Professional Documents
Culture Documents
North-Holland
Ronald W. MASULIS*
Southern Methodist University, Dallas, TX 75275. USA
This study analyzes both the causes and effects of mutual S&L conversions to corporate charter.
Changes in technology and government policies have substantially increased S&L competition,
riskbearing, and potential scale and scope economies. Evidence indicates that these changes have
decreased the relative operating advantages of mutual S&Ls, encouraging conversions to stock
charter. The S&Ls financial and operating characteristics, which affect the success of the
conversion etTort, are also explored.
1. Introduction
*I would like to thank Henry Cassidy, Harry DeAngelo, Espen Eckbo, Kenneth French, David
Hirshleifer, Brett Trueman, Lee Wakeman, David Mayers (the referee), and the editor, &fichaeI C.
Jensen, for valuable comments and discussions. I would like to also thank the FHLBB staff for
their invaluable assistance. Earlier versions of the paper were presented at the Western Finance
Association Meetings in Vancouver, Boston University, Federal Reserve Bank of Philadelphia,
Harvard University, Southern Methodist University, University of California at Los Angeles.
University of Connecticut, University of Indiana, University of Pennsylvania, University of
Pittsburgh and University of Washington and I would like to acknowledge the useful comments
made by participants. This research was done while at UCLA and was partially supported by the
Research Center for Managerial Economics and Public Policy. Responsibility for any remaining
errors is mine.
J.F.E.- B
The major finding of this study is that, on average, all the major claimants
in the MS&Ls choosing to convert to stock charter gain from this action.
Mayers and Smith (1986) draw the same conclusion in their analysis of the
causes and effects of the opposite form of organizational change: the mutuali-
zation of stock insurance companies. The evidence in both studies supports the
agency theory prediction of Alchian (1950) and Jensen and Meckling (1976);
namely, that organizational change occurs when economic efficiencies are to be
gained.
The paper begins by describing the S&L industry and the mutual form of
organization. The conversion process is outlined and the resulting major
changes in financial contracts and their market values are summarized. Predic-
tions are developed concerning the operating and financial characteristics of
MS&Ls most likely to attempt and complete the conversion process. The
remaining sections of the paper discuss sample properties, present empirical
evidence and draw conclusions.
S&Ls with assets over $750 billion at year-end 1983 have specialized in
providing origination and servicing of long-term residential mortgages and
short-term time deposits. In the last ten years, major changes have occurred in
the competitive and regulatory environment within which S&Ls operate. The
advent of electronic funds transfer (EFT) technology has opened up new
services and offered greater economies of scale and scope than were previously
available, thereby significantly increasing the competition for deposits among
S & Ls, commercial banks and other non-bank companies by rendering ineffec-
tive state and federal laws and regulations which previously restricted deposit
competition. Recent regulatory changes such as the Depository Institution
Deregulation and Monetary Control Act of 1980 and the Depository Institu-
tions Act of 1982 allow S&Ls to offer services previously reserved for
commercial banks, and have lifted interest rate ceilings on S&L liabilities.
This has created significant growth opportunities for individual S&ZLs while
requiring substantial amounts of new investment.
Historically, MS& Ls have had a competitive advantage over stock-chartered
commercial banks in terms of a lower federal tax burden. S&Ls were exempt
from federal taxation until 1951, and thereafter enjoyed a substantial tax
shield in the form of bad debt reserves. However, with the passage of the Tax
Acts of 1969 and 1976, S&Ls have gradually lost their tax advantage and in
recent years have been treated almost identically to commercial banks. Thus,
S& Ls have lost an important competitive advantage over their stock-organized
See McNulty (1981) for some recent evidence on economies of scale in the S&L industry. For
earlier estimates, see Benston (1970. 1972).
R. W. Madis, Muoul IO stockconversions 31
For a more formal analysis of optimal capital structure decisions by S&Ls in the face of
bankruptcy costs see DeAngelo and Masulis (1980), Orgler and Taggart (1983) and on the effects
of earnings variability see Castanias (1983).
See Brigham and Pettit (1969), Kreider (1972) and especially Yancey (1975, pp. 642-644) for
additional details. Also see Hetherington (1969) on mutual insurance companies.
MS&Ls initial equity capital) in the form of deposits receiving the passbook
interest rate.4 However, organizers do determine the composition of the S&Ls
initial board of directors, the permanence of which is virtually assured given
the depositors weak voting rights. With no threat of takeover, the board is
free to capture a portion of the S&Ls accumulated profits directly through
high management salaries and fringe benefits and indirectly through (1) loans
extended to friends, family and at?lliated businesses on a preferential basis and
(2) S&L purchases at non-competitive prices of mortgage-related services such
as appraisals and credit analysis from companies owned by friends or rela-
tives. However, the portion of S&L profits captured by the board is limited
currently by FSLIC regulation and prior to deposit insurance by state banking
authoriti.es and closer depositor monitoring. Overall, this analysis indicates
that the board of directors has economically significant, though legally unrec-
ognized and illiquid ownership claims in a MS&L.
4With respect to the risk capital that founders are required to invest, the GAO Report (1981)
states: Mutual applicants (requesting FSLIC deposit insurance) must pledge 20 percent of
withdrawable savings or %250,000, whichever is less, with the appropriate Federal Home Loan
Bank Board (District Bank) as a guarantee against operating deficits in excess of reserves. If the
S&L fails within this five-year period, these pledged deposits can be used by FSLIC to coyer
losses on insured deposits.
5 For some evidence on this issue, see Historical Statistics of the United Stmes: Colonial Times to
f970, U.S. Bureau of the Census, 1975. For further development of the argument. see Mayers and
Smith (1981, 1985) and more formally Rasmusen (1985).
R. W. Ma&is, Mutual to stock coa~erxmw 33
6There are some exceptions to the severity of this constraint: MS&Ls are allowed to sell off
mortgages that are far below face value and amortize the losses over a long period of time. In
some cases MS&Ls can obtain FSLIC income certificates which artificially increase net worth and
total assets. Also, MS&Ls can in principle increase net worth by issuing uninsured subordinated
debt or participating certificates (which are much like preferred stock). However, no mutual
S&Ls has sold significant amounts of these instruments, presumably because of their high agency
costs.
34 R. W. Mawh. Mutual IO stock conoers,otu
Table 1
Proportion of the S&L industry represented by stock associations in the 1950-1983 period.
Source: Federal Home Loan Bank Board, Savings and Home Financrng Source Book, 1980,
Washington, DC, August 1981, tables 6 and 7, and Combined Financial Statements, FSLIC-Insured
Savings and Loan Associations, 1983.
bData are for all S&L associations and MSBs insured by the Federal Savings and Loan
Insurance Corporation (FSLIC).
Prior to 1950, most state and federal regulations prohibited both the
chartering of stock S&Ls and the conversion of mutual associations to stock
charter. However, over the subsequent 35 years most states have altered their
statutes to permit newly chartered stock S&Ls. Following a twelve-year
moratorium. the FHLBB began in 1976 to allow federally chartered mutual
associations to convert in states which allow stock-chartered S&Ls; the
Depository Institutions Act of 1982 extended this option to S& Ls in all states.
Under FHLBB regulations a conversion must involve a 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 subscrip-
tion rights. Conversion leads to major changes in S&L voting rights, property
rights and capital structure, yet no direct tax consequences for a S&L, its
management or its securityholders occur. An outline of the conversion process
f0110ws:
The rights offering (termed a subscription offering) has two unusual features.
First, non-transferable rights to purchase S&L stock are distributed to deposi-
tors and management under a complicated priority system. Second, the
offering price is unknown over the subscription period: only a price range of
The FHLBB permits between 15 and 25 percent of total issue to be set aside in
an optional category for sale to officers and directors after the rights of the
first three categories are exercised. The percentage of the issue set aside is 25
percent for S&Ls under $50 million in assets, 15 percent for S&Ls over $500
million in assets, with a sliding scale in between [Goldberg and Marcotta
(1982, p. 859)]. For further details on the conversion process, see Lucarelli and
Teague (1979), Amott (1982), Goldberg and Marcotta (1982) and Dunham
(1985). In sum? the conversion process results in changes in both the wealth
and riskbearing of a S&Ls major claimants, who are its management,
depositors and deposit insurer.
The conversion process alters the market value of a S&L by (1) causing an
equity capital inflow, (2) increasing the present value of the S&Ls cash flows
from existing assets and current and future operations, (3) decreasing the
market value of deposit insurance coverage, and (4) creating current and
future conversion related expenses. The changes in a S&Ls existing assets and
liabilities (AV + AP) as well as expenses (E) which typically result from a
conversion will differ across S& Ls, yielding predictions as to which MS&Ls
are more likely to convert.
R. W. Masulis, Murul to stockcomersions 37
8The valuation effects of this leverage change on the values of the deposit insurance and the
uninsured debt can be estimated by applying Option Pricing Theory as shown in Merton (1977,
1978). This analysis can also be used to demonstrate a conflict of interest between FSLIC and
S&L stockholders under fixed price ipsurance. For application of Option Pricing Theory to the
valuation of a S&Ls major assets, its mortgages, see Smith (1980) and Masulis (1982).
38 R. W. Mm&. Mutual to srock conoersionr
Consistent with an increase in the benefits of stock over mutual structure, most recently
chartered S&Ls have been stocks, though some new MS&Ls have been chartered in states
allowing stock S&Ls over the 19761983 period.
R. W. Ma&is, Mutual to rrock cowersions 39
cash flows from assets and operations, V,, plus the market value of the deposit
insurance subsidy (or tax), PO, minus the face value of deposits, D, (assuming
all deposits are effectively insured and market interest rates are paid), W, = V,
+ PO- D,, 2 0. The S&Ls initial stockholders also obtain pro rata claims to
the proceeds of the sale of stock since no founding shareholders exist to claim
a portion of the net proceeds or the initial net worth as in a typical sale of
unseasoned stock. Thus, the market value of a converting associations stock,
IV,, is equal to its pre-conversion net worth, W,, plus the gross proceeds of the
stock offering, S, the conversion-related change in the market value of the
S&Ls existing assets, AV, and the change in the market value of deposit
insurance due to a conversion induced change in FSLIC risk bearing, A P,
minus conversion related expenses, E; that is,
w, = W,+S+AV+AP-E. (1)
It follows that the initial secondary market stock price should differ from the
offering price, S, by the pre-conversion net worth, W,, plus the conversion
induced net change in the S&Ls total assets [i.e., the remaining three terms of
the right side of(l)].
In order for rational investors and underwriters to buy a S&Ls stock at the
conversion date, its purchase price (the gross proceeds, S) cannot exceed the
stocks post-conversion expected value or net worth defined in eq. (1) W, 2 S.
Thus, for a successful offering investor rationality requires that the pre-conver-
sion net worth adjusted for the conversion induced changes in S&L value
(excluding proceeds of the equity sale) be non-negative:
W,+AV+AP-EzO. (2)
The MS&Ls board of directors must initiate and approve any conversion
proposal before it can be voted upon by depositors. Hence, this decision
should improve board members expected utility by some combination of (1)
increasing the expectation of their future income, (2) decreasing the riskiness
of their future income, and (3) increasing their perquisite consumption.
Nevertheless, the conversion process involves both positive and negative
effects for board members and management.
On the positive side, conversion offers board members and management
rights to purchase at a fixed price a transferable claim to a portion of the
associations pre-conversion net worth as well as the net gains derived from
converting. As the market value of this pre-conversion net worth increases
relative to the market value of the new equity being raised, the incentives to
obtain a transferable equity claim by converting grow. Management frequently
receives stock options and additional compensation in the form of stock-based
bonus plans. One effect of these holdings of market-sensitive financial claims
is improved managerial incentives. In contrast, FSLIC regulations effectively
limit the level of direct compensation received by the board of directors and
This problem can occur in any corporation with risky debt where the market value of debt
outstanding assuming fuIl default insurance exceeds the market value of assets.
R. W. ,Musuhs. Murual to stock concers,om 41
FHLBB has various powers to use in influencing MS&L policies. Discussions with staff
members of the Office of District Banks of the FHLBB indicate that management/board member
salaries that exceeded industry norms and which were a significant portion of S&L earnings
would be actively discouraged. This regulatory action is sanctioned under FHLBB Regulation
563.39.
See DeAngelo and Rice (1983) and DeAngelo, DeAngelo and Rice (1984) for evidence of
managerial aversion to takeover threats. However, this risk is mitigated by board and management
stock and stock option holdings.
Table 2
I&%&L applications to convert to stock charter and their disposition by year in the 1974-1983
periodh
Applications
No. of Successful withdrawn
applications conversions to Applications Inactive due to Conversion
Year filed stock charter in process applications mergers failures
1974 31 18 8 5 0
1975 6 4 1 1 0
1976 29 25 2 1 1
1977 24 16 3 1 2
1978 21 15 2 3 1
1979 42 28 6 3 5
1980 51 24 11 9 4
1981 57 20 20 8 2
1982 35 16 s 11 0 0
1983 105 39 58 3 0 5
Total 401 205 76 67 31 20
Classification is based on tiling status as of the beginning of 1984. These figures exclude
supervisory conversions and one conversion completed in 1976 that aas applied for in 1973 and
one conversion completed in 1979 by a Puerto Rican S&L. One 1983 application from a Puerto
Rican S&L was also excluded. Conversion failures occur when not all of the S&Ls stock is sold
in its initial public offering. In 1984, there were 76 new conversion applicants and 89 successful
conversions.
bSource: Federal Home Loan Bank Board
The major sources for public information on S&L conversions were the
semi-weekly Saoings and Loan Inoestor and the FHLBB Statement and Re-
ports to Congress on Mutual to Stock Conversions of 1976-1979. The primary
sources of data for individual conversions were the S&L associations con-
version proxy statements, and subscription and offering circulars. Individual
S&L income and balance sheet statements were obtained from FHLBB
Semi-Annual Reports on Statement of Condition. The annual number of S&Ls
and total deposit levels by state are taken from the FHLBBs Combined
Financial Statements of FSLIC Insured Institutions. Annual S&L branch and
deposit data were obtained from the FHLBB Branch Ofice Docket Directory
and Branch Directory and Summary of Deposits with Market Indicators by
Decision Research Sciences. The dollar value of S&L mortgage originations
by state was obtained from the FHLBB Savings and Home Financing Source
Books, 1977-1983. Daily stock price data were obtained primarily from
Standard and Poors NYSE, ASE and OTC Stock Price Records, Data Re-
sources Inc.s DRISEC database, and the National Daily Quotation Services
Stock Section. Most of these are OTC stocks and consequently most of their
daily rates of return are based on bid-ask averages. Changes in the number of
S&Ls outstanding by state is derived from FHLBB Annual Reports and the
various issues of the FHLBBs annual Asset and Liabiliy Trends.
R. W. ~Mawlis. Murual to stockconversions 43
Table 3
Number of MS&Ls converting to stock charter by year, with total equity capital raised and total
assets of converting S&Ls in the 1976-1983 period.
Total assets
No. of Total equity of converting S&Ls
conversions capital raised at prior year-end
Year completedb (S millions) ($ millions)
1976 15 52 3,817
1917 15 31 1,574
1978 4 12 445
1979 16 111 3,139
1980 15 141 5,959
1981 36 127 5,915
1982 31 123 4,966
1983 13 2.723 136,590
Total 205 3,320 163,505
YSource: Federal Home Loan Bank Board. Due to a FHLBB imposed moratorium on conver-
sion approvals, only one conversion from mutual to stock company was approved and completed
in the 1963-1975 period. In early 1971. Citizens Federal S&LA of San Francisco converted
through a free distribution of stock to members.
bTbese figures are based on the year the conversion is completed. It excludes supervisory
conversions of failing mutual S&Ls arranged by FSLIC and one conversion in 1979 by a Puerto
Rican S&L.
10. Methodology
There have been a number of earlier empirical studies of the differences between mutual and
stock-chartered S&Ls by Hester (1968), Hadaway (1982). Brigham and Pettit (1969), FLHBB
Report to Congress (1979). Nicols (1972), Verbrugge and Goldstein (1981), and OHara (1982).
The only empirical analysis of converting mutuals has been by Hadaway (1982). Multiple
discriminant analysis was employed to compare characteristics of each of the 29 converting
associations in the period January 1976-June 1979 with those of a stock and a mutual association
of similar size in the same FHLBB district.
the initial returns realized by the buyers of the converting S&Ls stock
offering are significantly different from zero. This allows an assessment of the
efficiency gains to a S&L from conversion and a measure of the S&Ls
pre-conversion net worth being distributed to the initial stockholders. To
evaluate managements incentives for supporting the conversion proposal,
their stock purchases and changes in compensation and wealth immediately
after conversion are also reviewed.
The conversion decision is inherently a discrete choice. Thus. employing
ordinary least squares to measure relationships with such a binary dependent
variable is an inappropriate estimation technique since it assumes that the
deviations of the dependent variable from its estimated values are normally
distributed. Statistical estimation of the functional relationship between the
conversion decision and its potential determinants requires a qualitative
response model, such as a probit probability model, if desirable properties for
the models parameter estimates are to be obtained.14 In these models, the
dependent variable is defined as the conditional probability of a conversion
decision P( D, = 1) = P( yr = /3,X,( -JJ* > 0), where the explanatory variables
are assumed to enter the probability function linearly and the conversion
decision is determined by whether or not the net gains from converting /3,X,!
exceed some threshold y*. In the probit model, the condition probability
function is represented by F, the cumulative distribution function of a unit
normal as shown below:
After adding a term E, to reflect the fact that P( y, < 0) is observed with error,
this equation is transformed by F-, the inverse of the normal cumulative
distribution function, to yield a linear equation in the explanatory variables,
F-v,+%) =B,X,,+vwt),
where P, represents P( yI -C0) and Z( P,) is the value of the unit normal density
evaluated at P,. To estimate the models parameters, the observations are
arranged by whether the categorical variable takes on its first possible value
(e.g., conversion) represented by n1 observations or its second possible value
(e.g., non-conversion) represented by the remaining n2 observations. The
14An estimation technique very similar to probit regression is logistic regression which was also
used as an alternative estimation procedure in the results that follow. Probit regression is generally
preferred over logistic regression because the probit regression assumes normally distributed
errors while the logistic regression assumes Weibull-distributed errors which have no clear
justification.
R. W. Ma&is. Mutual IO stockcomersions
z
r-1
log P( y, < 0) + l5
t=n,+l
log[l - P(Y, < 0)17
where P( y, < 0) is defined above for each observation. Calculating the parame-
ters of this maximum likelihood estimator involves an iterative Newton-
Raphson method. For further discussion of these issues, see Judge, Griffiths,
Hill and Lee (1980) or Maddala (1983).
with the passage of the Depository Institutions Act in November 1982. conversion to federal
stock charter was allowed in all states.
46 R. W. Madis, Murual to stock converriom
Table 4
OLS parameter estimates of the cross-sectional relation between MS&L conversion application
frequencies across states, permitting stock charters and market conditions, in the 1976-1983
period.lb
DEPENDENT = the proportion of MS&Ls applying to convert in a state based on the mean
VARIABLE number of MS&Ls outstanding over the 1976-1983 period,
AMTG = percentage change in dollar value of S&L mortgage originations in the state,
OFFINST = ratio of depository institution offices to depository institutions in the state
(depository institutions are defined as commercial banks, mutual savings
banks, and S&Ls).
AOFF = percentage change in state-wide depository institution offices,
ADEP = percentage change in state-wide deposits of depository institutions,
ASLDEP = percentage change in state-wide S&L deposits.
bFigures in parentheses are r-statistics. Explanatory variables are measured over the 1977-1983
period (since 1976 data were generally unavailable). Data are for the 40 states which allowed
conversions from mutual to stock charter as of the beginning of 1982; of these 3 states had no
conversion applications by the end of 1983.
ying for the scale economies being realized by competing branch networks.16
These state-wide ratios are all measured over the 1977-1983 period. It could
be argued that the percentage change in bank and S&L offices jointly measure
the supply response to growth in demand for depository institution services
and the differential impacts of anti-competitive state regulations (e.g., unit
banking laws, chartering restrictions). However, given that the model includes
growth rates in demand for S&L deposit and mortgage services as additional
explanatory variables, the coefficient estimate for the change in branch offices
should measure the partial correlation between conversion frequency and state
regulatory constraints on depository institution competition.
Table 4 presents estimates of an ordinary least squares model of conversion
frequency across states. The dependent variable is the ratio of MS&Ls
converting to the average number of MS&Ls outstanding over the period,
including those converting. Several regressions are estimated to help assess the
stability of the parameter estimates when one or more explanatory variables
r6Data on the number of banks are overstated, since they do not combine multi-bank holding
companies. Thus, the size of the ratio of branch offices to banks is understated in states with
significant multi-bank holding companies.
R. W. Masulis. Mutual to stock conversions 47
are excluded. The signs of all the significant parameter estimates are consistent
with the predictions of positive relationships between the likelihood of conver-
sion and growth in demand and intensity of competition. Parameter estimates
for the percentage change in the dollar value of mortgage originations, the
ratio of depository institution branches to institutions, and the percentage
change in S&L offices are large enough to reject the null hypothesis of zero
parameter values at a 5% significance level in all but one of the regressions.
However, the parameter estimates of the percentage changes in both deposits
of S&Ls and of all depository institutions were close to zero. In terms of
importance, both the percentage changes in depository institution offices and
the dollar value of S&L mortgage originations appear to have the most
influence on the conversion decision. These regression models, which use only
market-wide characteristics, explain approximately half the variation in con-
version activity across states.
TWO other explanatory variables were investigated. These were changes in S&L offices as a
substitute for the changes in depository institution offices and S&Ls average cost of funds.
Neither variable had a significant parameter estimate and the latter variable showed limited
variability.
48 R. W. ~Uasuhs. Mutual to stock conversions
Table 5
Mtimum likelihood parameter estimates of a S&Ls probability of tiling a conversion application
over the 1976-1983 period, using a binomial probit regressionbb
The binary dependent variable represents a MS&Ls conversion application status (non-appli-
cant = 0, applicant = 1)
Mean values of explanatory variables
for MS& Ls separated
Explanatory variables by conversion application status
Non-applicant Conversion
MS&Ls applicants
(N = 2333) (N=267)
NN = Non-financial business income/
total income of S&L 0.036 0.062
ASSET= Natural log of S&Ls total assets 17.744 18.394
NET = Net worth/total assets of S&L 0.059 0.048
NFA = Non-financial assets/total assets of S&L 0.018 0.019
GA = Growth rate of S&Ls total assets 0.223 0.499
GD = Growth rate of S&Ls deposits - 0.036 0.097
GL = Growth rate of S&Ls loan origination fee 0.561 0.894
These data are for the 40 states allowing conversions from mutual to stock charter as of the
beginning of 1982. For conversion applicants, growth rate variables are measured over the three
years prior to conversion, all other explanatory variables are averages over this period. For
non-applicants, the prior three-year period is chosen by randomly selecting a base year according
to the relative frequency of conversions across the years in that state.
bFigures in parentheses are r-statistics. Similar parameter estimates were obtained using logit
estimation.
the same state for that year. From the population of non-converting MS&Ls
in a given state, a random sample was selected by year in proportion to the
frequency of conversion in that state over the 1976-1983 period, and financial
data were collected for the prior three years. Any association lacking a
complete set of FHLBB financial data for the previous three years was
excluded from this analysis. Then all conversion applicants and all non-appli-
cant mutual associations from ail states with conversions were grouped to-
gether.
Estimates based on a binomial probit model are presented in table 5. The
results indicate that the conversion decision is positively and significantly
related to the size of association assets and the ratio of non-financial business
R. W. Masulis. Mutual to stock comersions 49
Table 6
Maximum likelihood parameter estimates of a conversion applicants probability of successful
conversion over the 1976-1983 period using a binomial probit regression.b
The binary dependent variable represents the individual conversion applications completion
status (failure to convert = 0, successful conversion = 1).
Mean values of explanatory variables
for MS&L applicants separated
Explanatory variables by conversion outcome
Failed conversion Successful
attempts conversions
(N-92) (N- 191)
NET Net worth/total assets
= 0.043 0.046
NFI Non-financial business income/total income
= 0.056 0.066
GD Growth rate of deposits
= - 0.035 0.332
GL Growth rate of loan origination fees
= 0.435 1.087
ASSET= Natural log of total assets 18.554 18.656
INC = Total income to total assets 0.045 0.048
OPINC- Operating income to total assets 0.045 0.047
bFigttres in parentheses are f-statistics. Similar parameter estimates were obtained using logit
estimation.
Table 1
Quartiles of the frequency distributions of semi-annual debt to net worth ratios for S&Ls
converting to stock charter over the 1973-1983 perioda (for six semi-annual periods preceding
and following the conversion period).
Semi-annual periods
surrounding No. of First Third
conversion per&lb observations quartile Median quartile
7; 198
196 16.97
16.75 21.13
20.02 28.30
27.02
1; 200 17.91
18.96 22.51
24.32 29.60
31.81
-2 201 19.91 26.71 35.92
-1 199 20.62 28.08 37.79
0 183 14.35 18.22 23.91
1 136 13.55 17.97 22.15
2 102 14.79 18.57 23.90
3 72 15.28 19.67 25.88
4 58 15.56 19.05 26.28
5 49 14.70 19.21 26.91
6 35 14.58 19.77 27.64
Table 8
Average and cumulative average S&L stock returns over the 20 trading days following conversion
in the 1976-1983 period (sample of 78 conversions).
5.61 5.61 78 90
: 1.88 7.59 78 78
3 0.01 7.60 78 60
4 -0.26 7.32 77 58
0.41 7.75 75 75
2 0.12 7.88 77 70
7 0.84 8.78 76 76
8 0.53 9.36 77 82
9 -0.11 9.23 75 65
10 -0.10 9.12 77 65
11 0.59 9.76 77 75
12 0.39 10.19 77 79
13 0.14 10.35 75 76
14 0.01 10.36 76 72
15 - 0.03 10.33 75 65
16 0.43 10.81 76 75
17 0.04 10.86 75 72
18 0.27 11.16 75 77
19 0.11 11.28 76 71
20 0.13 11.42 76 65
aThe distribution of the 78 conversions over the years 1976-1983 is: 3, 2, 0, 7, 8, 6, 4 and 48,
respectively.
bAll but three of the conversions studied had secondary market trading beginning within a day
of the public offerings completion. The remaining three conversions had active secondary market
trading begin within five trading days of the public offering date.
i6Tbis risk of takeover is initially not great since conversion regulations preclude takeover for
three years, e.g., only conversions completed prior to 1981 could legally be taken over in the
period through early 1984. However, since 1976 at least five converting associations have been
taken over and there has been at least two serious but unsuccessful takeover attempts. This is a
tangible threat to a S&Ls management, and especially for a larger S&L where management can
only afford to purchase a small fraction of the associations stock.
54 R. W. Mawlis, Muruai to stock con~vrs~om
Table 9
Managements initial gains and losses from stock purchases in S&Ls converting to stock charter
(ranked by dollar gains), managements initial stock purchases and the S&L stocks initial daily
returns over the 1976-1983 period (sample of 75 conversions having an active secondary market
within five trading days of the public offering date).
Managements initial
Managements initial purchases of
gains and losses Converting S&Ls
converting S&L stock
from S&L stock initial
purchasesb (% of shares stock retumc
($ millions) ($ milhons) outstanding) (8)
Table 9 (continued)
Managements initial
Managements initial purchases of Converting S&Ls
gains and losses
from S&L stock converting S&L stock initial
purchasesb (% of shares stock return
(S millions) (S millions) outstanding) ($)
0.011 1.046 3.3 1.06
0.010 1.230 10.9 0.83
0.010 0.810 11.6 1.25
0.009 0.748 9.7 1.14
0.008 0.198 0.5 3.98
0.008 0.750 6.0 1.00
0.007 0.429 7.8 1.71
0.007 0.714 3.1 0.98
0.007 0.432 0.8 1.56
0:006 0.495 5.6 1.14
0.005 0.182 3.6 2.68
0.004 0.232 2.0 1.72
0.003 0.743 0.5 0.46
0.003 0.729 0.9 0.46
0.003 0.096 1.8 3.13
0.003 0.308 1.0 0.89
0.003 0.154 0.5 1.71
0.002 0.156 1.0 1.56
0.000 0.501 4.1 0.00
0.000 0.590 1.5 0.00
0.000 0.553 17.6 0.00
O.OGO 6.363 8.5 0.00
0.000 0.225 0.3 0.00
- 0.005 0.523 1.4 - 0.98
- 0.008 0.870 3.7 -0.85
- 0.008 0.693 2.1 - 1.14
- 0.010 0.663 1.5 -1.47
-0.015 1.073 0.4 - 1.36
-0.018 0.588 3.8 - 3.00
- 0.021 1.568 6.2 - 1.36
- 0.044 1.704 8.9 - 2.59
Source: Individual public offering circulars of converting S&Ls for conversions having an
active secondary market within a day of the public offering.
bOnly management stock purchases derived from subscriptions to the S&Ls initial stock
offering are included. Initial stock gains and losses are defined as the first closing price on the first
day of secondary market trading minus the offering price, all multiplied by the shares subscribed
by senior management and the board of directors.
The stocks percentage change in price on the first day of secondary market trading relative to
the offering price.
56 R. W. Masulis, Mumal IO stockcon~emons
change at the end of the first day of secondary market trading relative to the
offer price. The evidence indicates that management generally realizes large
wealth gains: losses are small and infrequent. Senior management and board
of directors investment in a typical S&Ls stock is also significant; in this
sample it ranges from $100,000 to $7.4 million and has a median value of
$825,000. The distribution of the stocks percentage price changes on the first
day of secondary market trading relative to the offering price ranged from
37.23% to -3.00%. Significantly, stock option plans are proposed in all but 3
of these 75 conversions. These stock options give management the right to
purchase new shares equal to 10% of the outstanding stock at exercise prices
near the stocks offering price. As a result, management incentives are altered
so as to increase their interest in the associations long-term profitability and
to decrease their aversion to undertaking risky investment opportunities.
17. Summary
It is rare to observe an industry undergoing rapid organizational change.
Thus, the phenomenon of a large number of MS&Ls converting to stock
charter offers an important opportunity to further our understanding of the
economics of organizational choice. In this study, various conversion induced
changes in the S&Ls contractual relationships and the welfare of their major
claimants are documented. The statistical evidence indicates that all major
claimants benefit from the conversion decision. This is not surprising given
that the board of directors/management must initiate the conversion pro-
posal, a majority of depositors must vote to approve it, and the FSLIC/FHLBB
has crafted the conversion regulations that are in force. The statistical evidence
also suggests that conversion yields organizational efficiency gains which are
associated with the injection of new equity capital into the association,
distribution of managerial stock and stock option holdings, and a decreased
risk of insolvency.
The evidence shows that mutuals are more likely to convert to stock
associations in state markets that exhibit greater competition and growth.
Within state-wide markets, large MS&Ls and S&Ls having a higher per-
centage of income from specialized assets exhibit a much greater probability of
conversion. Successful conversion applicants exhibit greater net worth to total
assets and higher returns to capital and higher growth rates of total assets and
loan fees. S& Ls exhibit significant declines in leverage in the conversion year
which persist for a number of years thereafter, lowering the risk of insolvency.
Across the sample, management generally makes substantial investments in
the stock of converting S&Ls. At the time of conversion, management stock
option plans are adopted or proposed by most large S&Ls so that the
coincidence of management interests with outside stockholders is quickly
enhanced. Evidence also indicates that at the time of conversion a S&Ls
R. W. Masulis. Mutual to stock comersions 57
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