Knowledge that Transforms

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.

We empirically examine whether firms increase financial leverage following mergers. Firms could increase financial leverage either because of an increase in debt capacity or because of unused debt capacity from pre-merger years. We find that financial leverage of combined firms increases significantly following mergers. A cross-sectional analysis shows that the change in financial leverage around mergers is significantly positively correlated with the announcement period market-adjusted returns. Further tests indicate that the increase in financial leverage is an outcome of an increase in debt capacity, although there is weak evidence that some of the increase in financial leverage is a result of past unused debt capacity.

We extend the literature on director independence and the role of the board by focusing on the importance of audit committees in the contracting process. We find that the demand for independent and active audit committees is positively related to the demand for accounting certification. In particular, we find that the likelihood of a firm having a completely independent and active audit committee is negatively related to firm growth opportunities and managerial ownership and positively related to firm size and leverage. Our results suggest that audit committees are an important organizational construct related to the demand for accounting certification.

We investigate the extent to which managerial incentives, including golden parachute (GP) payments, have influenced target acquisition gains over the past two decades. We find that the use and scope of GP contracts expanded dramatically for a large sample of firms acquired from 1980 through 1995. To investigate the effect of managerial incentives on target acquisition gains, we estimate a regression of abnormal stock returns for acquisitions on variables including managerial incentives, the value of GP payments, and the interaction between GPs and management incentives. The regression results indicate that management incentives are positively associated with target acquisition returns and that GP payments serve to mitigate this influence. We do not, however, detect any direct association between the level of GP payments and target gains.

This paper uses insider trading around new security issues to provide evidence of managerial timing ability. I show that insider sales increase and purchases decrease prior to issues of information-sensitive securities (convertible debt and equity) by industrial firms. I then examine the relation between insider trading and subsequent stock returns. Although not all equity issues are motivated by overvaluation, those where managers sell prior to the issue are more likely to be. I find that industrial firms with abnormal insider selling underperform in the long run, whereas those with abnormal buying do not. There is no evidence of a relation between abnormal selling and future performance for utility offerings, however. Overall, the evidence is consistent with poor long-term performance being due to overvaluation.

This paper examines the takeover charter amendments made by 128 firms listed on the New Zealand Stock Exchange. By December 31, 1995, firms were to have adopted one of three charter amendments that varied the timing and content of information required to be provided in takeover bids. The results show that after controlling for the probability of takeover and firm size, unaffiliated directors, representing blockholders, are associated with a less restrictive takeover amendment. We also find evidence that equity owned and controlled by executive and affiliated directors is related to the choice of takeover amendment. We find no relation between the choice of takeover amendment and the level of institutional shareholding, the proportion of public directors or the joint role of CEO and board chairman.

This paper examines the valuation effects of a sample of 558 bank mergers from 1980–1997. The overall results indicate that bank mergers create wealth. On average over a 36-day (−30, +5) event window, targets gain over 22%, bidders break even, and combined firms gain 3%. The results further indicate that mergers in the 1990s, which have not been extensively studied in prior work, have positive effects. In the 1990s over the 36-day window: target gain significantly, bidder returns are positive and statistically larger than the mid-1980s, and combined firm returns are significantly positive. These results are consistent with the notion that bank mergers occur for synergistic reasons and are not the result of empire building. However, bidder returns are sensitive to the event window implemented. Examining returns over an 11-day (−5, +5) window, target returns remain significantly positive, while bidder returns are statistically negative, and combined firm returns are statistically positive. Results over both windows indicate that overall wealth effects from bank mergers are positive over time, particularly in the 1990s.

Using the universe of publicly traded banks at year-end 1993, we find that target banks' outside directors, but not inside directors, tend to own more stock than their counterparts in other banks. Having an outside blockholder is also associated with banks becoming targets. In contrast to existing research on industrial firms, board structure does not help determine which sample banks sell. Neither the fraction of outsiders on a bank's board nor having an outside-dominated board differentiate the target banks in our sample. Instead, outside directors/shareholders and blockholders appear to be primarily responsible for encouraging bank managers to accept an attractive merger offer