This paper demonstrates that differences in managerial ownership data cannot explain contradictory empirical evidence on the relation between equity ownership and the entrenchment of managers. Three commonly used sources of managerial equity ownership data are described and contrasted. The Value Line Investment Survey is shown to be a relatively low-cost substitute for the data on beneficial ownership by officers and directors found in corporate proxy statements.
Proponents of state antitakeover legislation argue that previous empirical tests by financial economists of the wealth effects of Pennsylvania's 1990 antitakeover law are biased. We show that the proponents are correct. In particular, firm size, event-time clustering, and non-synchronous trading effects account for the wealth decreases reported in earlier studies. We also show, however, that both proponents and critics of the Pennsylvania legislation have ignored the earliest press release about it. The wealth effect associated with this announcement is negative, large, and statistically significant. These results therefore are consistent with the hypothesis that the Pennsylvania law decreased company values and with the hypothesis that the initial market reaction is an unbiased estimate of the law's effect on firm values.
This paper seeks to provide an explanation for why corporate officers manage the disclosure of accounting information. We show that earnings management affects firm value when value-maximizing managers and investors are asymmetrically informed. In equilibrium, the strategic management of reported earnings influences investors' assessments of the market values of companies' shares.
Previous work suggests that, when the debtor has private information on the future profitability of the firm, financial distress is costly even if debt can be renegotiated. This paper shows that adverse selection problems can be completely avoided by offering creditors a mix of cash and equity in the renegotiation. Empirical evidence indicates that this is common practice in corporate debt workouts. However, asymmetric information leads to inefficiencies if equity is not treated as the residual claim in bankruptcy. In this case, equilibria exist in which distressed firms go to court too often.
We estimate continuous-time event-history models of the acquisition of conglomerate vs. non-conglomerate and predatory vs. friendly acquisitions among the 1962 Fortune 500 between January, 1963, and December, 1968. Our analysis of predatory acquisitions reveals that there were strong disciplinary motivations for these acquisitions in the 1960s. Q ratios were, by a large margin, the most important determinant of predatory acquisition likelihood. Surprisingly, however, corporate boards appear to have provided little alternative to predatory acquisition as a monitoring mechanism during this period. Friendly acquisitions, on the other hand, were concentrated among firms with low price-earnings ratios and high return on equity, suggestive of the earnings manipulation story often associated with conglomerate acquisitions. Our analysis of conglomerate acquisitions reveals that there were strong disciplinary motivations for conglomerate acquisitions during this period. Conglomerate targets had low Q ratios and were as likely as non-conglomerate targets to be acquired in a predatory fashion. We find no evidence that conglomerate acquisitions were motivated by a desire to improve earnings-per-share numbers, as some have maintained. In addition, regardless of type or tenor, we find managerial ownership, firm size, and industrial organization motivations for acquisition are consistently important determinants of acquisition likelihood.
Financing a multinational subsidiary by intra-firm parent debt has the advantage that while interest payments on the debt are tax deductible, there are no offsetting bankruptcy costs. Tax authorities put limits on the rate the parent is allowed to charge since the multinational firm has incentives to exaggerate the interest rate on the intra-firm debt when the foreign corporate tax rate is higher than the domestic rate. Since the interest rate on external debt — which entails potential bankruptcy costs — is determined competitively in the market, this can be used as a benchmark to justify the rate charged on intra-firm debt. We show that the firm would finance the subsidiary partly by intra-firm parent debt and partly by external debt, both of equal seniority, but it sometimes would choose to pay its external debtors in full even when it is not contractually obligated to do so. For any given level of total debt financing, higher corporate tax rates in the foreign country are associated with a larger proportion of debt financing by external debt, higher interest rates and a larger probability of bankruptcy; higher corporate tax rates in the home country are associated with a smaller proportion of debt financing by external debt, lower interest rates and a smaller probability of bankruptcy.
This paper models the maintenance of management quality through the simultaneous functioning of internal and external corporate control mechnism—board dismissals and takeovers. We examine how the information sets of the board and the acquiror are noisily aggregated, and how this affects the behaviour of the board and the acquiror. The board of directors, acting ion shareholders' interests will sometimes oppose a takeover, and this opposition can be good news for the firm. An unsuccessful takeover attempt may be followed by a high rate of management turnover, because a takeover attempt conveys adverse information possessed by the bidder about the manager. If there is a probability that the board is ineffective, then a forced resignation of the manager can be either good or bad news for the firm. A positive effect is predicted to dominate when there is more adverse public information avilable about the manager's performance and when there is a higher ex ante probability that the board is ineffective, for example, of the board is management-dominated rather than outsider-dominated.
Some argue that managers effectively control corporate voting: hence the process is meaningless. Others contend that shareholder voting motivates managers to maximize firm value. We provide evidence on this debate by analyzing the results from a large sample of management-sponsored anti-takeover amendments. Our results do not support the extreme form of either hypothesis. The evidence suggests that shareholder voting is important and indicates the circumstances where voting is most likely to constrain managers. Our results also have implications for the use of voting in political and other non-corporate contexts.
We study the joint distribution of ownership, performance, managerial turnover, and takeover activity at repurchasing firms during a five-year period centered on the repurchase, and compare this to the distribution of these variables for a control sample selected on the basis of size and industry. This evidence illuminates the link between defensive activity and performance, as well as the impact of defensive activity on the experience of firms and managers. We find that the performance of firms that pay greenmail is no worse than the performance of firms of similar size that operate in the same industry, either prior to the repurchase or following the repurchase. The fate of managers at firms that pay greenmail appears to reflect their performance, as does the occurence of takeover activity. The frequency of takeover activity cannot be distinguished from the frequency of takeover activity at firms involved in a 13-D filing. Bid premia appear to be unaffected by the payment of greenmail.