Knowledge that Transforms

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.

This paper examines seven instances in which the market value of a parent company was less than the market value of its publicly traded subsidiary. Efforts are made to explain this “parent company puzzle” in terms of taxes, agency costs, liquidity effects and noise trader risk. None of them work. The only explanation consistent with the evidence is a mispricing of the subsidiary shares associated with noise trader demand and impediments to arbitrage. As further evidence in support of this view, five corporate control transactions, all designed to exploit the apparent mispricing, were initiated while this research was in progress.

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.

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.

This paper studies financial policy, investment decisions and the threat of dismissal when managers value control and investments generate manager-specific value. A high probability of investigation focuses the manager on the profitability of replacement and therefore manager-specific value. The probability of an investigation increases when the firm enters bankruptcy. Thus, high debt levels focus the manager on investments that dissuade replacement during bankruptcy procedures. Dividends relax the manager's focus on manager-specific value since there is a lower probability of an investigation following a missed dividend. The ability to make dividend payments, however, is related to ex-post performance and can improve replacement decisions. When managerial quality is commonly known, the expected value of the firm is maximized with a combination of debt and dividend commitments. When managerial quality is hidden information, it is optimal for the combination of debt and dividend commitments to signal quality.

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.

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.

This paper examines the relationship between the likelihood a firm is acquired and the governance and financial characteristics of the firm. Given many of the developments in the corporate control market in the late 1980s, I suspect that the process governing takeover likelihood may have changed in the 1990s. I examine a sample of 342 NYSE/AMEX firms that were acquired during the 1990–1997 period and compare them to a matched sample of nonacquired firms. I find that firms that were acquired over this period can be characterized as having lower managerial ownership and higher ownership by outsiders, particularly higher ownership by nonmanagement blockholders with board representation. The fact that managerial ownership is negatively related to takeover likelihood is consistent with studies using data from 1970s and 1980s. This suggests that managerial ownership helps managers maintain control, or alternatively that ownership proxies for how much managers care about control.