Re-Jin Guo Phone: (312) 413-3718

Associate Professor of Finance FAX: (312) 413-7948

University of Illinois at Chicago E-Mail: rguo@uic.edu

Ph.D., University of Minnesota, 1999

Research interests: Corporate governance, mechanism of primary equity market, new venture financing, corporate disclosure policy, and behavior of analysts in the capital markets.

Published Papers:

1. “Ownership Structure and IPO Valuation”, with Yin-Hua Yeh and Pei-Gi Shu, forthcoming, Financial Management.

We investigate the effect of ownership structure on the valuation of initial public offerings (IPOs) in the Taiwanese market, in which many large shareholders exert control through pyramidal structures and cross shareholdings with voting rights that are in excess of cash flow rights. Our analysis of Taiwanese firms which made IPOs between 1992 and 2001 indicates that outside (minority) shareholders take into account the effect of potential expropriation by entrenched large shareholders in valuing an IPO, as a deviating voting-cash structure is negatively associated with the valuation metric of both the offer and initial aftermarket prices relative to the corresponding intrinsic value. A deviating voting-cash structure also correlates negatively with IPO underpricing, which is consistent with the hypothesis that controlling shareholders with excess voting rights have less of an incentive to underprice unseasoned shares to prevent the emergence of new blocks of shareholders. We also present evidence which indicates that the possession of higher levels of cash flow rights by the controlling shareholder is positively associated with offer price valuation, but that this positive association is weakened in aftermarket trading.

2. “Analysts’ Selective Coverage and the Long-term Performance of Newly Public Firms”, with Somnath Das and Huai Zhang, Journal of Finance, June 2006, 1159-1185.

We investigate the open question of whether financial analysts possess superior ability to predict firms’ future performance. Prior studies on examining analysts’ ability have focused on drawing inference from data on earnings and growth forecasts. Our work provides a different approach, which examines analysts’ decision to select firms to provide coverage for. Financial analysts produce recommendations and earnings forecasts regularly as investment advice to investors, while having to cater to corporate clients for information access and/or future banking business at the same time. Such inherent conflict provides strong incentives for analysts to withhold unfavorable opinions. As a result, analysts’ selective coverage contains information about their true expectations of future firm prospects. We extract the information of analysts’ underlying expectation from their selective coverage, and relate this measure to subsequent performance of IPO firms. We find a strong and positive correlation between this ex ante measure of analysts’ expectation, and the ex post long-run stock and operating performance. Our results support the proposition that analysts possess the ability to predict future performance of newly public firms. An important implication from our results is that as analysts self-select in reporting information, the published opinions could exhibit biases arising from analysts’ self-censoring. Our approach of drawing inference from the analyst coverage data adds significantly to the understanding of analysts’ forecasting ability, as it avoids the selection bias in analysts’ published opinions used in most prior finance studies.

3. “Competitive Costs of Disclosure by Biotech IPOs”, with Baruch Lev and Nan Zhou, Journal of Accounting Research, 42, n2, (May 2004): 319-355.

We examine the competitive cost of the non-financial product-related information for firms issuing IPOs in the biotechnology industry. Although disclosure of financial information is highly scrutinized and regulated (via audited financial statements), disclosure of nonfinancial information remains mostly voluntary. In view of the fast-paced innovation and low entry barrier in the biotech sector, we examine the determinants of a firm’s corporate disclosure decision of product-related information. We hypothesize that the benefits of disclosure are weighed against the costs of disclosure, that is, the adverse effects that competitors create by making use of the information. We construct a comprehensive disclosure index from the prospectuses IPO firms filed with the SEC, and identify four cost-based determinants of extent of disclosure: stage of product development, patent protection, venture-capital backing, and ownership retained by pre-IPO owners. We also find that for firms with more disclosure in product-related information, the bid-ask spread, quoted depth, and stock return volatility is lower in the aftermarket trading of the IPO shares.

4. “The Option to Withdraw IPOs during the Premarket'', with Lawrence Benveniste and Walid Busaba, Journal of Financial Economics, 60, n1 (April 2001): 73-102. (Abstracted in Contemporary Finance Digest 4, (2001) 13-14.)

We examine the option for firms to withdraw their IPOs. This contract feature of the US book building mechanism has been mostly ignored in the prior literature. We build on the argument that IPO underpricing is part of an incentive-compatible mechanism for investors to reveal their information truthfully. We argue that, for shares which investors perceive as more likely to be withdrawn, investors would bid more aggressively and less underpricing is needed as a payment for investor information. In effect, this option of IPO withdrawal strengthens the firms’ bargaining power vis-à-vis investors, and allows a strategy for issuing firms to reduce IPO underpricing as information rent. We report empirical findings consistent with our argument. We document empirically that underpricing is lower when investors’ perception of an IPO’s likelihood of withdrawal is higher. This paper is also the first study to conduct comprehensive analysis on firms with withdrawn IPO offerings. We clarify previous misconception that withdrawn firms are mostly small and unknown business entities, as we find that withdrawn offerings are filed by firms that are neither smaller nor less profitable than firms that complete their IPOs, and that they are lead- managed by underwriters that are as reputable as the ones underwriting completed offerings. We report that the probability of withdrawal is significantly correlated with leverage, and the intended use of proceeds.

5. “Valuation of Biotech IPOs ”, with Baruch Lev and Nan Zhou, Journal of Accounting, Auditing, and Finance, 20, n4, 2005, 188-244.

Our study addresses the challenge of IPO valuation by focusing on non-financial information. As most non-financial information is industry-specific, we study IPOs in biotech industry. As most biotech firms have no positive earnings and very little revenues at the time of IPOs, accounting data may not be informative. This lack of information in accounting data is exacerbated by the fact the current accounting report system is not well equipped to recognize and measure intangible assets. We hypothesize that the value of biotech IPOs consists mostly of their intangible assets --- patents, technology and knowledge accumulated in the drug discovery process. We conduct our empirical testing on the correlation between IPO preliminary/offer/market prices and firm’s product pipeline, commercialization capability, and technological strength.

6. “On Corporate Divestiture”, with Hsiu-Lang Chen, Review of Quantitative Finance and Accounting, 24, n4, 2005, 399-421.

We investigate why firms choose to divest their units/segments, and how firms choose among the three divestiture mechanisms. By drawing on a comprehensive set of corporate divestiture transactions, we obtain a complete picture on firm’s divestiture choices by directly comparing across three divestiture mechanisms. Our results provide support for the focusing hypothesis, which predicts that under-performing firms are divesting units to gain operating efficiency. Our results are consistent with the propositions that firms are selling off asset to relax its credit constraint, as firms divesting via asset sales have higher leverage ratios, as well as a lower dividend yield. Our empirical findings are not consistent with the hypothesis that firms divest in order to mitigate information asymmetry. Results from a multinomial logit analysis indicate that, once a divestiture decision is made, firms with a high cash-to-sales ratio or firms with units operating in similar industries are more likely to divest their units via spin-offs. Additionally, we find that more diversified firms and firms with larger units are more likely to use spin-off or carve-out transactions. There is strong evidence that parents are more likely to divest via equity carve-outs units operating in industries with rich valuation from the capital market.

7. “Information Collection and IPO Underpricing”, Review of Quantitative Finance and Accounting, 25, n1, 2005, 5-19.

I provide new evidence that IPO underpricing as economic rents could be higher when investor information is diverse. As diverse investor information is aggregated in the public market, the more informative stock price provides accurate feedback to firm’s investment decision. I make use of a new information diversity measure constructed from the analyst earnings forecast data, and report a positive and significant correlation between the extent of underpricing and the measure of information diversity. I document evidences that investor information serves as useful feedback for managers to make future investment decisions in the IPO market.

8. “Explaining the Short- and Long-Term IPO Anomalies by R&D”, with Baruch Lev and Charles Shi, Journal of Business Finance and Accounting, 33, April/May 2006, 550-579.

Financial scholars who research the initial underpricing and long-term underperformance of IPOs generally attribute these phenomena to information asymmetry and investors’ misevaluations. Here, we identify a widespread source of information asymmetry and valuation uncertainty—the R&D activities of issuers—and document that these activities significantly affect both the initial underpricing of IPOs (R&D is positively correlated with underpricing) and their long-term performance (R&D is positively related to long-term performance). Given the pervasiveness and constant growth of firms’ R&D activities in modern economies, our identification of R&D as a major factor affecting IPO’s performance contributes to the understanding of this important economic and capital market phenomenon.

Working Papers:

1. “Undoing the Powerful Anti-Takeover Force of Staggered Boards”, with Timothy Kruse and Tom Nohel.

In this paper we examine cases where managers announce an intention to de-stagger their boards via either proxy proposals or board action. The literature has now established the staggered board as arguably the most consequential of all available takeover defenses. Thus, the dismantling of this structure in favor of annual director elections has important implications for shareholder rights and wealth. We study the wealth effects and motives behind this change in governance. Our results are consistent with the view that forcing directors to face annual election is good for shareholders. Moreover, it is firms with better governance that are more likely to act in the interest of shareholders.

2. “Audit Committee, Ownership Structure, and Firm Valuation: Evidence from East Asian Markets”, with Yin-Hua Yeh.

We investigate determinants of audit committee composition in three major East Asian markets, in which controlling shareholders of many firms exert control through pyramidal structures and cross shareholdings with voting rights that are in excess of cash flow rights. We document effects of ownership concentration and deviation from the “one-share/one-vote” ownership on the independence and professionalism of established audit committees. Our analysis of 450 firms in Hong Kong, Singapore, and Malaysia in the year of 2000 indicates an increased percentage of independent directors serving audit committees in firms with controlling shareholders with larger cash flow rights or/and with less deviation between voting rights and cash ownership. We document that firms with independent and professional audit committee are associated with higher market-to-book ratios, as well as one-year cumulative returns. Overall, our results are consistent with the hypotheses that ownership structure affects audit committee composition, and that independent and professional audit committee enhances firm valuation.

3. “Liquidity Value of Large Shareholder Ownership: Evidence of Share Segmentation Reform in China”, with Huaizhong Yuan and Zongxin Zhang.

Our study examines the effect of liquidity of large shareholder’s ownership on security valuation, focusing on the unique event of recent share segmentation reform in the Chinese stock market. We investigate payment provided by large shareholders to acquire share liquidity to compensate minority shareholders. Consistent with previous theoretical analyses (Longstaff (1995), Kahl, Liu, and Longstaff (2003)), we report a significant correlation between the lower bound of illiquidity discount with return volatility, as well as various ownership variables. We find that, as ownership stake of firm’s largest shareholder and/or firm’s state shareholders increases, our computed lower bound of illiquidity discount is significantly higher. We also document a marginally lower discount for firms with higher revenue growth.

We analyze the determinants of market reaction to a firm’s announcement of its share reform plan. Our cross-sectional analysis on the market returns indicate that the market has been able to anticipate the extent of illiquidity compensation, as there is no significant correlation between the computed CARs and the lower bound of illiquidity discount. However, the market reaction is quite noisy, with a marginal correlation of CAR with the percentage of A-share ownership, and the investor sentiment.

4. “Self-Selection in Decision to Withdraw IPOs”, with Rong Chen and Ming Lin.

We examine jointly the consequences of withdrawal on subsequent firm performance, and firm's self-selection in the IPO withdrawal decision. We formulate our analysis in a system of endogenous switching hazard models, and compare subsequent performance between firms with completed and withdrawn IPOs after controlling for the simultaneity between the expected consequence of withdrawal and the decision of IPO withdrawal. Our analysis provides the first evidence that incidence of withdrawal unfavorably affects subsequent performance of the firm, and new evidence that firms with offerings underwritten by high-ranked bankers survive significantly longer after withdrawal of their offerings.

Work in Progress:

1. “Effect of Corporate Governance on Valuation and Performance of IPOs”.

2. “Corporate Governance, Executive Compensation, and Firm Performance”.

3. “Value Drivers of Biotech IPOs”, with Baruch Lev and Nan Zhou

4. “The Matching between Entrepreneurial Firms and Venture Capitalists”.

5. “Freeze-out Deals, an International Comparison”.