Knowledge that Transforms

This paper examines the relation between a company's performance and its top executives' service on other boards of directors. Using dividend cuts to measure performance, we find that top executives of companies that reduce their dividends are approximately 50% less likely to receive additional outside directorships than are top executives of companies that do not reduce their dividends (significant at 1% level). The probability that top executives will resign from or lose outside directorships they already hold is negatively, but not significantly, related to the performance of their own firms.

Empirical analysis reveals that investment-banker advisory fees in tender offers average 1.29% of the value of a completed transaction, far below the levels often alluded to in the business press. Most fees are contingent on offer outcome, with target-firm fees typically contingent on transaction value and bidding-firm fees on the number of shares purchased. Although these contingent contracts motivate investment bankers to satisfy some client objectives, many also create conflicts of interest between banker and firm. These incentive problems are apparent in offer evaluation, in hostile offers, and in the price paid by bidding firms.

We reason that dividend-yield surprises are perfectly correlated with dividend surprises. If investors with preference for dividends are the marginal investors in high-yield stocks, the price reaction to a dividend change should be larger, the higher the anticipated yield of the stock. An examination of over 8,500 dividend changes shows that price reactions to dividend increases are significantly more positive and to dividend decreases significantly more negative for high-yield stocks. Also, the price reactions to dividend changes are larger and the yield effect is stronger for low-priced and small-firm stocks, perhaps because of greater information content and higher transaction costs.

Share-price responses to 95 announcements of increased research and development (R & D) spending are significantly positive on average, even when the announcement occurs in the face of an earnings decline. High-technology firms that announce increases in R & D spending experience positive abnormal returns on average, whereas announcements by low-technology firms are associated with negative abnormal returns. Further, in our cross-sectional analyses we find that higher R & D intensity than the industry average leads to larger stock-price increases only for firms in high-technology industries.

We investigate the underlying causes and the announcement effects of plant closings. The closing in our sample do not appear related to takeover activity. Instead, they appear motivated by declining firm profitability. Firms announcing closings have lower earnings than market or industry medians; earnings typically improve slightly after the announcement. We find a negative stock-market reaction to plant-closing announcements.

Prebuyout bondholders, on average, suffer statistically significant wealth losses in leveraged buyouts. Bonds with strong covenant protection, however, gain value, while those with no protection lose value. The disposition of bonds after buyouts, e.g., remained outstanding, called, tendered, defeased, is also strongly linked to type of covenant protection. We also document that covenant use declines for bonds issued after 1980. Finally, the losses to bondholders are small compared with the gains accruing to shareholders.

I investigate changes in operating performance after 58 management buyouts of public companies completed during 1977–1986. Operating returns increase significantly from the year before to the year after buyouts as measured by operating cash flows (before interest and taxes) per employee and per dollar of operating assets. Subsequent changes in operating returns suggest that this increase is sustained. Adjustments in the management of working capital contribute to the increase in operating returns. The increase is not, however, the result of layoffs or reductions in expenditures for advertising, maintenance and repairs, research and development, or property, plant, and equipment.

We test the mean-variance efficiency of a given portfolio using a Bayesian framework. Our test is more direct than Shanken's (1987b), because we impose a prior on all the parameters of the multivariate regression model. The approach is also easily adapted to other problems. We use Monte Carlo numerical integration to accurately evaluate 90-dimensional integrals. Posterior-odds ratios are calculated for 12 industry portfolios from 1926–1987. The sensitivity of the inferences to the prior is investigated by using three different distributions. The probability that the given portfolio is mean-variance efficient is small for a range of plausible priors.

I present new evidence on the direct costs of bankruptcy and violation of priority of claims. In a sample of 37 New York and American Stock Exchange firms that filed for bankruptcy between November 1979 and December 1986, direct costs average 3.1% of the book value of debt plus the market value of equity, and priority of claims is violated in 29 cases. The breakdown in priority of claims occur primarily among the unsecured creditors and between the unsecured creditors and equity holders. Secured creditors' contracts are generally upheld.

This paper examines financial distress and its effect on organizational efficiency. Imperfect information and conflicts of interest among the firm's claimholders influence the outcome of financial distress. Methods for resolving distress and controlling conflicts of interest are discussed. New evidence on financial restructuring and distress costs is presented along with evidence on the organizational restructuring that accompanies financial distress. The evidence demonstrates that financial distress has benefits as well as costs, and that financial and ownership structure affect the net costs.