Knowledge that Transforms

We investigate the impact of debt covenants on acquisition characteristics. We find that acquirers with covenants pay lower merger premiums, make more focused acquisitions, and engage in acquisitions with higher synergy gains and higher acquirer returns around deal announcement, relative to those without. All these results are more pronounced with stricter debt covenants. Additionally, acquirers with covenants pay with a lower share fraction. In particular, capital covenants, which restrict debt issuance, are positively related to the share fraction, while performance covenants, which affect the stock of equity capital, result in a lower share fraction of payment. All our results hold only for acquirers who have not violated covenants, reemphasizing the importance of debt covenants and the threat they entail on corporate policies even before nearing violation states. Results also, generally, hold for badly governed firms, suggesting that creditors' monitoring role through debt covenants and borrower's effective corporate governance are substitutes.

The buyback anomaly survives when using the five factor Fama and French (2015) and the four factor Stambaugh and Yuan (2017) models: buyback announcements are followed by positive long-term excess returns that are positively related to (idiosyncratic) volatility, inconsistent with the low volatility anomaly. The results are consistent with the costly arbitrage hypothesis (Stambaugh et al., 2015) as well as with the market timing hypothesis: the option to take advantage of undervalued stock is more valuable when firm value is more uncertain or is more driven by company-specific information. Combining volatility with undervaluation indicators proposed by Peyer and Vermaelen (2009) improves the predictability of excess returns after buyback announcements.

The median U.S. non-regulated firm reports a 47% decline in leverage ratio between 1980 and 2010. We investigate whether the cost-benefit tradeoff to shareholders, captured by the valuation impact of an additional dollar of debt on owners' equity, is an explanation for the observed change in leverage. Using Faulkender and Wang (2006) methodology, we find that shareholders view increasing debt to have a negative impact on their wealth, that is, shareholders perceive firms to be over-levered. Further, the net cost of issuing additional debt has increased steadily for three decades beginning in 1980 before declining marginally after 2010. This trend holds for different groups of firms classified on factors known to affect capital structure decisions. Managers respond to the changing cost to shareholders by reducing (increasing) leverage when the cost of debt increases (decreases). The time-series pattern in the marginal cost of debt persists after controlling for firm-specific characteristics. We find that macroeconomic factors, such as federal debt, play a role in explaining the marginal value of debt.

In this paper we test the hypothesis that independent boards can insulate a company from the detrimental impact of corruption on its performance (proxied by innovation). To this purpose, we have estimated an innovation production function that links innovation outputs to innovation input (namely investment in R&D) on a sample of manufacturing subsidiaries controlled by British multinationals and located in 30 countries. Our analysis covers the period 2005–2013. After controlling for the subsidiary's characteristics (including the ownership structure and whether the main shareholders are from Common Law countries), we find that independent boards may mitigate the negative impact of corruption on innovation as subsidiaries located in more corrupt countries and with more independent boards tend to invest more in R&D and register more valuable patents. These results still hold after controlling for the average age of the directors, the proportion of directors with no local business affiliations and government effectiveness.

Documenting the US antitrust review process for M&As in rich detail, we unveil that regulatory costs and risks are significant and that mitigating these risks via lobbying by acquirers may benefit shareholders. Our results show that an adverse antitrust review outcome leads to a decline of 2.8% in acquirer firm value. Further, we show that lobbying before deal announcements is associated with more favorable review outcomes. Finally, higher pre-announcement lobbying is valued by shareholders, especially in horizontal deals and deals with a larger expected change in market concentration, which have higher antitrust concerns. However, this positive value effect of lobbying applies only in firms with strong corporate governance. Our results highlight the role of political connections and lobbying for corporate investments when facing regulatory costs and risks.

This paper presents evidence that firms conserve cash to manage employees' perceptions of the risk of becoming unemployed. Employing a matched sample design and using state level changes in unemployment insurance (UI) benefits to proxy for unemployment risk, we test the hypothesis that cash holdings and unemployment risk are positively related. We find an economically and statistically significant decrease in cash holdings after an increase in UI benefits (i.e., lower unemployment risk). Robust to alternative specifications, our findings also suggest that the positive relation between cash holdings and unemployment risk is more pronounced for firms that are more labor intensive, have a high layoff propensity, have a higher fraction of low-wage workers, and are in industries with a higher fraction of UI recipients. Overall, our results are consistent with the idea that cash holdings are affected by not only shareholders but also other stakeholders: namely employees.

We examine the relation between chief executive officer (CEO) inside debt holdings and the firm's choice between debt and equity financing when it accesses external capital markets. We find positive relations between CEO inside debt holdings and both the firm's likelihood to issue debt and the proportion of debt of their total external financing. Additional analysis indicates that CEO inside debt is negatively related to the cost of debt and positively related to the stock price reaction around the public debt issue announcement. Our results are consistent with the argument that inside debt aligns managers' and debtholders' interests leading to favorable debt terms that motivate firms to raise debt to meet their capital needs.

Using a large sample of US public companies, we find robust evidence that firms' payout policies, i.e., dividends and share repurchases, are significantly influenced by the policies of their industry peers. To overcome endogeneity problems, we employ instrumental variable techniques based on peers' stock price shocks. Peer influence on payouts is more pronounced among firms that face greater product market competition and operate in better information environments. With regards to dividends, firms, especially smaller and younger firms, are more sensitive to industry peers that are similar to them in size and age. However, mimicking repurchases is concentrated among large and mature firms only. Peer influence on dividends, compared to repurchases, seems more stable across firm and industry conditions. Overall, peer influence on dividends, and, to a less extent, on repurchases, is consistent with a rivalry-based theory of imitation, which posits that firms imitate peers' actions to maintain their competitive parity.

This study explores the effect of asset specificity on a target firm's value in a merger. Using US merger data, I show that, when their industry experiences a negative cash flow shock, target firms that consist of more industry-specific real assets receive a lower merger premium than do those consisting of more generic assets. Results also suggest that the asset specificity discount in the target return is more pronounced if target firms are financially distressed. However, the negative value effect of asset specificity is mitigated in the presence of financially unconstrained industry rivals who place high value on the targets' assets, compete for the targets, and, thereby, are more likely to acquire the targets. Overall, the results are consistent with the hypothesis that asset specificity of a firm is an important determinant of the firm's value.

In this study, we identify the relation between foreign institutional ownership and stock liquidity commonality in 39 countries from 2000 to 2014. Our results show a negative and robust linkage between foreign institutional ownership and global stock liquidity commonality. Corporate transparency is a key mechanism through which foreign institutional investors can reduce stock liquidity commonality. Independent and U.S.-based foreign institutional investors have a greater effect on reducing stock liquidity commonality. Additionally, there is a U-shaped relation between foreign institutional ownership and stock liquidity commonality. Next, we provide evidence that foreign institutional investors mitigate the effects of local culture, exaggerate the impacts of economic policy uncertainty, and substitute the role of a country's corporate governance level. Finally, it is evident that stock liquidity commonality mediates the relation between foreign institutional ownership and firm valuation. Foreign institutional investors can enhance firm valuation through stock liquidity commonality and stock illiquidity.