Knowledge that Transforms

This paper provides evidence of the association between a firm's investment opportunity set (IOS), director ownership, and corporate policy choices. Using a sample of growth and non-growth firms in an emerging Asian market, we find that the IOS theory has significant explanatory power in the financing, dividend, executive compensation, and leasing aspects of corporate policies. Growth firms have lower debt-to-equity ratios and dividend yields, pay higher cash compensation and bonus amounts to their top executives, and finance a higher proportion of their asset acquisitions through operating leases. We also find that director ownership moderates and counteracts the association between IOS and corporate policies. Our results are consistent with contracting theory predictions that high director ownership mitigates the need for incentive or bonus compensation plans in growth firms.

We examine the relation between firm diversification and asymmetric information empirically using metrics drawn from the market microstructure literature. We find that the average diversified firm in our sample has somewhat less severe asymmetric information problems than a similarly constructed portfolio of stand-alone firms chosen to approximate the segments of the conglomerate. We also find that the information asymmetry of diversified firms is very similar to that of individual focused firms that approximate the conglomerates along several dimensions not including industry composition. We conclude that greater diversification is not on average associated with increased asymmetric information.

We examine the operating performance of Thai firms after they go public. Overall, we find that their performance declines. We then explore the relationship between managerial ownership and the change in firm performance. We find that firms with ‘low’ and ‘high’ levels of managerial ownership experience positive relationships between managerial ownership and the change in performance (alignment-of-interest hypothesis), while firms with ‘intermediate’ levels of managerial ownership exhibit a negative relationship between managerial ownership and the change in performance (entrenchment hypothesis). Examining the operating performance of IPO firms from an emerging market and finding a curvilinear relationship between managerial ownership and the post-IPO change in performance represents two significant contributions to the IPO literature.

We investigate the economic role of mergers by performing a comparative study of mergers and internal corporate investment at the industry and firm levels. We find strong evidence that merger activity clusters through time by industry, whereas internal investment does not. Mergers play both an “expansionary” and “contractionary” role in industry restructuring. During the 1970s and 1980s, excess capacity drove industry consolidation through mergers, while peak capacity utilization triggered industry expansion through non-merger investments. In the 1990s, this phenomenon is reversed, as industries with strong growth prospects, high profitability, and near capacity experience the most intense merger activity.

Froot et al. [J. Finance 48 (1993) 1629] develop a framework in which a firm trades derivatives on the financial markets to coordinate its investing and financing decisions. This work specifies this framework by assuming that the firm faces a risk of going bankrupt. By deriving an approximated analytical solution, some properties of the optimal hedging strategy and the effects of hedging on a firm's investing and financing behaviour are developed and discussed. Numerical simulations of the nonclosed-form optimal solution are also obtained to validate the approximation.

In Belgian corporate groups, complex pyramidal structures and interlocking ownership lead to separation of ownership and control. This may generate incentives for the controlling shareholder to divert resources within the group through intragroup equity sales. This in turn could lead to significant private benefits at the expense of the minority shareholders. We test this hypothesis by investigating the stock price reaction to the announcement of equity sales in Belgian groups. Our results suggest that intragroup equity sales create value for minority shareholders. Equity sales between group members and non-group members do not seem to affect the value for minority shareholders in Belgian groups.

This paper investigates staged financing in an environment where an entrepreneur faces an imperfect capital market and an investor faces moral hazard and uncertainty. Staged financing plays two roles in this model: to control risk and to mitigate moral hazard. Using parametric functions and comparing staged financing with upfront financing, we discover a few interesting properties of staged financing. In particular, we show that when used together with a sharing contract, staged financing acts as an effective complementary mechanism to contracting in controlling agency problems.

In this paper, we present a case study of underwriter trading in the aftermarket of a recent initial public offering (IPO). The lead underwriter for this issue actively repurchased approximately 15% of the issue size to cover its initial short position. Detailed audit-trail and short-covering data identify the timing, volume, and counterparties for the Lead's trades. We find that price-support objectives are important on the first two short-covering days. Subsequently, repurchases appear to be governed primarily by their profitability and market liquidity. The Lead incurs lower transaction costs than other large traders, but provides substantial liquidity to the market.

In a sample of California hospitals, we find that the composition of the board of directors varies systematically across ownership types. For all ownership types, except government-owned, we find that poor financial performance is related to board and CEO turnover. However, different ownership types place different weights on levels of charity care and administrative expenses. Our overall findings support the proposition that ownership type reflects heterogeneity across consumers and producers, and that differences in these groups lead to differences in the organization's objectives and governance.

We find that trading volume increases and market liquidity remains unchanged, while the adverse selection and order-processing cost components of the spread increase and decrease, respectively, after margin levels decline when stocks become margin-eligible. This evidence indicates that the information content of trades has increased, thereby improving market quality. However, no changes were detected after the 1997 regulatory reforms. These results have implications across a broad swath of corporate finance dimensions, including the (1) cost of capital, (2) public vs. private financing decision, (3) form of managerial compensation, (4) type of ownership structure, and (5) degree of shareholder monitoring.