1. “Preemptive Bidding, Target Resistance and Takeover Premiums” (Journal of Financial Economics)
· Abstract: We evaluate empirically two sources of large takeover premiums: preemptive bidding and target resistance. We develop an auction model that features costly sequential entry of bidders in takeover contests and encompasses both explanations. We estimate the model parameters by simulated method of moments for a sample of US takeovers. Our estimates imply that target resistance explains the entire magnitude of the premium in 74% of successful single-bidder contests. Simulation experiments show that initial bidders have, on average, a higher valuation for the target than rival bidders, so that a relatively low initial bid is sufficient to deter a rival from entry.
We quantify the impact of merger activity on productive efficiency. We develop and calibrate a dynamic industry-equilibrium model that features mergers, entry, and exit by heterogeneous firms. Mergers affect productivity directly through realized synergies, and indirectly through firms' incentives to enter or exit the industry. Merger activity increases average firm productivity by 4.8%, of which 4.1% reflects the accumulation of synergies, and 0.7% the interaction between merger options and firms' entry and exit decisions. We show that ignoring the implications of merger activity for public policies that promote entry can reverse the expected impact of these policies on productivity.
2. "Technological Heterogeneity and Corporate Investment” (Journal of Economic Dynamics and Control)
· Abstract: We propose an importance-sampling procedure to improve the computational performance of the simulated method of moments (SMM) for the estimation of structural models with fixed parameter heterogeneity. The main advantage of the procedure is that is does not require to simulate observations every time that the structural parameters change during the minimization of the SMM cirterion function. We illustrate the use of our method by estimating a neoclassical model of investment for a sample of US manufacturing companies, allowing the technological parameters to vary across firms.
3. "Merger Activity in Industry Equilibrium" (Journal of Financial Economics, forthcoming)
· Abstract: We quantify the impact of merger activity on productive efficiency. We develop and calibrate a dynamic industry-equilibrium model that features mergers, entry, and exit by heterogeneous firms. Mergers affect productivity directly through realized synergies, and indirectly through firms' incentives to enter or exit the industry. Merger activity increases average firm productivity by 4.8%, of which 4.1% reflects the accumulation of synergies, and 0.7% the interaction between merger options and firms' entry and exit decisions. We show that ignoring the implications of merger activity for public policies that promote entry can reverse the expected impact of these policies on productivity.
4. “Corporate Governance and CEO Turnover Decisions” (joint with Hannes Wagner)
· Abstract: This paper provides a cross-country analysis to determine whether CEO turnover is a credible disciplining device for managers, whether it is effective in delivering performance improvements, and whether better governance improves the credibility and effectiveness of CEO turnover. The analysis is based on a detailed panel of 5,300 CEO years and spans two distinctly different financial systems- the U.K. and Germany-over the period 1995-2005. We find that CEOs face a credible threat of being removed for underperformance and that the hiring of new CEOs is effective in realizing large profitability improvements in the following years. We also find both relations to be virtually identical in both countries, despite large structural governance differences. Further, we consider a large number of firm-specific governance mechanisms previously proposed as indicators of better governance and find no evidence that any of them improves the observed relations between firm performance and CEO turnover. Taken together, our results suggest that replacing the CEO is an important component of successful turnarounds in underperforming firms and that this economic mechanism appears to work in nearly identical ways across very different financial markets, and across firms with very different quality of governance.
5. “Self-Inflicted Debt Crises” (joint with Norman Schürhoff)
· Abstract: Optimal resolution of debt crises requires bailouts to account for borrowers’ time-inconsistency. We show in a dynamic model of strategic default that myopic borrowers undervalue their option to default by a U-shaped error, which causes excessive leverage, imperfect consumption smoothing, underinvestment in normal times, and risk shifting in crisis times. Optimal bailouts either punish or reward myopia through smaller or larger transfers, leading to procrastinated default and protracted crises or the reverse, depending on whether financial transfers exacerbate or alleviate the borrowers’ misperception of default risk. The model shows that borrowers and lenders ultimately self-inflict debt crises through their strategic interaction, myopic distress can be cheaper to resolve than rational distress, and myopia can benefit stakeholders.
6. “Heterogeneity in corporate investment and financing policies” (joint with Stefano Sacchetto)
· Abstract: We empirically examine the sources of persistent heterogeneity in firms' investment and leverage policies. We estimate a dynamic model of investment and financing for a sample of US manufacturing companies, allowing the structural parameters to vary across firms. Despite short-panel effects, most of the between-firm variation in leverage is due to heterogeneity in firm-level parameters. In counterfactual experiments, we find that differences across firms in the persistence of profit shocks and in corporate tax rates are the main determinants of leverage dispersion. Capital-adjustment costs and equity-issuance costs drive most of the explained variation in investment-cash-flow sensitivities.