URL: http://www.sciencedirect.com/science/article/B6VFK-46FJ8G1-1/2/bc1a19e2e3b1d7b1feeaca71ee87fd79
Reference Type: Journal Article
Record Number: 29251
Author: J. A. Doukas and C. Pantzalis
Year: 2003
Title: Geographic diversification and agency costs of debt of multinational firms
Journal: Journal of Corporate Finance
Volume: 9
Issue: 1
Pages: 59-92
Short Title: Geographic diversification and agency costs of debt of multinational firms
ISSN: 0929-1199
Keywords: Geographic diversification
Debt
Multinational firms
Abstract: This paper examines the agency conflicts between shareholders and bondholders of multinational and non-multinational firms and provides an explanation for the puzzle that multinational firms use less long-term debt, but more short-term debt than domestic firms. Using a sample of 6951 firm-year observations for multinational and domestic firms over the 1988-1994 period, we find that alternative measures of agency costs have statistically significant negative effects on the firm's long-term leverage. The results, however, also show that the negative effects of agency costs of debt on long-term leverage are significantly greater for multinational than non-multinational firms. It is documented that the effect of the agency costs of debt on leverage are increased by the firm's degree of foreign involvement. The evidence shows that firm's increasing foreign involvement exacerbates agency costs of debt leading to lower (greater) use of long-term (short-term) debt financing. This result is also confirmed using alternative measures of foreign involvement. The evidence is consistent with the view that multinational corporations (MNCs) are susceptible to higher agency costs of debt than domestic corporations because geographic diversity renders active monitoring more difficult and expensive in comparison to domestic firms. The results fail to support the view that MNCs' lower long-term debt ratios are due to the advantages of the internal capital markets.
Notes: doi: DOI: 10.1016/S0929-1199(01)00056-6
URL: http://www.sciencedirect.com/science/article/B6VFK-47PCP01-5/2/4134c2a5100276c8ee57d41edc4921c9
Reference Type: Journal Article
Record Number: 29154
Author: J. D'Souza, W. Megginson and R. Nash
Year: 2005
Title: Effect of institutional and firm-specific characteristics on post-privatization performance: Evidence from developed countries
Journal: Journal of Corporate Finance
Volume: 11
Issue: 5
Pages: 747-766
Short Title: Effect of institutional and firm-specific characteristics on post-privatization performance: Evidence from developed countries
ISSN: 0929-1199
Keywords: Privatization
Corporate governance
Abstract: This study adds to the empirical evidence that privatization improves the performance of divested firms and offers preliminary evidence as to why these performance improvements occur. Using a sample of 129 share-issue privatizations from 23 developed (OECD) countries, we first document significant increases in profitability, efficiency, output, and capital expenditure following privatization. Our data indicate that ownership (both private and foreign), degree of economic freedom, and level of capital market development significantly affect post-privatization performance. A comparison to the findings of Boubakri et al. (2005) [Boubakri, N., Cosset, J., Guedmani, O., 2005. Liberalization, corporate governance, and the performance of newly privatized firms. Journal of Corporate Finance (this issue)] suggests that several determinants of post-privatization performance improvements differ between developed and developing countries.
Notes: doi: DOI: 10.1016/j.jcorpfin.2004.12.001
URL: http://www.sciencedirect.com/science/article/B6VFK-4FHKD0K-1/2/30c2da923b03362418a78db2b8222548
Reference Type: Journal Article
Record Number: 29320
Author: R. Duggal and J. A. Millar
Year: 1999
Title: Institutional ownership and firm performance: The case of bidder returns
Journal: Journal of Corporate Finance
Volume: 5
Issue: 2
Pages: 103-117
Short Title: Institutional ownership and firm performance: The case of bidder returns
ISSN: 0929-1199
Keywords: Bidder returns
Corporate performance
Institutional ownership
Abstract: We employ corporate takeover decisions to investigate the impact of institutional ownership on corporate performance. The OLS regressions of bidder gains on institutional ownership indicate a positive relation between the two. However, we find institutional ownership to be significantly determined by firm size, insider ownership and the firm's presence in the S&P 500 index. Thus, when bidder gains are regressed on the predicted values of institutional ownership in two-stage regressions, the recursive estimates do not confirm the relationship shown by the OLS regressions. Furthermore, we do not find any evidence that active institutional investors (e.g., CalPERS) as a group enhance efficiency in the market for corporate control. These findings cast doubt on the superior selection/monitoring abilities of institutional investors.
Notes: doi: DOI: 10.1016/S0929-1199(98)00018-2
URL: http://www.sciencedirect.com/science/article/B6VFK-3WRBP47-1/2/5fa7babff810abb0ba22479e05bcace1
Reference Type: Journal Article
Record Number: 29099
Author: A. Dumitrescu
Year: 2007
Title: Valuation of defaultable bonds and debt restructuring
Journal: Journal of Corporate Finance
Volume: 13
Issue: 1
Pages: 94-111
Short Title: Valuation of defaultable bonds and debt restructuring
ISSN: 0929-1199
Keywords: Debt valuation
Defaultable bonds
Strategic contingent claim analysis
Modigliani-Miller theorem
Abstract: In this paper we develop a contingent valuation model for zero-coupon bonds with default. In order to emphasize the role of maturity time and place of the lender's claim in a firm's debt hierarchy, we consider a firm that issues two bonds with different maturities and different seniorage. The model allows us to analyze the implications of both debt renegotiation and capital structure of a firm on the prices of bonds. We obtain that renegotiation brings about a significant change in the bond prices and that the effect is dispersed through various channels: increasing the value of the firm, reallocating payments, and avoiding costly liquidation. Moreover, the presence of two creditors leads to qualitatively different implications for pricing, while emphasizing the importance of bond covenants and renegotiation of the entire debt.
Notes: doi: DOI: 10.1016/j.jcorpfin.2006.07.001
URL: http://www.sciencedirect.com/science/article/B6VFK-4KV8TB2-1/2/e71218ccec2f0888ca0604fdc40dae70
Reference Type: Journal Article
Record Number: 29351
Author: C. G. Dunbar
Year: 1997
Title: Overallotment option restrictions and contract choice in initial public offerings
Journal: Journal of Corporate Finance
Volume: 3
Issue: 3
Pages: 251-275
Short Title: Overallotment option restrictions and contract choice in initial public offerings
ISSN: 0929-1199
Keywords: Overallotment option
Warrant compensation
Reputation
Reneging
Certification
Abstract: Relaxation of the national association of securities dealers (NASD) limit on overallotment option use in 1983 provides a natural experiment to test the substitutability or complementarity of underwriting contract terms in initial public offerings. For firms that would find the initial limit constraining, use of terms that are substitutes (complements) should decrease (increase) after the limit is raised. The evidence indicates that warrant compensation and overallotment options are substitutes. Underwriter reputation and overallotment options are substitutes if warrants are used as compensation and complements otherwise. The significant change in contract terms after 1983 suggests the initial NASD policy was costly.
Notes: doi: DOI: 10.1016/S0929-1199(96)00015-6
URL: http://www.sciencedirect.com/science/article/B6VFK-3SX0D8F-3/2/073605007c14c5a5211db771c287bc4e
Reference Type: Journal Article
Record Number: 29335
Author: I. J. A. Dyck and K. H. Wruck
Year: 1998
Title: Organization structure, contract design and government ownership: A clinical analysis of German privatization
Journal: Journal of Corporate Finance
Volume: 4
Issue: 3
Pages: 265-299
Short Title: Organization structure, contract design and government ownership: A clinical analysis of German privatization
ISSN: 0929-1199
Keywords: Contract design
Privatization
Organization structure
Abstract: This paper examines the role that organization structure and contract design played in resolving economic and political problems that arose during Germany's privatization process. We find that German officials structured organizations and contracts in a way that made credible the government's commitment to rapid privatization. This credibility served to protect the process from political and social opposition. In addition, it enabled Germany to attract talented private sector managers to its privatization effort. This began with the establishment of an independent privatization agency, the Treuhand. It culminated with the creation of another set of independent organizations called Management KGs, to which the Treuhand outsourced part of its restructuring, management and privatization work.
Notes: doi: DOI: 10.1016/S0929-1199(98)00008-X
URL: http://www.sciencedirect.com/science/article/B6VFK-3V72TPY-3/2/02de2380d32ab208dbc4c1037a49ff47
Reference Type: Journal Article
Record Number: 29194
Author: A. C. Eberhart
Year: 2005
Title: A comparison of Merton's option pricing model of corporate debt valuation to the use of book values
Journal: Journal of Corporate Finance
Volume: 11
Issue: 1-2
Pages: 401-426
Short Title: A comparison of Merton's option pricing model of corporate debt valuation to the use of book values
ISSN: 0929-1199
Keywords: Valuation
Corporate finance
Option pricing
Abstract: Many studies use the book value of debt as a proxy for its market value because most corporate debt does not trade. I call this practice the book value of debt (BVD) approximation, and it appears to be justified by the observation that the average market value of debt is close to its book value. Many corporate bonds, however, trade at values significantly different from their book values, and consequently the BVD approximation can create important biases. I compare the accuracy of the BVD approximation to Merton's option pricing (OPT) model of corporate debt valuation, and find consistent evidence that the Merton model provides more accurate estimates. I also show that this model is an easily estimated alternative to the BVD approximation. In short, the BVD approximation not only creates significant biases, but it is also an unnecessary simplification.
Notes: doi: DOI: 10.1016/j.jcorpfin.2003.07.002
URL: http://www.sciencedirect.com/science/article/B6VFK-4BN0NH6-2/2/e9050b7678f69bae984600b6f1da0563
Reference Type: Journal Article
Record Number: 28990
Author: B. E. Eckbo
Year: 2009
Title: Bidding strategies and takeover premiums: A review
Journal: Journal of Corporate Finance
Volume: 15
Issue: 1
Pages: 149-178
Short Title: Bidding strategies and takeover premiums: A review
ISSN: 0929-1199
Keywords: Takeover
Merger
Tender offer
Auction
Offer premium
Bidder gains
Toeholds
Overbidding
Markups
Hostility
Method of payment
Fire-sale discounts
Bankruptcy
Abstract: I review recent empirical research documenting offer premiums and bidding strategies in corporate takeovers. The discussion ranges from optimal auction bidding to the choice of deal payment form and premium effects of poison pills. The evidence describes the takeover process at a detailed level, from initial premiums to bid jumps, entry of rival bidders, and toehold strategies. Cross-sectional tests illuminate whether bidders properly adjust for winner's curse, whether target stock price runups force offer price markups, and whether auctions of bankrupt firms result in fire-sale discounts. The evidence is suggestive of rational strategic bidding behavior in specific contexts.
Notes: doi: DOI: 10.1016/j.jcorpfin.2008.09.016
URL: http://www.sciencedirect.com/science/article/B6VFK-4TPHRMH-2/2/70c05dbacf40c06d8d77029cbcb5b79d
Reference Type: Journal Article
Record Number: 29178
Author: B. E. Eckbo and Ø. Norli
Year: 2005
Title: Liquidity risk, leverage and long-run IPO returns
Journal: Journal of Corporate Finance
Volume: 11
Issue: 1-2
Pages: 1-35
Short Title: Liquidity risk, leverage and long-run IPO returns
ISSN: 0929-1199
Keywords: Liquidity risk
Leverage
IPO
Abstract: We examine the risk-return characteristics of a rolling portfolio investment strategy where more than 6000 Nasdaq initial public offering (IPO) stocks are bought and held for up to 5 years. The average long-run portfolio return is low, but IPO stocks appear as "longshots", as 5-year buy-and-hold returns of 1000% or more are somewhat more frequent than for non-issuing Nasdaq firms matched on size and book-to-market ratio. The typical IPO firm is of average Nasdaq market capitalization but has relatively low book-to-market ratio. We also show that IPO firms exhibit relatively high stock turnover and low leverage, which may lower systematic risk exposures. To examine this possibility, we launch an easily constructed "low-minus-high" (LMH) stock turnover portfolio as a liquidity risk factor. The LMH factor produces significant betas for broad-based stock portfolios, as well as for our IPO portfolio and a comparison portfolio of seasoned equity offerings. The factor-model estimation also includes standard characteristic-based risk factors, and we explore mimicking portfolios for leverage-related macroeconomic risks. Because they track macroeconomic aggregates, these mimicking portfolios are relatively immune to market sentiment effects. Overall, we cannot reject the hypothesis that the realized return on the IPO portfolio is commensurable with the portfolio's risk exposures, as defined here.
Notes: doi: DOI: 10.1016/j.jcorpfin.2004.02.002
URL: http://www.sciencedirect.com/science/article/B6VFK-4C76H57-1/2/303dbb86c3dc1d9fda2d1ec41b482054
Reference Type: Journal Article
Record Number: 28980
Author: B. E. Eckbo and K. S. Thorburn
Year: 2009
Title: Creditor financing and overbidding in bankruptcy auctions: Theory and tests
Journal: Journal of Corporate Finance
Volume: 15
Issue: 1
Pages: 10-29
Short Title: Creditor financing and overbidding in bankruptcy auctions: Theory and tests
ISSN: 0929-1199
Keywords: Bankruptcy
Auction
Overbidding
Creditor financing
Allocative efficiency
Going-concern sale
Piecemeal liquidation
Operating performance
Abstract: We present unique empirical tests for auction overbidding using data from Sweden's auction bankruptcy system. The main creditor (a bank) can neither bid in the auction nor refuse to sell in order to support a minimum price. However, we argue that the bank may increase its expected revenue by financing a bidder in return for a joint bid strategy, and we show that the optimal coalition bid exceeds the bidder's private valuation (overbidding) by an amount that is increasing in the bank's ex ante debt impairment. We find that bank-bidder financing arrangements are common, and our cross-sectional regressions show that winning bids are increasing in the bank-debt impairment as predicted. While, in theory, overbidding may result in the coalition winning against a more efficient rival bidder, our evidence on post-bankruptcy operating performance fails to support such allocative inefficiency effects. We also find that restructurings by bank-financed bidders are relatively risky as they have greater bankruptcy refiling rates, irrespective of the coalition's overbidding incentive.
Notes: doi: DOI: 10.1016/j.jcorpfin.2008.04.005
URL: http://www.sciencedirect.com/science/article/B6VFK-4SBY4S8-1/2/2b5384748947cb38b912c85779e106e4
Reference Type: Journal Article
Record Number: 28955
Author: M. Egami
Year: 2009
Title: A framework for the study of expansion options, loan commitments and agency costs
Journal: Journal of Corporate Finance
Volume: 15
Issue: 3
Pages: 345-357
Short Title: A framework for the study of expansion options, loan commitments and agency costs
ISSN: 0929-1199
Keywords: Irreversible investment
Bankruptcy cost
Agency cost
Optimal stopping
Loan commitment
Abstract: We consider a firm that operates a single plant and has an expansion option to invest in a new plant. This setup leads to two-sided optimal stopping problems. We analyze optimal expansion timing and quantify the value of the loan commitment that the equityholder obtained from the lender and associated agency costs incurred on the lender's side. Moreover, we incorporate construction period for the new plant, which throws another layer of uncertainty into the model: the parties cannot tell price level of the firm's product when the construction completes. This analysis contrasts with the conventional one-sided stopping models in corporate finance literature. We can study expansion options by viewing a firm's existing operation, bankruptcy threat, and financing decisions all together.
Notes: doi: DOI: 10.1016/j.jcorpfin.2009.01.004
URL: http://www.sciencedirect.com/science/article/B6VFK-4VG7MR9-1/2/2ae5a42a3aded5523997f329d4570c58
Reference Type: Journal Article
Record Number: 29201
Author: L. Eldenburg, B. E. Hermalin, M. S. Weisbach and M. Wosinska
Year: 2004
Title: Governance, performance objectives and organizational form: evidence from hospitals
Journal: Journal of Corporate Finance
Volume: 10
Issue: 4
Pages: 527-548
Short Title: Governance, performance objectives and organizational form: evidence from hospitals
ISSN: 0929-1199
Keywords: Governance
Performance objectives
Organizational form
Hospitals
Abstract: In a sample of California hospitals, we find that the composition of the board of directors varies systematically across ownership types. For all ownership types, except government-owned, we find that poor financial performance is related to board and CEO turnover. However, different ownership types place different weights on levels of charity care and administrative expenses. Our overall findings support the proposition that ownership type reflects heterogeneity across consumers and producers, and that differences in these groups lead to differences in the organization's objectives and governance.
Notes: doi: DOI: 10.1016/S0929-1199(03)00031-2
URL: http://www.sciencedirect.com/science/article/B6VFK-4873M95-1/2/035f6f9a4fd27b3fa0898bbee387713d
Reference Type: Journal Article
Record Number: 29100
Author: W. B. Elliott, J. Koëter-Kant and R. S. Warr
Year: 2007
Title: A valuation-based test of market timing
Journal: Journal of Corporate Finance
Volume: 13
Issue: 1
Pages: 112-128
Short Title: A valuation-based test of market timing
ISSN: 0929-1199
Keywords: Residual income model
Capital structure
Market timing
Financing deficit
Abstract: We implement an earnings-based fundamental valuation model to test the impact of market timing on the firm's method of funding the financing deficit. We argue that our valuation metric provides a superior measure of equity misvaluation because it avoids multiple interpretation problems faced by the market-to-book ratio. It also eliminates the need to infer market timing based on the actions of corporate insiders or other indirect measures. We find a strong positive relation between the degree to which a firm is overvalued and the proportion of the firm's financing deficit that is funded with equity. This result is found cross-sectionally and through time and is robust to firm size, and other variables known to impact capital structure. We find evidence that overvaluation in the 1990s led to equity being increasingly preferred over debt. For a broad set of firms, market timing explains a significant portion of the variation in the type of security used to fund the financing deficit.
Notes: doi: DOI: 10.1016/j.jcorpfin.2006.12.001
URL: http://www.sciencedirect.com/science/article/B6VFK-4MY0TS6-1/2/e46e1752f1625c2c908fecec1033c487
Reference Type: Journal Article
Record Number: 29224
Author: P. C. English, T. I. Smythe and C. R. McNeil
Year: 2004
Title: The "CalPERS effect" revisited
Journal: Journal of Corporate Finance
Volume: 10
Issue: 1
Pages: 157-174
Short Title: The "CalPERS effect" revisited
ISSN: 0929-1199
Keywords: Pension funds
Corporate governance
Shareholder activism
Event studies
Abstract: Institutional investors have become more active in corporate governance with the relaxation of Depression Era securities laws. The California Public Employees Retirement System (CalPERS) is a leading institutional activist. In this paper, we examine the relationship between CalPERS' public targeting and both short- and long-term stock returns to address what has been dubbed the "CalPERS effect." Our results indicate evidence of an announcement effect and that, while there is also evidence of some long-term improvement, it is limited to 6 months from the announcement of the target list in the Wall Street Journal when more consistent empirical methodologies are employed.
Notes: doi: DOI: 10.1016/S0929-1199(03)00020-8
URL: http://www.sciencedirect.com/science/article/B6VFK-48F5T9H-1/2/a932f9adaec13f3bb44b4dbd0b167dba
Reference Type: Journal Article
Record Number: 28993
Author: M. Ertugrul and S. Hegde
Year: 2008
Title: Board compensation practices and agency costs of debt
Journal: Journal of Corporate Finance
Volume: 14
Issue: 5
Pages: 512-531
Short Title: Board compensation practices and agency costs of debt
ISSN: 0929-1199
Keywords: Director incentives
Cost of debt
Corporate governance
Agency costs
Abstract: Extant theory and empirical evidence indicate that equity-based compensation can align the interests of managers with those of shareholders, but it has a side effect of aggravating bondholder-shareholder conflicts by increasing managers' risk-shifting incentives. Recent evidence confirms that extending equity-based compensation to outside directors also is effective in aligning their interests with those of shareholders, but its adverse effects on the debt-related agency problems are unknown. In this paper, we examine how stock and stock option compensation for outside directors affects corporate bond yields in the secondary market. Our results show that the greater the ratio of outside directors' stock and option compensation to total compensation, the lower the average yield spreads on the firms' outstanding bonds, with stock compensation having a larger impact than option compensation. Further, the effect of equity-based compensation on yield spreads is stronger for firms with lower-rated debt.
Notes: doi: DOI: 10.1016/j.jcorpfin.2008.09.004
URL: http://www.sciencedirect.com/science/article/B6VFK-4TG9HS2-1/2/769e6f6321283b83c6c725665526eb85
Reference Type: Journal Article
Record Number: 29346
Author: G. R. Erwin and J. J. McConnell
Year: 1997
Title: To live or let die? An empirical analysis of piecemeal voluntary corporate liquidations
Journal: Journal of Corporate Finance
Volume: 3
Issue: 4
Pages: 325-354
Short Title: To live or let die? An empirical analysis of piecemeal voluntary corporate liquidations
ISSN: 0929-1199
Keywords: Agency theory
Founders
Governance
Voluntary liquidations
Ownership structure
Abstract: This paper is an in-depth investigation of 61 publicly-traded firms that chose to liquidate voluntarily on a piecemeal basis during the 1970s and 1980s. In comparison with their industry peers, these firms have lower Tobin's Q, a higher percentage of equity ownership by management and the board, a higher incidence of a member of the corporation's founding family in a key executive position or on the board, and a higher incidence of asset sales and prior attempts to transfer control of the firm. The average excess stock return of 20% around liquidation announcements is positively correlated with the fraction of stock owned by management and the board. These results suggest that firms that make the value enhancing decision to voluntarily liquidate confront low future growth opportunities, but the absence of future growth opportunities is not sufficient to bring about this decision. It is also necessary that decision makers have a vested interest in the outcome, either because of their ownership stake or because of their family affiliation with the business, and that the valuation consequences of the decision are greater, the more closely aligned are managerial and shareholder interests.
Notes: doi: DOI: 10.1016/S0929-1199(97)00003-5
URL: http://www.sciencedirect.com/science/article/B6VFK-3SWSK8H-2/2/8e7e1bcc3dfdb896c2f80552a4fa753b
Reference Type: Journal Article
Record Number: 29389
Author: B. Espen Eckbo and S. Verma
Year: 1994
Title: Managerial shareownership, voting power, and cash dividend policy
Journal: Journal of Corporate Finance
Volume: 1
Issue: 1
Pages: 33-62
Short Title: Managerial shareownership, voting power, and cash dividend policy
ISSN: 0929-1199
Keywords: Dividends
Voting power
Managerial ownership
Agency costs
Taxes
Abstract: While the classical dividend irrelevance theory implies that shareholders unanimously support the firm's dividend policy, managerial benefits from free cash flow, heterogenous personal tax rates and information asymmetries give rise to internal shareholder conflicts over the dividend decision. We conjecture that observed dividends resolve this conflict by consensus across heterogenous shareholder groups. We develop and test this consensus-dividend hypothesis using Canadian firms where managers tend to own a large amount of voting stock. The empirical evidence indicates that cash dividends decrease as the voting power of owner-managers increases, and are almost always zero when owner-managers have absolute voting control of the firm. Panel data estimation as well as factor-analytic techniques give further empirical support for the consensus-dividend hypothesis.
Notes: doi: DOI: 10.1016/0929-1199(94)90009-4
URL: http://www.sciencedirect.com/science/article/B6VFK-47DD36X-9/2/babd0474b3fee29181588e6ec26512dc
Reference Type: Journal Article
Record Number: 29253
Author: J. Evans
Year: 2003
Title: The effect of discretionary actions on small firms' ability to survive Chapter 11 bankruptcy
Journal: Journal of Corporate Finance
Volume: 9
Issue: 1
Pages: 115-128
Short Title: The effect of discretionary actions on small firms' ability to survive Chapter 11 bankruptcy
ISSN: 0929-1199
Keywords: Financial distress
Capital structure
Abstract: This paper analyzes whether judges' actions within Chapter 11 bankruptcy affect debtor firms' ability to reorganize (e.g., debt restructurings and mergers) as opposed to being liquidated in Chapter 7 bankruptcy. Our main finding is that debtor firms' control of the process, e.g., the exclusivity period, affects their ability to restructure debt. A reduction in the exclusivity period decreases the likelihood of reorganization, but increases the likelihood of deviation from absolute priority when plans of reorganization are agreed upon. An extension of the exclusivity period, however, does not increase the likelihood of either reorganization or deviation from absolute priority.
Notes: doi: DOI: 10.1016/S0929-1199(01)00052-9
URL: http://www.sciencedirect.com/science/article/B6VFK-47PCP01-7/2/afa0e99a7a61144cce58c920e89d0dbc
Reference Type: Journal Article
Record Number: 29311
Author: M. Faccio and M. A. Lasfer
Year: 2000
Title: Do occupational pension funds monitor companies in which they hold large stakes?
Journal: Journal of Corporate Finance
Volume: 6
Issue: 1
Pages: 71-110
Short Title: Do occupational pension funds monitor companies in which they hold large stakes?
ISSN: 0929-1199
Keywords: Corporate governance
Pension funds
Board structure
Performance
Abstract: In this paper we analyze the monitoring role of occupational pension funds in the UK. We argue that because of their objectives, structure and overall share holding, occupational pension funds are likely to have more incentives to monitor companies in which they hold large stakes than other financial institutions. By comparing companies in which these funds hold large stakes with a control group of companies listed on the London Stock Exchange, we show that occupational pension funds hold large stakes over a long-time period mainly in small companies. However, the value added by these funds is negligible and their holdings do not lead companies to comply with the Code of Best Practice or outperform their industry counterparts. Overall, our results suggest that occupational pension funds are not effective monitors.
Notes: doi: DOI: 10.1016/S0929-1199(99)00016-4
URL: http://www.sciencedirect.com/science/article/B6VFK-3YS9BS2-5/2/8efb66e869da5cddcf9596f0f59757e7
Reference Type: Journal Article
Record Number: 29269
Author: D. Falaschetti
Year: 2002
Title: Golden parachutes: credible commitments or evidence of shirking?
Journal: Journal of Corporate Finance
Volume: 8
Issue: 2
Pages: 159-178
Short Title: Golden parachutes: credible commitments or evidence of shirking?
ISSN: 0929-1199
Keywords: Credible commitment
Ownership structure
Abstract: External agents are frequently characterized as necessary for efficiency in team production settings. At the same time, these agents must be constrained from opportunistically exercising their enforcement capabilities. I argue that collective action costs and formal institutions (e.g., golden parachute agreements) can act as substitute factors in producing this constraint. The incidence of golden parachutes in a sample of S&P 500 firms is consistent with this conjecture: golden parachutes are more likely in firms with concentrated ownership. Interpreted in this light, golden parachutes enhance efficiency by increasing the credibility with which owners can commit against opportunism.
Notes: doi: DOI: 10.1016/S0929-1199(01)00032-3
URL: http://www.sciencedirect.com/science/article/B6VFK-457VJGY-4/2/34cc68c759d18c2b7d2d9df939aa5e23
Reference Type: Journal Article
Record Number: 29294
Author: J. P. H. Fan
Year: 2000
Title: Price uncertainty and vertical integration: an examination of petrochemical firms
Journal: Journal of Corporate Finance
Volume: 6
Issue: 4
Pages: 345-376
Short Title: Price uncertainty and vertical integration: an examination of petrochemical firms
ISSN: 0929-1199
Keywords: Vertical integration
Price uncertainty
The petrochemical industry
Abstract: The petrochemical industry employs assets subject to temporal and site specificity. The OPEC oil price shocks of the 1970s made it difficult to write contracts covering business dealings in the industry. I use this production and economic setting as a natural experiment to test transaction cost theory. In support of the theory, I find that input price uncertainty in the 1970s positively affected the extent of vertical integration by firms into input stages. Moreover, the positive reaction of vertical integration to price uncertainty mainly occurs in transactions subject to asset specificity. I also examine price controls and market power as alternative explanations for vertical integration in the industry, but fail to find support for these hypotheses.
Notes: doi: DOI: 10.1016/S0929-1199(00)00006-7
URL: http://www.sciencedirect.com/science/article/B6VFK-42G0MJ1-1/2/5ba00dd0f532c65f595c8e05d91d7b28
Reference Type: Journal Article
Record Number: 29008
Author: K. A. Farrell, G. C. Friesen and P. L. Hersch
Year: 2008
Title: Erratum to "How do firms adjust director compensation?" [Journal of Corporate Finance14 (2008) 153-162]
Journal: Journal of Corporate Finance
Volume: 14
Issue: 5
Pages: 753-754
Short Title: Erratum to "How do firms adjust director compensation?" [Journal of Corporate Finance14 (2008) 153-162]
ISSN: 0929-1199
Notes: doi: DOI: 10.1016/j.jcorpfin.2008.09.013
URL: http://www.sciencedirect.com/science/article/B6VFK-4TWSWJH-1/2/399d49fc2d024514ea44153b511597f7
Reference Type: Journal Article
Record Number: 29040
Author: K. A. Farrell, G. C. Friesen and P. L. Hersch
Year: 2008
Title: How do firms adjust director compensation?
Journal: Journal of Corporate Finance
Volume: 14
Issue: 2
Pages: 153-162
Short Title: How do firms adjust director compensation?
ISSN: 0929-1199
Keywords: Board of directors
Board compensation
Director compensation
Contracting
Abstract: This paper examines outside director compensation for a sample of 237 Fortune 500 firms over the 1998-2004 period. We document a trend towards fixed-value equity compensation and away from cash only and fixed-number equity compensation. Adjustments to director compensation are consistent with firms targeting a market level of compensation, and firms that deviate from their market wage symmetrically adjust compensation back toward the market level. We also document the relation between changes in compensation and changes in equity values, and find that upward adjustments begin sooner than downward adjustments. When equity values rise, we find virtually no immediate offset to director compensation. However, when equity values fall, fixed-number equity compensation is adjusted in the same period (by awarding more shares or options) to offset the loss of income by almost one-third. Thus, the magnitude of adjustments towards the market wage level is symmetric, but the timing is not.
Notes: doi: DOI: 10.1016/j.jcorpfin.2008.02.004
URL: http://www.sciencedirect.com/science/article/B6VFK-4S0204G-1/2/a6f4245908c3cbae6cb5508bd9adccbe
Reference Type: Journal Article
Record Number: 29181
Author: K. A. Farrell and P. L. Hersch
Year: 2005
Title: Additions to corporate boards: the effect of gender
Journal: Journal of Corporate Finance
Volume: 11
Issue: 1-2
Pages: 85-106
Short Title: Additions to corporate boards: the effect of gender
ISSN: 0929-1199
Keywords: Board of directors
Board composition
Diversity
Gender
Abstract: During the decade of the 1990s the number of women serving on corporate boards increased substantially. Over this decade, we show that the likelihood of a firm adding a woman to its board in a given year is negatively affected by the number of woman already on the board. The probability of adding a woman is materially increased when a female director departs the board. Adding a director, therefore, is clearly not gender neutral. Although we find that women tend to serve on better performing firms, we also document insignificant abnormal returns on the announcement of a woman added to the board. Rather than the demand for women directors being performance based, our results suggest corporations responding to either internal or external calls for diversity.
Notes: doi: DOI: 10.1016/j.jcorpfin.2003.12.001
URL: http://www.sciencedirect.com/science/article/B6VFK-4C6KWH4-1/2/2e73d70523ad1d124b064e2c9dbcd30b
Reference Type: Journal Article
Record Number: 29198
Author: L. Fauver, J. F. Houston and A. Naranjo
Year: 2004
Title: Cross-country evidence on the value of corporate industrial and international diversification
Journal: Journal of Corporate Finance
Volume: 10
Issue: 5
Pages: 729-752
Short Title: Cross-country evidence on the value of corporate industrial and international diversification
ISSN: 0929-1199
Keywords: International diversification
Corporate diversification
Organizational structure
Valuation benchmarks
Abstract: We provide evidence on the value of industrial and international diversification for more than 3000 firms from Germany, the U.K., and the U.S. Consistent with prior studies, we find that industrial diversification reduces firm value in the U.K. and the U.S. Furthermore, similar to the recent findings of Denis et al. [J. Finance 57 (2002)], we find that U.S. multinationals trade at a discount relative to firms operating only in the domestic market. This result is robust to different benchmarks used to measure the value of diversification. By contrast, we find that international diversification has no effect on the value of firms headquartered in either Germany or the U.K.
Notes: doi: DOI: 10.1016/S0929-1199(03)00027-0
URL: http://www.sciencedirect.com/science/article/B6VFK-4876CGC-1/2/68802431bb303b95c3de61ea85d647ed
Reference Type: Journal Article
Record Number: 29348
Author: S. P. Ferris, N. Jayaraman and A. K. Makhija
Year: 1997
Title: The response of competitors to announcements of bankruptcy: An empirical examination of contagion and competitive effects
Journal: Journal of Corporate Finance
Volume: 3
Issue: 4
Pages: 367-395
Short Title: The response of competitors to announcements of bankruptcy: An empirical examination of contagion and competitive effects
ISSN: 0929-1199
Keywords: Bankruptcy
Contagion effect
Competitive effect
Abstract: We find, like [Lang, L.H.P., Stulz, R.M., 1992. Contagion and competitive intra-industry effects of bankruptcy announcements: An empirical analysis, Journal of Financial Economics, 32(1), 45-60], that large firm bankruptcies generate a dominant contagion effect. A value-weighted portfolio of competitors' stocks experiences a significant loss of 0.56% in the three days centered around the Chapter 11 announcement. This represents an average loss of $3.32 for all the competitors combined for every dollar lost by the bankrupt firm. In addition, we find that small firm bankruptcies also generate a dominant contagion effect among smaller sized competitors; an equally-weighted portfolio of all competitors has a significant 0.12% drop. In a new approach to separate the contagion and competitive effects, we compare the stock price reactions of competitors who themselves subsequently file for bankruptcy in the next three years (candidates for contagion effect) with those who do not do so (candidates for competitive effect). As expected, candidates for contagion effect experience a significant, negative three-day stock price reaction of -4.68%. However, contrary to expectations, candidates for competitive effect also have a significant, negative return (-0.49%), suggesting that the competitive effect is weak at best since it is dominated by the contagion effect even in this sample. Other procedures to identify candidates for competitive effect generally yield similar findings. Finally, we analyze competitors' stock price reactions based on selected characteristics (e.g., industry concentration, and leverage), with similar results as before. One explanation for the failure to detect a competitive effect is that the impact may already have been incorporated in stock prices prior to the filing for Chapter 11. Consistent with this explanation, we find significant positive stock price reactions by competitor stocks for the hundred days prior to the bankruptcy announcement.
Notes: doi: DOI: 10.1016/S0929-1199(97)00006-0
URL: http://www.sciencedirect.com/science/article/B6VFK-3SWSK8H-4/2/1fb5b75442ceaf2c6421db3d9c281f85
Reference Type: Journal Article
Record Number: 29090
Author: S. P. Ferris and X. Yan
Year: 2007
Title: Do independent directors and chairmen matter? The role of boards of directors in mutual fund governance
Journal: Journal of Corporate Finance
Volume: 13
Issue: 2-3
Pages: 392-420
Short Title: Do independent directors and chairmen matter? The role of boards of directors in mutual fund governance
ISSN: 0929-1199
Keywords: Mutual funds
Governance
Board of directors
Fund fees
Fund scandals
Abstract: Recent scandals involving late trading, market timing, and other trading abuses have prompted the SEC to propose changes in the governance of mutual funds. Among these changes are the requirements for an independent chairman and a board consisting of at least 75% independent directors. Using a large sample of mutual fund families for 2002, we find that neither the probability of a fund scandal nor overall fund performance is related to either chair or board independence. Overall, our results question the usefulness of these recently proposed SEC changes in mutual fund governance.
Notes: (Sterling)
doi: DOI: 10.1016/j.jcorpfin.2006.12.004
URL: http://www.sciencedirect.com/science/article/B6VFK-4N4407B-1/2/e0f242af9640e045416b2b58797aff2c
Reference Type: Journal Article
Record Number: 29184
Author: E. M. Fich and L. J. White
Year: 2005
Title: Why do CEOs reciprocally sit on each other's boards?
Journal: Journal of Corporate Finance
Volume: 11
Issue: 1-2
Pages: 175-195
Short Title: Why do CEOs reciprocally sit on each other's boards?
ISSN: 0929-1199
Keywords: Interlocking directorates
CEOs
Board of directors
Corporate governance
Stock options
Abstract: The reciprocal interlocking of chief executive officers is a non-trivial phenomenon: among large companies in 1991, about one company in seven was in a relationship whereby the CEO of one company sat on a second company's board and the second company's CEO sat on the first company's board. We develop hypotheses to distinguish whether this practice furthers the interests of shareholders or the private interests of the CEOs. Using a sample of large companies, we employ a probit model to test these hypotheses. Our empirical findings are that these reciprocal CEO interlocks primarily benefit the CEOs rather than their shareholders.
Notes: doi: DOI: 10.1016/j.jcorpfin.2003.06.002
URL: http://www.sciencedirect.com/science/article/B6VFK-4B543JW-1/2/60b2162ce3d5e30d89e59d246753c7fa
Reference Type: Journal Article
Record Number: 29215
Author: L. C. Field and D. P. Sheehan
Year: 2004
Title: IPO underpricing and outside blockholdings
Journal: Journal of Corporate Finance
Volume: 10
Issue: 2
Pages: 263-280
Short Title: IPO underpricing and outside blockholdings
ISSN: 0929-1199
Keywords: Initial public offerings
Underpricing
Blockholdings
Abstract: Recent papers have proposed a link between underpricing of an initial public offering (IPO) and the resulting ownership structure of the firm. Brennan and Franks [J. Financ. Econ. 45 (1997) 391] hypothesize that IPO managers want to discourage new blockholdings to reduce the likelihood of being monitored. They show that underpricing encourages oversubscription, allowing discrimination against large blockholders. Conversely, Stoughton and Zechner [J. Financ. Econ. 49 (1998) 45] hypothesize that managers underprice to encourage investment by blockholders who provide monitoring services. We find that the link between underpricing and ownership structure is weak. Most firms have outside blocks in place at the IPO and retain them afterwards. In terms of acquiring new blockholders, there is no difference between firms that underprice and those that do not.
Notes: doi: DOI: 10.1016/S0929-1199(03)00057-9
URL: http://www.sciencedirect.com/science/article/B6VFK-496G0D4-1/2/f3dfabafc2c29cff9494eaa8c925509e
Reference Type: Journal Article
Record Number: 29113
Author: M. Firth, P. M. Y. Fung and O. M. Rui
Year: 2006
Title: Corporate performance and CEO compensation in China
Journal: Journal of Corporate Finance
Volume: 12
Issue: 4
Pages: 693-714
Short Title: Corporate performance and CEO compensation in China
ISSN: 0929-1199
Keywords: Executive compensation
Pay-performance sensitivities
Ownership
Abstract: This paper examines the compensation of CEOs in China's listed firms. First, we discuss what is known about the setting of CEO compensation and then we go on to examine factors that may help explain variations in the use of performance related pay. In China, listed firms have a dominant or controlling shareholder and we argue that the distinct types of controlling shareholder have different impacts on the use of incentive pay. We find that firms that have a State agency as the major shareholder do not appear to use performance related pay. In contrast, firms that have private blockholders or SOEs as their major shareholders relate the CEO's pay to increases in stockholders' wealth or increases in profitability. However the pay-performance sensitivities for CEOs are low and this raises questions about the effectiveness of firms' incentive systems.
Notes: doi: DOI: 10.1016/j.jcorpfin.2005.03.002
URL: http://www.sciencedirect.com/science/article/B6VFK-4GGXX91-1/2/e4795a847de95b791a6ae28dc6a0346d
Reference Type: Journal Article
Record Number: 29001
Author: M. Firth, C. Lin and S. M. L. Wong
Year: 2008
Title: Leverage and investment under a state-owned bank lending environment: Evidence from China
Journal: Journal of Corporate Finance
Volume: 14
Issue: 5
Pages: 642-653
Short Title: Leverage and investment under a state-owned bank lending environment: Evidence from China
ISSN: 0929-1199
Keywords: Capital structure
Investment
State ownership of banks and firms
China
Abstract: This study examines the relations between leverage and investment in China's listed firms, where corporate debt is principally provided by state-owned banks. We obtain three major findings. First, there is a negative relation between leverage and investment. Second, the negative relation between leverage and investment is weaker in firms with low growth opportunities and poor operating performance than in firms with high growth opportunities and good operating performance. Third, the negative relation between leverage and investment is weaker in firms with a higher level of state shareholding than in firms with a lower level of state shareholding. Overall, our results are consistent with the hypothesis that the state-owned banks in China impose fewer restrictions on the capital expenditures of low growth and poorly performing firms and also firms with greater state ownership. This creates an overinvestment bias in these firms.
Notes: doi: DOI: 10.1016/j.jcorpfin.2008.08.002
URL: http://www.sciencedirect.com/science/article/B6VFK-4T84K0H-1/2/160d6669294b4cd86be53c0c5c853c3d
Reference Type: Journal Article
Record Number: 29234
Author: K. P. Fuller
Year: 2003
Title: The impact of informed trading on dividend signaling: a theoretical and empirical examination
Journal: Journal of Corporate Finance
Volume: 9
Issue: 4
Pages: 385-407
Short Title: The impact of informed trading on dividend signaling: a theoretical and empirical examination
ISSN: 0929-1199
Keywords: Informed trading
Dividend signaling
Theoretical and empirical examination
Abstract: This paper examines how the trading behavior of various investors impacts the market reaction to a dividend signal. The dividend signaling model incorporates asymmetric information among traders, firm insiders, and the market. This interaction among market participants explains why not all dividend increases are viewed by the market as good news. The model predicts that the announcement day returns for a dividend increase are inversely related to measures of informed trading and decreasing in the level of buy demand relative to sell demand. Further, the model hypothesizes that more informed trading results in larger dividend increases. Empirical tests confirm these predictions.
Notes: doi: DOI: 10.1016/S0929-1199(02)00052-4
URL: http://www.sciencedirect.com/science/article/B6VFK-48CW2GF-2/2/1a18b48705e8a2f28807579edb0ea976
Reference Type: Journal Article
Record Number: 29212
Author: J. K. W. Fung, L. T. W. Cheng and K. C. Chan
Year: 2004
Title: The impact of the costs of subscription on measured IPO returns: the case of Asia
Journal: Journal of Corporate Finance
Volume: 10
Issue: 3
Pages: 459-465
Short Title: The impact of the costs of subscription on measured IPO returns: the case of Asia
ISSN: 0929-1199
Keywords: Initial public offerings
Asian IPOs
Non-discretionary allocation
Abstract: Asian initial public offerings (IPOs) require investors to pay subscription funds up-front upon submission of applications, and these funds are locked-up for 1-3 weeks without interest. Hence, the IPO process entails an explicit financing cost (opportunity cost) whether investors borrow funds or use their own funds to apply for IPO shares. The IPO subscription costs are not trivial, especially in a high interest rate environment or when an IPO is highly oversubscribed. These costs should be considered in any comparison of IPO returns across countries.
Notes: doi: DOI: 10.1016/j.jcorpfin.2003.08.002
URL: http://www.sciencedirect.com/science/article/B6VFK-4B4Y3YH-1/2/a8c2a69aa33547466b31be749aa03a38
Reference Type: Journal Article
Record Number: 29095
Author: J.-F. Gajewski, E. Ginglinger and M. Lasfer
Year: 2007
Title: Why do companies include warrants in seasoned equity offerings?
Journal: Journal of Corporate Finance
Volume: 13
Issue: 1
Pages: 25-42
Short Title: Why do companies include warrants in seasoned equity offerings?
ISSN: 0929-1199
Keywords: Equity issue
Flotation method
Unit offerings
Warrants
Abstract: We analyze the reasons why companies issue units when they raise additional capital. We find that, in contrast to previous evidence, units are not offered to mitigate the agency conflicts or to signal security mispricing as they are predominantly issued during cold periods, in public rather than in rights offerings, and when the issue is underwritten. In addition, the results indicate that companies choose to offer units to increase their offer price flexibility and to underprice their seasoned equity offering so as to minimize the issue cost and the risk of failure of the issue. These results provide support for the net proceeds maximization hypothesis.
Notes: doi: DOI: 10.1016/j.jcorpfin.2006.05.001
URL: http://www.sciencedirect.com/science/article/B6VFK-4K9C6H7-1/2/4385891c9ef6a0ee63d9d5f77a5ffb8b
Reference Type: Journal Article
Record Number: 29037
Author: D. Galai and Z. Wiener
Year: 2008
Title: Stakeholders and the composition of the voting rights of the board of directors
Journal: Journal of Corporate Finance
Volume: 14
Issue: 2
Pages: 107-117
Short Title: Stakeholders and the composition of the voting rights of the board of directors
ISSN: 0929-1199
Keywords: Corporate governance
Stakeholders
Board of directors
Contingent claims
Voting rights
Abstract: We propose a new approach to dynamic representation of different groups of stakeholders on the board of directors. This approach is based on a simple economic model of the firm, with an objective function to maximize its market value. We look at the marginal claim of each stakeholder on the assets of the firm. It divides the voting rights based on the change in value of each stakeholder with a one dollar change in the value of the firm as a whole. We translate these conditions to relative voting powers on the board. While there are many claims in the academic and popular literature on sharing voting rights on the board, our paper is the first to propose a quantitative dynamic model of the power sharing in the corporation.
Notes: doi: DOI: 10.1016/j.jcorpfin.2008.02.005
URL: http://www.sciencedirect.com/science/article/B6VFK-4RYNMDK-1/2/0b343993d46db7bfb2af2a0685b574cd
Reference Type: Journal Article
Record Number: 29003
Author: W. Gao, L. Ng and Q. Wang
Year: 2008
Title: Does geographic dispersion affect firm valuation?
Journal: Journal of Corporate Finance
Volume: 14
Issue: 5
Pages: 674-687
Short Title: Does geographic dispersion affect firm valuation?
ISSN: 0929-1199
Keywords: Geographic dispersion
Firm valuation
Corporate governance
Abstract: We find that the geographic dispersion of a corporation affects its firm valuation. Firms with subsidiaries located in different regions of the United States experience a valuation discount of 6.2% after controlling for the impact of both global and industrial diversifications. The valuation discount increases as firms expand their operations to different regions nationwide. Results show that firms with more anti-takeover provisions are more likely to be geographically diverse, and that these firms experience greater value discounts compared with their counterparts with fewer such provisions. Our overall evidence suggests that the geographic location of corporate activities is an essential component of corporate policies and has important market valuation implications.
Notes: doi: DOI: 10.1016/j.jcorpfin.2008.08.004
URL: http://www.sciencedirect.com/science/article/B6VFK-4T8SKYT-4/2/f950474970aac75f8296959d1fb0e7c1
Reference Type: Journal Article
Record Number: 29345
Author: L. Gardiol, R. Gibson-Asner and N. S. Tuchschmid
Year: 1997
Title: Are liquidity and corporate control priced by shareholders? Empirical evidence from Swiss dual class shares
Journal: Journal of Corporate Finance
Volume: 3
Issue: 4
Pages: 299-323
Short Title: Are liquidity and corporate control priced by shareholders? Empirical evidence from Swiss dual class shares
ISSN: 0929-1199
Keywords: Dual class shares
Corporate control
Liquidity
Market segmentation
Abstract: Stadard asset pricing models generally exclude corporate control and liquidity considerations as joint explanatory factors of the stock price formation process. This empirical study investigates their influence on Swiss Bearer and Registered share prices issued by the same firm. It is shown that the statistical properties of both shares' returns differ without implying profitable arbitrage opportunities. A multifactor model of the [`]premium' between Bearer and Registered stock prices is then proposed and tested. The results show that the freely negotiable equity book value, the existence of dominant shareholder positions and ownership transfer regime changes are significant variables in explaining the dual class share price differential.
Notes: doi: DOI: 10.1016/S0929-1199(97)00002-3
URL: http://www.sciencedirect.com/science/article/B6VFK-3SWSK8H-1/2/9dbbcea381ef1023688f02a323d512c8
Reference Type: Journal Article
Record Number: 29353
Author: J. A. Garfinkel
Year: 1997
Title: New evidence on the effects of federal regulations on insider trading: The Insider Trading and Securities Fraud Enforcement Act (ITSFEA)
Journal: Journal of Corporate Finance
Volume: 3
Issue: 2
Pages: 89-111
Short Title: New evidence on the effects of federal regulations on insider trading: The Insider Trading and Securities Fraud Enforcement Act (ITSFEA)
ISSN: 0929-1199
Keywords: Insider trading
Regulations
Earnings announcements
Abstract: This paper finds new evidence that the threat of legal sanctions significantly affects the trading behavior of insiders. Specifically, I examine the effects of the Insider Trading and Securities Fraud Enforcement Act (ITSFEA) on insider trading around earnings announcements. Given ITSFEA's stated concern with trading on private information prior to its release, I argue that insiders may respond to the Act by altering the timing of their trades. I find that, following ITSFEA, insiders are more likely to postpone liquidity sales until after negative earnings surprises. I also find that insiders increase their relative emphasis on post-event as opposed to pre-event information based trading. Finally, earnings announcements appear to be more informative in the post-ITSFEA period, consistent with less information based trading in front of earnings announcements, after the Act.
Notes: doi: DOI: 10.1016/S0929-1199(96)00009-0
URL: http://www.sciencedirect.com/science/article/B6VFK-3SWTKS3-1/2/10a585864bb89f862bb626e66168935b
Reference Type: Journal Article
Record Number: 29382
Author: G. T. Garvey and P. L. Swan
Year: 1994
Title: The economics of corporate governance: Beyond the Marshallian firm
Journal: Journal of Corporate Finance
Volume: 1
Issue: 2
Pages: 139-174
Short Title: The economics of corporate governance: Beyond the Marshallian firm
ISSN: 0929-1199
Keywords: Corporate governance
Incomplete contracts
Abstract: It is now customary to view the corporation as nexus of explicit and implicit contracts. Governance determines how the firm's top decision makers (executives) actually administer such contracts. We survey recent theory and evidence on executive behaviour and incentives and reject the standard assumption of shareholder-wealth-maximisation, either in its strict sense or in the sense implied by standard principal-agent models. Explanations for this state of affairs as an inefficient, rent-seeking outcome are contrasted with efficiency explanations, particularly those that explicitly consider the diverse claims of employees, customers, and suppliers as well as those of investors.
Notes: doi: DOI: 10.1016/0929-1199(94)90001-9
URL: http://www.sciencedirect.com/science/article/B6VFK-47DD36F-1/2/8bdab0faa4b4d933aaa695469d739a6e
Reference Type: Journal Article
Record Number: 28966
Author: V. A. Gatchev, P. A. Spindt and V. Tarhan
Year: 2009
Title: How do firms finance their investments?: The relative importance of equity issuance and debt contracting costs
Journal: Journal of Corporate Finance
Volume: 15
Issue: 2
Pages: 179-195
Short Title: How do firms finance their investments?: The relative importance of equity issuance and debt contracting costs
ISSN: 0929-1199
Keywords: Debt financing
Equity financing
Issue costs
Abstract: This paper examines the financing decisions of firms in response to changes in investments and profits. We find that information frictions play important roles in firms' financing decisions. However, we find no evidence that asymmetric information about the value of a firm's assets causes equity to be used only as a last resort. Indeed equity is the predominant source of finance in situations, such as profit shortfalls, investment in intangible assets, and internally generated growth opportunities, where informational asymmetries and agency costs are likely to be high. We also find that firms respond asymmetrically to positive and negative profit shocks. In financing fixed assets, high asymmetric information firms use more short-term debt and less long-term debt, whereas firms with high potential agency problems use significantly more equity and less long-term debt and cash.
Notes: doi: DOI: 10.1016/j.jcorpfin.2008.11.001
URL: http://www.sciencedirect.com/science/article/B6VFK-4TY44NM-1/2/1a867a371c1507d75c28f8e7874dd192
Reference Type: Journal Article
Record Number: 29288
Author: A. Ghosh
Year: 2001
Title: Does operating performance really improve following corporate acquisitions?
Journal: Journal of Corporate Finance
Volume: 7
Issue: 2
Pages: 151-178
Short Title: Does operating performance really improve following corporate acquisitions?
ISSN: 0929-1199
Keywords: Acquisitions
Operating performance
Abstract: Previous research indicates that operating performance improves following corporate acquisitions relative to industry-median firms. Such performance results are likely to be biased because acquiring firms undertake acquisitions following a period of superior performance and they are generally larger than industry-median firms. Using firms matched on performance and size as a benchmark, I find no evidence that operating performance improves following acquisitions. I also analyze if performance is higher in cash acquisitions as suggested by various studies. The results indicate that cash flows increase significantly following acquisitions that are made with cash, but decline for stock acquisitions.
Notes: doi: DOI: 10.1016/S0929-1199(01)00018-9
URL: http://www.sciencedirect.com/science/article/B6VFK-43DDWJC-3/2/0ae670e7197d33f63a913a7b0baaf086
Reference Type: Journal Article
Record Number: 29295
Author: A. Ghosh and P. C. Jain
Year: 2000
Title: Financial leverage changes associated with corporate mergers
Journal: Journal of Corporate Finance
Volume: 6
Issue: 4
Pages: 377-402
Short Title: Financial leverage changes associated with corporate mergers
ISSN: 0929-1199
Keywords: Mergers
Financial leverage
Debt capacity
Abstract: We empirically examine whether firms increase financial leverage following mergers. Firms could increase financial leverage either because of an increase in debt capacity or because of unused debt capacity from pre-merger years. We find that financial leverage of combined firms increases significantly following mergers. A cross-sectional analysis shows that the change in financial leverage around mergers is significantly positively correlated with the announcement period market-adjusted returns. Further tests indicate that the increase in financial leverage is an outcome of an increase in debt capacity, although there is weak evidence that some of the increase in financial leverage is a result of past unused debt capacity.
Notes: doi: DOI: 10.1016/S0929-1199(00)00007-9
URL: http://www.sciencedirect.com/science/article/B6VFK-42G0MJ1-2/2/3261a177b3f798cc9388ac8bd83c21e2
Reference Type: Journal Article
Record Number: 29123
Author: S. L. Gillan
Year: 2006
Title: Recent Developments in Corporate Governance: An Overview
Journal: Journal of Corporate Finance
Volume: 12
Issue: 3
Pages: 381-402
Short Title: Recent Developments in Corporate Governance: An Overview
ISSN: 0929-1199
Keywords: Corporate governance
Corporate boards
Executive compensation
Ownership structure
Abstract: I develop a corporate governance framework, provide a broad overview of recent corporate governance research, and place each of the Special Issue papers within the context of this framework. The papers in the issue contribute to our understanding of a wide range of governance topics including: the role of antitakeover measures, board structure, capital market governance, compensation and incentives, debt and agency costs, director and officer labor markets, fraud, lawsuits, ownership structure, and regulation. In short, the papers span almost every aspect of governance systems.
Notes: doi: DOI: 10.1016/j.jcorpfin.2005.11.002
URL: http://www.sciencedirect.com/science/article/B6VFK-4J4402R-1/2/9f2186da3f4d745e503a9c7112f549f0
Reference Type: Journal Article
Record Number: 29061
Author: S. L. Gillan and J. D. Martin
Year: 2007
Title: Corporate governance post-Enron: Effective reforms, or closing the stable door?
Journal: Journal of Corporate Finance
Volume: 13
Issue: 5
Pages: 929-958
Short Title: Corporate governance post-Enron: Effective reforms, or closing the stable door?
ISSN: 0929-1199
Keywords: Corporate governance
Financial distress
Abstract: We examine Enron's collapse to provide insights as to the efficacy of recent governance reforms. In doing so, we explore two main issues. First, if recently mandated governance changes had been in place earlier, would they have constrained actions by Enron's management? Second, and more generally, which of the recent governance changes might act to constrain governance failures going forward? Although many aspects of corporate governance failed at Enron, the firm's viability ultimately rested on an inherently risky business strategy, a strategy that the board and others apparently failed to understand. However, it is not apparent that increasing board independence would have changed Enron's strategic direction, or prevented the firm's collapse. From this perspective, many recent reforms, including those mandating specific board structures likely move firms away from their optimal governance structure and are tantamount to closing the stable door after the horse has bolted. We assert that, ceteris paribus, stronger internal controls coupled with reduced potential for conflicts of interest on the part of the external auditor might have constrained management's ability to hide the firm's true financial condition and are likely to constrain aspects of fraudulent behavior going forward.
Notes: doi: DOI: 10.1016/j.jcorpfin.2007.03.008
URL: http://www.sciencedirect.com/science/article/B6VFK-4NVCFTV-1/2/a12a42b1ebde6c1ad4f5d49c516f3ff6
Reference Type: Journal Article
Record Number: 29149
Author: K. C. Gleason, L. Rosenthal and R. A. Wiggins Iii
Year: 2005
Title: Backing into being public: an exploratory analysis of reverse takeovers
Journal: Journal of Corporate Finance
Volume: 12
Issue: 1
Pages: 54-79
Short Title: Backing into being public: an exploratory analysis of reverse takeovers
ISSN: 0929-1199
Keywords: Going public
Takeovers
Financial distress
Agency theory
Abstract: We examine 121 reverse takeovers (RT), in which a privately held firm acquires a publicly traded firm to obtain their exchange listing. The public firms, many of which went public during the initial public offering (IPO) bubble, are generally poor performers. Their shareholders receive significant wealth gains upon announcement, suggesting that these events may provide shareholders of distressed firms a way to recover some of their investment. We observe little post-event improvement in operations or profitability, and only 46% of the sample survives two years. Thus, while reverse takeovers provide alternative means of going public, they are risky and may fail to generate long-term wealth.
Notes: doi: DOI: 10.1016/j.jcorpfin.2004.08.001
URL: http://www.sciencedirect.com/science/article/B6VFK-4DXJYWK-1/2/31d8b4fb33095f3e2dc403e137abbe7f
Reference Type: Journal Article
Record Number: 29283
Author: M. Goergen and L. Renneboog
Year: 2001
Title: Investment policy, internal financing and ownership concentration in the UK
Journal: Journal of Corporate Finance
Volume: 7
Issue: 3
Pages: 257-284
Short Title: Investment policy, internal financing and ownership concentration in the UK
ISSN: 0929-1199
Keywords: Investment
Liquidity constraints
Ownership
Control
Corporate governance
Abstract: This paper investigates whether investment spending of firms is sensitive to the availability of internal funds. Imperfect capital markets create a hierarchy for the different sources of funds such that investment and financial decisions are not independent. The relation between corporate investment and free cash flow is investigated using the Bond and Meghir [Review of Economic Studies, 61 (1994a) 197] Euler-equation model for a panel of 240 companies listed on the London Stock Exchange over a 6-year period. This method allows for a direct test of the first-order condition of an intertemporal maximisation problem. It does not require the use of Tobin's q, which is subject to mismeasurement problems. Apart from past investment levels and generated cash flow, the model also includes a leverage factor which captures potential bankruptcy costs and the tax advantages of debt. More importantly, we investigate whether ownership concentration by class of shareholder creates or mitigates liquidity constraints. When industrial companies control large shareholdings, there is evidence of increased overinvestment. This relation is strong when the relative voting power (measured by the Shapley values) of the combined equity stakes of families and industrial companies and the Herfindahl index of industrial ownership are high. This suggests that a small coalition of industrial companies is able to influence investment spending. In contrast, large institutional holdings reduce the positive link between investment spending and cash flow relation and, hence, suboptimal investing. Whereas there is no evidence of over- or underinvesting at low levels of insider shareholding, a high concentration of control in the hands of executive directors reduces the underinvestment problem.
Notes: doi: DOI: 10.1016/S0929-1199(01)00022-0
URL: http://www.sciencedirect.com/science/article/B6VFK-4435022-3/2/3619b281a9517822461d76a3f4112c7c
Reference Type: Journal Article
Record Number: 29025
Author: M. Goergen and L. Renneboog
Year: 2008
Title: Contractual corporate governance
Journal: Journal of Corporate Finance
Volume: 14
Issue: 3
Pages: 166-182
Short Title: Contractual corporate governance
ISSN: 0929-1199
Keywords: Contractual corporate governance
Corporate governance regulation
Cross-border mergers and acquisitions
Cross-listings
Reincorporations
Shareholder protection
Creditor protection
Spillover effects
Abstract: Companies have the choice to deviate from their national corporate governance standards by opting into another system. They can do so via contractual devices - such as cross-border mergers and acquisitions, (re)incorporations, and cross-listings - which enable them to choose their preferred level of investor protection and regulation. This paper reviews these three main contractual governance devices, their effect on value, and whether their adoption by firms induces a race to the bottom or a race to the top. Indeed, firms may opt for less shareholder-orientation or investor protection (shareholder-expropriation hypothesis) rather than for more stringent rules that require firms to focus on shareholder value (bonding hypothesis).
Notes: doi: DOI: 10.1016/j.jcorpfin.2008.04.003
URL: http://www.sciencedirect.com/science/article/B6VFK-4S9P5NB-1/2/1025309e81b90f3a41bcb65e5a0602a6
Reference Type: Journal Article
Record Number: 29193
Author: M. Goergen, L. Renneboog and L. Correia da Silva
Year: 2005
Title: When do German firms change their dividends?
Journal: Journal of Corporate Finance
Volume: 11
Issue: 1-2
Pages: 375-399
Short Title: When do German firms change their dividends?
ISSN: 0929-1199
Keywords: Dividend policy
Ownership
Control
Bank monitoring
Corporate governance
Abstract: Dividends of German firms are often perceived to be more flexible than those of Anglo-American firms. We analyse the decision to change the dividend for 221 German firms over 1984-1993. Consistent with Lintner [Am. Econ. Rev. 46 (1956) 97], net earnings are key determinants of dividend changes. However, our findings also refine those of Lintner [Am. Econ. Rev. 46 (1956) 97] and Miller and Modigliani [J. Bus. 34 (1961) 411]. First, the occurrence of a loss is a key determinant of dividends in addition to the traditional key determinant, the level of net earnings. Second, the majority of dividend cuts or omissions are temporary. This stands in marked contrast with DeAngelo et al. [J. Finance 47 (1992) 1837] who report that US firms are more likely to reduce their dividend when earnings deteriorate on a permanent basis. Finally, we find that firms with a bank as their major shareholder are more willing to omit their dividend than firms controlled by other shareholders.
Notes: doi: DOI: 10.1016/j.jcorpfin.2003.09.001
URL: http://www.sciencedirect.com/science/article/B6VFK-4B543JW-2/2/d038eee08df8cc0c4444fac07c718aee
Reference Type: Journal Article
Record Number: 29086
Author: A. Gomes, G. Gorton and L. Madureira
Year: 2007
Title: SEC Regulation Fair Disclosure, information, and the cost of capital
Journal: Journal of Corporate Finance
Volume: 13
Issue: 2-3
Pages: 300-334
Short Title: SEC Regulation Fair Disclosure, information, and the cost of capital
ISSN: 0929-1199
Keywords: Disclosure
Regulation
Capital markets
Cost of capital
Regulation fair disclosure
Reg FD
Information production
Abstract: Regulation Fair Disclosure ("Reg FD"), adopted by the U.S. Securities and Exchange Commission in October 2000 was intended to stop the practice of "selective disclosure", in which companies give material information only to a few analysts and institutional investors prior to disclosing it publicly. Our analysis shows that the adoption of Reg FD caused a significant shift in analyst attention, resulting in a welfare loss for small firms, which now face a higher cost of capital. The loss of the "selective disclosure" channel for information flows could not be compensated for via other information transmission channels. This effect was more pronounced for firms communicating complex information and, consistent with the investor recognition hypothesis, for those losing analyst coverage. Moreover, we find no significant relationship of the different responses with litigation risks and agency costs. Our cross-sectional results suggest that Reg FD had unintended consequences and that "information" in financial markets may be more complicated than current finance theory admits.
Notes: doi: DOI: 10.1016/j.jcorpfin.2006.11.001
URL: http://www.sciencedirect.com/science/article/B6VFK-4MMP2BN-1/2/4c6cb70c1ef1dbc8a94f1d24253a7a18
Reference Type: Journal Article
Record Number: 29013
Author: V. M. González and F. González
Year: 2008
Title: Influence of bank concentration and institutions on capital structure: New international evidence
Journal: Journal of Corporate Finance
Volume: 14
Issue: 4
Pages: 363-375
Short Title: Influence of bank concentration and institutions on capital structure: New international evidence
ISSN: 0929-1199
Keywords: Capital structure
Bank concentration
Property rights
Creditor rights
Institutions
Abstract: This paper analyzes the effect of bank market concentration and institutions on capital structure in 39 countries. Results for 12,049 firms over 1995-2004 indicate that firm leverage increases with greater bank concentration and stronger protection of creditor rights, but drops with stronger protection of property rights. The results also indicate that greater bank concentration substitutes for creditor protection and asset tangibility to reduce the agency cost of debt between shareholders and debtholders. Weaker protection of property rights raises the agency cost of external funds, leading to the preferential use of internal funds as posited by the pecking order theory. The trade-off theory, however, is more valid in countries with stronger protection of property rights.
Notes: doi: DOI: 10.1016/j.jcorpfin.2008.03.010
URL: http://www.sciencedirect.com/science/article/B6VFK-4S80XF8-1/2/4d5860de4b58a6b4a04887581313ce9a
Reference Type: Journal Article
Record Number: 29321
Author: G. Gorton and F. Schmid
Year: 1999
Title: Corporate governance, ownership dispersion and efficiency: Empirical evidence from Austrian cooperative banking
Journal: Journal of Corporate Finance
Volume: 5
Issue: 2
Pages: 119-140
Short Title: Corporate governance, ownership dispersion and efficiency: Empirical evidence from Austrian cooperative banking
ISSN: 0929-1199
Keywords: Corporate governance
Ownership dispersion
Austrian cooperative banking
Abstract: The ownership structures of firms are endogenous. This makes it difficult to produce direct evidence on the Berle and Means [Berle, A.A., Means, G.C., 1932. The Modern Corporation and Private Property, New York.] hypothesis that corporate governance becomes less efficient as the degree of separation of ownership and control increases. We address this issue by studying Austrian cooperative banking, an organizational form in which the ownership structure is exogenous. We show that firm performance declines as the number of cooperative members increases, corresponding to a greater separation of ownership and control. We also provide direct evidence on another theory that is difficult to test, namely, the efficiency wage hypothesis. We show that the decline in firm performance as the number of shareholders increases is due to an increase in efficiency wages.
Notes: doi: DOI: 10.1016/S0929-1199(98)00019-4
URL: http://www.sciencedirect.com/science/article/B6VFK-3WRBP47-2/2/e0a66d64db9af81e51500cd79f6fdf0a
Reference Type: Journal Article
Record Number: 29329
Author: V. K. Goyal, N. Gollapudi and J. P. Ogden
Year: 1998
Title: A corporate bond innovation of the 90s: The clawback provision in high-yield debt
Journal: Journal of Corporate Finance
Volume: 4
Issue: 4
Pages: 301-320
Short Title: A corporate bond innovation of the 90s: The clawback provision in high-yield debt
ISSN: 0929-1199
Keywords: Clawback provision
High-yield bonds
Corporate bonds
Yield spread
Abstract: This paper examines a recent financial innovation in corporate bond contracts, referred to as the clawback provision. A clawback provision in debt contracts gives the issuer an option to redeem a specified fraction of the bond issue within a specified period at a predetermined price and with funds that must come from a subsequent equity offering. We argue that issuers use clawback provisions to mitigate the wealth losses that would otherwise occur when new equity is offered. Consistent with the hypotheses, the evidence shows that bond offerings are more likely to include a clawback provision if their issuers are private, have more intangible assets, have fewer liquid assets, and are unregulated. We also estimate the price of clawback provisions and find that yield spreads on bonds with clawback provisions are a median of 86 basis points higher relative to what they otherwise would be.
Notes: doi: DOI: 10.1016/S0929-1199(98)00009-1
URL: http://www.sciencedirect.com/science/article/B6VFK-3V5VTYC-1/2/2c9a71c272f052934fe53f1fac7c2683
Reference Type: Journal Article
Record Number: 29273
Author: V. K. Goyal and C. W. Park
Year: 2002
Title: Board leadership structure and CEO turnover
Journal: Journal of Corporate Finance
Volume: 8
Issue: 1
Pages: 49-66
Short Title: Board leadership structure and CEO turnover
ISSN: 0929-1199
Keywords: Corporate governance
Leadership structure
CEO duties
CEO turnover
Sensitivity to firm performance
Abstract: We study whether bestowing chief executive officer (CEO) and board chairman duties on one individual affects a boards decision to dismiss an ineffective CEO. The results show that the sensitivity of CEO turnover to firm performance is significantly lower when the CEO and chairman duties are vested in the same individual. These results are consistent with the view that the lack of independent leadership in firms that combine the CEO and Chairman positions makes it difficult for the board to remove poorly performing managers.
Notes: doi: DOI: 10.1016/S0929-1199(01)00028-1
URL: http://www.sciencedirect.com/science/article/B6VFK-44SJGX0-3/2/165a9db7cf8da97b783125a8a39806d9
Reference Type: Journal Article
Record Number: 29046
Author: P. M. Guest
Year: 2008
Title: The determinants of board size and composition: Evidence from the UK
Journal: Journal of Corporate Finance
Volume: 14
Issue: 1
Pages: 51-72
Short Title: The determinants of board size and composition: Evidence from the UK
ISSN: 0929-1199
Keywords: Board size
Board composition
UK
US
Corporate governance
Cadbury
Hampel
Abstract: This paper examines the trends and determinants of board structure for a large sample of UK firms from 1981 to 2002. We extend the predominantly US based literature in a number of important ways. Firstly, a comparative analysis of the UK and US legal and institutional settings leads us to hypothesize that UK boards will play a weaker monitoring role and hence board structures will not be determined by monitoring related factors. Our evidence supports this conjecture, showing that board structure determinants differ in predictable ways across different institutional settings. Secondly, in contrast to recent US mandatory reforms, UK reforms have been voluntary. As such they provide an interesting comparison, being arguably more effective than a mandatory approach by allowing firms to choose board structures most appropriate for their own needs. Our results support this point of view. Although the UK reforms do have a significant impact on board structures, a large number of firms choose not to comply, and those that do appear to do so for strong economic reasons. The reforms also appear to reduce the ability of well performing CEOs to influence board structures.
Notes: doi: DOI: 10.1016/j.jcorpfin.2008.01.002
URL: http://www.sciencedirect.com/science/article/B6VFK-4RSYC71-1/2/e4b9e1b8e791541afa9dd1f97b400206
Reference Type: Journal Article
Record Number: 29004
Author: K. Gugler, D. C. Mueller and B. B. Yurtoglu
Year: 2008
Title: Insider ownership, ownership concentration and investment performance: An international comparison
Journal: Journal of Corporate Finance
Volume: 14
Issue: 5
Pages: 688-705
Short Title: Insider ownership, ownership concentration and investment performance: An international comparison
ISSN: 0929-1199
Keywords: Insider ownership
Ownership structure
Entrenchment and wealth effects
Investment performance
Abstract: This article makes two important contributions to the literature on the incentive effects of insider ownership. First, it presents a clean method for separating the positive wealth effect of insider ownership from the negative entrenchment effect, which can be applied to samples of companies from the US and any other country. Second, it measures the effects of insider ownership using a measure of firm performance, namely a marginal q, which ensures that the causal relationship estimated runs from ownership to performance. The article applies this method to a large sample of publicly listed firms from the Anglo-Saxon and Civil law traditions and confirms that managerial entrenchment has an unambiguous negative effect on firm performance as measured by both Tobin's (average) q and our marginal q, and that the wealth effect of insider ownership is unambiguously positive for both measures. We also test for the effects of ownership concentration for other categories of owners and find that while institutional ownership improves the performance in the USA, financial institutions have a negative impact in other Anglo-Saxon countries and in Europe.
Notes: doi: DOI: 10.1016/j.jcorpfin.2008.09.007
URL: http://www.sciencedirect.com/science/article/B6VFK-4THC1C3-1/2/3f1895aea02e02405e9d4a5f656c512d
Reference Type: Journal Article
Record Number: 29322
Author: F. A. Gul
Year: 1999
Title: Growth opportunities, capital structure and dividend policies in Japan
Journal: Journal of Corporate Finance
Volume: 5
Issue: 2
Pages: 141-168
Short Title: Growth opportunities, capital structure and dividend policies in Japan
ISSN: 0929-1199
Keywords: Japan
Growth opportunities
Dividends
Debt
Keiretsu
Abstract: This paper, using 5308 observations of listed Japanese firms between the years 1988-1992, provides additional evidence on contracting theory arguments for the relation between growth opportunities, capital structure and dividend policies. To avoid the problems of using cross-sectional proxies for time-sequenced variables, this study uses (1) pooled cross-sectional time-series analysis and (2) time-series analysis with a one-year lag for the dependent variables. Results show significant negative relations between growth opportunities and levels of both debt financing and dividend yields after controlling for firm size, profitability, firm keiretsu affiliations and industry regulation. The results are consistent with contracting cost arguments for corporate finance and dividend policies and confirm the importance of growth opportunities in corporate finance theory.
Notes: doi: DOI: 10.1016/S0929-1199(99)00003-6
URL: http://www.sciencedirect.com/science/article/B6VFK-3WRBP47-3/2/122ba7b024ae40c4fafcd1fca263ed6a
Reference Type: Journal Article
Record Number: 29280
Author: F. A. Gul
Year: 2001
Title: Free cash flow, debt-monitoring and managers' LIFO/FIFO policy choice
Journal: Journal of Corporate Finance
Volume: 7
Issue: 4
Pages: 475-492
Short Title: Free cash flow, debt-monitoring and managers' LIFO/FIFO policy choice
ISSN: 0929-1199
Keywords: Free cash flow
Debt monitoring
Inventory accounting method
Growth opportunities
Abstract: This paper explores the explanatory power of Jensen's free cash flow hypothesis in managers' choice of LIFO versus FIFO. The association between FCF, and choice of inventory methods is based on the assumption that there is a potential conflict of interest between managers and shareholders when LIFO is the tax minimization method and that non-value-maximizing managers of firms with the FCF problem have incentives to choose FIFO, an income increasing method, in order to increase their compensation. However, since debt can act as a monitoring device and mitigate the agency problems of FCF, managers of firms with high FCF and high debt are less likely to choose FIFO than managers of firms with high FCF and low debt. The evidence is consistent with this expectation.
Notes: doi: DOI: 10.1016/S0929-1199(01)00037-2
URL: http://www.sciencedirect.com/science/article/B6VFK-44B1WWV-5/2/94af8a0e6aa8dbb42055939e3a1a6f9b
Reference Type: Journal Article
Record Number: 29031
Author: R.-J. Guo, T. A. Kruse and T. Nohel
Year: 2008
Title: Undoing the powerful anti-takeover force of staggered boards
Journal: Journal of Corporate Finance
Volume: 14
Issue: 3
Pages: 274-288
Short Title: Undoing the powerful anti-takeover force of staggered boards
ISSN: 0929-1199
Keywords: Corporate governance
Staggered board of directors
Classified board of directors
Shareholder activism
Abstract: We examine cases where managers announce an intention to de-stagger their boards via proxy proposals or board action. The literature has established the staggered board as the most consequential of all takeover defenses and one that destroys wealth. Thus, dismantling staggered boards benefits shareholders. We study the wealth effects and motives behind this change in governance within a conditional event study. We find that de-staggering the board creates wealth and that shareholder activism is an important catalyst for pushing through this change. Moreover, in the period preceding Sarbanes-Oxley, investor reaction indicates a perception that de-staggering firms are more likely to be takeover targets.
Notes: doi: DOI: 10.1016/j.jcorpfin.2008.03.007
URL: http://www.sciencedirect.com/science/article/B6VFK-4S6P1YH-4/2/52aaa8102bbbf8bb1c577d61ba606427
Reference Type: Journal Article
Record Number: 28975
Author: D. Hackbarth
Title: Determinants of corporate borrowing: A behavioral perspective
Journal: Journal of Corporate Finance
Volume: In Press, Corrected Proof
Short Title: Determinants of corporate borrowing: A behavioral perspective
ISSN: 0929-1199
Keywords: Behavioral corporate finance
Capital structure
Debt overhang
Real options
Abstract: This article integrates an earnings-based capital structure model into a simple real options framework to analyze the effects of managerial optimism and overconfidence on the interaction between financing and investment decisions. Several empirical implications follow from solving the model. Notably, my analysis reveals that managerial traits can ameliorate bondholder-shareholder conflicts, such as the debt overhang problem. While debt delays investment inefficiently, mildly biased managers can overcome this problem, even though they tend to issue more debt. Similar properties and results are discussed for other real options, such as the asset stripping or risk-shifting problems.
Notes: doi: DOI: 10.1016/j.jcorpfin.2009.02.001
URL: http://www.sciencedirect.com/science/article/B6VFK-4VNH3TW-1/2/be8c6bab01e520588a1b8db8fb7378e7
Reference Type: Journal Article
Record Number: 29312
Author: K. F. Hallock and P. Oyer
Year: 1999
Title: The timeliness of performance information in determining executive compensation
Journal: Journal of Corporate Finance
Volume: 5
Issue: 4
Pages: 303-321
Short Title: The timeliness of performance information in determining executive compensation
ISSN: 0929-1199
Keywords: Executive compensation
Performance timing
Managerial contracts
Boards of directors
Abstract: We study whether boards of directors concentrate on performance near compensation decision times rather than providing consistent incentives for chief executive officers (CEO) throughout the fiscal year. We show empirically that managers can profit by moving sales revenue among fiscal quarters. Though this may suggest that boards use short-term trends when determining rewards, we find evidence consistent with boards tying pay to recent sales growth so as to use the best information about future performance. We also find that the timing of profits throughout the year does not affect CEO pay, which may suggest that smoothing firm income is important to CEOs.
Notes: doi: DOI: 10.1016/S0929-1199(99)00011-5
URL: http://www.sciencedirect.com/science/article/B6VFK-3Y51V09-1/2/5412b6d83c8bb586602c6f6578b78e17
Reference Type: Journal Article
Record Number: 29096
Author: S. Han and J. Qiu
Year: 2007
Title: Corporate precautionary cash holdings
Journal: Journal of Corporate Finance
Volume: 13
Issue: 1
Pages: 43-57
Short Title: Corporate precautionary cash holdings
ISSN: 0929-1199
Keywords: Cash
Cash flow volatility
Investment
Precautionary savings
Abstract: This paper models the precautionary motive for a firm's cash holdings. A two-period investment model shows that the cash holdings of financially constrained firms are sensitive to cash flow volatility because financial constraints create an intertemporal trade-off between current and future investments. When future cash flow risk cannot be fully diversifiable, this intertemporal trade-off gives constrained firms the incentives of precautionary savings: they increase their cash holdings in response to increases in cash flow volatility. However, there is no systematic relationship between cash holdings and cash flow volatility for unconstrained firms. We test the empirical implications of our theory using quarterly information from a sample of U.S. publicly traded companies from 1997 to 2002, and find that the empirical evidence supports our theory.
Notes: doi: DOI: 10.1016/j.jcorpfin.2006.05.002
URL: http://www.sciencedirect.com/science/article/B6VFK-4K9C58B-1/2/07862d19f4cd0475aec16905d72ac995
Reference Type: Journal Article
Record Number: 29310
Author: R. C. Hanson and M. H. Song
Year: 2000
Title: Managerial ownership, board structure, and the division of gains in divestitures
Journal: Journal of Corporate Finance
Volume: 6
Issue: 1
Pages: 55-70
Short Title: Managerial ownership, board structure, and the division of gains in divestitures
ISSN: 0929-1199
Keywords: Divestitures
Managerial ownership
Board structure
Abstract: This study shows that shareholders of a firm that divests assets receive gains that are significantly related to stock ownership by the firm's managers and to the proportion of outside directors on the firm's board when the divestiture produces positive total dollar gains. Our results agree with the notions that higher levels of ownership give managers the incentive to sell assets that create negative synergies, the incentive to negotiate the best price for shareholders, and that outside directors fulfill their responsibilities as effective monitors and advisors to management.
Notes: doi: DOI: 10.1016/S0929-1199(99)00013-9
URL: http://www.sciencedirect.com/science/article/B6VFK-3YS9BS2-4/2/598b6d4fbb9a1db84cf42c52ad808604
Reference Type: Journal Article
Record Number: 29167
Author: M. Harjoto and J. Garen
Year: 2005
Title: Inside ownership beyond the IPO: the evolution of corporate ownership concentration
Journal: Journal of Corporate Finance
Volume: 11
Issue: 4
Pages: 661-679
Short Title: Inside ownership beyond the IPO: the evolution of corporate ownership concentration
ISSN: 0929-1199
Keywords: Corporate governance
Ownership structure
IPO
Abstract: This study examines the firm's equity ownership by insiders and blockholders starting right after the firm goes public, its decline thereafter, and what alters the decline. Previous literature has shown the incentive of insiders to let their ownership fall after their initial public offering (IPO). After the IPO, management attains only a fraction of the benefits of good governance, so has an incentive to let inside ownership erode. We verify this, but examine the effect that re-entry into capital market via a seasoned equity offering (SEO) has on insider ownership. The incentive of management to hold stock is restored by a desire to raise additional capital because it implicitly raises management's stake. We show empirically that it raises insider stockholding relative to what it otherwise would have been, thus providing an avenue by which this aspect of corporate governance is improved. This, and other results, is shown with a sample of IPO firms during 1996 and 1997. Our findings indicate that, in expectation, the increased holdings due to re-entry into the capital market almost exactly offsets 1 year's downward trend in management shareholdings. Also, we find an interesting interplay between types of blockholders in that CEOs tend to hold less stock after the IPO if external blockholders initially hold more.
Notes: doi: DOI: 10.1016/j.jcorpfin.2004.08.002
URL: http://www.sciencedirect.com/science/article/B6VFK-4DXSRMV-1/2/daecefa0b932e121d624619e898c8549
Reference Type: Journal Article
Record Number: 29091
Author: J. Harold Mulherin
Year: 2007
Title: Measuring the costs and benefits of regulation: Conceptual issues in securities markets
Journal: Journal of Corporate Finance
Volume: 13
Issue: 2-3
Pages: 421-437
Short Title: Measuring the costs and benefits of regulation: Conceptual issues in securities markets
ISSN: 0929-1199
Keywords: Regulation
Public interest
Special interest
Unintended consequences
Abstract: This paper reviews the economic theory of regulation and surveys the empirical evidence on its application to past and recent changes in U.S. securities regulation. The theory provides multiple potential motives for regulation and cautions the empirical researcher against naïve modeling of the costs and benefits of regulatory change. Moreover, the nature of the regulatory process compounds the standard pitfalls of empirical analysis such as endogeneity and confounding events. Productive empirical techniques include the development of cross-sectional predictions of the effects of regulation as well as the use of unregulated control samples. An important avenue for future research is a more refined estimation of the extent to which regulation has unintended consequences.
Notes: doi: DOI: 10.1016/j.jcorpfin.2007.02.005
URL: http://www.sciencedirect.com/science/article/B6VFK-4NFXG83-3/2/01d9f6710121bd3845774f4bacd59824
Reference Type: Journal Article
Record Number: 29246
Author: S. Hauser, E. Kraizberg and R. Dahan
Year: 2003
Title: Price behavior and insider trading around seasoned equity offerings: the case of majority-owned firms
Journal: Journal of Corporate Finance
Volume: 9
Issue: 2
Pages: 183-199
Short Title: Price behavior and insider trading around seasoned equity offerings: the case of majority-owned firms
ISSN: 0929-1199
Keywords: Seasoned equity offerings
Insider trading
Majority-owned
Abstract: Small public firms in the US and elsewhere are often managed by majority owners. This paper offers the hypothesis that majority insiders have an incentive to engage in insider trading around seasoned equity offerings (SEOs), primarily for the sake of preserving control. This hypothesis is tested side-by-side with traditional hypotheses regarding insider trading, such as signaling or growth opportunities that are often considered in the context of firms with dispersed ownership. The empirical analysis in this paper utilizes data of 76 SEOs announced by firms listed on the Tel Aviv Stock Exchange (TASE) between June 1989 and December 1997, whose inside ownership exceeds 50%. The results demonstrate the strong effect of expected post-announcement share price changes on insider trading, and a weaker effect of pre-announcement insider trading on price changes. Unlike minority insiders, who may have an incentive to trade on inside information in order to extract short-term capital gains, majority insiders appear to take the long-term view by buying shares before the offering in order to preserve or increase their control over the firm. This activity does not seem to be dependent upon the firm's growth opportunities. Rather, it seems to be market-dependent; that is, the ownership ratio of majority insiders is increased in a bear market and remains the same in a bull market.
Notes: doi: DOI: 10.1016/S0929-1199(02)00005-6
URL: http://www.sciencedirect.com/science/article/B6VFK-452164M-1/2/2bd358c8ade4f7a4d0d14d41169ec847
Reference Type: Journal Article
Record Number: 29265
Author: G. D. Haushalter, R. A. Heron and E. Lie
Year: 2002
Title: Price uncertainty and corporate value
Journal: Journal of Corporate Finance
Volume: 8
Issue: 3
Pages: 271-286
Short Title: Price uncertainty and corporate value
ISSN: 0929-1199
Keywords: Risk management
Financial distress
Underinvestment
Oil producers
Hedging
Abstract: This study examines the sensitivity of equity values of oil producers to changes in the uncertainty of future oil prices. We document that this sensitivity is negatively correlated with a firm's debt ratio and its production costs. These results indicate that companies that are more likely to experience financial distress or underinvestment from low cash flows are adversely affected by increases in the uncertainty of future cash flows. We conclude that corporate risk management can increase shareholder value by reducing the expected costs of financial distress and underinvestment.
Notes: doi: DOI: 10.1016/S0929-1199(01)00043-8
URL: http://www.sciencedirect.com/science/article/B6VFK-45M5P54-5/2/4d2ee18ad28b71ad6cfca8b360a27d07
Reference Type: Journal Article
Record Number: 29248
Author: U. Hege
Year: 2003
Title: Workouts, court-supervised reorganization and the choice between private and public debt
Journal: Journal of Corporate Finance
Volume: 9
Issue: 2
Pages: 233-269
Short Title: Workouts, court-supervised reorganization and the choice between private and public debt
ISSN: 0929-1199
Keywords: Private and public debt
Workouts
Reorganization law
Chapter 11
Absolute priority rule
Abstract: This paper investigates the interaction between creditor structure and reorganization law. Private debt offers the advantage of flexible renegotiation out of court. Due to incomplete information and holdout incentives, the out-of-court renegotiation will typically fail for dispersed public debt. The introduction of Chapter 11-style renegotiation will benefit public debt firms and will be harmful for private debt firms. Moreover, Chapter 11 reduces the role of private debt in corporate borrowing in accordance with the US experience. The overall efficiency of a reorganization law is therefore ambiguous. Three prominent shortcomings of Chapter 11--its cost and delay, equity deviations and inefficient continuation--are shown to do little harm or even shown to be welfare-improving as they increase the incentives to renegotiate debt out of court and choose private debt. The effect of a low-cost reorganization procedure is more likely to be positive in a market-based financial system.
Notes: doi: DOI: 10.1016/S0929-1199(02)00002-0
URL: http://www.sciencedirect.com/science/article/B6VFK-452FF5N-1/2/ff8750cdcaf12e000b5c933d392f2272
Reference Type: Journal Article
Record Number: 29216
Author: R. J. Hendershott
Year: 2004
Title: Net value: wealth creation (and destruction) during the internet boom
Journal: Journal of Corporate Finance
Volume: 10
Issue: 2
Pages: 281-299
Short Title: Net value: wealth creation (and destruction) during the internet boom
ISSN: 0929-1199
Keywords: Internet
Wealth creation
Venture capital
Abstract: During the internet bubble, dot-com stocks rose by a factor of 35, creating what we now know were massively distorted price signals. This paper looks at net value creation in a sample of 441 venture-backed dot-coms that received over US$21 billion from private and public equity investors. As of the end of 2001, this US$21 billion corresponded to an estimated US$39 billion of enterprise value, giving an annualized return-on-equity capital invested of 19%. These results suggest that, despite the distorted price signals and contrary to popular perception, wealth was created during the dot-com investment boom.
Notes: doi: DOI: 10.1016/S0929-1199(03)00058-0
URL: http://www.sciencedirect.com/science/article/B6VFK-4991WGM-1/2/2662bc3803de52ad8bcd385c8f4bee29
Reference Type: Journal Article
Record Number: 29097
Author: M. J. Higgins
Year: 2007
Title: The allocation of control rights in pharmaceutical alliances
Journal: Journal of Corporate Finance
Volume: 13
Issue: 1
Pages: 58-75
Short Title: The allocation of control rights in pharmaceutical alliances
ISSN: 0929-1199
Keywords: Strategic alliances
Control rights
Biopharmaceutical industry
Contractual design
Abstract: This paper uses alliances in the biopharmaceutical industry to test contractual theories of the firm. I find that the allocation of control rights between pharmaceutical and biotechnology firms is sensitive to the bargaining position of both parties. Pharmaceutical firms engaging in more costly, later stage alliances tend, on average, to relinquish more rights. Additionally, biotechnology firms entering their first alliance tend, on average, to relinquish more rights. Finally, I explore if and when alliances begin to impact pharmaceutical firm shareholder value. Overall, my findings indicate the importance of considering both parties to a contract when studying contractual design.
Notes: doi: DOI: 10.1016/j.jcorpfin.2006.08.001
URL: http://www.sciencedirect.com/science/article/B6VFK-4M1CYYN-1/2/be1e711ed9927adaa61ea1d4f13a9440
Reference Type: Journal Article
Record Number: 29337
Author: D. Hillier and A. P. Marshall
Year: 1998
Title: A model of complex equity funding for contingent acquisitions - a case study of non-interest bearing convertible unsecured loan stock
Journal: Journal of Corporate Finance
Volume: 4
Issue: 2
Pages: 133-152
Short Title: A model of complex equity funding for contingent acquisitions - a case study of non-interest bearing convertible unsecured loan stock
ISSN: 0929-1199
Keywords: Equity rights issues
Non-interest bearing convertible unsecured loan stock
Binomial asset pricing model
Abstract: Equity finance, raised through a rights issue, is a popular method for funding acquisitions in UK. Acquisitions are often contingent on a number of external factors. This paper uses a binomial asset pricing model to examine the effects on the share price of a company that undertakes an equity rights issue to fund a contingent acquisition. We consider a new equity rights issue instrument called a non-interest bearing convertible unsecured loan stock (NICULS), specifically designed to deal with contingent acquisitions. We develop our model in two stages. First, we assume perfect foresight on behalf of the issuing company and investors and, secondly, we develop a model that relaxes these restrictive assumptions, called a NICULS model. Our preliminary findings based on a case study show that there is a dip in the share price over and above that expected by the dilution effect of the increased number of shares. We interpret this either as a natural consequence of the market's evaluation of the value of the investments for which the funds were raised or as a signal imparted by the company about the future investment opportunities of the company. We have also found that the market's expectation of the success of the acquisition attempt has a direct and significant effect on the observed dip in the share price.
Notes: doi: DOI: 10.1016/S0929-1199(98)00003-0
URL: http://www.sciencedirect.com/science/article/B6VFK-3V72TS4-5/2/cb6780c9439a3002ece7f9b5424b3c69
Reference Type: Journal Article
Record Number: 29260
Author: D. Hillier and A. P. Marshall
Year: 2002
Title: Are trading bans effective? Exchange regulation and corporate insider transactions around earnings announcements
Journal: Journal of Corporate Finance
Volume: 8
Issue: 4
Pages: 393-410
Short Title: Are trading bans effective? Exchange regulation and corporate insider transactions around earnings announcements
ISSN: 0929-1199
Keywords: Insider trading
Event studies
Earnings announcements
Regulation
Abstract: There is considerable controversy on the role of corporate insider trading in the financial markets. However, there appears to be a consensus view that some form of regulation concerning their activities should be imposed. One such constraint involves a trading ban in periods when corporate insiders are expected to be advantaged vis-à-vis the information flow. This paper directly tests whether constraints of this kind are effective in curtailing insider activity through a study of the trading characteristics of UK company directors. The London Stock Exchange Model Code (1977) imposes a two-month close period prior to company earnings announcements. We find that although the close period affects the timing of director trades, it is unable to affect their performance or distribution. Directors consistently earn abnormal returns irrespective of the period in which they trade. They tend to buy after abnormally bad earnings news and sell after abnormally good earnings news. Moreover, there are systematic differences in the trading patterns of directors surrounding interim and final earnings announcements. It appears that many corporate insiders have private information and exploit this in their trading activities. As a result, one can conclude that trading bans do not impose significant opportunity costs on the trading of corporate insiders.
Notes: doi: DOI: 10.1016/S0929-1199(01)00046-3
URL: http://www.sciencedirect.com/science/article/B6VFK-46FJ8G1-6/2/6ecb0df748b26d086428b7fbb027a852
Reference Type: Journal Article
Record Number: 29390
Author: D. Hirshleifer and A. V. Thakor
Year: 1994
Title: Managerial performance, boards of directors and takeover bidding
Journal: Journal of Corporate Finance
Volume: 1
Issue: 1
Pages: 63-90
Short Title: Managerial performance, boards of directors and takeover bidding
ISSN: 0929-1199
Keywords: Takeovers
Board of directors
Managerial performance
Information aggregation
Abstract: This paper models the maintenance of management quality through the simultaneous functioning of internal and external corporate control mechnism--board dismissals and takeovers. We examine how the information sets of the board and the acquiror are noisily aggregated, and how this affects the behaviour of the board and the acquiror. The board of directors, acting ion shareholders' interests will sometimes oppose a takeover, and this opposition can be good news for the firm. An unsuccessful takeover attempt may be followed by a high rate of management turnover, because a takeover attempt conveys adverse information possessed by the bidder about the manager. If there is a probability that the board is ineffective, then a forced resignation of the manager can be either good or bad news for the firm. A positive effect is predicted to dominate when there is more adverse public information avilable about the manager's performance and when there is a higher ex ante probability that the board is ineffective, for example, of the board is management-dominated rather than outsider-dominated.
Notes: doi: DOI: 10.1016/0929-1199(94)90010-8
URL: http://www.sciencedirect.com/science/article/B6VFK-47DD36X-B/2/fcb0df26693147ef54a60bbaaf5f76f8
Reference Type: Journal Article
Record Number: 29209
Author: S. S. M. Ho, K. C. K. Lam and H. Sami
Year: 2004
Title: The investment opportunity set, director ownership, and corporate policies: evidence from an emerging market
Journal: Journal of Corporate Finance
Volume: 10
Issue: 3
Pages: 383-408
Short Title: The investment opportunity set, director ownership, and corporate policies: evidence from an emerging market
ISSN: 0929-1199
Keywords: Growth opportunities
Director ownership
Corporate governance
Corporate policies
Hong Kong
Abstract: This paper provides evidence of the association between a firm's investment opportunity set (IOS), director ownership, and corporate policy choices. Using a sample of growth and non-growth firms in an emerging Asian market, we find that the IOS theory has significant explanatory power in the financing, dividend, executive compensation, and leasing aspects of corporate policies. Growth firms have lower debt-to-equity ratios and dividend yields, pay higher cash compensation and bonus amounts to their top executives, and finance a higher proportion of their asset acquisitions through operating leases. We also find that director ownership moderates and counteracts the association between IOS and corporate policies. Our results are consistent with contracting theory predictions that high director ownership mitigates the need for incentive or bonus compensation plans in growth firms.
Notes: doi: DOI: 10.1016/S0929-1199(02)00024-X
URL: http://www.sciencedirect.com/science/article/B6VFK-462BR0W-1/2/86917bd917de7d376538ef066611d345
Reference Type: Journal Article
Record Number: 29296
Author: P. Högfeldt and K. Högholm
Year: 2000
Title: A law and finance theory of strategic blocking and preemptive bidding in takeovers
Journal: Journal of Corporate Finance
Volume: 6
Issue: 4
Pages: 403-425
Short Title: A law and finance theory of strategic blocking and preemptive bidding in takeovers
ISSN: 0929-1199
Keywords: Law and finance
Takeover gains
Corporate control
Strategic blocking
Arbitrageurs
Abstract: This paper uses a law and finance approach to develop a new takeover theory that formalizes the idea that large target shareholders, who can block a takeover attempt, exercise a strategic influence on tender offer prices, and thereby, on the distribution of the takeover gain. The theory captures the interaction between legal rules, target ownership structure, bidder toehold and potential effects of arbitrageurs in an endogenously determined bargaining parameter that predicts a skewed distribution of the gain in favor of target shareholders. In a regression model, the parameter has significant explanatory power, specifically when the total takeover gain is positive.
Notes: doi: DOI: 10.1016/S0929-1199(00)00015-8
URL: http://www.sciencedirect.com/science/article/B6VFK-42G0MJ1-3/2/6af9e66d9d919a947a43b6b30266b5cc
Reference Type: Journal Article
Record Number: 29145
Author: L. C. Holland and E. M. Elder
Year: 2006
Title: Employee stock options in compensation agreements: A financing explanation
Journal: Journal of Corporate Finance
Volume: 12
Issue: 2
Pages: 367-379
Short Title: Employee stock options in compensation agreements: A financing explanation
ISSN: 0929-1199
Keywords: Employee stock options
Compensation packages
Abstract: We develop a model for the use of stock options in compensation agreements based on a financing explanation. Our model is consistent with the extensive use of options for non-executive employees. Simulation results from our model show an optimal use of options of about 9.3% of total compensation for a non-executive employee with a compensation of US$50,000. Finding an optimal level of options as part of compensation in this context requires a balancing of two opposing factors--the benefit of a lower capital issuance cost versus a higher compensation cost as a result of the discount that an employee places on options because of an undiversified position.
Notes: doi: DOI: 10.1016/j.jcorpfin.2005.06.002
URL: http://www.sciencedirect.com/science/article/B6VFK-4GTW8RG-1/2/844beaf865a20e422526729eb927b606
Reference Type: Journal Article
Record Number: 29230
Author: E. S. Hotchkiss and R. M. Mooradian
Year: 2003
Title: Auctions in bankruptcy
Journal: Journal of Corporate Finance
Volume: 9
Issue: 5
Pages: 555-574
Short Title: Auctions in bankruptcy
ISSN: 0929-1199
Keywords: Auctions
Bankruptcy
Reorganization
Financial distress
Chapter 11
Abstract: This paper examines whether mandatory auctions promote the efficient restructuring of distressed firms relative to a reorganization-based bankruptcy system such as Chapter 11. Under a mandatory auction system, aggressive bidding by a coalition of incumbent management and pre-bankruptcy creditors may deter outside bidders, may result in the coalition paying more than its valuation to acquire the firm, and may result in assets remaining in a lower value use. In a reorganization-based bankruptcy system, management's voluntary choice to seek an auction conveys information about the coalition's valuation, which facilitates competition. Our model shows that a reorganization-based bankruptcy system that encourages, but does not mandate auctions, can actually increase the likelihood that an outside bidder enters and the assets of the bankrupt firm are redeployed.
Notes: doi: DOI: 10.1016/S0929-1199(02)00026-3
URL: http://www.sciencedirect.com/science/article/B6VFK-46RVH7N-1/2/e994ec72e425096b2ee028e47bdaf1e8
Reference Type: Journal Article
Record Number: 29374
Author: J. Howard Beales and T. J. Muris
Year: 1995
Title: The foundations of franchise regulation: Issues and evidence
Journal: Journal of Corporate Finance
Volume: 2
Issue: 1-2
Pages: 157-197
Short Title: The foundations of franchise regulation: Issues and evidence
ISSN: 0929-1199
Notes: doi: DOI: 10.1016/0929-1199(95)00008-V
URL: http://www.sciencedirect.com/science/article/B6VFK-3Y2GCVW-B/2/f9a0715a10624dc4112e718ec979a3fb
Reference Type: Journal Article
Record Number: 29261
Author: J. C. Howell and R. D. Stover
Year: 2002
Title: How much do governance and managerial behavior matter in investment decisions? Evidence from failed thrift auctions
Journal: Journal of Corporate Finance
Volume: 8
Issue: 3
Pages: 195-211
Short Title: How much do governance and managerial behavior matter in investment decisions? Evidence from failed thrift auctions
ISSN: 0929-1199
Keywords: Thrift actions
Managerial behavior
Investment decision
Governance
Abstract: Corporate governance and managerial behavior, both in terms of entrenchment and financial leverage, have been individually shown to directly affect firm performance and to indirectly affect it through influence on other determinants of performance. Employing an empirical model that captures documented interactions among the explanatory variables, we examine the importance of these integrated factors in an investment decision by focusing on the determinants of bank bidding activity for failed thrift institutions. While the endogenous relationships based on previous research appear tractable, their overall addition to the explanatory power of the bidding model based on traditional auction variables is very limited. These results suggest questions that should be further examined regarding how much managerial variables as defined by previous studies actually affect firm investment decisions once their endogeneity and unique linkages are formally recognized.
Notes: doi: DOI: 10.1016/S0929-1199(01)00044-X
URL: http://www.sciencedirect.com/science/article/B6VFK-45M5P54-1/2/f77eb1f4203601e2ba9cc8998ade195b
Reference Type: Journal Article
Record Number: 29088
Author: H. T. C. Hu and B. Black
Year: 2007
Title: Hedge funds, insiders, and the decoupling of economic and voting ownership: Empty voting and hidden (morphable) ownership
Journal: Journal of Corporate Finance
Volume: 13
Issue: 2-3
Pages: 343-367
Short Title: Hedge funds, insiders, and the decoupling of economic and voting ownership: Empty voting and hidden (morphable) ownership
ISSN: 0929-1199
Keywords: G32
G34
K22
Vote buying
Equity swaps
Record date capture
Shareholder voting
Stock lending
Abstract: Most U.S. public companies have a single class of voting common shares: voting power is proportional to economic ownership. Linking votes to shares is often thought to be desirable, because, as residual claimants, shareholders have an incentive to exercise voting power well. The linkage also facilitates the market for corporate control. On the other hand, decoupling is efficient in some situations. Equity derivatives and other capital market developments now allow shareholders to readily decouple voting rights from economic ownership of shares, often without public disclosure. Hedge funds are prominent users of decoupling. Sometimes they hold more votes than economic ownership (a situation we term "empty voting"). Sometimes they hold undisclosed economic ownership without votes, but often with the de facto ability to acquire votes if needed (a situation we term [`][`]hidden (morphable) ownership"). This Article analyzes empty voting and hidden (morphable) ownership, which we term the "new vote buying." We offer a framework for unpacking its functional elements and assess its potential benefits and costs. Two companion legal articles (Hu, Henry T.C., and Bernard S. Black, 2006a. The New Vote Buying: Empty Voting and Hidden (Morphable) Ownership, Southern California Law Review 79, 811-908#, and Hu, Henry T.C., and Bernard S. Black, 2006b. Empty Voting and Hidden Ownership: Taxonomy, Implications and Reforms, Business Lawyer 61, 1011-1069.) provide more details on current disclosure rules and offer a disclosure reform proposal.
Notes: doi: DOI: 10.1016/j.jcorpfin.2007.02.004
URL: http://www.sciencedirect.com/science/article/B6VFK-4NFXG83-2/2/78c523e44dc7fa3cd5af907f24b2c323
Reference Type: Journal Article
Record Number: 29007
Author: R. Huang, Z. Shangguan and D. Zhang
Year: 2008
Title: The networking function of investment banks: Evidence from private investments in public equity
Journal: Journal of Corporate Finance
Volume: 14
Issue: 5
Pages: 738-752
Short Title: The networking function of investment banks: Evidence from private investments in public equity
ISSN: 0929-1199
Keywords: Investment bank
Networking function
Investor participation
Private investment in public equity
PIPE
Placement agent
Fees
Abstract: We examine investment banks' networking function in capital markets, using a sample of Private Investments in Public Equity (PIPEs). We argue that investment banks develop relationships with investors through repeat dealings, and that investment banks' networks of relationship investors form the basis of their networking function. We find that investment banks, especially those with larger investor networks, help issuers attract investors. Correspondingly, an issuer that desires more investors is more likely to hire an investment bank than place the shares directly. We also find that issuers pay higher fees to hire investment banks with larger investor networks. Our empirical findings suggest that the networking function of investment banks is important in securities offerings.
Notes: doi: DOI: 10.1016/j.jcorpfin.2008.09.014
URL: http://www.sciencedirect.com/science/article/B6VFK-4TN82FW-1/2/c9da3da129ce07ac4e306fa2fba9a7ab
Reference Type: Journal Article
Record Number: 29238
Author: M. R. Huson and G. MacKinnon
Year: 2003
Title: Corporate spinoffs and information asymmetry between investors
Journal: Journal of Corporate Finance
Volume: 9
Issue: 4
Pages: 481-503
Short Title: Corporate spinoffs and information asymmetry between investors
ISSN: 0929-1199
Keywords: Spinoffs
Information asymmetry
Bid-ask spreads
Abstract: We examine the effect of corporate spinoffs on the trading environment of the stock of firms that spinoff units. Spinoffs change the information environment of firms. The increased transparency following spinoffs can obviate informed traders' information or make it more valuable. We find that residual return variance increases following spinoffs. More importantly, transaction costs and the price impact of trades are also higher following spinoffs. These results are stronger for spinoffs where parent firms divest unrelated subsidiaries. Changes in the information environment associated with focusing spinoffs appear to benefit informed traders at the expense of uninformed traders.
Notes: doi: DOI: 10.1016/S0929-1199(02)00056-1
URL: http://www.sciencedirect.com/science/article/B6VFK-48B0S94-1/2/784cf2cc6982923ae0daf690caa4a19e
Reference Type: Journal Article
Record Number: 29204
Author: M. Hutchinson and F. A. Gul
Year: 2004
Title: Investment opportunity set, corporate governance practices and firm performance
Journal: Journal of Corporate Finance
Volume: 10
Issue: 4
Pages: 595-614
Short Title: Investment opportunity set, corporate governance practices and firm performance
ISSN: 0929-1199
Keywords: Agency theory
Corporate governance
Investment opportunity set
Firm performance
Abstract: Prior research on the relationship between corporate controls and firm performance is premised on the notion that, in theory, there is direct association between corporate governance and firm performance. However, extensive research has produced mixed and often weak results. In this paper, we posit, as a primary relationship, a negative association between growth and firm performance and then examine whether corporate governance variables moderate this negative relationship. Our results support this notion and show that the role of corporate governance variables in firm performance should be evaluated in the context of the firm's external environment measured in this study in terms of growth opportunities.
Notes: doi: DOI: 10.1016/S0929-1199(03)00022-1
URL: http://www.sciencedirect.com/science/article/B6VFK-487N6YF-1/2/45210e5608df6a85afccc0f20a201ef1
Reference Type: Journal Article
Record Number: 29142
Author: N. Huyghebaert and C. Van Hulle
Year: 2006
Title: Structuring the IPO: Empirical evidence on the portions of primary and secondary shares
Journal: Journal of Corporate Finance
Volume: 12
Issue: 2
Pages: 296-320
Short Title: Structuring the IPO: Empirical evidence on the portions of primary and secondary shares
ISSN: 0929-1199
Keywords: IPO
Primary and secondary shares
Motives for going public
Liquidity
Takeovers
Abstract: We empirically study the determinants of the portions of primary and secondary shares offered in IPOs. The data show that young, small growth firms tend to issue primary shares. Limited internal cash generation and a debt mix that largely consists of bank loans have a significant positive impact on the primary portion. The data also reveal that if financing needs warrant a relatively small primary portion, companies add secondary shares to increase the offering size, which enhances post-IPO stock liquidity. Furthermore, these growth firms are more likely to issue seasoned equity in the aftermarket. Conversely, established firms tend to offer only secondary shares. The diversification motive does not drive the size of the secondary portion but adverse selection costs have an impact. Also, firms selling only secondary shares show higher post-IPO control turnover.
Notes: doi: DOI: 10.1016/j.jcorpfin.2005.01.001
URL: http://www.sciencedirect.com/science/article/B6VFK-4GH49R3-2/2/cc53ffa8e047eba496eb16b91b8d3951
Reference Type: Journal Article
Record Number: 29236
Author: P. J. Irvine
Year: 2003
Title: The incremental impact of analyst initiation of coverage
Journal: Journal of Corporate Finance
Volume: 9
Issue: 4
Pages: 431-451
Short Title: The incremental impact of analyst initiation of coverage
ISSN: 0929-1199
Keywords: Sell-side analysts
Initiation of coverage
Liquidity
Abstract: I compare the return surrounding a sell-side analyst's initiation of coverage to the return surrounding a recommendation by an analyst who already covers the stock. The market responds more positively to analysts' initiations than to other recommendations. The incremental price impact of an initiation is 1.02% greater than the reaction to a recommendation by an analyst who already covers the stock. I examine whether the hypothesis that analyst coverage increases liquidity explains this incremental return. I find that liquidity improves after initiations, but that one must extend the liquidity hypothesis in order to fully explain the incremental price impact. Liquidity gains subsequent to analyst initiation depend on the analyst's recommendation. The more positive the initial recommendation, the greater the subsequent liquidity improvement. I also find that the initiation abnormal return correlates with the subsequent improvements in liquidity. Corporations should encourage analyst coverage to capture this liquidity benefit.
Notes: doi: DOI: 10.1016/S0929-1199(02)00053-6
URL: http://www.sciencedirect.com/science/article/B6VFK-47X6XPG-1/2/5ce21a4838d62d870121fe01bb49823c
Reference Type: Journal Article
Record Number: 29264
Author: N. Isagawa
Year: 2002
Title: Callable convertible debt under managerial entrenchment
Journal: Journal of Corporate Finance
Volume: 8
Issue: 3
Pages: 255-270
Short Title: Callable convertible debt under managerial entrenchment
ISSN: 0929-1199
Keywords: Callable convertible debt
Managerial entrenchment
Call provision
Abstract: This paper provides an explanation of callable convertible issue from the viewpoint of managerial entrenchment. Zweibel [American Economic Review 86 (1996)] has shown that an entrenched manager voluntarily issues straight debt in order to avoid hostile takeover. Straight debt, however, may lead the firm into bankruptcy in which a manager loses her position. We show that an entrenched manager can avoid a hostile takeover and bankruptcy at the same time by issuing well-designed callable convertible debt. Although callable convertible debt may decrease the value of the firm, an entrenched manager will prefer it over straight debt.
Notes: doi: DOI: 10.1016/S0929-1199(01)00041-4
URL: http://www.sciencedirect.com/science/article/B6VFK-45M5P54-4/2/f2dae92580c9bbbc4db0c73aa2b19c2a
Reference Type: Journal Article
Record Number: 28996
Author: V. Ivanov and C. M. Lewis
Year: 2008
Title: The determinants of market-wide issue cycles for initial public offerings
Journal: Journal of Corporate Finance
Volume: 14
Issue: 5
Pages: 567-583
Short Title: The determinants of market-wide issue cycles for initial public offerings
ISSN: 0929-1199
Keywords: IPO issue cycles
Hot and cold markets
Autoregressive conditional count model
Abstract: This paper identifies the determinants of market-wide issue cycles for initial public offerings (IPOs) using an autoregressive conditional count model. We consider whether IPO volume is related to business conditions, investor sentiment, and time variation in adverse selection costs caused by asymmetric information between managers and investors. We provide evidence indicating that time variation in business conditions and investor sentiment are important determinants of monthly issue activity. By contrast, time variation in adverse selection costs does not significantly affect IPO volume.
Notes: doi: DOI: 10.1016/j.jcorpfin.2008.09.009
URL: http://www.sciencedirect.com/science/article/B6VFK-4TMBVP9-1/2/e7efb7cfcab3cbb83d78c294303bec6a
Reference Type: Journal Article
Record Number: 28994
Author: I. Iwasaki
Year: 2008
Title: The determinants of board composition in a transforming economy: Evidence from Russia
Journal: Journal of Corporate Finance
Volume: 14
Issue: 5
Pages: 532-549
Short Title: The determinants of board composition in a transforming economy: Evidence from Russia
ISSN: 0929-1199
Keywords: D21
D23
G34
K22
L22
P31
Outsider directorship
Board composition
Corporate governance
Russia
Abstract: Using a unique dataset of 730 joint-stock companies, we studied the determinants of corporate board composition in Russia. Despite the widespread image of insider control in the 1990s, a large number of Russian companies now actively appoint outsider directors to monitor top management. The findings reported in this paper strongly suggest that the theories and empirical methods of financial and organizational economics help to pinpoint the factors affecting the extent of outsider directorship. We also found that, among potential determinants, bargaining variables have considerable explanatory power. Furthermore, our empirical evidence demonstrated that Russia's legal system and its peculiarities as a transition economy also exert a certain degree of influence on board composition.
Notes: doi: DOI: 10.1016/j.jcorpfin.2008.09.005
URL: http://www.sciencedirect.com/science/article/B6VFK-4TGS7D2-1/2/d9989b33679cf799701902607080e6db
Reference Type: Journal Article
Record Number: 29160
Author: T. Jandik and A. K. Makhija
Year: 2005
Title: Debt, debt structure and corporate performance after unsuccessful takeovers: evidence from targets that remain independent
Journal: Journal of Corporate Finance
Volume: 11
Issue: 5
Pages: 882-914
Short Title: Debt, debt structure and corporate performance after unsuccessful takeovers: evidence from targets that remain independent
ISSN: 0929-1199
Keywords: Unsuccessful bids
Corporate performance
Level and structure of debt
Abstract: Significant increases in the level of target leverage have been previously documented following unsuccessful takeover attempts. This increased leverage may signal managerial commitment to improved performance, suggesting that corporate performance and leverage should be positively related. If, however, the increased leverage leads to further managerial entrenchment, then corporate performance and leverage should be negatively related. In this paper, we reexamine both motivations for the observed increase in leverage. Furthermore, we argue that changes in the composition of debt are also important, besides changes in the level of leverage. In particular, bank debt has frequently been assigned a proactive, beneficial monitoring role in the literature. Besides confirming the increase in the level of leverage, we also document increases in bank debt surrounding cancelled takeovers. As a result, we find a more complex relation between corporate performance and debt use: Overall, the relation between corporate performance and leverage is negative, as predicted by a dominant entrenchment effect. However, increases in bank debt reduce the adverse effect of the increase in the level of leverage.
Notes: doi: DOI: 10.1016/j.jcorpfin.2004.04.002
URL: http://www.sciencedirect.com/science/article/B6VFK-4CXDTWW-1/2/e693b4e4f30c75b473d797a3df82ffe7
Reference Type: Journal Article
Record Number: 29298
Author: L. A. Jeng and P. C. Wells
Year: 2000
Title: The determinants of venture capital funding: evidence across countries
Journal: Journal of Corporate Finance
Volume: 6
Issue: 3
Pages: 241-289
Short Title: The determinants of venture capital funding: evidence across countries
ISSN: 0929-1199
Keywords: Venture capital
Initial public offerings
Gross domestic product
Abstract: This paper analyses the determinants of venture capital for a sample of 21 countries. In particular, we consider the importance of initial public offerings (IPOs), gross domestic product (GDP) and market capitalization growth, labor market rigidities, accounting standards, private pension funds, and government programs. We find that IPOs are the strongest driver of venture capital investing. Private pension fund levels are a significant determinant over time but not across countries. Surprisingly, GDP and market capitalization growth are not significant. Government policies can have a strong impact, both by setting the regulatory stage, and by galvanizing investment during downturns. Finally, we also show that different types of venture capital financing are affected differently by these factors. In particular, early stage venture capital investing is negatively impacted by labor market rigidities, while later stage is not. IPOs have no effect on early stage venture capital investing across countries, but are a significant determinant of later stage venture capital investing across countries. Finally, government funded venture capital has different sensitivities to the determinants of venture capital than non-government funded venture capital. Our insights emphasize the need for a more differentiated approach to venture capital, both from a research as well as from a policy perspective. We feel that while later stage venture capital investing is well understood, early stage and government funded investments still require more extensive research.
Notes: doi: DOI: 10.1016/S0929-1199(00)00003-1
URL: http://www.sciencedirect.com/science/article/B6VFK-40X8H9S-1/2/20ac01e1bb10059b785e1c3ebc683ee9
Reference Type: Journal Article
Record Number: 29278
Author: T. Jenkinson and A. Ljungqvist
Year: 2001
Title: The role of hostile stakes in German corporate governance
Journal: Journal of Corporate Finance
Volume: 7
Issue: 4
Pages: 397-446
Short Title: The role of hostile stakes in German corporate governance
ISSN: 0929-1199
Keywords: Corporate governance
Block trades
Takeovers
Banks
Germany
Abstract: This article uses clinical evidence to show how the German system of corporate control and governance is both more active and more hostile than has previously been suggested. It provides a complete breakdown of ownership and takeover defence patterns in German listed companies and finds highly fragmented (but not dispersed) ownership in non-majority controlled firms. We document how the accumulation of hostile stakes can be used to gain control of target companies given these ownership patterns. The article also suggests an important role for banks in helping predators accumulate, and avoid the disclosure of, large stakes.
Notes: doi: DOI: 10.1016/S0929-1199(01)00034-7
URL: http://www.sciencedirect.com/science/article/B6VFK-44B1WWV-3/2/370b44fe06c86047e78fd8d0b38606a6
Reference Type: Journal Article
Record Number: 29200
Author: J. Jindra and R. A. Walkling
Year: 2004
Title: Speculation spreads and the market pricing of proposed acquisitions
Journal: Journal of Corporate Finance
Volume: 10
Issue: 4
Pages: 495-526
Short Title: Speculation spreads and the market pricing of proposed acquisitions
ISSN: 0929-1199
Keywords: Tender offer
Speculation
Risk arbitrage
Abstract: This paper examines speculation spreads following initial acquisition announcements in 362 cash tender offers spanning the 1981-1995 period. Speculation spreads in acquisitions, defined as the percentage difference between the bid price and market price one-day after the initial announcement, are the starting point for arbitrage returns, a subject receiving increased attention in practice and in the literature. Speculation spreads exhibit a positive mean, with considerable cross-sectional variation. In fact, over 23% of speculation spreads are negative, indicating a post-announcement price greater than the initial bid price. In spite of its importance, the informational content of the speculation spread and the reasons for its cross-sectional variation have not been previously examined. We model speculation spreads as the visible component of total speculative returns of the target. Rational traders set speculation spreads anticipating the expected price resolution and length of the acquisition bid. Empirically, we find strong support for key implications of our model. Speculation spreads are significantly related to bid and offer characteristics observable ex ante. Consistent with our model, they are also significantly negatively related to the magnitude of price revision and significantly positively related to offer duration. These results are robust to the inclusion of bid and offer characteristics known ex ante as well as those only revealed ex post. The results are consistent with market pricing of both offer duration and price resolution at the time of the initial announcement.
Notes: doi: DOI: 10.1016/S0929-1199(03)00030-0
URL: http://www.sciencedirect.com/science/article/B6VFK-488G9N6-1/2/ef7983ebcc50b77f89d1e12a6674381d
Reference Type: Journal Article
Record Number: 28968
Author: S.-g. Jun, M. Jung and R. A. Walkling
Year: 2009
Title: Share repurchase, executive options and wealth changes to stockholders and bondholders
Journal: Journal of Corporate Finance
Volume: 15
Issue: 2
Pages: 212-229
Short Title: Share repurchase, executive options and wealth changes to stockholders and bondholders
ISSN: 0929-1199
Keywords: Share repurchase
Executive options
Wealth transfer
Signaling
Corporate governance
Bond ratings
Abstract: We test the signaling and wealth transfer hypotheses around the announcement of share repurchases using a recent and larger sample of data than previously examined while employing a methodology designed to enhance the power of our tests. Disentangling the wealth transfer and signaling hypotheses is difficult; they are not mutually exclusive and can have opposite effects for bondholders. Wealth transfers decrease bondholder wealth while positive signals increase it; the combined result obscures tests of each hypothesis. By focusing on sub-samples where signaling is more and less likely to be present we increase our ability to isolate the separate effects. In addition to traditional tests of wealth effects, we feature information inherent in the correlation of wealth changes to equity and debt. Our results are generally consistent with the positive signaling effect of stock repurchases, but also provide some support for wealth transfer. Our work also emphasizes the importance of trying to disentangle the various hypotheses. In the subset of option funding repurchases, where signaling effects are less likely, the positive correlation of wealth changes between stockholders and bondholders is completely eliminated. Bond ratings are much more likely to be upgraded in samples without executive options which is precisely where the signaling effects are expected to be concentrated. Firms with weaker shareholder rights experience greater bondholder wealth losses at the announcement of stock repurchases.
Notes: doi: DOI: 10.1016/j.jcorpfin.2008.11.003
URL: http://www.sciencedirect.com/science/article/B6VFK-4V42J66-1/2/b0964c8158352ee6758f773184b8777b
Reference Type: Journal Article
Record Number: 29252
Author: R. Kabir and P. Roosenboom
Year: 2003
Title: Can the stock market anticipate future operating performance? Evidence from equity rights issues
Journal: Journal of Corporate Finance
Volume: 9
Issue: 1
Pages: 93-113
Short Title: Can the stock market anticipate future operating performance? Evidence from equity rights issues
ISSN: 0929-1199
Keywords: Equity offerings
Rights issues
Valuation effect
Firm performance
Abstract: This paper examines whether the stock market valuation impact is consistent with subsequent operating performance of firms. We use data for equity rights offerings--the widely adopted flotation method in the Netherlands. We first examine the stock market announcement effect of rights issues and observe that a statistically significant stock price decline takes place when companies announce rights issues. Further stock price decline is also observed during the subscription period. We then analyze post-rights issue operating performance of firms and find that, consistent with the announcement period decline in stock price, rights issuing firms subsequently exhibit a statistically significant decline in their operating performance. Additional investigation of both stock and operating performance declines provides full support for the information asymmetry hypothesis, partial support for the free cash flow hypothesis but no support for the window of opportunity hypothesis.
Notes: doi: DOI: 10.1016/S0929-1199(01)00054-2
URL: http://www.sciencedirect.com/science/article/B6VFK-47PCP01-6/2/5ff48814d8a9ef36574a13083726e2d8
Reference Type: Journal Article
Record Number: 29309
Author: K. M. Kahle
Year: 2000
Title: Insider trading and the long-run performance of new security issues
Journal: Journal of Corporate Finance
Volume: 6
Issue: 1
Pages: 25-53
Short Title: Insider trading and the long-run performance of new security issues
ISSN: 0929-1199
Keywords: Insider trading
Long-run stock performance
New security issues
Abstract: This paper uses insider trading around new security issues to provide evidence of managerial timing ability. I show that insider sales increase and purchases decrease prior to issues of information-sensitive securities (convertible debt and equity) by industrial firms. I then examine the relation between insider trading and subsequent stock returns. Although not all equity issues are motivated by overvaluation, those where managers sell prior to the issue are more likely to be. I find that industrial firms with abnormal insider selling underperform in the long run, whereas those with abnormal buying do not. There is no evidence of a relation between abnormal selling and future performance for utility offerings, however. Overall, the evidence is consistent with poor long-term performance being due to overvaluation.
Notes: doi: DOI: 10.1016/S0929-1199(99)00015-2
URL: http://www.sciencedirect.com/science/article/B6VFK-3YS9BS2-3/2/1488a423e7621dec11686680b937324a
Reference Type: Journal Article
Record Number: 29022
Author: Q. Kang and Q. Liu
Year: 2008
Title: Stock trading, information production, and executive incentives
Journal: Journal of Corporate Finance
Volume: 14
Issue: 4
Pages: 484-498
Short Title: Stock trading, information production, and executive incentives
ISSN: 0929-1199
Keywords: Market microstructure
Pay-performance sensitivity
Probability of informed trading (PIN)
Analysts' earnings forecasts
Abstract: This paper investigates the effect of stock market microstructure on managerial compensation schemes. We propose and empirically demonstrate that the sensitivity of chief executive officer's (CEO's) compensations to changes in stockholders' value is higher when the stock market facilitates the production and aggregation of private or public information. Using stock trading data and analysts' earnings forecast data, we construct five different measures of the information content in stock prices. These measures, separately and jointly, account for the cross-sectional variations in CEO pay-performance sensitivity well. Our results are robust to the choice of samples, incentive measures, model specifications, and estimation methods. We extend the analysis to non-CEO executives and executive teams and find similar results.
Notes: doi: DOI: 10.1016/j.jcorpfin.2008.06.003
URL: http://www.sciencedirect.com/science/article/B6VFK-4SVC5K9-1/2/df6aded8f6008debcbc35060d7b0814d
Reference Type: Journal Article
Record Number: 29228
Author: V. Kanniainen and C. Keuschnigg
Year: 2003
Title: The optimal portfolio of start-up firms in venture capital finance
Journal: Journal of Corporate Finance
Volume: 9
Issue: 5
Pages: 521-534
Short Title: The optimal portfolio of start-up firms in venture capital finance
ISSN: 0929-1199
Keywords: Venture capital finance
Double moral hazard
Company portfolio
Abstract: Venture capitalists (VCs) not only finance but also add value to start-up companies. Advising firms is time consuming and creates a trade-off between intensity of advice and portfolio size. We jointly determine the optimal number of portfolio companies and the intensity of managerial advice. Diminishing returns to advice per firm call for a larger portfolio. With progressively increasing managerial effort cost, however, a larger number crowds out advice to each individual firm. As they receive less support, entrepreneurs request a larger profit share, making further portfolio expansion eventually unprofitable. Comparative static analysis shows how optimal portfolio size responds to venture returns and other parameters.
Notes: doi: DOI: 10.1016/S0929-1199(02)00021-4
URL: http://www.sciencedirect.com/science/article/B6VFK-460MB3J-1/2/89b0f411e82d250967ec51df0e01426d
Reference Type: Journal Article
Record Number: 29235
Author: G. A. Karolyi
Year: 2003
Title: DaimlerChrysler AG, the first truly global share
Journal: Journal of Corporate Finance
Volume: 9
Issue: 4
Pages: 409-430
Short Title: DaimlerChrysler AG, the first truly global share
ISSN: 0929-1199
Keywords: International finance
Market microstructure
Multi-market trading
Abstract: On November 17, 1998, trading commenced in DaimlerChrysler ordinary shares, a single global registered share (GRS) certificate, on stock exchanges around the world. The GRS quotes, trades and settles in U.S. Dollars on the New York Stock Exchange and in Deutschemarks/Euros on the Frankfurt Stock Exchange through a new global share registrar linking German and U.S. registrars and clearing facilities. This study critically evaluates the new share structure and asks whether it is associated with an improvement in market quality. I find that the initiation of the program was associated with greater trading activity and enhanced liquidity overall, but there was a significant migration of its order flow back to Frankfurt during the first 6 months. While return volatility also increased significantly, this increase was not associated with the changes in trading activity, the changes in liquidity or the flow-back to Frankfurt. I argue that this new share structure to date has not improved the quality of the trading environment relative to other share structures.
Notes: doi: DOI: 10.1016/S0929-1199(02)00054-8
URL: http://www.sciencedirect.com/science/article/B6VFK-47YHRTG-1/2/13a9c3300612f3e0153d6122e327f630
Reference Type: Journal Article
Record Number: 29379
Author: J. M. Karpoff and P. H. Malatesta
Year: 1995
Title: State takeover legislation and share values: The wealth effects of Pennsylvania's Act 36
Journal: Journal of Corporate Finance
Volume: 1
Issue: 3-4
Pages: 367-382
Short Title: State takeover legislation and share values: The wealth effects of Pennsylvania's Act 36
ISSN: 0929-1199
Abstract: Proponents of state antitakeover legislation argue that previous empirical tests by financial economists of the wealth effects of Pennsylvania's 1990 antitakeover law are biased. We show that the proponents are correct. In particular, firm size, event-time clustering, and non-synchronous trading effects account for the wealth decreases reported in earlier studies. We also show, however, that both proponents and critics of the Pennsylvania legislation have ignored the earliest press release about it. The wealth effect associated with this announcement is negative, large, and statistically significant. These results therefore are consistent with the hypothesis that the Pennsylvania law decreased company values and with the hypothesis that the initial market reaction is an unbiased estimate of the law's effect on firm values.
Notes: doi: DOI: 10.1016/0929-1199(94)00010-R
URL: http://www.sciencedirect.com/science/article/B6VFK-3XY2J7C-4/2/7ab592491aa0c306ba9bbe11f0547e2e
Reference Type: Journal Article
Record Number: 29012
Author: J. B. Kau, J. S. Linck and P. H. Rubin
Year: 2008
Title: Do managers listen to the market?
Journal: Journal of Corporate Finance
Volume: 14
Issue: 4
Pages: 347-362
Short Title: Do managers listen to the market?
ISSN: 0929-1199
Keywords: Agency costs
Information markets
Investment decisions
Merger
Acquisition
Learning
Abstract: There are competing theories as to whether managers learn from stock prices. Dye and Sridhar (2002), for example, argue that capital markets can be better informed than the firm itself, while Roll [Roll, R., 1986, "The hubris hypothesis of corporate takeovers," Journal of Business 59, 97-216.] argues managers may ignore market signals due to hubris. In this paper, we examine whether managers listen to the market in making major corporate investments, and whether agency costs and corporate governance mechanisms help explain managers' propensity to listen. We find that, on average, managers listen to the market: they are more likely to cancel investments when the market reacts unfavorably to the related announcement. Further, we find mixed evidence consistent with the notion that managers' propensity to listen is related to agency costs. We find that firms tend to listen to the market more when more of their shares are held by large blockholders, and when their CEOs have higher pay-performance sensitivities.
Notes: doi: DOI: 10.1016/j.jcorpfin.2008.03.002
URL: http://www.sciencedirect.com/science/article/B6VFK-4S7JFW1-1/2/03d567ae1fef7feebcbdeb41a050af6f
Reference Type: Journal Article
Record Number: 29333
Author: A. Khorana and M. Zenner
Year: 1998
Title: Executive compensation of large acquirors in the 1980s
Journal: Journal of Corporate Finance
Volume: 4
Issue: 3
Pages: 209-240
Short Title: Executive compensation of large acquirors in the 1980s
ISSN: 0929-1199
Keywords: Executive compensation
Corporate acquisitions
Abstract: To examine the role of executive compensation in corporate acquisition decisions, we compare executive compensation of firms undertaking large acquisitions to a control sample of non-acquirors. Before the acquisitions, we find a positive relation between firm size and compensation for executives of acquirors; we do not find such a relation for non-acquirors. This result suggests an ex ante expectation that larger firm size will result in larger managerial remuneration. Ex post, however, large acquisitions have a small positive effect on total compensation. When we separate good from bad acquisitions, we find that good acquisitions increase compensation, whereas bad acquisitions do not have a positive effect on compensation.
Notes: doi: DOI: 10.1016/S0929-1199(98)00004-2
URL: http://www.sciencedirect.com/science/article/B6VFK-3V72TPY-1/2/7ebf3c0728c75dc3f07cbffbb540eab2
Reference Type: Journal Article
Record Number: 29208
Author: K. A. Kim, P. Kitsabunnarat and J. R. Nofsinger
Year: 2004
Title: Ownership and operating performance in an emerging market: evidence from Thai IPO firms
Journal: Journal of Corporate Finance
Volume: 10
Issue: 3
Pages: 355-381
Short Title: Ownership and operating performance in an emerging market: evidence from Thai IPO firms
ISSN: 0929-1199
Keywords: Initial public offerings
Managerial ownership
Thailand
Abstract: We examine the operating performance of Thai firms after they go public. Overall, we find that their performance declines. We then explore the relationship between managerial ownership and the change in firm performance. We find that firms with [`]low' and [`]high' levels of managerial ownership experience positive relationships between managerial ownership and the change in performance (alignment-of-interest hypothesis), while firms with [`]intermediate' levels of managerial ownership exhibit a negative relationship between managerial ownership and the change in performance (entrenchment hypothesis). Examining the operating performance of IPO firms from an emerging market and finding a curvilinear relationship between managerial ownership and the post-IPO change in performance represents two significant contributions to the IPO literature.
Notes: doi: DOI: 10.1016/S0929-1199(02)00019-6
URL: http://www.sciencedirect.com/science/article/B6VFK-45X0CH1-1/2/b7d147f239ac6de1706d1cf8d32f4990
Reference Type: Journal Article
Record Number: 29058
Author: K. A. Kim, P. Kitsabunnarat-Chatjuthamard and J. R. Nofsinger
Year: 2007
Title: Large shareholders, board independence, and minority shareholder rights: Evidence from Europe
Journal: Journal of Corporate Finance
Volume: 13
Issue: 5
Pages: 859-880
Short Title: Large shareholders, board independence, and minority shareholder rights: Evidence from Europe
ISSN: 0929-1199
Keywords: G30
G32
G38
Large shareholders
Board independence
Shareholder laws
Europe
Abstract: We examine the relation between minority shareholder protection laws, ownership concentration, and board independence. Minority shareholder rights is a country-level governance variable. Ownership structure and board composition represent firm-level governance variables. Prior research hypothesizes and documents a negative relation between countries' minority shareholder rights quality and firms' ownership concentration. We introduce the hypothesis that shareholder protection rights and firms' board independence are positively related. When a country's minority shareholder rights are strong, then minority shareholders should have the legal power to affect board composition. Using a sample of large firms from 14 European countries, we test both hypotheses and find that countries with stronger shareholder protection rights have firms with lower ownership concentrations and with more independent directors, consistent with both hypotheses. We also find evidence that ownership concentration and board independence are negatively related.
Notes: doi: DOI: 10.1016/j.jcorpfin.2007.09.001
URL: http://www.sciencedirect.com/science/article/B6VFK-4PRYFX1-1/2/e47e3058d4b9e5785070fcd86a27cc87
Reference Type: Journal Article
Record Number: 28960
Author: W. Kim, W. Kim and K.-S. Kwon
Title: Value of outside blockholder activism: Evidence from the switchers
Journal: Journal of Corporate Finance
Volume: In Press, Corrected Proof
Short Title: Value of outside blockholder activism: Evidence from the switchers
ISSN: 0929-1199
Keywords: Blockholders
Shareholder activism
Investment purpose
5% rule
Korea
Abstract: This paper measures the value of shareholder activism focusing on outside blockholders who switch their investment purpose from passive to active but are not likely to engage in control-related activities. Unlike the usual 5% ownership disclosure, a switch does not necessarily involve additional share purchase, and thus provides a cleaner test in effectively ruling out alternative theories such as those related to stock picking skills, private information, or herding. We apply the test to outside blockholders in the Korean market, which experienced a concentrated number of switchers in the first half of 2005 when the government adopted a new disclosure rule. We find that target price reaction is significantly positive around the time of the switch disclosure and this effect is more pronounced when the switcher declares to use a wider scope of activist measures. Following the switch, we also find evidence of increases in dividend payouts for firms targeted by switchers with a wider scope of activism, and those with high free cash flows.
Notes: doi: DOI: 10.1016/j.jcorpfin.2009.04.002
URL: http://www.sciencedirect.com/science/article/B6VFK-4W7J0XN-1/2/14e0fbf3be2f08924717c28570c85cf0
Reference Type: Journal Article
Record Number: 29120
Author: Y. S. Kim, I. Mathur and J. Nam
Year: 2006
Title: Is operational hedging a substitute for or a complement to financial hedging?
Journal: Journal of Corporate Finance
Volume: 12
Issue: 4
Pages: 834-853
Short Title: Is operational hedging a substitute for or a complement to financial hedging?
ISSN: 0929-1199
Keywords: Operational hedging
Financial hedging
Foreign exchange exposure
Financial derivatives
Abstract: This paper investigates operational hedging by firms and how operational hedging is related to financial hedging by using a sample of 424 firm observations, which consist of 212 operationally hedged firms (firms with foreign sales) and a size- and industry-matched sample of 212 non-operationally hedged firms (firms with export sales). We find that non-operationally hedged firms use more financial hedging, relative to their levels of foreign currency exposure, as measured by the amount of export sales. On the other hand, though operationally hedged firms have more currency exposure, their usage of financial derivatives becomes much smaller than that of exporting firms. These results can explain why some global firms use very limited amount of financial derivatives for hedging purpose despite much higher levels of currency risk exposure. We also show that hedging increases firm value.
Notes: doi: DOI: 10.1016/j.jcorpfin.2005.09.003
URL: http://www.sciencedirect.com/science/article/B6VFK-4HDG9C2-1/2/9e3b275e412353333a093208e7c6c706
Reference Type: Journal Article
Record Number: 29380
Author: O. Kini, W. Kracaw and S. Mian
Year: 1995
Title: Corporate takeovers, firm performance, and board composition
Journal: Journal of Corporate Finance
Volume: 1
Issue: 3-4
Pages: 383-412
Short Title: Corporate takeovers, firm performance, and board composition
ISSN: 0929-1199
Keywords: Corporate takeovers
Firm performance
Board composition
CEO turnover
Board restructuring
Abstract: This paper examines the relation between corporate takeovers and the board of directors as alternative control mechanisms to discipline top management. Previous research shows that CEO turnover subsequent to corporate takeovers is inversely related to pre-takeover market-related performance. We find this relation is concentrated in targets with inside-dominated boards of directors. Our results support the notion that, as an alternative control device, takeovers serve as a "substitute" for outside directors. Further, we show that the discipline associated with corporate takeovers extends beyond top management to effect restructuring of the entire board. The nature of the discipline depends on the composition of the target board prior to the takeover. Disciplinary takeovers result in two general effects: (1) for inside-dominated targets, the number of inside directorships decreases while the number of outside directorships remains about the same; and (2) for outside-dominated boards, the number of inside directorships increases while the number of outside directorships decreases. As a result, the board is recomposed toward a more even balance between inside and outside directorships.
Notes: doi: DOI: 10.1016/0929-1199(94)00011-I
URL: http://www.sciencedirect.com/science/article/B6VFK-3XY2J7C-5/2/5246beaba1a729e2854123c1cfb8c588
Reference Type: Journal Article
Record Number: 29197
Author: L. F. Klapper and I. Love
Year: 2004
Title: Corporate governance, investor protection, and performance in emerging markets
Journal: Journal of Corporate Finance
Volume: 10
Issue: 5
Pages: 703-728
Short Title: Corporate governance, investor protection, and performance in emerging markets
ISSN: 0929-1199
Keywords: Corporate governance
International finance
Law and finance
Abstract: We use recent data on firm-level corporate governance (CG) rankings across 14 emerging markets and find that there is wide variation in firm-level governance in our sample and that the average firm-level governance is lower in countries with weaker legal systems. We explore the determinants of firm-level governance and find that governance is correlated with the extent of the asymmetric information and contracting imperfections that firms face. We also find that better corporate governance is highly correlated with better operating performance and market valuation. Finally, we provide evidence that firm-level corporate governance provisions matter more in countries with weak legal environments.
Notes: doi: DOI: 10.1016/S0929-1199(03)00046-4
URL: http://www.sciencedirect.com/science/article/B6VFK-48JK6TT-1/2/f0779a20eadb37400af5a84262f5921e
Reference Type: Journal Article
Record Number: 29369
Author: B. Klein
Year: 1995
Title: The economics of franchise contracts
Journal: Journal of Corporate Finance
Volume: 2
Issue: 1-2
Pages: 9-37
Short Title: The economics of franchise contracts
ISSN: 0929-1199
Keywords: Franchise contracts
Self-enforcement commitment
Vertical integration
Abstract: An incentive problem exists in franchise relationships because of the failure of franchisees to take account of franchisor profit. Franchise contracts ameliorate this malincentive not by specifying a proxy for desired franchisee performance, but by creating a premium stream that facilitates a self-enforcing agreement. The structure of credible commitments within this self-enforcing arrangement is elucidated, with initial franchisee investments shown to serve no performance guaranteeing purpose. Franchisors do not demand large initial lump sum payments from franchisees because doing so makes it more difficult to terminate franchisees for nonperformance. Franchisors use vertical integration when the premium necessary to assure franchisee performance is large.
Notes: doi: DOI: 10.1016/0929-1199(95)00003-Q
URL: http://www.sciencedirect.com/science/article/B6VFK-3Y2GCVW-5/2/cea2c827cc38245a1a6a230314322af9
Reference Type: Journal Article
Record Number: 29220
Author: J. Köke
Year: 2004
Title: The market for corporate control in a bank-based economy: a governance device?
Journal: Journal of Corporate Finance
Volume: 10
Issue: 1
Pages: 53-80
Short Title: The market for corporate control in a bank-based economy: a governance device?
ISSN: 0929-1199
Keywords: Corporate governance
Ownership structure
Management turnover
Restructuring
Abstract: This study examines whether changes in ultimate firm ownership (control) play a disciplinary role in a bank-based economy. We focus on Germany as the prototype of a bank-based system. We find that poor performance makes a change in control more likely; this suggests a disciplinary role. Tight shareholder control acts as a substitute for control changes, strong creditor control as a complement. Following a change in control, management turnover increases, but not as a consequence of poor performance, and performance does not improve significantly. These findings are inconsistent with a disciplinary role of the market for corporate control in bank-based Germany.
Notes: doi: DOI: 10.1016/S0929-1199(02)00046-9
URL: http://www.sciencedirect.com/science/article/B6VFK-46YBVKV-1/2/a25ecde4507f5e651c878f9da6b0f259
Reference Type: Journal Article
Record Number: 29381
Author: S. R. Kole
Year: 1995
Title: Measuring managerial equity ownership: a comparison of sources of ownership data
Journal: Journal of Corporate Finance
Volume: 1
Issue: 3-4
Pages: 413-435
Short Title: Measuring managerial equity ownership: a comparison of sources of ownership data
ISSN: 0929-1199
Keywords: Managerial stock ownership
Insiders
Management entrenchment
Abstract: This paper demonstrates that differences in managerial ownership data cannot explain contradictory empirical evidence on the relation between equity ownership and the entrenchment of managers. Three commonly used sources of managerial equity ownership data are described and contrasted. The Value Line Investment Survey is shown to be a relatively low-cost substitute for the data on beneficial ownership by officers and directors found in corporate proxy statements.
Notes: doi: DOI: 10.1016/0929-1199(94)00012-J
URL: http://www.sciencedirect.com/science/article/B6VFK-3XY2J7C-6/2/38d4b8d8067dfde262392e9aea04c8bf
Reference Type: Journal Article
Record Number: 29157
Author: T. P. Korkeamaki
Year: 2005
Title: Effects of law on corporate financing practices--international evidence from convertible bond issues
Journal: Journal of Corporate Finance
Volume: 11
Issue: 5
Pages: 809-831
Short Title: Effects of law on corporate financing practices--international evidence from convertible bond issues
ISSN: 0929-1199
Keywords: International
Law
Convertible securities
Call protection
Abstract: Firms can adjust their convertibles to be more debt-like or equity-like through several contract terms. In particular, by providing call protection, a convertible issuer can assure its convertible bondholders that it will not force them to become equity holders during the call protection period. The possibility of a forced conversion instituted by an early call should be more threatening to investors in an economy where local laws are biased against shareholders. I examine call protection terms in an international sample and find evidence consistent with the hypothesis that convertible bond design varies based on the features of local law.
Notes: doi: DOI: 10.1016/j.jcorpfin.2004.10.003
URL: http://www.sciencedirect.com/science/article/B6VFK-4G4NR20-1/2/cf5fb6c27a81a7dd70d201c72553b020
Reference Type: Journal Article
Record Number: 29370
Author: F. Lafontaine and S. Bhattacharyya
Year: 1995
Title: The role of risk in franchising
Journal: Journal of Corporate Finance
Volume: 2
Issue: 1-2
Pages: 39-74
Short Title: The role of risk in franchising
ISSN: 0929-1199
Keywords: Franchising
Risk
Agency
Contracts
Abstract: The empirical literature on franchising suggests that the proportion of risk borne by franchisees increases as the amount of risk to be shared goes up. This has been interpreted by some as evidence that franchisors use franchising as a way to "shed" risk. This paper argues against this conclusion. First we show that the evidence is weak given the problems associated with measuring risk in franchising. Second, we show how a model emphasizing incentive issues and informational problems can give rise to the patterns found in the data. We conclude that risk shedding need not be invoked to explain franchising.
Notes: doi: DOI: 10.1016/0929-1199(95)00004-R
URL: http://www.sciencedirect.com/science/article/B6VFK-3Y2GCVW-6/2/3dca8626357ed404faa6af4591dd0d8a
Reference Type: Journal Article
Record Number: 29368
Author: F. Lafontaine and S. E. Masten
Year: 1995
Title: Franchise contracting, organization, and regulation: Introduction
Journal: Journal of Corporate Finance
Volume: 2
Issue: 1-2
Pages: 1-7
Short Title: Franchise contracting, organization, and regulation: Introduction
ISSN: 0929-1199
Notes: doi: DOI: 10.1016/0929-1199(95)00002-P
URL: http://www.sciencedirect.com/science/article/B6VFK-3Y2GCVW-4/2/c3d15e4a7fbce4e1a563ae93749230a6
Reference Type: Journal Article
Record Number: 28972
Author: D. W. Lee and K. S. Park
Title: Does institutional activism increase shareholder wealth? Evidence from spillovers on non-target companies
Journal: Journal of Corporate Finance
Volume: In Press, Corrected Proof
Short Title: Does institutional activism increase shareholder wealth? Evidence from spillovers on non-target companies
ISSN: 0929-1199
Keywords: Institutional activism
Shareholder wealth
Spillovers
Korea corporate governance fund
Abstract: This paper presents evidence of the shareholder wealth effect of institutional activism using its spillovers on non-target companies. The spillovers are instructive because they are a response to an exogenous shock and thus create an environment to conduct a clean event study. In particular, we examine the spillover effects of the first target announcement of the Korea Corporate Governance Fund. As the very first sign of institutional activism in the country, this announcement creates an expectation of similar governance efforts even in non-target companies, especially in those companies whose governance is currently poorer and thus the scope for future activism is greater. Consistent with institutional activism contributing to shareholder wealth, we find that, among non-targets, those firms granting fewer rights to outside shareholders experience a more positive stock price reaction. Further analysis lends additional support to the positive wealth effect of institutional activism.
Notes: doi: DOI: 10.1016/j.jcorpfin.2009.03.002
URL: http://www.sciencedirect.com/science/article/B6VFK-4VY2C6H-1/2/673947004b7699d71391b4e8ba9d76d2
Reference Type: Journal Article
Record Number: 29339
Author: I. Lee and T. Loughran
Year: 1998
Title: Performance following convertible bond issuance
Journal: Journal of Corporate Finance
Volume: 4
Issue: 2
Pages: 185-207
Short Title: Performance following convertible bond issuance
ISSN: 0929-1199
Keywords: Convertible bond issuance
Long-run stock performance
Operating performance
Abstract: Using a sample of 986 convertible bond issuers of U.S. operating companies during 1975-1990, we document poor stock and operating performance in the years following the offering. The underperformance of stock returns cannot be explained by new issues activity (recent initial public offerings (IPOs) or seasoned equity offerings (SEOs)) or the level of the proceeds. Concurrent with the low subsequent stock returns, we document a rapid decline in the operating performance of the issuers following the offering. Profit margin and return on assets for the issuers are approximately halved in the four years after the convertible bond issue.
Notes: doi: DOI: 10.1016/S0929-1199(98)00007-8
URL: http://www.sciencedirect.com/science/article/B6VFK-3V72TS4-7/2/ec948b4051aa3ba82d224f7b037bbc37
Reference Type: Journal Article
Record Number: 29307
Author: C. E. Lefanowicz, J. R. Robinson and R. Smith
Year: 2000
Title: Golden parachutes and managerial incentives in corporate acquisitions: evidence from the 1980s and 1990s
Journal: Journal of Corporate Finance
Volume: 6
Issue: 2
Pages: 215-239
Short Title: Golden parachutes and managerial incentives in corporate acquisitions: evidence from the 1980s and 1990s
ISSN: 0929-1199
Keywords: Corporate acquisitions
Golden parachutes
Management incentives
Abstract: We investigate the extent to which managerial incentives, including golden parachute (GP) payments, have influenced target acquisition gains over the past two decades. We find that the use and scope of GP contracts expanded dramatically for a large sample of firms acquired from 1980 through 1995. To investigate the effect of managerial incentives on target acquisition gains, we estimate a regression of abnormal stock returns for acquisitions on variables including managerial incentives, the value of GP payments, and the interaction between GPs and management incentives. The regression results indicate that management incentives are positively associated with target acquisition returns and that GP payments serve to mitigate this influence. We do not, however, detect any direct association between the level of GP payments and target gains.
Notes: doi: DOI: 10.1016/S0929-1199(00)00014-6
URL: http://www.sciencedirect.com/science/article/B6VFK-40V4F2V-6/2/62d496989b2c4b6138a17ea3ff4b4168
Reference Type: Journal Article
Record Number: 29387
Author: K. Lehn and W. Marr
Year: 1994
Title: Statement by the editors
Journal: Journal of Corporate Finance
Volume: 1
Issue: 1
Pages: 1-3
Short Title: Statement by the editors
ISSN: 0929-1199
Notes: doi: DOI: 10.1016/0929-1199(94)90007-8
URL: http://www.sciencedirect.com/science/article/B6VFK-47DD36X-7/2/68fd7545e21c8e60d5d7ee0a6f33a84b
Reference Type: Journal Article
Record Number: 29060
Author: K. Lehn, S. Patro and M. Zhao
Year: 2007
Title: Governance indexes and valuation: Which causes which?
Journal: Journal of Corporate Finance
Volume: 13
Issue: 5
Pages: 907-928
Short Title: Governance indexes and valuation: Which causes which?
ISSN: 0929-1199
Keywords: Governance
Governance index
Causality
Abstract: Two recent papers document a significant relation between valuation multiples and governance indices during the 1990s. We test whether causation runs from governance to valuation or vice versa. We find that valuation multiples during the early 1980s, a period preceding the adoption of the provisions comprising the governance indices, are highly correlated with valuation multiples during the 1990s. After controlling for valuation multiples during 1980-1985, no significant relation exists between contemporaneous valuation multiples and governance indices during the 1990s. The results are consistent with the hypothesis that firms with low valuation multiples were more likely to adopt provisions comprising the governance indices, not that the adoption of these provisions depresses valuation multiples.
Notes: doi: DOI: 10.1016/j.jcorpfin.2007.07.002
URL: http://www.sciencedirect.com/science/article/B6VFK-4P7FSBH-1/2/5409867da8d313d11f7da0f8ad08674b
Reference Type: Journal Article
Record Number: 29056
Author: T. Leite
Year: 2007
Title: Adverse selection, public information, and underpricing in IPOs
Journal: Journal of Corporate Finance
Volume: 13
Issue: 5
Pages: 813-828
Short Title: Adverse selection, public information, and underpricing in IPOs
ISSN: 0929-1199
Keywords: Public information
Partial adjustment
Winner's curse
IPOs
Underpricing
Abstract: This paper generalizes the informational environment of the Rock model to address empirical evidence and conjectures that cannot be addressed within the standard model based on informed and uninformed investors such as underpricing being positively related to market returns observed prior to the IPO, the number of IPOs being positively related to market returns, underpricing being partly predictable based on public information, and the return to uninformed participation being negative overall but positively related to market returns observed prior to the IPO. Finally, the model suggests that a positive relation between market returns and underpricing need not represent an inefficiency in the pricing of IPOs.
Notes: doi: DOI: 10.1016/j.jcorpfin.2007.04.010
URL: http://www.sciencedirect.com/science/article/B6VFK-4NK4G3W-1/2/9843cd649213d073a5e94a7b30376773
Reference Type: Journal Article
Record Number: 29108
Author: J. Leung and K. Menyah
Year: 2006
Title: Issuer-oriented underpricing costs in initial public offers: Evidence from Hong Kong
Journal: Journal of Corporate Finance
Volume: 12
Issue: 5
Pages: 897-905
Short Title: Issuer-oriented underpricing costs in initial public offers: Evidence from Hong Kong
ISSN: 0929-1199
Keywords: Initial public offers
Issuer underpricing
Interest on application funds
Fixed-price IPOs
Abstract: This paper estimates the underpricing cost associated with new shares issued and sold when firms go public in a traditional British-style IPO market in contrast to prior work which focussed on the underpricing cost to pre-IPO investors. Secondly, the estimates account for interest income on application funds received by issuing firms. Using data from the Hong Kong IPO market, the results show that the issuer underpricing cost of new share issues is on average only 14% of headline underpricing. When interest on application funds is taken into account, net issuer underpricing cost reduces to just around 7% of headline underpricing. This finding provides a compelling explanation of why issuing companies may not be concerned about underpricing in traditional British-style IPO markets. Thirdly, we also find that pre-IPO investors take steps to minimise wealth transfer to new investors either by selling a very small proportion or none of their pre-IPO shares. These findings suggest that explanations of IPO underpricing to the various parties involved in the process should, in part, be sought in the institutional structures and investment banking practices of the relevant primary capital market.
Notes: doi: DOI: 10.1016/j.jcorpfin.2005.11.003
URL: http://www.sciencedirect.com/science/article/B6VFK-4J7H43D-1/2/02573d4391505288bb9d96bf0621c1a3
Reference Type: Journal Article
Record Number: 29158
Author: C. B. Levine and J. S. Hughes
Year: 2005
Title: Management compensation and earnings-based covenants as signaling devices in credit markets
Journal: Journal of Corporate Finance
Volume: 11
Issue: 5
Pages: 832-850
Short Title: Management compensation and earnings-based covenants as signaling devices in credit markets
ISSN: 0929-1199
Keywords: Management compensation
Earnings-based covenant
Credit markets
Abstract: A firm seeks to raise capital in credit markets to fund risky operating activities. The firm has private information about the future cash flows from such activities. Firm owners delegate operating decisions to a manager who privately learns further information about the distribution of those cash flows subsequent to contracting, but before taking actions. Those actions include the selection of which operating activities to pursue and how much hidden effort to exert. At issue initially after introducing the problem is the efficient design of the manager's compensation as a device for signaling private information to lenders as well as for inducing operating decisions. Our results provide conditions under which a Bayesian Nash separating equilibrium satisfying the Cho-Kreps intuitive criterion exists. Broadly speaking, these results suggest that contracts that resolve internal adverse selection and moral hazard problems may serve as signaling devices in efficiently resolving information asymmetries with external parties. Next, we show how earnings-based debt covenants and the selection of conservative accounting methods may eliminate signaling costs altogether.
Notes: doi: DOI: 10.1016/j.jcorpfin.2005.08.002
URL: http://www.sciencedirect.com/science/article/B6VFK-4H39303-1/2/e67273796c2f8d3e097d89861cb7e944
Reference Type: Journal Article
Record Number: 29279
Author: C. M. Lewis, R. J. Rogalski and J. K. Seward
Year: 2001
Title: The long-run performance of firms that issue convertible debt: an empirical analysis of operating characteristics and analyst forecasts
Journal: Journal of Corporate Finance
Volume: 7
Issue: 4
Pages: 447-474
Short Title: The long-run performance of firms that issue convertible debt: an empirical analysis of operating characteristics and analyst forecasts
ISSN: 0929-1199
Keywords: Debt
Security
Firm
Abstract: Many firms issue hybrid securities, such as convertible debt, instead of standard securities like straight debt or common equity. Theoretical arguments suggest that convertible debt minimizes costs for firms facing high debt- and equity-related external financing costs. Theory also suggests that an appropriately designed convertible security provides efficient investment incentives. We show, however, that firms on average perform poorly following the issuance of convertible debt. The empirical evidence suggests that the efficient investment decisions predicted by theory are not in fact achieved by the actual design and issuance of convertible debt securities. An alternative interpretation of convertible debt offers is that investors ration the participation of some issuers in the seasoned equity market.
Notes: doi: DOI: 10.1016/S0929-1199(01)00035-9
URL: http://www.sciencedirect.com/science/article/B6VFK-44B1WWV-4/2/ca2fe270c8751d660b5b28edd50de594
Reference Type: Journal Article
Record Number: 29274
Author: C. M. Lewis, R. J. Rogalski and J. K. Seward
Year: 2002
Title: Risk changes around convertible debt offerings
Journal: Journal of Corporate Finance
Volume: 8
Issue: 1
Pages: 67-80
Short Title: Risk changes around convertible debt offerings
ISSN: 0929-1199
Keywords: Risk changes
Convertible debt offerings
Cost of capital
Abstract: Firms issuing convertible debt experience poor long-run stock price and operating performance. We examine the possibility that this poor performance may be caused by an unexpected increase in the cost of capital. Our finding that the cost of capital decreases following a convertible debt offer (CDO) is inconsistent with this interpretation. We also provide evidence that idiosyncratic and total risk increases and that these increases are not related to corresponding changes in the issuer's industry. The results are consistent with an interpretation that idiosyncratic risk affects investment decisions following convertible debt offers, which in turn adversely impacts future operating performance. Our empirical evidence reinforces the notion suggested in earlier studies that the efficient investment decisions predicted by theory are not achieved by the actual design and issuance of convertible debt securities in practice.
Notes: doi: DOI: 10.1016/S0929-1199(01)00029-3
URL: http://www.sciencedirect.com/science/article/B6VFK-44SJGX0-4/2/7118b7674a978762bc0427a2306e9d51
Reference Type: Journal Article
Record Number: 29148
Author: E. Lie
Year: 2005
Title: Operating performance following dividend decreases and omissions
Journal: Journal of Corporate Finance
Volume: 12
Issue: 1
Pages: 27-53
Short Title: Operating performance following dividend decreases and omissions
ISSN: 0929-1199
Keywords: Dividend decreases
Dividend omissions
Signaling
Operating performance
Abstract: Using quarterly data and benchmarks based on past performance characteristics, I find little evidence that earnings change following 661 dividend decreases and 484 dividend omissions between 1980 and 1998. The exception is that earnings deteriorate during the quarter of dividend omissions, but they recover within a couple of quarters. My results further suggest that the lack of a more pronounced earnings decline is neither attributable to a contemporaneous and confounding increase in share repurchases, to earnings management, nor to improving investment opportunities, and the results are similar for firms that are not predicted to cut dividend payouts based on their financial flexibility. Instead, I find some evidence that the negative stock price reaction reflects the dismal performance during the quarter of the announcement, especially for firms that omit dividends, and that the market interprets the dividend announcements too pessimistically.
Notes: doi: DOI: 10.1016/j.jcorpfin.2004.04.004
URL: http://www.sciencedirect.com/science/article/B6VFK-4CX72M6-1/2/b0c83bf9f13b74b2706a712703a885da
Reference Type: Journal Article
Record Number: 29289
Author: E. Lie, H. J. Lie and J. J. McConnell
Year: 2001
Title: Debt-reducing exchange offers
Journal: Journal of Corporate Finance
Volume: 7
Issue: 2
Pages: 179-207
Short Title: Debt-reducing exchange offers
ISSN: 0929-1199
Keywords: Debt-reducing exchange offers
Financial distress
Chapter 11
Abstract: Announcements of debt-reducing exchange offers are associated with a negative average stock price reaction. We address two questions: Why do firms undertake debt-reducing exchange offers? And, what is the information conveyed by such offers? The answers are interrelated: Debt-reducing exchange offers are undertaken by financially weak firms in an effort to stave off further financial distress and, thereby, preserve value for shareholders. A successfully completed exchange offer significantly reduces the likelihood that a firm will enter Chapter 11. Announcements of debt-reducing exchange offers apparently contain two pieces of information: (1) the firm is financially weaker than would have been apparent from other publicly available information, and (2) management is attempting to preserve value for shareholders.
Notes: doi: DOI: 10.1016/S0929-1199(01)00019-0
URL: http://www.sciencedirect.com/science/article/B6VFK-43DDWJC-4/2/cde962daf20ce6b1570fa6987855522f
Reference Type: Journal Article
Record Number: 29016
Author: C. Lin and D. Su
Year: 2008
Title: Industrial diversification, partial privatization and firm valuation: Evidence from publicly listed firms in China
Journal: Journal of Corporate Finance
Volume: 14
Issue: 4
Pages: 405-417
Short Title: Industrial diversification, partial privatization and firm valuation: Evidence from publicly listed firms in China
ISSN: 0929-1199
Keywords: Diversification
Partial privatization
Political costs
Corporate governance
China
Abstract: This paper investigates the relationship between industrial diversification and firm valuation in a sample of 816 publicly listed firms in China. It contributes to the literature in three ways. First, it is one of the first studies of diversification and firm value in an emerging market dominated by partially privatized firms. Second, it explores the determinants of corporate diversification by considering some unique aspects of the agency and political conflicts inherent in China's transition toward a market economy. Third, it employs a number of empirical methodologies (instrumental variables estimation, the Heckman self-selection model, and propensity score matching) to examine the relationship between diversification and firm value. The paper finds that when the decision to diversify is modeled as an endogenous choice based on firm characteristics, multi-segment firms have significantly higher Tobin's q than single-segment firms, even after controlling for factors such as ownership structure, ownership concentration, and growth opportunities. In addition, government-controlled multi-segment firms have lower Tobin's q than non-government-controlled multi-segment firms, providing evidence in support of the political cost hypothesis of diversification. Moreover, non-government-controlled firms in growth industries that perform better are more likely to diversify. Overall, our results illustrate that the valuation effect of diversification depends on government control.
Notes: doi: DOI: 10.1016/j.jcorpfin.2008.05.001
URL: http://www.sciencedirect.com/science/article/B6VFK-4SHMCF9-1/2/b298a4028b7b9084ffa54562499b1787
Reference Type: Journal Article
Record Number: 29334
Author: T. H. Lin and R. L. Smith
Year: 1998
Title: Insider reputation and selling decisions: the unwinding of venture capital investments during equity IPOs
Journal: Journal of Corporate Finance
Volume: 4
Issue: 3
Pages: 241-263
Short Title: Insider reputation and selling decisions: the unwinding of venture capital investments during equity IPOs
ISSN: 0929-1199
Keywords: Reputation
Insider selling
Venture capital
Initial public offering
Abstract: Data on selling by venture capitalists during the IPOs of their portfolio companies are used to examine the relation between insider selling decisions and reputation. We hypothesize that, in deciding whether to sell, venture capitalists balance the costs of continued managerial/monitoring involvement against the adverse reaction to selling. Further, they facilitate unwinding of investment positions by developing reputations for not selling overpriced shares. Evidence on the timing of IPOs and selling decisions of venture capitalists confirms the importance of reputation as a determinant of the organization of the venture capital market and as a factor affecting insider selling decisions.
Notes: doi: DOI: 10.1016/S0929-1199(98)00005-4
URL: http://www.sciencedirect.com/science/article/B6VFK-3V72TPY-2/2/83d88bec3993aaf295f196935eb875ba
Reference Type: Journal Article
Record Number: 29168
Author: S. C. Linn and D. Park
Year: 2005
Title: Outside director compensation policy and the investment opportunity set
Journal: Journal of Corporate Finance
Volume: 11
Issue: 4
Pages: 680-715
Short Title: Outside director compensation policy and the investment opportunity set
ISSN: 0929-1199
Keywords: Outside directors
Investment opportunities
Compensation policy
Abstract: We investigate the relation between outside director compensation and the investment opportunities of firms. The sample of cases is drawn from the period 1996 to 2001. We find that elements of outside director compensation are significantly related to the investment opportunity set. Firms with more investment opportunities pay a higher level of compensation to their outside directors than firms with fewer investment opportunities. In addition to paying more total compensation, firms with greater investment opportunities compensate directors more heavily with stock-based forms of compensation than with cash. The result is consistent with the hypothesis that board compensation policy is designed to: (1) attract directors whose marginal productivity interacts with the investment opportunities of the firm to produce the maximal gain, and (2) mitigate agency problems. We also document a positive relation between total compensation of outside directors and firm size. A separate analysis indicates the results are economically significant. We conclude that firms pay more and emphasize incentive-based compensation to motivate outside directors to act in the interests of shareholders when the costs of monitoring are high.
Notes: doi: DOI: 10.1016/j.jcorpfin.2004.11.002
URL: http://www.sciencedirect.com/science/article/B6VFK-4FHKD0K-2/2/44b1b07b5cf3413b9e33b87e39a546ac
Reference Type: Journal Article
Record Number: 29233
Author: M. L. Lipson
Year: 2003
Title: Market microstructure and corporate finance
Journal: Journal of Corporate Finance
Volume: 9
Issue: 4
Pages: 377-384
Short Title: Market microstructure and corporate finance
ISSN: 0929-1199
Keywords: Market microstructure
Stock
Corporate finance
Abstract: This article provides a brief overview of the importance of market microstructure research and identifies existing areas of research that focus on links between microstructure and corporate finance. Each of the special issue articles is then summarized with particular attention given to the research contribution of the article and to the links explored between microstructure and corporate finance.
Notes: doi: DOI: 10.1016/S0929-1199(02)00051-2
URL: http://www.sciencedirect.com/science/article/B6VFK-47MJ54M-1/2/7eb29d3dc1c932592cf1ee2a6f9e80cb
Reference Type: Journal Article
Record Number: 29107
Author: M. L. Lipson and S. Mortal
Year: 2006
Title: The effect of stock splits on clientele: Is tick size relevant?
Journal: Journal of Corporate Finance
Volume: 12
Issue: 5
Pages: 878-896
Short Title: The effect of stock splits on clientele: Is tick size relevant?
ISSN: 0929-1199
Keywords: Stock splits
Tick size
Clientele
Abstract: We explore whether the relation between stock splits and clientele is driven by binding tick sizes. We find little evidence that firms adjusted prices to maintain similarly binding tick sizes as the NYSE reduced tick sizes. Furthermore, though splits that increase the extent to which tick sizes are binding are associated with greater increases in spreads, these splits experience similar changes in measures related to clientele, including trade size, breadth of individual and institutional ownership, and analyst following. We find little evidence supporting theories, such as spread-induced sponsorship, that rely on binding tick sizes to link splits and clientele.
Notes: doi: DOI: 10.1016/j.jcorpfin.2006.01.002
URL: http://www.sciencedirect.com/science/article/B6VFK-4JF8H8X-1/2/c9ee88d22e18f518ed5743520a45f36f
Reference Type: Journal Article
Record Number: 29081
Author: K. Litvak
Year: 2007
Title: The effect of the Sarbanes-Oxley act on non-US companies cross-listed in the US
Journal: Journal of Corporate Finance
Volume: 13
Issue: 2-3
Pages: 195-228
Short Title: The effect of the Sarbanes-Oxley act on non-US companies cross-listed in the US
ISSN: 0929-1199
Keywords: Sarbanes-Oxley Act
Cross-listing
Event study
Securities regulation
Corporate governance
Abstract: This paper uses a natural experiment to measure market response to the adoption of the Sarbanes-Oxley Act ([modifier letter reversed comma][modifier letter reversed comma]SOX"). Because SOX applies to all US public companies, US-based studies have difficulty separating the effects of contemporaneous events. However, controlled analysis is available: SOX applies to some cross-listed firms (those listed on level 2 or 3), but not to others (listed on level 1 or 4). By comparing reactions of SOX-exposed foreign firms to reactions of otherwise similar SOX-unexposed foreign firms, we can test investor beliefs about the costs and benefits of SOX in a way that is not cleanly available for US-based studies. We find that stock prices of foreign firms subject to SOX declined (increased) significantly, compared to cross-listed firms not subject to SOX and to non-cross-listed firms, during key announcements indicating that SOX would (would not) fully apply to cross-listed issuers. In cross-sectional tests, high-disclosing firms and firms from high-disclosing countries experienced the strongest declines, while faster-growing companies experienced weaker declines. This evidence is consistent with the view that investors expected the Sarbanes-Oxley Act to have a net negative effect on cross-listed foreign companies, with high-disclosing and low-growth companies suffering larger net costs, and faster-growing companies suffering smaller costs, particularly when they are located in poorly governed countries.
Notes: doi: DOI: 10.1016/j.jcorpfin.2007.03.002
URL: http://www.sciencedirect.com/science/article/B6VFK-4NMV003-1/2/f8a6d7b5a6de37d24486e32f9532a9d7
Reference Type: Journal Article
Record Number: 29059
Author: Q. Liu and Z. Lu
Year: 2007
Title: Corporate governance and earnings management in the Chinese listed companies: A tunneling perspective
Journal: Journal of Corporate Finance
Volume: 13
Issue: 5
Pages: 881-906
Short Title: Corporate governance and earnings management in the Chinese listed companies: A tunneling perspective
ISSN: 0929-1199
Keywords: Agency problems
Earnings management
Tunneling
Corporate governance
Abstract: This paper examines the relation between earnings management and corporate governance in China by introducing a tunneling perspective. We document systematic differences in earnings management across the universe of China's listed companies during 1999-2005, and empirically demonstrate that firms with higher corporate governance levels have lower levels of earnings management. We study two China-specific situations, in which the listed firms have strong incentives to manage earnings in order to meet certain return on equity (ROE) thresholds, and earnings management has been shown to be the most conspicuous. We identify tunneling evidence for each. Our empirical findings, although not being able to completely exclude other explanations, strongly suggest that agency conflicts between controlling shareholders and minority investors account for a significant portion of earnings management in China's listed firms.
Notes: (Joe)
doi: DOI: 10.1016/j.jcorpfin.2007.07.003
URL: http://www.sciencedirect.com/science/article/B6VFK-4PB6VTK-1/2/28a254cc822540b5409343885d500a06
Reference Type: Journal Article
Record Number: 29050
Author: T. Loughran
Year: 2007
Title: Geographic dissemination of information
Journal: Journal of Corporate Finance
Volume: 13
Issue: 5
Pages: 675-694
Short Title: Geographic dissemination of information
ISSN: 0929-1199
Keywords: Familiarity
Lead-lag relationships
Urgent trades
Abstract: Urban companies are located near millions more potential investors and sophisticated money managers than non-urban companies. More investors are familiar with urban companies and have access to informal information about them. The stock of urban companies is also more liquid than the stock of non-urban companies. We hypothesize that these factors lead information to be spread from urban companies to other companies. Urban stock returns lead rural/small city stock returns even controlling for size, industry, and analyst coverage. Closer examination of the lead-lag relation reveals that urgent trades, which are likely to reflect short-lived information, are much more common for urban firms. Information appears to be uncovered through informal means more easily available to people physically near a company. We discuss the corporate finance implications of our findings.
Notes: doi: DOI: 10.1016/j.jcorpfin.2007.03.006
URL: http://www.sciencedirect.com/science/article/B6VFK-4NP3P2C-1/2/3c5dfda9ded436284234e031a3014ed0
Reference Type: Journal Article
Record Number: 29258
Author: L. L. Lundstrum
Year: 2002
Title: Corporate investment myopia: a horserace of the theories
Journal: Journal of Corporate Finance
Volume: 8
Issue: 4
Pages: 353-371
Short Title: Corporate investment myopia: a horserace of the theories
ISSN: 0929-1199
Keywords: Investing policy
R&D
Abstract: This paper tests two theories of corporate investment myopia which predict a distortion in investment policy with respect to the standard net present value rule. The theories are confronted with the empirical evidence, allowing the theories to compete to explain investment behavior. Research and development expense is used to proxy for long-term investment in a pooled, cross-sectional time-series regression. I find that research and development expense is decreasing in the age of the Chief Executive Officer. Results are consistent with the hypothesis that agency costs are lower when the firm invests myopically, rather than follow a standard net present value rule.
Notes: doi: DOI: 10.1016/S0929-1199(01)00050-5
URL: http://www.sciencedirect.com/science/article/B6VFK-46FJ8G1-4/2/8c2c11a469c748eedc1a6454cc8facb9
Reference Type: Journal Article
Record Number: 29372
Author: N. A. Lutz
Year: 1995
Title: Ownership rights and incentives in franchising
Journal: Journal of Corporate Finance
Volume: 2
Issue: 1-2
Pages: 103-131
Short Title: Ownership rights and incentives in franchising
ISSN: 0929-1199
Keywords: Franchising
Double moral hazard
Vertical integration
Abstract: I focus on the incentive effects of asset ownership in franchising. Franchise contracts give a manager ownership of some local assets; the franchisor owns other assets, notably the trademark. Under double moral hazard, the allocation of ownership effects the incentives of both the franchisor and the franchisee. I compare franchising with company-ownership of all assets. Franchising the local unit gives the manager strong incentives, but gives the central firm weak incentives. Franchising may be the preferred organizational form when the local manager's effort has a relatively small effect on the unit's current profit, but a large effect on the unit's future profit.
Notes: doi: DOI: 10.1016/0929-1199(95)00006-T
URL: http://www.sciencedirect.com/science/article/B6VFK-3Y2GCVW-8/2/7ee3fd4c8ddf16c9b68eac4273fa61ae
Reference Type: Journal Article
Record Number: 29062
Author: E. Lyandres
Year: 2007
Title: Costly external financing, investment timing, and investment-cash flow sensitivity
Journal: Journal of Corporate Finance
Volume: 13
Issue: 5
Pages: 959-980
Short Title: Costly external financing, investment timing, and investment-cash flow sensitivity
ISSN: 0929-1199
Keywords: Financial constraints
External financing
Investment
Cash flow
Abstract: This paper examines the effects of costly external financing on the optimal timing of a firm's investment. By altering the optimal investment timing, costly financing affects current investment and the sensitivity of investment to internal cash flow. Importantly, the relation between the cost of external funds and investment-cash flow sensitivity is non-monotonic. Investment-cash flow sensitivity is decreasing in the cost of external financing when it is relatively low and is increasing in the financing cost when it is high. Empirical tests examining investment-cash flow sensitivities within groups of firms classified by proxies for their costs of external funds provide evidence consistent with the model. The model and the empirical results complement recent studies by Cleary, Povel and Raith [Cleary, S., Povel, P. and Raith, M., 2007. The U-shaped investment curve: theory and evidence, Journal of Financial and Quantitative Analysis 42, 1-39.] and Almeida and Campello [Almeida, H. and Campello, M., in press, Financial constraints, asset tangibility and corporate investment, Review of Financial Studies.] that show a non-monotonic relation between firms' investment and the availability of internal funds.
Notes: doi: DOI: 10.1016/j.jcorpfin.2007.07.001
URL: http://www.sciencedirect.com/science/article/B6VFK-4P6VD5G-1/2/c6abd82f83f903687069b1dd18991572
Reference Type: Journal Article
Record Number: 29282
Author: Y. T. Mak and Y. Li
Year: 2001
Title: Determinants of corporate ownership and board structure: evidence from Singapore
Journal: Journal of Corporate Finance
Volume: 7
Issue: 3
Pages: 235-256
Short Title: Determinants of corporate ownership and board structure: evidence from Singapore
ISSN: 0929-1199
Keywords: Corporate governance
Board of directors
Corporate ownership
Simultaneous equations
Abstract: This study examines the determinants and interrelationships among corporate ownership and board structure characteristics using a sample of Singapore listed firms. The institutional environment in Singapore differs from that in many developed Western economies in several important respects, including a weak market for corporate control, more concentrated stock ownership, and significant government ownership in many private sector firms. Three characteristics--board composition, board leadership structure and board size--are used to capture the monitoring ability of the board. These board characteristics are assumed to be endogenously determined, together with two ownership characteristics, managerial ownership and blockholder ownership. We use two-stage least squares regression to estimate the determinants of board and ownership characteristics. Our findings indicate that corporate ownership and board structures are related, and that there are significant interrelationships among board structure characteristics. The proportion of outside directors is negatively related to managerial ownership, board size and government ownership. The use of a dual leadership structure is positively related to blockholder ownership, and negatively related to regulation and to CEO tenure.
Notes: doi: DOI: 10.1016/S0929-1199(01)00021-9
URL: http://www.sciencedirect.com/science/article/B6VFK-4435022-2/2/64982a1826238b9cd43bb712c497e293
Reference Type: Journal Article
Record Number: 29237
Author: M. T. Maloney and J. H. Mulherin
Year: 2003
Title: The complexity of price discovery in an efficient market: the stock market reaction to the Challenger crash
Journal: Journal of Corporate Finance
Volume: 9
Issue: 4
Pages: 453-479
Short Title: The complexity of price discovery in an efficient market: the stock market reaction to the Challenger crash
ISSN: 0929-1199
Keywords: Price discovery
Stock market
Challenger
Abstract: We provide evidence on the speed and accuracy of price discovery by studying stock returns and trading volume surrounding the crash of the space shuttle Challenger. While the event was widely observed, it took several months for an esteemed panel to determine which of the mechanical components failed during the launch. By contrast, in the period immediately following the crash, securities trading in the four main shuttle contractors seemingly singled out the firm that manufactured the faulty component. We show that price discovery occurred without large trading profits and that much of the price discovery occurred during a trading halt of the firm responsible for the faulty component. Finally, although we document what are arguably quick and accurate movements of the market, we are unable to detect the actual manner in which particular informed traders induced price discovery.
Notes: doi: DOI: 10.1016/S0929-1199(02)00055-X
URL: http://www.sciencedirect.com/science/article/B6VFK-47X0WGT-1/2/cd3de4cf38cb10ea9dfe57942b3d5274
Reference Type: Journal Article
Record Number: 29229
Author: S. V. Mann and E. A. Powers
Year: 2003
Title: Indexing a bond's call price: an analysis of make-whole call provisions
Journal: Journal of Corporate Finance
Volume: 9
Issue: 5
Pages: 535-554
Short Title: Indexing a bond's call price: an analysis of make-whole call provisions
ISSN: 0929-1199
Keywords: Callable bond
Make-whole call
Abstract: We analyze a new form of call provision known as a "make-whole" call, which utilizes a floating call price based on the level of current interest rates. As rates drop (rise), the call price increases (decreases.) Usually, a floor at par sets a minimum call price. This provision effectively eliminates the reinvestment rate risk associated with bonds with fixed-price call provisions. Survey results indicate a majority of Chief Financial Officers (CFOs) believe make-whole call provisions are "costless." Analysis of 318 recent, make-whole call bonds indicates that this provision is indeed priced. On average, the at-issue yield-to-maturity of a make-whole call bond is 11.2 basis points higher than the yield of a comparable straight bond.
Notes: doi: DOI: 10.1016/S0929-1199(02)00022-6
URL: http://www.sciencedirect.com/science/article/B6VFK-460DN7J-2/2/51d9a694caead7bab3cd256f28210c02
Reference Type: Journal Article
Record Number: 29315
Author: D. Manry and K. Nathan
Year: 1999
Title: Greenmail premia, board composition and management shareholdings
Journal: Journal of Corporate Finance
Volume: 5
Issue: 4
Pages: 369-382
Short Title: Greenmail premia, board composition and management shareholdings
ISSN: 0929-1199
Keywords: Insider stock ownership
Managerial entrenchment
Greenmail
Abstract: This paper investigates the association between premia paid in targeted share repurchases (greenmail) and the characteristics of the boards of directors. A nonlinear relationship is found between the premium paid and the proportion of shares held by the inside directors. The premium decreases as the proportion of unaffiliated outside directors increases.
Notes: doi: DOI: 10.1016/S0929-1199(99)00007-3
URL: http://www.sciencedirect.com/science/article/B6VFK-3Y51V09-4/2/b48d9fe70e4721466c8e43e151d9e83e
Reference Type: Journal Article
Record Number: 29243
Author: D. Manry and D. Stangeland
Year: 2003
Title: The United Shareholders Association Shareholder 1000 and firm performance
Journal: Journal of Corporate Finance
Volume: 9
Issue: 3
Pages: 353-375
Short Title: The United Shareholders Association Shareholder 1000 and firm performance
ISSN: 0929-1199
Keywords: United Shareholders Association
Management responsiveness
Entrenchment
Abstract: From 1989 through 1993, the United Shareholders Association (USA) published its Shareholder 1000 report, which ranked 1000 firms on several dimensions of corporate performance, including shareholder rights and management compensation. We examine two measures reported by the USA of the alignment between managers' and shareholders' interests: a shareholder rights score and a management compensation rating. The associations between these measures and measures of operating performance and investment levels are analyzed. We find evidence that the USA shareholder rights and management compensation scores are significantly and positively associated with measures of operating performance and investment spending. Further tests indicate that USA management compensation scores proxy for aspects of corporate behavior that have significant valuation implications not reflected in financial statements.
Notes: doi: DOI: 10.1016/S0929-1199(02)00018-4
URL: http://www.sciencedirect.com/science/article/B6VFK-45VCNY1-1/2/23bb74374f6fb115736e592edc62b0ca
Reference Type: Journal Article
Record Number: 29017
Author: D. Marciukaityte and R. Varma
Year: 2008
Title: Consequences of overvalued equity: Evidence from earnings manipulation
Journal: Journal of Corporate Finance
Volume: 14
Issue: 4
Pages: 418-430
Short Title: Consequences of overvalued equity: Evidence from earnings manipulation
ISSN: 0929-1199
Keywords: Earnings manipulation
Earnings restatements
Agency costs of overvalued equity
Long-run performance
Abstract: Firms that made earnings-decreasing restatements over the period 1990 to 2001 lost $72 billion around restatement announcements. Forty-seven large-loss firms restating their earnings in the 1998 to 2001 period account for $66 billion of these losses. Despite very good stock performance and low book-to-market values before earnings misstatements, large-loss firms are associated with mean abnormal returns of - 39% during the announcement period, and underperform matched firms by 44% during the first post-restatement year. Collectively, our results support Jensen's [Jensen, M.C. Agency costs of overvalued equity. Financial Management 2005;34; 5-19.] argument that substantial overvaluation of equity pressures managers to manipulate earnings and when investors learn about earnings restatements by overvalued firms, they reevaluate firms to correct not only for pre-misstatement overvaluation, but also for the loss of confidence in the firms' managers.
Notes: doi: DOI: 10.1016/j.jcorpfin.2008.05.002
URL: http://www.sciencedirect.com/science/article/B6VFK-4SJ2WS3-1/2/a916f9e21e70a6213f8db590f46d7c81
Reference Type: Journal Article
Record Number: 29250
Author: J. D. Martin and A. Sayrak
Year: 2003
Title: Corporate diversification and shareholder value: a survey of recent literature
Journal: Journal of Corporate Finance
Volume: 9
Issue: 1
Pages: 37-57
Short Title: Corporate diversification and shareholder value: a survey of recent literature
ISSN: 0929-1199
Keywords: Corporate diversification
Firm valuation
Abstract: We survey the recent developments in the literature on corporate diversification. This literature is voluminous, diverse, and quite old. To make the task more manageable, we focus our attention on recent contributions to that subset of the diversification literature that is in our judgment most influential in setting the agenda for financial research. The study of diversification at the corporate level can be grouped into one of two bodies of literature: cross-sectional studies of the link between corporate diversification and firm value (i.e., the diversification discount) and longitudinal studies of patterns in corporate diversification through time. The prevailing wisdom among financial economists throughout much of the last decade has been that diversified firms sell at a discount and that the level of corporate diversification has been trending downward. However, recent research questions both these tenets and a number of studies now suggest that the diversification discount is either not due to diversification at all, or may be a result of improper measurement techniques. Furthermore, some researchers are now beginning to argue that previous attempts to assess changes in the levels of corporate diversification through time is also flawed as a result of biases built into the database in combination with the use of noisy proxies for corporate diversification.
Notes: doi: DOI: 10.1016/S0929-1199(01)00053-0