Fleischer provides us with a series of case studies that shows that firms use contract design to signal various traits about the firm to stakeholders.
In the author's own words:
"This Article claims that the legal infrastructure of deals sometimes has a branding effect - that is, an effect on the brand image of the company. Deal structure affects the atmospherics of the brand. "Or to put it another way: firms draw up contracts both for the traditional legal and incentive reasons generally mentioned in economics and finance but also for marketing (or branding) reasons. Which, while obvious, is often missed.
For instance, Fleischer uses the examples of the Google IPO and the Ben and Jerry's IPO. In each of these cases, the firm significantly altered the traditional IPO process. Why did they do so? One explanation is this branding story: the firms wanted to stand out as different. The IPO process was just one other way that they could signal this message to all stakeholders.
A few look-ins:
"From a traditional corporate finance perspective, the goal of a properly structured IPO is to manage the information asymmetry between the issuer and potential buyers in order to raise the most amount of money possible per share of stock sold. From this perspective, the success of the Google deal is questionable. Few would call the deal elegant or efficient. But this is not really what the Google IPO structure was about, or at least it is not the full story. When Google structured its IPO as an auction, it reinforced Google’sidentity as an innovative, egalitarian, playful, trustworthy company."
"Similarly, the Ben & Jerry’s deal structure may not have been terribly efficient.and later:
By selling its stock only to Vermont residents, the company saved a few thousand dollars in legal and accounting fees. On the other hand, the geographic restriction artificially limited demand for the stock, and the offering price might have been higher if the offering had not been geographically limited.11 But without considering consumers, this sort of cost-benefit analysis fails to capture the essence of the deal. The offering was not just about selling stock and raising capital. It was also about selling ice cream. Selling stock to Vermonters helped build the brand image of the company."
"What can we learn from these case studies? Deal structure sometimes allows us to peer through the gossamer corporate veil and spy the values of the company’s founders and managers. Unusual deal structures, in particular, tend to anthropomorphize the firm. Google is not just a network of connected contracts;18 it is playful and innovative. Ben & Jerry’s is not just a manufacturer of a dessert product; it is a companion. For some products, consumers seek a personal bond. We crave more than mere product functionality. Deal structure serves as a specialized advertising medium, providing early adopters with quality assurance or enhancing the expressive value of the purchasingdecision"This idea fits in well with the Demers and Lewellen that find that web hits are higher following underpriced IPOs.
Definitely recommended. The examples will make great class material! And its a fun paper too! Indeed one of the more fun reads I have had in a while (which either says something about me or the paper or both ;) )
Fleischer, Victor, "Brand New Deal: The Google IPO and the Branding Effect of Corporate Deal Structures" (September 7, 2005). UCLA School of Law, Law-Econ Research Paper No. 05-18 http://ssrn.com/abstract=790928