(January 10, 2022 Version)
Masulis, R., 2020, A Survey of Recent Evidence on Boards of Directors and CEO Incentives. Asia-Pacific Journal of Financial Studies 49, 7-35. (Invited Lead Article, Featured in the ECGI Preamble and Working Paper Series.)
This article surveys the recent literature on boards of directors and the interplay between director incentives and CEO incentives. The primary focus is on how the incentives and other characteristics of directors, boards, and CEOs interact to affect firm performance. The article reviews the recent evidence documenting a causal relationship between board independence and measures of firm performance. It also discusses the major limitations of the current measure of director independence. Finally, the article highlights how board independence provides strong incentives for CEOs to create firm value and examines the recent evidence on what other director characteristics improve board effectiveness.
Liu, C. Y., A. Low, R. Masulis and L. Zhang, 2020, Monitoring the Monitor: Distracted Institutional Investors and Board Governance, Review of Financial Studies 33, 4489-4531. (ECGI Preamble and ECGI Working Paper and Featured in The Harvard Law School Forum on Corporate Governance and Financial Regulation.)
Boards are crucial to shareholder wealth. Yet little is known about how shareholder oversight affects director incentives. Using exogenous shocks to institutional investor portfolios, we find that institutional investor distraction weakens board oversight. Distracted institutions are less likely to discipline ineffective directors with negative votes. Consequently, independent directors face weaker monitoring incentives and exhibit poor board performance; ineffective independent directors are also more frequently appointed. Moreover, we find that the adverse effects of investor distraction on various corporate governance outcomes are stronger among firms with problematic directors. Our findings suggest that institutional investor monitoring creates important director incentives to monitor.
Masulis, R. and E. J. Zhang, 2019, How Valuable Are Independent Directors? Evidence from External Distractions, Journal of Financial Economics, 132:3, 226-256. (Featured in The Harvard Law School Forum on Corporate Governance and Financial Regulation and the ECGI Working Paper Series.)
We provide new evidence on the value of independent directors by exploiting exogenous events that seriously distract independent directors. Approximately 20% of independent directors are significantly distracted in a typical year. They attend fewer meetings, trade less frequently in the firm’s stock, and resign from the board more frequently, indicating declining firm-specific knowledge and a reduced board commitment. Firms with more preoccupied independent directors have declining firm valuation and operating performance and exhibit weaker merger and acquisition (M&A) profitability and accounting quality. These effects are stronger when distracted independent directors play key board monitoring roles and when firms require greater director attention.
Guo, L. and R. Masulis, 2015, Board Structure and Monitoring: New Evidence from CEO Turnovers, Review of Financial Studies, 28 (10), 2770-2811. (Featured in The Harvard Law School Forum on Corporate Governance and Financial Regulation.)
We use the 2003 NYSE and NASDAQ listing rules for board and committee independence as a quasi-natural experiment to examine the causal relations between board structure and CEO monitoring. Noncompliant firms forced to raise board independence or adopt a fully independent nominating committee significantly increased their forced CEO turnover sensitivity to performance relative to compliant firms. Nominating committee independence is important even when firms had an independent board, and the effect is stronger when the CEO is on the committee. We conclude that greater board independence and full independence of nominating committees lead to more rigorous CEO monitoring and discipline.
Masulis, R. and S. Reza, 2015, Agency Problems of Corporate Philanthropy, Review of Financial Studies 28:2, 592-636. (Featured in The Harvard Law School Forum on Corporate Governance and Financial Regulation and The Conference Board’s Giving Thoughts.)
Evaluating agency theory and optimal contracting theory views of corporate philanthropy, we find that as corporate giving increases, shareholders reduce their valuation of firm cash holdings. Dividend increases following the 2003 Tax Reform Act are associated with reduced corporate giving. Using a natural experiment, we find that corporate giving is positively (negatively) associated with CEO charity preferences (CEO shareholdings and corporate governance quality). Evidence from CEO-affiliated charity donations, market reactions to insider-affiliated donations, its relation to CEO compensation, and firm contributions to director-affiliated charities indicates that corporate donations advance CEO interests and suggests misuses of corporate resources that reduce firm value.
Masulis, R. and S. Mobbs, 2014, Independent Director Incentives: Where Do Talented Directors Spend their Limited Time and Energy? Journal of Financial Economics 111, 406-429. (Featured in The Harvard Law School Forum on Corporate Governance and Financial Regulation.)
We study reputation incentives in the director labor market and find that directors with multiple directorships distribute their effort unequally according to the directorship’s relative prestige. When directors experience an exogenous increase in a directorship’s relative ranking, their board attendance rate increases and subsequent firm performance improves. Also, directors are less willing to relinquish their relatively more prestigious directorships, even when firm performance declines. Finally, forced CEO departure sensitivity to poor performance rises when a larger fraction of independent directors view the board as relatively more prestigious. We conclude that director reputation is a powerful incentive for independent directors.
Knyazeva, A., D. Knyazeva and R. Masulis, 2013, The Supply of Corporate Directors and Board Independence, Review of Financial Studies 26:6, 1561-1605.
Empirical evidence on the relations between board independence and board decisions and firm performance is generally confounded by serious endogeneity issues. We circumvent these endogeneity problems by demonstrating the strong impact of the local director labor market on board composition. Specifically, we show that proximity to larger pools of local director talent leads to more independent boards for all but the largest quartile of S&P1500. Using local director pools as an instrument for board independence, we document that board independence has a positive effect on firm value and operating performance and CEO fraction of incentive based pay and turnover.
Masulis, R., C. Wang and F. Xie, 2012, Globalizing the Boardroom – The Effects of Foreign Directors on Corporate Governance and Firm Performance, Journal of Accounting and Economics 53:3, 527-554.
We examine the benefits and costs associated with foreign independent directors (FIDs) at U.S. corporations. We find that firms with FIDs make better cross-border acquisitions when the targets are from the home regions of FIDs. However, FIDs also display poor board meeting attendance records, and firms with FIDs are more prone to commit intentional financial misreporting and overpay their CEOs and have lower CEO turnover sensitivity to performance. Finally, firms with FIDs are associated with significantly poorer performance, especially as their business presence in the FID’s home region becomes less important.
Masulis, R. and S. Mobbs, 2011, Are All Inside Directors the Same? Evidence from the External Directorship Market, Journal of Finance 66:3, 823-872.
Agency theory and optimal contracting theory posit opposing roles and shareholder wealth effects for corporate inside directors. We evaluate these competing theories using the labor market for outside directorships to differentiate inside directors. Firms with inside directors holding outside directorships have better operating performance and market-to-book ratios, especially when board monitoring is more difficult. These boards make better acquisition decisions, have greater cash-holdings and overstate earnings less often. Announcements of outside board appointments improve shareholder wealth, while departure announcements reduce it, consistent with these inside directors improving board performance and outside directorships being an important source of inside director incentives.
Masulis, R., P. Pham, J. Zein and A. Ang, 2022, Crises as Opportunities for Growth: The Strategic Value of Business Group Affiliation, forthcoming Journal of Financial and Quantitative Analysis (Featured in Harvard Law School Forum on Corporate Governance and the ECGI Working Paper Series.)
We document a novel strategic motive for family business groups to utilize their internal capital markets (ICMs) during financial crises. We find that crisis-period group ICM activity is targeted toward exerting product market dominance over standalone rivals. Groups make significant post-crisis gains in market share that are concentrated among affiliates (and industry segments within affiliates) operating in highly competitive product markets, where capturing such gains is difficult in normal times. These patterns are observed only in emerging markets, suggesting that ICMs enable groups to exploit crises to realize long-term competitive advantages only when rivals face chronic financing frictions.
Masulis, R., P. Pham, and J. Zein, 2020, Family Business Group Expansion through IPOs: The Role of Internal Capital in Financing Growth while Preserving Control, Management Science 66 (11), 5191-5215. (Featured in The Harvard Law School Forum on Corporate Governance and Financial Regulation.)) (ECGI Preamble and ECGI Working Paper.)
Using data from 44 countries, we document a new channel through which a family business group's internal capital market supports its members. We find that groups use internal capital to incubate difficult-to-finance projects, making it feasible for them to rapidly scale up, thus facilitating their IPO market access. This IPO support role is particularly valuable in circumstances where groups find capital raising through IPOs more attractive than SEOs for control-retention reasons, and in markets with high new-firm financing barriers. Unlike carve-outs employed as a corporate restructuring strategy, group-affiliated IPOs appear to primarily serve groups' expansion goals rather than liquidation needs.
Dou, Y., R. Masulis and J. Zein, 2019, Shareholder Wealth Consequence of Insider Pledging of Company Stock as Collateral for Personal Loans, Review of Financial Studies 32 (12), 4810-4854. (Featured in The Harvard Law School Forum on Corporate Governance and Financial Regulation and ECGI Preamble and Working Paper.)
We study a widespread yet under-explored corporate governance phenomenon: the pledging of company stock by insiders as collateral for personal bank loans. Utilizing a regulatory change that exogenously decreases pledging, we document a negative causal impact of pledging on shareholder wealth.We study two channels that could explain this effect. First, we find that margin calls triggered by severe price falls exacerbate the crash risk of pledging firms. Second, since margin calls may cause insiders to suffer personal liquidity shocks or to forgo private benefits of control, we hypothesize and find that pledging is associated with reduced firm risk-taking.
Masulis, R., P. Pham, and J. Zein, 2015, The Structure of Family Business Groups around the World, Research Handbook on Shareholder Power, editors, Jennifer Hill and Randall Thomas, Edward Elgar Publishing.
In many financial markets, publicly listed firms are frequently linked together through a common controlling shareholder, often a family. Such family business groups have been identified in the “law and finance” literature as posing a significant risk for minority investors and a manifestation of weak legal and institutional environments underpinning their investments. This study examines the importance of family business groups in individual economies that exhibit varying levels of investor legal protection and financial development. For this analysis, we rely on a new dataset of business group structures from 45 countries first developed in Masulis, Pham and Zein (2011). Expanding on the evidence from Masulis, Pham and Zein (2011), we focus on cross-country variations in family business group control structures and their recent changes in market capitalization and number of affiliated members to further our understanding of why family business groups continue to be economically important and their implications for shareholder protection around the world. We begin by reviewing the current state of the literature on business groups and especially on some key findings in several related studies based on our dataset.
Masulis, R., P. Pham and J. Zein, 2011, Family Business Groups around the World: Financing Advantages, Control Motivations, and Organizational Choice, Review of Financial Studies 24:11, 3556-3600.
Using a dataset of 28,635 firms in 45 countries, this study investigates the motivations for family-controlled business groups. We provide new evidence consistent with the argument that particular group structures emerge not only to perpetuate control, but also to alleviate financing constraints at the country and firm levels. At the country level, family groups, especially those structured as pyramids, are more prevalent in markets with limited availability of capital. At the firm level, investment intensity is greater for firms held in pyramidal rather than in horizontal structures, reflecting the financing advantages of the former. Within a pyramid, internal equity funding, investment intensity, and firm value all increase down the ownership chain. However, group firm performance declines when dual-class shares and cross shareholdings are employed as additional control-enhancing mechanisms.
Masulis, R., C. Wang and F. Xie, 2009, Agency Costs at Dual-Class Companies, Journal of Finance 64:4, 1697-1727. (Featured in The Harvard Law School Forum on Corporate Governance and Financial Regulation.)
Abstract:
We use a sample of U.S. dual-class companies to examine how the divergence between insider control rights and cash-flow rights affects managerial extraction of private benefits of control. We find that as the insider control-cash flow rights divergence becomes larger, dual-class acquirers experience lower acquisition announcement-period abnormal stock returns, CEOs receive higher levels of compensation, corporate cash holdings are worth less to outside shareholders, and capital expenditures contribute less to shareholder value. These findings are robust to both a wedge and a ratio measure of the control-cash flow rights divergence. They support the hypothesis that managers with greater control rights in excess of cash-flow rights are prone to waste corporate resources to pursue private benefits at the expense of shareholders. As such, they contribute to our understanding of why firm value is decreasing in the insider control-cash flow rights divergence.
Faccio, M., R. Masulis and J. McConnell, 2006, Political Connections and Government Bailouts, Journal of Finance 61:6, 2597-2635. (Nominated for the Brattle Prize for the Best Corporate Finance Paper Published in the Journal of Finance.)
Abstract:
We analyze the likelihood of government bailouts of 450 politically connected firms from 35 countries during 1997–2002. Politically connected firms are significantly more likely to be bailed out than similar nonconnected firms. Additionally, politically connected firms are disproportionately more likely to be bailed out when the International Monetary Fund or the World Bank provides financial assistance to the firm's home government. Further, among bailed-out firms, those that are politically connected exhibit significantly worse financial performance than their nonconnected peers at the time of and following the bailout. This evidence suggests that, at least in some countries, political connections influence the allocation of capital through the mechanism of financial assistance when connected companies confront economic distress.
Masulis, R., C. Wang, and F. Xie, 2020, Employee-Manager Alliances and Shareholder Returns from Acquisitions, Journal of Financial and Quantitative Analysis 55 (2), 473-516. (ECGI Preamble and ECGI Working Paper and Featured in The Harvard Law School Forum on Corporate Governance and Financial Regulation.)
We examine the potential for management-worker alliances when employees have substantial voting rights, and how such alliances affect the balance of power between managers and shareholders. We find that substantial employee voting rights exacerbate the manager shareholder conflicts. Specifically, they entrench incumbent managers and allow them to pursue value-destroying acquisitions by undercutting the disciplinary influence of the corporate control market. Importantly, employee support for managers is conditional on favor able treatment of employees. Our findings are consistent with Pagano and Volpin’s theory of worker-management alliances and highlight the potential risks associated with large employee voting power.
Masulis, R. and S. Simsir, 2018, Deal Initiation in Mergers and Acquisitions, Journal of Financial and Quantitative Analysis 53 (6), 2389-2430. (Featured in the Columbia Law School Blue Sky Blog, ECGI Working Paper.)
We investigate the effects of target initiation in mergers and acquisitions. We find target-initiated deals are common and that important motives for these deals are target economic weakness, financial constraints, and negative economy-wide shocks. We determine that average takeover premia, target abnormal returns around merger announcements, and deal value to EBITDA multiples are significantly lower in target-initiated deals. This gap is not explained by weak target financial conditions. Adjusting for self-selection, we conclude that target managers’ private information is a major driver of lower premia in target-initiated deals. This gap widens as information asymmetry between merger partners rises.
Krishnan, CNV, R. Masulis, R. Thomas and R. Thompson, 2014, M&A Litigation and Jurisdictional Effects, Journal of Empirical Legal Studies 11:1 132-158.
We compile the most extensive hand-collected data set on all forms of M&A litigation in the United States to study the effects of lawsuit jurisdictions during a sample period (1999 and 2000) of the fifth merger wave, a period characterized by an abundance of friendly one bidder deals and the near demise of the hostile offer. We find that only about 12 percent of all M&A offers are challenged in the courts during this period. Almost half the suits are filed in Delaware, while federal suits account for less than 9 percent of the suits in our sample. We find a very small incidence of multijurisdictional litigation (about 3 percent of all suits), unlike the recent sharp increase in such cases in the post-2008 global financial crisis period. We find that litigation filed in Delaware is less of a barrier to deal completion than cases brought in federal court. Litigation filed in federal court is associated with a significantly higher takeover premium in all offers and in completed deals, suggesting that state court cases, on average, put less pressure on bidders to raise takeover premia. In line with these findings, we find that federal courts attract a significantly higher proportion of target initiated litigation than state courts; no target lawsuit is filed in Delaware during our sample period. Finally, we find that while jurisdiction does not significantly affect settlement rates or the consideration paid upon settlement, litigation challenging controlling shareholder squeeze-outs is more likely to settle with cash consideration paid to shareholders, reflecting the stricter judicial standard applied to such bids.
Krishnan, CVN, and R. Masulis, 2013, Law Firm Expertise and Mergers and Acquisitions, Journal of Law and Economics 56:1, 189-226. (Featured in The Harvard Law School Forum on Corporate Governance and Financial Regulation.)
Using a comprehensive sample of U.S. mergers and acquisitions (M&A) bids over 1990–2008, we document that top-market-share law firms are associated with a number of important bid outcomes and characteristics. Top bidder law firms are associated with significantly higher offer completion rates. In contrast, top target law firms are associated with significantly higher offer withdrawal rates. Top bidder and target law firms are both associated with significantly higher takeover premia. These associations are significant even after controlling for selection bias and major offer, bidder, and investment bank adviser characteristics. Our interpretation is that top bidder law firms have stronger incentives and abilities to facilitate deal completions, while top target law firms have stronger incentives and abilities to help realize higher takeover premia, consistent with their clients’ objectives. Our findings suggest that law firm market share is an important omitted variable in current economic models of M&A deal outcomes.
Krishnan, CVN, R. Masulis, R. Thomas, and R. Thompson, 2012, Shareholder Litigation in Mergers and Acquisitions, Journal of Corporate Finance 18, 1248-1268. (Featured in The Harvard Law School Forum on Corporate Governance and Financial Regulation.)
Using hand-collected data, we examine the targeting of shareholder class action lawsuits in merger and acquisition (M&A) transactions, and the associations of these lawsuits with offer completion rates and takeover premia. We find that M&A offers subject to shareholder lawsuits are completed at a significantly lower rate than offers not subject to litigation, after controlling for selection bias, different judicial standards, major offer characteristics, M&A financial and legal advisor reputations as well as industry and year fixed effects. M&A offers subject to shareholder lawsuits have significantly higher takeover premia in completed deals, after controlling for the same factors. Economically, the expected rise in takeover premia more than offsets the fall in the probability of deal completion, resulting in a positive expected gain to target shareholders. However, in general, target stock price reactions to bid announcements do not appear to fully anticipate the positive expected gain from potential litigation. We find that during a merger wave characterized by friendly single-bidder offers, shareholder litigation substitutes for the presence of a rival bidder by policing low-ball bids and forcing offer price improvement by the bidder.
Masulis, R., C. Wang and F. Xie, 2007, Corporate Governance and Acquirer Returns, Journal of Finance 62:4, 1851-1889.
We examine whether corporate governance mechanisms, especially the market for corporate control, affect the profitability of firm acquisitions. We find that acquirers with more antitakeover provisions experience significantly lower announcement‐period abnormal stock returns. This supports the hypothesis that managers at firms protected by more antitakeover provisions are less subject to the disciplinary power of the market for corporate control and thus are more likely to indulge in empire‐building acquisitions that destroy shareholder value. We also find that acquirers operating in more competitive industries or separating the positions of CEO and chairman of the board experience higher abnormal announcement returns.
Faccio, M., and R. Masulis, 2005, The Choice of Financing Methods in European Mergers & Acquisitions, Journal of Finance 60:3, 1345-1388.
We study merger and acquisition (M&A) payment choices of European bidders for publicly and privately held targets in the 1997–2000 period. Europe is an ideal venue for studying the importance of corporate governance in making M&A payment choices, given the large number of closely held firms and the wide range of capital markets, institutional settings, laws, and regulations. The tradeoff between corporate governance concerns and debt financing constraints is found to have a large bearing on the bidder’s payment choice. Consistent with earlier evidence, we find that several deal and target characteristics significantly affect the method of payment choice.
Liu, C. Y., R. Masulis and J. Stanfield, 2020, CEO Option Compensation Can Be a Bad Option: Evidence from Product Market Relationships, Journal of Financial Economics. (Featured in the ECGI Preamble and Working Paper Series and Harvard Law School Forum on Corporate Governance.)
We study how the existence of important production contracts affects the choice of CEO compensation contracts. We hypothesize that having major customers raises the costs associated with CEO risk-taking incentives and leads to lower option-based compensation. Using industry-level import tariff reductions in the U.S. as exogenous shocks to customer relationships, we find firms with major customers subsequently reduce CEO option-based compensation significantly. We also show that continued high option compensation following tariff cuts, is associated with significant declines in these relationships and in these firms’ performance. Our study provides new insights into how important stakeholders shape executive compensation decisions.
Dou, Y., R. Masulis and J. Zein, 2019, Shareholder Wealth Consequence of Insider Pledging of Company Stock as Collateral for Personal Loans, Review of Financial Studies 32 (12), 4810-4854. (Featured in The Harvard Law School Forum on Corporate Governance and Financial Regulation and the ECGI Preamble and Working Paper Series.)
We study a wide-spread yet unexplored corporate governance phenomenon: the pledging of company stock by insiders as collateral for personal bank loans. Utilizing a regulatory change that exogenously decreases pledging, we document a negative causal impact of pledging on shareholder wealth. We study two channels that could explain this effect. First, we find that margin calls triggered by severe price falls exacerbate the crash risk of pledging firms. Second, since margin calls may cause insiders to suffer personal liquidity shocks or to forego private benefits of control, we hypothesize and find that pledging is associated with reduced firm risk-taking.
Hill, J., R. Masulis and R. Thomas, 2011, Comparing CEO Employment Contract Provisions: Differences between Australia and the U.S., Vanderbilt Law Review 64:2, 557-608. (Featured in The Harvard Law School Forum on Corporate Governance and Financial Regulation.)
This study compares CEO employment contracts across two very different common law countries. In order to do our comparison, we create pairs of U.S. and Australian firms that are matched on a number of dimensions including firm size and industry. We find that Australian CEOs have significantly greater base salaries than their U.S. counterparts, while U.S. CEOs are more likely to be compensated with restricted stock and stock options than the Australians. More striking is the fact that U.S. CEO employment contracts tend to last longer than Australian contracts, and are more likely to have arbitration provisions, change-in-control provisions, tax gross-ups, do not compete clauses, and SERPs.
Krishnan, CVN, and R. Masulis, 2012, Venture Capital Reputation: A Survey (Handbook of Entrepreneurial Finance, Venture Capital and Private Equity, D. Cummings, Editor, Oxford University Press.)
The reputations of venture capital firms that operate in a highly fragmented private equity industry are examined in several recent studies, and this evidence is further developed in this article. The relations of a large number of suggested venture capitalist (VC) reputation measures to the probability of future successful initial public offers (IPOs) are analyzed, as well as four well-known measures of firm long-run performance: the rate of return on assets, market-to-book ratio, firm survival, and abnormal stock return. The primary finding is that a VC's past market share of VC-backed IPOs consistently shows a significant positive relation with the probability of future IPOs as well as with all four post-IPO issuer long-run performance measures investigated. This result holds after controlling for VC backing, VC banks, underwriter reputation, and issue and issuer characteristics. There is also evidence that more reputable VCs select stronger portfolio firms. However, the relation of VC reputation to firm performance continues to hold after adjusting for self-selection using well-known approaches. Thus after taking VC selectivity into account, strong evidence is found that more reputable VCs do add value to their portfolio firms after they go public.
Krishnan, CNV, V. Ivanov, R. Masulis and A. Singh, 2011, Venture Capital Reputation, Post-IPO Performance and Corporate Governance, Journal of Financial and Quantitative Analysis 46:5, 1295-1333.
We examine the association of a venture capital (VC) firm's reputation with the post-initial public offering (IPO) long-run performance of its portfolio firms. We find that VC reputation, measured by the past market share of VC-backed IPOs, has significant positive associations with long-run firm performance measures. While more reputable VCs initially select better-quality firms, more reputable VCs continue to be associated with superior long-run performance, even after controlling for VC selectivity. We find that more reputable VCs exhibit more active post-IPO involvement in the corporate governance of their portfolio firms, and this continued VC involvement positively influences post-IPO firm performance.
Masulis, R. and R. Nahata, 2011, Venture Capital Conflicts of Interest: Evidence from Acquisitions of Venture Backed Firms, Journal of Financial and Quantitative Analysis 46:2, 395-430.
We analyze the effects of venture capital (VC) backing on profitability of private firm acquisitions. We find that VC backing leads to significantly higher acquirer announcement returns, averaging 3%, even after controlling for deal characteristics and endogeneity of venture funding. This leads us to investigate whether some VCs have interests that conflict with those of other investors. We show that such conflicts arise from VCs having financial relationships with both acquirers and targets, corporate VCs having a dominant strategic focus, and VC funds nearing maturity experiencing pressure to liquidate. Our conclusions follow from examinations of target takeover premia and acquirer announcement returns.
Masulis, R. and R. Nahata, 2009, Financial Contracting with Strategic Investors: Evidence from Corporate Venture Capital Backed IPOs, Journal of Financial Intermediation 18:4, 599-631.
We analyze financial contracting in start-ups backed by corporate venture capitalists (CVCs). CVCs' strategic goals can economically hurt or benefit the start-ups, depending on product market relationships between start-ups and CVC parents. Empirically, start-ups receive funding from both complementary and competitive CVC parents. However, start-up insiders commonly limit the influence of competitive CVCs, awarding them lower board power, while retaining higher board representation for themselves. Second, lead CVCs receive lower board representation, indicating heightened concerns about their greater influence in start-ups' early stages. Finally, start-ups extract higher valuations from competitive CVCs, reflecting greater moral hazard problems. Overall, CVC strategic objectives affect their early inclusion in VC syndicates, their control rights and share pricing.
Masulis, R and R. Thomas, 2009, Does Private Equity Create Wealth? The Effects of Private Equity and Derivatives on Corporate Governance, University of Chicago Law Review 76, 219-260. (Featured in The Harvard Law School Forum on Corporate Governance and Financial Regulation.)
Private equity has reaped large rewards in recent years. We claim that one major reason for this success is due to the corporate governance advantages of private equity over those of the public corporation. We argue that the development and trade of substantial derivative contracts have significantly weakened the governance of public corporations and have created a need for financially sophisticated directors and much closer supervision of management. The private-equity model delivers these benefits and allows corporations to be better governed, creating large wealth gains for investors.
Johnson, W., J.K. Kang, R. Masulis and S. Yi, 2018, Seasoned Equity Offerings and Customer-Supplier Relationships, Journal of Financial Intermediation 33:1, 98-114.
We investigate how seasoned equity offerings (SEOs) by issuers with large customers affect both trading partners’ market values and the relationship's health. We hypothesize that SEOs reveal adverse information about an issuer's major customers and find that issuers and their large customers experience negative returns on SEO announcements. These results are more pronounced when customers have higher levels of information asymmetry and when customer-supplier relationships are particularly important. Large customers of issuers experience larger declines in post-SEO sales, operating performance, and credit ratings than large customers of non-issuers. Also, SEO issuer sales to large customers and relationship duration significantly decline.
Karpoff, J., G. Lee and R. Masulis, 2013, Contracting under Asymmetric Information: Lockup Agreements in Seasoned Equity Offerings, Journal of Financial Economics 110:3, 607-626.
We document the frequent use of lockup agreements in seasoned equity offerings (SEOs) and examine the determinants of their use, duration, and early release. We find that the likelihood of an SEO lockup and its duration are positively related to issuer information asymmetry measures. Lockup duration is negatively related to underwriter spreads and underpricing, indicating that lockups lower expected flotation costs. Lockups are frequently released early following share prices rises. We conclude that lockups represent a contracting solution to asymmetric information and agency problems that plague equity issues by helping to insure SEO quality and deter opportunistic insider trading.
Lee, G. and R. Masulis, 2011, Do More Reputable Financial Institutions Reduce Earnings Management by IPO Issuers? Journal of Corporate Finance 17:4, 982–1000.
This study investigates whether financial intermediaries (FIs) participating in the IPO process play a significant role in restraining earnings management (EM). Specifically, we examine whether EM around IPOs is negatively related to investment banks (IBs) and venture capital (VC) investor reputations. In general, we do not find evidence that VCs as a group significantly restrain EM by IPO issuers. However, we uncover strong evidence that more reputable VCs and IBs are associated with significantly less EM, which is consistent with them implicitly certifying the quality of issuer financial reports. Moreover, a stronger reduction in EM is found when more reputable IBs are matched with more reputable VCs, which indicates that VC and IB reputation are complements rather than substitutes. These conclusions are invariant to adjustments for potential endogeneity of underwriter reputation and VC-backing or reputation.
Masulis, R. and G. Lee, 2009, Seasoned Equity Offerings: Quality of Accounting Information and Expected Flotation Costs, Journal of Financial Economics 92:3, 443-469.
Flotation costs represent a significant loss of capital to firms and are positively related to information asymmetry between managers and outside investors. We measure a firm's information asymmetry by its accounting information quality based on two extensions of the Dechow and Dichev earnings accruals model (2002), which is a more direct approach to assessing the information available to outside investors than the more commonly used proxies. Our main hypothesis is that poor accounting information quality raises uncertainty about a firm's financial condition for outside investors, though not necessarily for insiders. This accounting effect lowers demand for a firm's new equity, thereby raising underwriting costs and risk. Using a large sample of seasoned equity offerings, we show that poor accounting information quality is associated with higher flotation costs in terms of (1) larger underwriting fees, (2) larger negative SEO announcement effects, and (3) a higher probability of SEO withdrawals. These results are robust to joint determination of offer size and flotation cost components and to adjustments for sample selection bias.
Eckbo, E., R. Masulis, and O. Norli, 2007, Security Offerings, Handbook of Corporate Finance: Empirical Corporate Finance, E. Eckbo, editor, North-Holland /Elsevier, Chapter 13.
This essay surveys the extant literature and adds to the empirical evidence on issuance activity, flotation costs, and valuation effects of security offerings. We focus primarily on public offerings of equity for cash, although we also review and present new evidence on debt offerings and private placements. The essay has four major parts: (1) We review aggregate issue activity in exchange listed securities from 1980 through 2004. Following the IPO, only about one-half of the publicly traded firms undertake a public security offering of any type, and only about one-quarter undertake a SEO. Thus, SEOs are relatively rare, which is consistent with adverse selection costs being an important consideration when raising cash externally. (2) We review the evidence on direct issue costs across security types and flotation methods, including the more recent SEO underpricing phenomenon. A large number of studies provide evidence on the determinants of underwriter compensation, and confirm the importance of variables capturing information asymmetries and underwriter competition. (3) We survey and interpret the valuation effects of security issue announcements. In the period since the Eckbo and Masulis (1995) survey, many studies examining announcement-period stock returns have focused on the effects of flotation method choice and foreign offerings. The well-known negative average announcement effect observed for U.S. SEOs appears to be a somewhat U.S.-specific phenomenon. (4) We review and extend evidence on the performance of issuing firms in the five year post-issue period. The literature proposes either a risk based-explanation or a behavioral explanation for the phenomenon of low average realized returns following IPOs and SEOs. Standard factor model regressions fail to reject the null that the low average returns are commensurate with issuers’ risk exposures. Recent theoretical developments suggest that lower risk levels following equity issues may be linked to issuers’ investment activity, a promising direction for future research.
Masulis, R. and L. Shivakumar, 2002, Does Market Structure Affect the Immediacy of Stock Price Responses to News?, Journal of Financial and Quantitative Analysis 37:4, 617-648.
This study uses transactions data to compare the speed of price adjustments to seasoned equity offering announcements by NYSE/AMEX and NASDAQ stocks. We find that price adjustments following offering announcements are significantly faster on NASDAQ than on the NYSE/AMEX and that the difference in reaction times can be as much as one hour. This result is not due to differences in issuer characteristics or the size of announcement effects across the markets. Further analysis suggests that the faster price reaction of NASDAQ stocks is due to several differences in market structure. We find evidence that greater risk-taking by NASDAQ dealers, more rapid electronic order execution on NASDAQ, a more potent information trading threat (SOES bandits) on NASDAQ, stale limit orders on the NYSE/AMEX and a less efficient price discovery mechanism at the open of the NYSE/AMEX, all contribute to more rapid NASDAQ stock price adjustments.
Eckbo, E., R. Masulis and O. Norli, 2000, Seasoned Public Offerings: Resolution of the ‘New Issues Puzzle’, Journal of Financial Economics 56:2, 251-291. JFE All Star Award.
The 'new issues puzzle' is that stocks of common stock issuers subsequently underperform nonissuers matched on size and book-to-market ratio. With 7000 seasoned equity and debt issues, we document that issuer underperformance reflects lower systematic risk exposure for issuing firms relative to the matches. A consistent explanation is that, as equity issuers lower leverage, their exposures to unexpected inflation and default risks decrease, thus decreasing their stocks' expected returns relative to matched firms. Equity issues also significantly increase stock liquidity (turnover), again lowering expected returns relative to nonissuers. We conclude that the 'new issue puzzle' is explained by a failure of the matched-firm technique to provide a proper control for risk. This conclusion is robust to issue characteristics and the choice of factor model framework.
Masulis, R. and Eckbo, E., 1995, Seasoned Equity Offerings: A Survey, Handbook in Finance, R. Jarrow, V. Maksimovic and B. Ziemba (eds.) North Holland.
We review the theory and statistical evidence concerning the causes and effects of seasoned public offerings of common stock. We focus in particular on results and findings that post-date the well known survey by Smith (1986). In fact, recent studies now provide at least partial answers to several of the "unresolved issues'' listed by Smith at the end of his survey. These include (i) to what extent does the market reaction to issue announcements depend on the flotation method; (ii) the conditions that lead issuers to select uninsured rights or rights with standby underwriting over a firm commitment underwritten offer; (iii) why rights issues continue to be the predominant flotation method in many foreign jurisdictions while they have become virtually extinct in the U.S.; and (iv) the determinants of direct and indirect flotation costs across flotation methods. In addition, we review (v) recent trends in aggregate issue activity; (vi) the timing of individual equity issues; and (vii) market microstructure effects of equity offers.
Masulis, R., H. Choe and V. Nanda, 1993, Common Stock Offerings across the Business Cycle: Theory and Evidence, Journal of Empirical Finance 1:1, 3-31 (lead article, inaugural issue).
It is well known that historically a larger number of firms issue common stock and the proportion of external financing accounted for by equity is substantially higher in expansionary phases of the business cycle. We show that this phenomenon is consistent with firms selling seasoned equity when they face lower adverse selection costs, which occurs in period with more promising investment opportunities and with less uncertainty about assets in place. Thus, firm announcements of equity issues are predicted to convey less adverse information about equity values in such periods. Empirically, we find evidence that generally supports these predictions. Consistent with historical patterns, firms in recent times have tended to increase equity more frequently in expansionary periods. While business cycle variables are significant explanatory variables, interest rate variables are generally insignificant. The adverse selection effects as measured by the average negative price reaction to seasoned common stock offering announcements is significantly lower in expansionary periods and in periods with a relatively larger volume of equity financing. These offer announcement effects are less negative for smaller stock offerings and for issuers with less uncertainty about assets in place.
Masulis, R. and E. Eckbo, 1992, Adverse Selection and the Rights Offer Paradox, Journal of Financial Economics 32:3, 293-332. Reprinted in Empirical Issues in Raising Equity Capital, M. Levis editor, in Advances in Finance, Investment and Banking series, Amsterdam: North-Holland, 1995.
We develop an analytical framework to explain firm's choice of equity flotation method and the near disappearance of rights offers by U.S. exchange-listed firms. The choice between uninsured rights, rights with standby underwriting, and firm-commitment underwriting depends on information asymmetries, shareholder characteristics, and direct flotation costs. Underwriter certification and current-shareholder takeup are viewed as substitute mechanisms for minimizing wealth transfers between shareholders and outside investors. Uninsured rights create adverse-selection effects when shareholder takeup is low. Implications for stock-price behavior around issue announcements, shareholder subscription precommitments, and relative issue frequencies are supported by large-sample evidence.
Masulis, R., R. Lease and J. Page, 1991, An Investigation of Market Microstructure Impacts on Event Study Returns, Journal of Finance 46:4, 1523-1536.
We investigate the importance of bid-ask spread-induced biases on event date returns as exemplified by seasoned equity offerings by NYSE listed firms. We document significant negative return biases on the offering day which explain a large portion of the negative event date return documented in the literature. Buy-sell order flow imbalance is prominent around the offering and induces a relatively large spread bias. If order imbalances are suspected, the researcher can use returns calculated from the midpoint of the closing bid and ask quotes instead of returns calculated from closing transaction prices to avoid this return bias.
Masulis, R., 1987, Changes in Ownership Structure: Conversions of Mutual Savings and Loans to Stock Charter, Journal of Financial Economics 18:1, 29-60.
This study analyzes both the causes and effects of mutual S&L conversions to corporate charter. Changes in technology and government policies have substantially increased S&L competition, riskbearing, and potential scale and scope economies. Evidence indicates that these changes have decreased the relative operating advantages of mutual S&Ls, encouraging conversions to stock charter. The S&L's financial and operating characteristics, which affect the success of the conversion effort, are also explored.
Masulis, R. and A. Korwar, 1986, Seasoned Equity Offerings: An Empirical Investigation, Journal of Financial Economics 15:1/2, 91-118, JFE All Star Award.
This study examines common stock price adjustments to announcements of underwritten common stock offerings. On average, a negative stock price change is observed, which is larger for industrials than for public utilities. Combination primary-secondary stock offerings and dual stock-bond offerings exhibit similar negative announcement effects. Combination offerings involving decreases in management shareholdings exhibit significantly larger negative announcement effects. Cross-sectional analysis of stock announcement returns indicates a positive relationship to firms' leverage changes, and a negative relationship to prior stock returns and (for industrials) to decreases in management shareholdings.
Chang, X., Y. Chen and R. Masulis, 2022, Bank Lines of Credit as a Source of Long-Term Finance, forthcoming, Journal of Financial and Quantitative Analysis.
Hand-collecting credit line drawdowns that firms classify as long-term debt, we first document how long-term drawdowns rise with high investment needs or weak external capital market conditions. Nearly all drawdown proceeds finance long-term investment, including M&A activity. Unrated and lower-rated firms rely more on long-term drawdowns than high or very poorly rated firms. We further find that credit lines have tighter covenants than terms loans. Drawdowns are repaid fairly quickly and often refinanced with other long-term debt. Our findings support the monitored liquidity insurance theory of credit lines and highlight that long-term drawdowns act as a valuable bridge financing mechanism.
Huang, R., R. Masulis, 2003, Trading Activity and Stock Price Volatility: Evidence from the London Stock Exchange, Journal of Empirical Finance 10:3, 249-269, (lead article).
Abstract:
Analysis of transactions data for the Financial Times Stock Exchange (FTSE-100) stock index on the London Stock Exchange (LSE) shows that trade frequency and average trade size impact price volatility for small trades (i.e. trades of one normal market size (NMS) or less). For large trades, only trade frequency affects price volatility. In further splitting small trades by relative size, trade frequency and average trade size are found to affect price volatility only for trades close to stocks' maximum-guaranteed quoted depth. This evidence is consistent with microstructure models of dealer inventory adjustment and strategic behavior by informed traders, where dealers and uninformed traders face adverse selection costs.
Masulis, R. and R. Huang, 1999, FX Spreads and Dealer Competition Across the 24 Hour Day, Review of Financial Studies 12:1, 61-93.
Abstract:
This study examines the impact of changing dealer competition and order flow across the 24 hour day on bid-ask spreads in the foreign exchange (FX) market. Using one year of tick-by-tick data in the spot Deutschmark-Dollar FX market, trading information is aggregated into 15 minute intervals over the trading day. Dealer competition is approximated by the number of individual dealers revising their quotes in each 15 minute interval. Bid-ask spreads, dealer activity and volatility are jointly modeled in a 3 equation VAR system, taking into account major market microstructure theories of spread determination which focus on adverse selection risk and inventory costs. Model estimation is by GMM, and takes into account a rich set of seasonal patterns and strong serial correlation in the dependent variables. Consistent with market microstructure theory, bid-ask spreads decrease as predicted dealer activity rises and as predicted FX volatility falls. Dealer competition is strongly time-varying and highly predictable, reflecting changing business activity over the 24-hour trading day as major Asian, European and North American markets open and close. Model estimates show that an expected addition of another dealer lowers average quoted spreads by 1.7%, while a 10% rise in FX volatility raises average quoted spreads by 10%.
Masulis, R., R. Huang and H. Stoll, 1996, Energy Shocks and Financial Markets, Journal of Futures Markets 16:1, 1-27, (lead article).
Abstract:
This study analyzes the information transmission mechanism linking oil futures with stock prices, where we examine the lead and lag cross-correlations of returns in one market with the others. We investigate the dynamic interactions between oil futures prices traded on the New York Mercantile Exchange (NYMEX) and U.S. stock prices, which allows us to examine the effects of energy shocks on financial markets. In particular, we examine the extent to which these markets are contemporaneously correlated, with particular attention paid to the association of oil price indexes with the S&P 500 index; 12 major industry stock price indices and 3 individual oil company stock price series. We also examine the extent to which price changes or returns in one market dynamically lead returns in the others and whether volatility spillover effects exist across these markets. Using VAR model estimates for various time series of returns we find that petroleum industry stock index and our three oil company stocks are the only series where we can reject the null hypothesis that oil futures do not lead Treasury Bill rates and stock returns, while we can reject the hypothesis that oil futures lag these other two series. Finally, the return volatility evidence for oil futures leading individual oil company stocks is much weaker than is the evidence for returns themselves.
Masulis, R. and V. Ng, 1995, Overnight and Daytime Stock Return Dynamics on the London Stock Exchange: The Impacts of 'Big Bang' and the 1987 Stock Market Crash, Journal of Business and Economic Statistics 13:4, 365-378, (lead article).
Abstract:
We explore the time series properties of stock returns on the London Stock Exchange around the 1986 market restructuring (Big Bang) and the 1987 stock-market crash using a modified generalized autoregressive conditional heteroscedasticity model. Using this general dynamic model, which allows (a) intradaily returns to have different impacts and persistence on stock-return volatility, (b) return effects on volatility to be asymmetric, and (c) intradaily returns to follow conditional distributions with different fourth moments, we uncover important changes in return dynamics and conditional fourth moments following Big Bang and the 1987 crash not reported before.
Masulis, R., Hamao, Y. and Ng, V., 1991, The Effect of the 1987 Stock Crash on International Financial Integration, Japanese Financial Market Research, W. Bailey, Y. Hamao and W. Ziemba, editors, Amsterdam: North Holland.
Abstract:
This paper examines daily open-to-close returns of major stock market indices on the New York Stock Exchange, Tokyo Stock Exchange and the London Stock Exchange over the 1985-1990 period, which encompasses the October 1987 Stock Market Crash. We estimate volatility spillover effects across the 24 hour day using a GARCH-M model. We find evidence that volatility spillover effects emanating from Japan have been gathering strength over time, especially after the 1987 Crash. This may reflect a growing awareness by domestic investors of the economic interdependence of international financial markets since the 1987 Stock Market Crash.
Masulis, R., Y. Hamao and V. Ng, 1990, Correlations in Price Changes and Volatility across International Stock Markets, Review of Financial Studies 3:2, 281-308. Reprinted in International Capital Market Integration, R. Stulz and A. Karolyi editors, London: Edward Elgar Publishing, 2003.
Abstract:
The short-run interdependence of prices and price volatility across three major international stock markets is studied. Daily opening and closing prices of major stock indexes for the Tokyo, London, and New York stock markets are examined. The analysis utilizes the autoregressive conditionally heteroskedastic (ARCH) family of statistical models to explore these pricing relationships. Evidence of price volatility spillovers from New York to Tokyo, London to Tokyo, and New York to London is observed, but no price volatility spillover effects in other directions are found for the pre-October 1987 period. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.
Masulis, R., September 1982, Government Intervention in the Mortgage Market, A Study of Anti‑Redlining Regulations, Journal of Monetary Economics 10, 191-213.
Abstract:
This paper addresses the question of whether economic incentives exist for mortgage lenders to avoid or to minimize mortgage originations in neighborhoods inhabited primarily by low-income racial minorities. The Option Pricing Model is utilized to determine what mortgage borrower characteristics affect the market value of the mortgage contracts. It is found that existing laws do not enable mortgage lenders to vary either origination prices or mortgage terms so as to adjust for differences in the market values of mortgages. As a result, incentives are created for both the mortgage lender and the mortgage insurer to avoid originations and underwritings in areas with relatively high default probabilities. Various changes in mortgage lending regulations are suggested to eliminate these incentives, and the effects of alternative programs to subsidize mortgage borrowers with relatively high default probabilities are considered.
Masulis, R. and D. Galai, 1976, The Option Pricing Model and the Risk Factor of Stock, Journal of Financial Economics 3:1/2, 53-81, JFE All Star Award. Reprinted in Financial Analysis and Planning: Theory and Application, C. F. Lee, editor, Addison-Wesley 1982.
Abstract:
In this paper a combined capital asset pricing model and option pricing model is considered and then applied to the derivation of equity's value and its systematic risk. In the first section we develop the two models and present some newly found properties of the option pricing model. The second section is concerned with the effects of these properties on the securityholders of firms with less than perfect ‘me first’ rules. We show how unanticipated changes in firm capital and asset structures can differentially affect the firm's debt and equity. In the final section of the paper we consider a number of theoretical and empirical implications of the joint model. These include investment policy as well as the causes and effects of non-stationarity in the systematic risk of levered equity and risky debt.
Dann, L. Y., Masulis, R. W., & Mayers, D. (1991). Repurchase tender offers and earnings information. Journal of Accounting and Economics, 14(3), 217-251.
Abstract:
Announcements of stock repurchase tender offers are examined as a source of information about firms' future earnings prospects and market risk levels. We document positive earnings surprises and equity systematic risk reduction following tender offers. Announcement stock price reactions are positively correlated with earnings surprises over the concurrent and subsequent two years, and negatively correlated with changes in equity market risk. Finally, stock price reactions to quarterly earnings announcements are more strongly correlated with time-series based earnings surprises in the year prior to the tender offer than during the subsequent year, consistent with tender offer announcements conveying earnings information.
Masulis, R. and B. Trueman, 1988, Corporate Investment and Dividend Decisions under Differential Personal Taxation, Journal of Financial and Quantitative Analysis 23:4, 369-386.
Abstract:
This paper explores implications of differential personal taxation for corporate investment and dividend decisions. The personal tax advantage of dividend deferral causes shareholders to generally prefer greater investment in real assets under internal as opposed to external financing. Furthermore, dividend deferral is shown to be costly at the corporate level, causing shareholders in different tax brackets at times to disagree over optimal investment and dividend policies under internal financing. The profitability of internallyfinanced security investment is shown to depend on a security's tax status and shareholders' tax brackets. However, externally-financed security purchases are unprofitable from a tax standpoint.
Masulis, R., 1987, Changes in Ownership Structure: Conversions of Mutual Savings and Loans to Stock Charter, Journal of Financial Economics 18:1, 29-60.
Abstract:
This study analyzes both the causes and effects of mutual S&L conversions to corporate charter. Changes in technology and government policies have substantially increased S&L competition, riskbearing, and potential scale and scope economies. Evidence indicates that these changes have decreased the relative operating advantages of mutual S&Ls, encouraging conversions to stock charter. The S&L's financial and operating characteristics, which affect the success of the conversion effort, are also explored.
Masulis, R., M. Grinblatt and S. Titman, 1984, The Valuation Effects of Stock Splits and Stock Dividends, Journal of Financial Economics 13:4, 461-490, (lead article).
Abstract:
This study presents evidence which indicates that stock prices, on average, react positively to stock dividend and stock split announcements that are uncontaminated by other contemporaneous firm-specific announcements. In addition, it documents significantly positive excess returns on and around the ex-dates of stock dividends and splits. Both announcement and ex-date returns were found to be larger for stock dividends than for stock splits. While the announcement returns cannot be explained by forecasts of imminent increases in cash dividends, the paper offers several signalling based explanations for them. These are consistent with a cross-sectional analysis of the announcement period returns.
Masulis, R., 1983, The Impact of Capital Structure Change on Firm Value, Some Estimates, Journal of Finance 38:1, 107-126.
Abstract:
This study develops a model based on current corporate finance theories which explains stock returns associated with the announcement of issuer exchange offers. The major independent variables are changes in leverage multiplied by senior security claims outstanding and changes in debt tax shields. Parameter estimates are statistically significant and consistent in sign and relative magnitude with model predictions. Overall, 55 percent of the variance in stock announcement period returns is explained. The evidence is consistent with tax-based theories of optimal capital structure, a positive debt level information effect, and leverage-induced wealth transfers across security classes.
Masulis, R., 1980, Stock Repurchase by Tender Offer, An Analysis of the Causes of Common Stock Price Changes, Journal of Finance 35:2, 305-319.
Abstract:
Masulis, R. and H. DeAngelo, 1980, Leverage and Dividend Irrelevance under Corporate and Personal Taxation, Journal of Finance 35:2, 453-464.
Abstract:
Masulis, R. and H. DeAngelo, 1980, Optimal Capital Structure under Corporate and Personal Taxation, Journal of Financial Economics 8:1, 3-27, (lead article), JFE All Star Award. Reprinted in the 1st and 2nd editions of The Modern Theory of Corporate Finance, M. Jensen and C. Smith, Jr., editors, McGraw Hill, New York, 1984, 1990.
Abstract:
In this paper, a model of corporate leverage choice is formulated in which corporate and differential personal taxes exist and supply side adjustments by firms enter into the determination of equilibrium relative prices of debt and equity. The presence of corporate tax shield substitutes for debt such as accounting depreciation, depletion allowances, and investment tax credits is shown to imply a market equilibrium in which each firm has a unique interior optimum leverage decision (with or without leverage-related costs). The optimal leverage model yields a number of interesting predictions regarding cross-sectional and time-series properties of firms' capital structures. Extant evidence bearing on these predictions is examined.
Masulis, R., 1980, The Effects of Capital Structure Change on Security Prices: A Study of Exchange Offers, Journal of Financial Economics 8:2, 139-178, JFE All Star Award. Reprinted in the 1st and 2nd editions of The Modern Theory of Corporate Finance, M. Jensen and C. Smith, Jr., editors, McGraw Hill, New York, 1984, 1990.
Abstract:
This study considers the impact of capital structure change announcements on security prices. Statistically significant price adjustments in firms' common stock, preferred stock and debt related to these announcements are documented and alternative causes for these price changes are examined. The evidence is consistent with both corporate tax and wealth redistribution effects. There is also evidence that firms make decisions which do not maximize stockholder wealth. In addition, a new approach to testing the significance of public announcements on security returns is presented.