Estimating comovement measures for a large set of bilateral foreign exchange (FX) rates, I explore the relation between firm-level FX exposure and its time-varying diversifiability. For a sample of U.S. firms, the magnitude of FX exposure appears to increase during periods of low currency risk diversifiability. Additional results suggest that the introduction of the euro exacerbated the effect of diversifiability on developed market currency exposure. Moreover, the low diversifiability of emerging market currencies seems to have a stronger effect on FX exposure than the low diversifiability of developed market currencies.

This study analyzes foreign exchange (FX) cash flow and equity exposures of a sample of U.S. multinational firms. Focusing on asymmetry in FX cash flow exposures to direction and magnitude of FX shocks, the study finds that asymmetry is pervasive in several alternative measures of FX cash flow exposure. Also, after decomposing FX equity exposures into discount rate and cash flow components, the study documents significant asymmetries in FX discount rate exposures. The latter finding implies that market-related factors in addition to cash flow–based arguments need to be considered when further exploring FX equity exposure. This study also highlights the importance of model specification: models with asymmetric specifications detect more firms with significant FX exposures.

This paper examines the anticipated components of bidder returns by focusing on the banking industry around the passage of interstate deregulation (Riegle Neal Act of 1994). Overall, firms that became bidders after Riegle Neal have large significant positive returns during its passage. Moreover, these positive wealth effects are significantly larger than the effects at the merger announcement. These results suggest that bidder returns are anticipated and focusing only on narrow event windows underestimates gains to bidders. Finally, the positive bidder returns appear to provide evidence against both the entrenchment and hubris hypotheses. Additional tests provide evidence to suggest that mergers are motivated by synergy rather than disciplinary motives.

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.

To date, there has been little modeling of the board of directors as an independent entity in the corporate finance literature. Most theoretical papers omit the board entirely and model only managers and shareholders as active players. In this paper, I model the board as an entity distinct from both management and shareholders. The analysis is based on management's power in the selection and retention of board members and it focuses on the effect of this power on the frequency of open dissent in the boardroom and the board's effectiveness in disciplining management. The model predicts behavior consistent with empirical observation and produces testable implications about the links between board compensation, structure, and information and the frequency of board dissent and the level of board effectiveness.

I focus on the incentive effects of asset ownership in franchising. Franchise contracts give a manager ownership of some local assets; the franchisor owns other assets, notably the trademark. Under double moral hazard, the allocation of ownership effects the incentives of both the franchisor and the franchisee. I compare franchising with company-ownership of all assets. Franchising the local unit gives the manager strong incentives, but gives the central firm weak incentives. Franchising may be the preferred organizational form when the local manager's effort has a relatively small effect on the unit's current profit, but a large effect on the unit's future profit.

This paper examines the financing decisions of firms in response to changes in investments and profits. We find that information frictions play important roles in firms' financing decisions. However, we find no evidence that asymmetric information about the value of a firm's assets causes equity to be used only as a last resort. Indeed equity is the predominant source of finance in situations, such as profit shortfalls, investment in intangible assets, and internally generated growth opportunities, where informational asymmetries and agency costs are likely to be high. We also find that firms respond asymmetrically to positive and negative profit shocks. In financing fixed assets, high asymmetric information firms use more short-term debt and less long-term debt, whereas firms with high potential agency problems use significantly more equity and less long-term debt and cash.

We challenge a common presumption that poison pills and two Delaware case rulings in 1995 validating such pills materially entrench firms. Based on unsolicited takeover attempts from 1985 to 2009, we find that poison pills enhance takeover premiums, but do not reduce completion rates. Furthermore, the 1995 Delaware rulings affected neither the use of poison pills among the targets, the effectiveness of the pills that were used, the completion rate of the takeover attempts, nor the takeover premiums.

We describe four channels through which breakups can potentially increase idiosyncratic volatility for parent firms. These are: loss of diversification (portfolio effect), change in growth opportunities, change in operational efficiency, and the flow and assimilation of information (information effect). The relevance of each channel depends on the mode of a breakup. We explain conceptually and show empirically, using a sample of 530 breakups (259 spinoffs and 271 equity carveouts), that the portfolio effect is dominant for spinoff parents, while the information effect gains importance for carveout parents. Our novel insight is that the magnitude of the information effect depends on the pre-announcement information set held by investors; we provide a simple state-space model and empirical evidence to support this intuition. We also find a relation between the change in operational efficiency and the change in idiosyncratic volatility for spinoff parents.

This paper examines speculation spreads following initial acquisition announcements in 362 cash tender offers spanning the 1981–1995 period. Speculation spreads in acquisitions, defined as the percentage difference between the bid price and market price one-day after the initial announcement, are the starting point for arbitrage returns, a subject receiving increased attention in practice and in the literature. Speculation spreads exhibit a positive mean, with considerable cross-sectional variation. In fact, over 23% of speculation spreads are negative, indicating a post-announcement price greater than the initial bid price. In spite of its importance, the informational content of the speculation spread and the reasons for its cross-sectional variation have not been previously examined. We model speculation spreads as the visible component of total speculative returns of the target. Rational traders set speculation spreads anticipating the expected price resolution and length of the acquisition bid. Empirically, we find strong support for key implications of our model. Speculation spreads are significantly related to bid and offer characteristics observable ex ante. Consistent with our model, they are also significantly negatively related to the magnitude of price revision and significantly positively related to offer duration. These results are robust to the inclusion of bid and offer characteristics known ex ante as well as those only revealed ex post. The results are consistent with market pricing of both offer duration and price resolution at the time of the initial announcement.