Knowledge that Transforms

This paper investigates the effect of voluntary corporate spin-off announcements on shareholder wealth. A significant positive share price reaction is documented for 93 voluntary spin-off announcements between 1963 and 1981. These shareholder gains do not appear to come wholly at the expense of bondholders. Evidence suggests the gains to shareholders may arise from tax and regulatory advantages and/or improved managerial efficiency resulting from the spin-off.

Several studies of mergers and tender offers examine the changes in the value of ownership claims associated with corporate acquisitions and use the observed value changes to address the degree of competition in the market for corporate acquisitions. These studies conclude that the takeover market is competitive on the basis of the abnormal stock price changes of bidding firms, the time series behavior of the market value of target firms, and the proportion of gains that accrue to target and bidding firms. Unfortunately, none of these tests are sufficient to conclude that the takeover market is competitive. A competitive acquisition market implies that the potential gain to unsuccessful bidders at the successful offer price is nonpositive. This implication is tested using data on tender offers in which there are multiple bidders. The results appear to be consistent with competition in the market for corporate acquisitions.

This study examines, month-by-month, the empirical relation between abnormal returns and market value of NYSE and AMEX common stocks. Evidence is provided that daily abnormal return distributions in January have large means relative to the remaining eleven months, and that the relation between abnormal returns and size is always negative and more pronounced in January than in any other month — even in years when, on average, large firms earn larger risk-adjusted returns than small firms. In particular, nearly fifty percent of the average magnitude of the ‘size effect’ over the period 1963–1979 is due to January abnormal returns. Further, more than fifty percent of the January premium is attributable to large abnormal returns during the first week of trading in the year, particularly on the first trading day.

Standstill agreements are voluntary contracts which limit a substantial stockholder's ownership interest in a corporation for a specified number of years. They are often accompanied by repurchase of the substantial stockholder's shares at a premium above the market price. Standstills and premium buybacks reduce competition for corporate control and provide differential treatment of large block stockholders. The analysis indicates a statistically significant negative average effect on non-participating stockholder wealth associated with standstill agreements. Negotiated premium repurchases are also associated with negative, but less significant, stockholder returns. The evidence is inconsistent with the hypothesis that these management actions are in the best interests of non-participating stockholders.

This study investigates the effect of merger bids on stock returns. Abnormal stock returns are examined throughout the entire merger process for both successful and unsuccessful merger bids. The evidence shows that increases in the probability of merger benefit the stockholders of target firms, and that decreases in the probability of merger harm the stockholders of both target and bidding firms. There is also evidence that the stock market forecasts probable merger targets in advance of any merger announcement, and because of this, previous studies have underestimated the market's reaction to merger bids.

Many large corporations have recently adopted antitakeover charter amendments which make the transfer of corporate control more difficult. This paper develops and tests competing theoretical explanations for the passage of these amendments. In one view, antitakeover provisions are adopted because incumbent management seeks job protection at stockholders' expense. The alternative hypothesis is that antitakeover provisions benefit stockholders, perhaps by extracting greater payment in exchange for corporate control. Although inconclusive, the evidence provides weak preliminary support for the hypothesis that antitakeover amendments are best explained as a device for managerial entrenchment.

This paper reviews much of the scientific literature on the market for corporate control. The evidence indicates that corporate takeovers generate positive gains, that target firm shareholders benefit, and that bidding firm shareholders do not lose. The gains created by corporate takeovers do not appear to come from the creation of market power. With the exception of actions that exclude potential bidders, it is difficult to find managerial actions related to corporate control that harm shareholders. Finally, we argue the market for corporate control is best viewed as an arena in which managerial teams compete for the rights to manage corporate resources.

This paper examines the association between one specific change in executive compensation contracts (adoption of performance plans), changes in corporate capital investment, and security market performance. The empirical results indicate that (when compared to similar non-adopting firms) firms adopting performance plans exhibit a significant growth in capital expenditures and a favorable security market reaction to the announcement of the performance plan adoption. These results provide evidence that changes in executive compensation contracts are associated with changes in managerial decisions.

The earnings ‘time-series literature’ in accounting focuses on the statistical characteristics of the processes which generate corporate earnings. In order to further our understanding of earnings behavior, this study investigates the question whether inter-firm differences in these statistical characteristics (autocorrelations and variances of earnings changes) can be explained by economic factors. Various relationships between economic factors and earnings behavior are derived from the economic literature and examined empirically in this study. Findings indicate that autocorrelations and variability of annual earnings and earnings over equity changes are systematically associated with the following factors: the type of product, the height of industry barriers-to-entry (a surrogate for degree of competition), the degree of capital intensity (‘operating leverage’), and the firm size.