Knowledge that Transforms

This paper examines the impact of foreign investors on stock returns in Korea from November 30, 1996 to the end of 1997 using order and trade data. We find strong evidence of positive feedback trading and herding by foreign investors before the period of Korea's economic crisis. During the crisis period, herding falls, and positive feedback trading by foreign investors mostly disappears. We find no evidence that trades by foreign investors had a destabilizing effect on Korea's stock market over our sample period. In particular, the market adjusted quickly and efficiently to large sales by foreign investors, and these sales were not followed by negative abnormal returns.

We examine the importance of stockholder–bondholder conflicts in capital-structure choice. Numerical techniques are used to compute the expected wealth transfer between stockholders and bondholders when a firm adopts a new project. We characterize the set of positive NPV projects that stockholders prefer to ignore and the set of negative NPV projects that stockholders want to accept. The results illustrate how these distortions vary with firm and project characteristics. We also estimate the impact of stockholder–bondholder conflicts on investment decisions for 23 different firms and examine the extent to which stockholder-bondholder conflicts explain observed cross-sectional variation in capital structures.

We examine the equity ownership structure and board composition of a sample of 583 firms over the ten-year period 1983–1992. Our evidence suggests that a substantial fraction of firms exhibit large changes in ownership and board structure in any given year. These changes are correlated with one another and are not reversed in subsequent years. Ownership and board changes are strongly related to top executive turnover, prior stock price performance, and corporate control threats, but only weakly related to changes in firm-specific determinants of ownership and board structure. Furthermore, large ownership changes are typically preceded by economic shocks and followed by asset restructurings.

This study examines how political and economic factors affect the offer price, share allocation, and other terms governments choose when they privatize state-owned enterprises via a public share offering. Using a 59 country sample of 630 share issue privatizations (SIPs) with total proceeds of over $446 billion during the period 1977–1997, we find that governments consistently underprice SIP offers, tilt their share allocation patterns to favour domestic investors, impose control restrictions on privatized firms, and typically use fixed-price offers rather than book building or competitive tender offers, all to further political and economic policy objectives.

In 1992, the Amex launched the Emerging Company Marketplace (ECM) to trade the stocks of small but growing companies. Bid–ask spreads decreased dramatically for listing firms, and news coverage increased. Executives of listing firms were quite satisfied. Yet few firms chose to list on the ECM, and it closed in 1995. What went wrong? Most Amex stakeholders had little to gain from the success of the ECM, and a series of scandals damaged the reputation of the exchange. Similar small-firm markets have also failed, largely because successful firms quickly depart for traditional markets, leaving only unsuccessful firms behind.

Economic volatility, high transaction costs, and fragile institutions hinder financial contracting in emerging markets. These conditions characterize the economy of Brazil, yet a nascent corporate bond market thrives. I analyze 50 Brazilian indenture agreements and find that sample debentures are characterized by (i)features that mitigate inflation risk for investors, (ii)contingent-maturity mechanisms that provide periodic opportunities for exit or renegotiation, (iii)a paucity of covenants that restrict the debtor's investment, financing, and dividend decisions, and (iv)self-enforcement mechanisms that avoid reliance on inefficient institutions. Analysis of these features enhances our understanding of contracting in emerging economies.

In this paper, we examine the value of the right to choose the method of sale of corporate assets. We show that this right is valuable, and that its value comes from recognizing conflicting incentives of claimants at the time of sale. As with risky projects, senior and junior claimants are shown to have distinct preferences on a set of common auction procedures. They also differ on the issue of allocation of resources towards attracting bidders for the auction. As a consequence, the optimal allocation of the design right must depend on circumstances prevailing at the time of the sale. While, in general, selling the firm by auction does not guarantee the use of optimal selling arrangements, a suitable allocation of design rights may help mitigate inefficiency problems significantly.

Volvo's attempt to merge with Renault in 1993 temporarily destroyed SEK 8.6 billion (US$ 1.1 billion) in Volvo shareholder wealth. This study traces the destruction to hubris, managerialism, and the escalation of commitment – elements suggested in previous research. In addition, the case suggests path dependence as a source of wealth destruction in mergers. An elaborate structure of cross-shareholdings, joint committees, and a poison pill made it difficult for the strategic allies (Volvo and Renault) to follow any strategic path other than merger if they wanted to exploit economies more fully. Activism by institutional investors was instrumental in halting the destruction of shareholder wealth and redirecting the firm. This study reveals significant positive abnormal returns associated with the institutional activism. Consistent with Shleifer and Vishny (1986), institutional `jawboning' is valuable. An analysis of the voting premium between Volvo's `A' and `B' shares suggests that the value created by institutional voice derived from the strategic change in the firm's direction rather than the power of the coalition of institutional investors to expropriate wealth.

When a rate of return is regressed on a lagged stochastic regressor, such as a dividend yield, the regression disturbance is correlated with the regressor's innovation. The OLS estimator's finite-sample properties, derived here, can depart substantially from the standard regression setting. Bayesian posterior distributions for the regression parameters are obtained under specifications that differ with respect to (i) prior beliefs about the autocorrelation of the regressor and (ii) whether the initial observation of the regressor is specified as fixed or stochastic. The posteriors differ across such specifications, and asset allocations in the presence of estimation risk exhibit sensitivity to those differences.

We examine whether the existence of a bank/firm relationship lowers the cost of public debt financing. Using a sample of first public straight debt offers, we test the cross-monitoring effect of bank debt and Diamond's (1991, Journal of Political Economy, 99, 689–721) reputation-building argument. We find that the existence of bank debt lowers the at-issue yield spreads for first public straight bond offers by about 68 basis points, on average. Consistent with Diamond's reputation-building argument, we document that firm reputation is negatively related to the at-issue yield spread for initial public debt offers.