Knowledge that Transforms

This paper examines share price behaviour surrounding announcements of CEO departures from UK firms listed on the All Share Index between 1990 and 1995. We find that many firms choose not to announce CEO departures, and that these firms have poorer performance records, and higher chances of future failure, than those firms who officially announce CEO turnover to the London Stock Exchange. The market reacts negatively to announcements of top executive departures, especially when the CEO is dismissed or leaves to take up another job. Share price reactions to the disclosure of top executive departure are significantly affected by the financial risk of the firm and whether the board announces a replacement CEO.

This paper analyzes the joint impact of the interest rate volatility and debt on firm investment. We derive an investment model taking account of the risk attitude of the owners of the firm. Using a panel of Dutch listed firms in the period of 1984–1995, we find that the cross-effect of the interest rate volatility and debt on investment is positive. This effect is more important for highly indebted firms than for less-indebted firms. The results are robust to different measures for the interest rate volatility. We interpret this finding by the tradeoff between the effect of the interest burden and the effect of debt revaluation.

We investigate the choice of organizational form for investment funds. We find that funds that hold less liquid securities with less transparent prices are more likely to be closed-end. The relation is economically meaningful as well as statistically significant. Our results are consistent with Fama and Jensen's [J. Law Econ. 26 (1983a) 327; J. Law Econ. 26 (1983b) 301] prediction that redeemable shares are not efficient when assets are relatively illiquid and asset prices are difficult to observe.

External agents are frequently characterized as necessary for efficiency in team production settings. At the same time, these agents must be constrained from opportunistically exercising their enforcement capabilities. I argue that collective action costs and formal institutions (e.g., golden parachute agreements) can act as substitute factors in producing this constraint. The incidence of golden parachutes in a sample of S&P 500 firms is consistent with this conjecture: golden parachutes are more likely in firms with concentrated ownership. Interpreted in this light, golden parachutes enhance efficiency by increasing the credibility with which owners can commit against opportunism.

Most of the theoretical literature on tender offers has been devoted to illustrating the positive effects of the toehold on the bidder's profits. Empirical research, however, shows that a high proportion of bidders do not trade on the target's shares prior to the tender offer announcement. This paper presents a model in which the bidder trades in the open market before announcing a tender offer and the incumbent shareholders form beliefs about the rival's quality given the order size. Market liquidity allows the potential bidder to partially hide her trade, and thus insiders are not able to ascertain whether an increase in volume indicates toehold acquisition. Stock price prior to the announcement date and market perception about the probability of a takeover are therefore contingent on players actions. We show that in some situations no trade will be optimal, and a negative relationship between takeover premium and toehold size arises. Interestingly, stock liquidity and initial stake are positively related. Our results also provide a theoretical basis for the observed pre-bid stock price dynamics. In particular, we show that the ratio between price runup and bid premium is increasing in the toehold size.

Investment institutions with substantial shareholdings in a firm have the resources and incentives to monitor and influence management decisions. Whether the institutions actually monitor and exert pressure on managers is an empirical question. Previous studies have reported mixed results on this question. We examine whether large institutional shareholdings in a firm deter earnings management by its managers when those executives otherwise have incentives to increase or decrease reported profits. Using discretionary accounting accruals as the measure of earnings management, we find that the presence of large institutional shareholdings inhibit managers from increasing or decreasing reported profits towards the managers' desired level or range of profits. The evidence is consistent with institutional investors monitoring and constraining the self-serving behavior of corporate managers.

This paper examines the relatively neglected link between dividend policy and institutional ownership. It is also the first example of using well-established dividend payout models to examine the potential association between ownership structures and dividend policy. Moreover, the paper presents the first results for the UK, where the institutional framework and ownership structures are different from those of the US. Using a UK panel data set, the role of institutional ownership in association to dividend payout ratios is analysed within the context of the dividend models of Lintner [American Economic Review, 46 (1956) 97], Waud [Journal of the American Statistical Association, 1996] and Fama and Babiak [Journal of the American Statistical Association, 63 (1968) 1132]. The results consistently produce strong support for the hypothesis that a positive association exists between dividend payout policy and institutional ownership. Furthermore, the results for an earnings trend model suggest a positive earnings trend component to the association between institutional ownership and the dividend payout ratio. In addition, there is some evidence in support of the hypothesis that a negative association exists between dividend payout policy and managerial ownership.

This paper examines the relative share pricing of 98 firms with two classes of common stock trading in the United States from 1984 to 1999. The firms feature common stock classes with differential voting rights and, in some cases, differential rights to dividends. The observed voting premiums are higher than those reported in previous studies of U.S. firms and are dependent on the form of dividend promise to the low-vote shareholder. The voting premium is higher in the presence of a control threat, when insiders do not hold controlling voting power, and during periods of poor firm performance.

This paper provides an explanation of callable convertible issue from the viewpoint of managerial entrenchment. Zweibel [American Economic Review 86 (1996)] has shown that an entrenched manager voluntarily issues straight debt in order to avoid hostile takeover. Straight debt, however, may lead the firm into bankruptcy in which a manager loses her position. We show that an entrenched manager can avoid a hostile takeover and bankruptcy at the same time by issuing well-designed callable convertible debt. Although callable convertible debt may decrease the value of the firm, an entrenched manager will prefer it over straight debt.

This study examines the sensitivity of equity values of oil producers to changes in the uncertainty of future oil prices. We document that this sensitivity is negatively correlated with a firm's debt ratio and its production costs. These results indicate that companies that are more likely to experience financial distress or underinvestment from low cash flows are adversely affected by increases in the uncertainty of future cash flows. We conclude that corporate risk management can increase shareholder value by reducing the expected costs of financial distress and underinvestment.