402***
(0.1577)
1.1888***
(0.1963)
0.6248
73.73
High
0.2442
(0.2993)
0.7078***
(0.0723)
0.9758***
(0.1203)
0.9341***
(0.1458)
0.5782
63.15
Low
0.3613
(0.2978)
0.8392***
(0.0829)
0.5055***
(0.0821)
0.8352***
(0.1121)
0.5100
38.13
High
0.5422**
(0.2479)
0.6837***
(0.0737)
0.4876***
(0.0781)
0.7978***
(0.1025)
0.4914
35.14
Panel B. 1985-1991 IPOs
Panel C. 1992-1996 IPOs
43
44
Table 7.Average annual returns ofthe IPOs relativetothe average annual returns on several benchmark
indexes (percent)
This table presents the annual buy-and-hold returns (including all distributions) starting on the second
date after the IPO and ending (at the lower limit) on the five year anniversary date of the offering or the
firm’s delisting date.
T
Rj,post= [ Y l d + r , t ) - w
oo%
t=l
where Rj>post is post conversion return; rj<t is the daily stock return on the j conversion; t = one is the first
day after the conversion date; and T in the ending day. The benchmark buy-and-hold annual returns
(including all distributions) are calculated over an identical time period as each IPO. The daily bank index
is created by equally weighting an initial sample of about 150 banking organizations. The difference
between the annual return on the thrift IPOs and the annual return on a benchmark index is:
T
T
n o + rJt)- l]xl00% - [f|(l+ rIt )- l]xl00%
t=l
t=l
where rMis the daily return on benchmark index I. The z-statistics (in parentheses) test the equality of
distributions for matched pairs of observations using the Wilcoxon matched-pairs signed-ranks test.
Panel A: 1985-1996 IPOs
Post-IPO Year
Thrift IPOs
Year 1
Year 2
Year 3
Year 4
Year 5
21.02
18.92
9.64
-0.94
18.46
D ifference b etw een the annual return on
the thrift IPOs and the annual return on the
value-weighted N Y SE -A m ex-N asdaq index
7.65
1.75
-10.60
-15.66
2.83
(z-statistic)
4.55
0.47
-6.39
-8.13
-0.44
D ifference b etw een the annual return on
the thrift IPOs and the annual return on the
value-w eighted N asdaq index
10.84
2.82
-9.23
-19.50
-6.12
(z-statistic)
7.10
1.14
-5.36
-8.46
-2.63
5.49
-8.25
-13.12
-12.44
3.07
399
-6.77
-8.73
-7.62
-10.43
-5.49
399
390
364
325
D ifference b etw een the annual return on
the thrift IPOs and the annual return on the
equally-w eighted bank index
(z-statistic)
Number o f firms
45
Table 7.Average annual returns ofthe IPOs relativetothe average annual returns on several benchmark
indexes (percent) (Continued)
Panel B: 1985-1991 IPOs
Thrift IPOs
D ifference betw een the annual return on
the thrift IPOs and the annual return on the
value-weighted N Y SE -A m ex-N asdaq index
Post-IPO Year
Year 3
Year 4
Year 1
Year 2
10.02
12.04
-2.40
-17.60
26.51
Year 5
1.37
3.20
-20.19
-24.91
10.24
(z-statistic)
-0.66
0.67
-6.93
-7.98
1.33
D ifference b etw een the annual return on
the thrift IPOs and the annual return on the
value-w eighted Nasdaq in d ex
8.61
6.28
-13.87
-20.55
2.74
(z-statistic)
3.74
2.18
-5.40
-7.33
-0.26
D ifference betw een the annual return on
the thrift IPOs and the annual return on the
equally-w eighted bank index
8.11
-1.45
-15.48
-16.98
-14.46
(z-statistic)
3.61
-1.42
-5.64
-6.21
-4.01
Number o f firms
200
200
194
186
173
Year 1
Year 2
Year 3
Year 4
Year 5
Thrift IPOs
32.09
25.83
21.55
16.48
9.31
D ifference betw een the annual return on
the thrift IPOs and the annual return on the
value-weighted N Y SE -A m ex-N asdaq index
13.96
0.29
-1.11
-6.00
-5.60
(z-statistic)
7.18
-0.08
-1.21
-2.98
-2.64
D ifference betw een the annual return on
the thrift IPOs and the annual return on the
value-w eighted N asdaq index
13.08
-18.41
-16.49
6.27
-0.66
-0.72
-4.64
(z-statistic)
-1.98
-4.82
-3.53
D ifference betw een the annual return on
the thrift IPOs and the annual return on the
equally-w eighted bank index
2.86
-15.09
-10.77
-7.69
-5.86
(z-statistic)
0.62
-8.23
-6.88
-4.49
-3.84
Number o f firms
199
199
196
178
152
Panel C: 1992-1996 IPOs
Post-IPO Year
46
Table 8.Average annual returns ofthe IPOs relativetothe average annual returns on the value-weighted
NYSE-Amex-Nasdaq index forhigh and low insidersubscription (percent)
This table presents the annual buy-and-hold returns (including all distributions) starting on the second
date after the IPO and ending (at the lower limit) on the five year anniversary date of the offering or the
firm’s delisting date.
T
Rj,post= [J“[(l+ r; ,)-l]xl00%
t=l
where Rj>post is post conversion return; rj>t is the daily stock return on the j conversion; t = one is the first
day after the conversion date; and T in the ending day. The benchmark buy-and-hold annual returns
(including all distributions) are calculated over an identical time period as each IPO. The daily bank index
is created by equally weighting an initial sample of about 150 banking organizations. The difference
between the annual return on the thrift IPOs and the annual return on a benchmark index is:
T
T
t r i o + rj t ) - l]xl00% - [J}(1 + rI t ) - l]xl00%
t=l
t=l
where rMis the daily return on benchmark index I. The z-statistics (in parentheses) test the equality of
distributions for matched pairs of observations using the Wilcoxon matched-pairs signed-ranks test.
Panel A: 1985-1996 IPOs
Post-IPO Year
5 year buy-and
hold returns
Year 1
Year 2
Year 3
Year 4
Year 5
L ow subscription IPOs
17.35
5.03
-10.57
13.13
63.24
5.51
-0.29
-15.23
-22.71
-0.14
-34.41
1.96
-0.51
-6.15
-7.68
-0.80
199
199
196
178
156
20.48
14.29
8.29
23.39
127.87
3.78
-5.93
-2.89
-8.92
5.57
21.89
-3.65
0.20
Thrift IPOs
20.90
D ifference betw een the annual return on
the thrift IPOs and the annual return on
the value-weighted N Y SE -A m exN asdaq index
(z-statistic)
Number o f firms
H igh subscription IPOs
Thrift IPOs
21.15
D ifference betw een the annual return on
the thrift IPOs and the annual return on
the value-weighted NY SE-A m exN asdaq index
(z-statistic)
4.58
Number o f firms
200
200
194
186
169
-1. 42
-1. 44
- 2. 67
- 3. 70
-0.96
T-statistic
9.77
-1.18
47
-3.38
Table 8.Average annual returns ofthe IPOs relativetothe average annual returns on the value-weighted
NYSE-Amex-Nasdaq index forhigh and low insidersubscription (percent) (Continued)
Panel B: 1985-1991 IPOs
Post-IPO Year
5 year buy-and
hold returns
Year 1
Year 2
Year 3
Year 4
Year 5
Thrift IPOs
8.78
8.00
-7.31
-23.45
19.51
16.78
D ifference betw een the annual return on
the thrift IPOs and the annual return on
the value-weighted N YSE-A m exNasdaq index
-0.44
0.53
-26.41
-29.64
3.13
-46.36
(z-statistic)
-0.76
-0.30
-6.51
-6.29
-0.17
105
105
102
97
89
L ow subscription IPOs
Number o f firms
H igh subscription IPOs
11.38
16.50
3.04
-11.22
33.92
79.88
D ifference betw een the annual return on
the thrift IPOs and the annual return on
the value-weighted N Y SE -A m exN asdaq index
3.36
6.16
-13.28
-19.76
17.78
14.57
(z-statistic)
-0.10
1.22
-3.24
-4.81
2.06
95
95
92
89
84
- 0 . 83
-1. 15
- 2 . 36
-1. 77
-1.47
Year 1
Year 2
Year 3
Year 4
Year 5
34.43
27.78
18.42
4.85
4.65
115.14
12.16
3.71
-1.20
-3.09
-14.41
-4.47
-21.06
-0.43
-4.27
-1.45
94
94
-1.50
94
81
67
24.09
24.45
26.19
12.98
171.28
28.51
Thrift IPOs
Number o f firms
T-statistic
-2.45
Panel C: 1992-1996 IPOs
Post-IPO Year
5 year buy-and
hold returns
L ow subscription IPOs
ThriftIPOs
D ifference betw een the annual return on
the thrift IPOs and the annual return on
the value-weighted N Y SE-A m exNasdaq index
(z-statistic)
Number o f firms
H igh subscription IPOs
ThriftIPOs
29.99
D ifference betw een the annual return on
the thrift IPOs and the annual return on
the value-weighted N Y SE-A m exN asdaq index
15.57
1.62
0.71
1.02
-6.50
(z-statistic)
6.45
0.34
-0.31
-0.06
-2.24
Number o f firms
105
105
102
97
85
-0.88
-0.98
-0.98
-3.45
0.37
T-statistic
48
-2.20
Table 9.Regression ofpercentage spread forconversion IPOs: 1992:1998
1992 - 1998 (N = 103)
Intercept
Std. Dev.
Variance
Interest rate
OP/EP3
Hypothesis
a 0> 0
(Xi> 0
a 2> 0
a 3> 0
a 4=o
M odel A
Coefficient
P-Value
.0598*
.0912
1.24*
0.0878
-32.4**
0.0131
-0.992
0.1535
Model B
Coefficient
P-Value
.0658*
.0849
1.27*
0.0817
-33.2**
0.0117
-0.968
0.1672
a: OP = Offer Price
EP = Estimated Price
** Significant at the 5% level.
* Significant at the 10% level.
49
F
R2
0.00032
0.3000
3.97
0.14
0.00098
0.8822
3.67
0.13
@FedFRASER