Knowledge that Transforms

We investigate termination fee size in mergers. Although the deal premium does not significantly affect fee size, smaller targets and targets with lower institutional ownership offer larger fees. Low or moderate fees do not eliminate post-announcement competing bids, while large fees do. Fee size is generally positively correlated with deal completion. However, large fees are negatively correlated with the consummation of high-premium deals. Fee size is generally unrelated to announcement-date cumulative abnormal returns. However, returns are significantly lower for deals including fees larger than 5%. Overall, the study provides evidence that low- or moderate-size fees serve as efficient contractual devices, while large fees are less beneficial to shareholders and therefore tend to suggest agency conflicts.

French law mandates that employees of publicly listed companies can elect two types of directors to represent employees. Privatized companies must reserve board seats for directors elected by employees by right of employment, while employee-shareholders can elect a director whenever they hold at least 3% of outstanding shares. Using a comprehensive sample of firms in the Société des Bourses Françaises (SBF) 120 Index from 1998 to 2008, we examine the impact of employee-directors on corporate valuation, payout policy, and internal board organization and performance. We find that directors elected by employee shareholders increase firm valuation and profitability, but do not significantly impact corporate payout policy. Directors elected by employees by right significantly reduce payout ratios, but do not impact firm value or profitability. Employee representation on corporate boards thus appears to be at least value-neutral, and perhaps value-enhancing in the case of directors elected by employee shareholders.

Simulation experiments show that both partial-adjustment and debt-equity choice models can generate spuriously significant estimates that are consistent with the hypothesis that firms have target debt ratios to which they periodically adjust. Regressions relying on full-sample fixed effects models of target leverage, in particular, produce results severely biased in favor of the target-adjustment hypothesis. Various target proxies and modifications to the standard methodologies are examined to identify partial-adjustment and debt-equity choice models that have power to reject the target-adjustment hypothesis. The resulting estimates of the speed of adjustment are in the range of five-eight percent per year.

Following the dividend flexibility hypothesis used by DeAngelo and DeAngelo (2006), Blau and Fuller (2008), and others, we theoretically extend the proposition of DeAngelo and DeAngelo (2006) optimal payout policy in terms of the flexibility dividend hypothesis. In addition, we also introduce growth rate, systematic risk, and total risk variables into the theoretical model. To test the theoretical results derived in this paper, we use the data collected in the US from 1969 to 2009 to investigate the impact of the growth rate, systematic risk, and total risk on the optimal payout ratio in terms of the fixed-effect model. We find that based on flexibility considerations, a company will reduce its payout when the growth rate increases. In addition, we find that a nonlinear relationship exists between the payout ratio and the risk. In other words, the relationship between the payout ratio and the risk is negative (or positive) when the growth rate is higher (or lower) than the rate of return on total assets. Our theoretical model and empirical results can therefore be used to identify whether flexibility or the free cash flow hypothesis should be used to determine the dividend policy.

We propose an alternative measure of the long-term economic impact of mergers on firm value: post-acquisition changes in intrinsic value. Consistent with the literature on post-acquisition returns, the intrinsic value of merged firms decreases on average in the three years following deal completion, especially for firms with high initial intrinsic values. The loss of intrinsic value is driven primarily by decreases in expected earnings. Finally, using return decompositions, we find evidence that the poor post-acquisition stock returns documented in other studies can be attributed primarily to lost intrinsic value rather than changes in valuation levels.

This paper tests whether financial constraints play a disciplinary role in cash dissipation in the presence of agency problems. We hypothesize that when firms have difficulty raising external funds, empire-building managers of cash-rich firms will be less likely to spend cash on negative NPV projects as compared to unconstrained managers. Empirically, we examine firm performance after cash dissipation and associate it with the degree of financial constraints. We find that cash spending by managers in financially constrained firms is associated with higher future profitability and stock returns compared to cash spending by managers in unconstrained firms. Further tests reveal that the positive effect of financial constraints on firm performance is not driven by differences in corporate governance. Financial constraints actually substitute for good governance in disciplining managers. We find that corporate governance improves the efficiency of cash dissipation in unconstrained firms, but not in constrained firms. Likewise, financial constraints' disciplinary effect is found to be concentrated in firms that are poorly governed.

Using data from 944 public companies in 2006, I examine how a firm's propensity to pay dividends is related to (i) board independence and (ii) independent directors' tenure, number of board seats (busy) and equity incentive compensation. After controlling for the effects of traditional economic, CEO entrenchment and ownership determinants of the propensity to pay dividends, I find evidence of a positive association between the propensity to pay and (i) board independence and (ii) director tenure, and a negative association between the propensity to pay and (i) busy directors and (ii) greater equity incentive compensation in the director pay structure. I find consistent results when the decision is to pay cash dividends or repurchase shares. In further tests, I find that equity incentive compensation in the independent director pay structure is the most pervasive determinant across other dividend measures such as dividend payout, total payout and repurchases. Overall, the findings suggest that the characteristics of independent directors are important determinants of the payout policy. The results also suggest that future corporate governance research could benefit from incorporating characteristics of independent directors rather than limiting governance measures to board independence especially when recent empirical evidence (Linck et al., 2008, 2009) shows convergence, and therefore, narrowing variation in the proportion of outsiders and insiders on a board.