Knowledge that Transforms

This paper examines the effects of employee stock ownership plans (ESOPs) on shareholder wealth. ESOPs established in the presence of takeover activity reduce share values, by approximately 4% on average. ESOPs also reduce share values if they are structured to transfer control away from outside shareholders, by creating a new ownership block with veto power over takeover bids. Large ESOPs established with nonvoting stock, so as to preclude any immediate control transfers, result in a significant increase in share values. The wealth effect of any given ESOP thus depends upon both its incentive and control effects on the corporation.

This study investigates the incentives of financially distressed firms to restructure their debt privately rather than through formal bankruptcy. In a sample of 169 financially distressed companies, about half successfully restructure their debt outside of Chapter 11. Firms more likely to restructure their debt privately have more intangible assets, owe more of their debt to banks, and owe fewer lenders. Analysis of stock returns suggests that the market is also able to discriminate ex ante between the two sets of firms, and that stockholders are systematically better off when debt is restructured privately.

Dual-class recapitalizations and leveraged buyouts have similar effects on ownership of corporate voting rights but very different effects on ownership of residual claims. We predict that firms with greater growth opportunities, lower agency costs, and lower tax liability are more likely to consolidate control through dual-class recapitalizations. We find strong support for the growth hypothesis and weaker support for the other hypotheses. These results increase our understanding of the causes of change in organizational form by illustrating that the method and effects of consolidating corporate control are systematically related to firm attributes.

This paper discusses the main findings in three statistical studies: ‘ESOPs and Corporate Control’ by Gordon and Pound, ‘…The Choice Between Dual-Class Recapitalizations and Leveraged Buyouts’ by Lehn, Netter, and Poulsen, and ‘Outside Directorships and Corporate Performance’ by Kaplan and Reishus. I conclude that, despite the sophisticated design and execution of the three studies, the amount of important new information they provide is small. Specific problems regarding their methodologies and interpretation are discussed. I question the fruitfulness of an exclusively statistical approach to corporate governance research.

To provide a framework for judging the economic significance of departures from the arbitrage pricing theory, we adopt a utility-based metric based on optimal portfolio choices. This measure is examined using both predictive and posterior analysis. Our predictive analysis shows very large and economically significant departures from the model restrictions. However, the high level of parameter uncertainty suggests that we cannot conclusively either affirm or reject the APT. Our conclusions differ markedly from other studies which employ traditional significance-testing procedures and, in many instances, fail to reject the APT restrictions.

We examine two Anglo-Dutch groups the shares of whose parents trade on several international exchanges. Within each group, the parents' corporate charters mandate the division of cash flows available for distribution. This implies a specific ratio for the market prices of their securities. We document persistent deviations from these ratios on both the New York and London exchanges. The direction and magnitude of the mispricing are common to both pairs of stocks and both markets. Nevertheless, we find no evidence of profitable intra- or intermarket trading rules.

This paper investigates how an established borrowing relationship affects the costs associated with initial public offerings of equity. Our model illustrates how the existence of a borrowing relationship reduces the ex ante uncertainty about the value of the issuing firm's equity in the secondary market. If underpricing is related to uncertainty, a borrowing relationship can reduce underpricing. Empirically, we find that, other things equal, IPOs of firms with previously established borrowing relationships are underpriced substantially less than other IPOs.

We study the effect on IPO proceeds of uniform-price restrictions and restrictions on the allocation of oversubscribed issues. Our model suggests that underwriters, given the opportunity to allocate IPOs among both regular and retail investors, would maximize proceeds by using a combination of price and allocation discrimination. Uniform-price restrictions increase the cost of soliciting information from regular investors and, when combined with evenhanded distribution restrictions, make information gathering impossible. We also provide conditions under which either adverse selection or the cost of soliciting information is likely to be the dominant force behind IPO discounting.

In 111 publicly traded firms that either file for bankruptcy or privately restructure their debt between 1979 and 1985, bank lenders frequently become major stockholders or appoint new directors. On average, only 46% of incumbent directors remain when bankruptcy or debt restructuring ends. Directors who resign hold significantly fewer seats on other boards following their departure. Common-stock ownership becomes more concentrated with large blockholders and less with corporate insiders. Few firms are acquired. Collectively, these results suggest that corporate default leads to significant changes in the ownership of firms' residual claims and in the allocation of rights to manage corporate resources.