Knowledge that Transforms

Management plays a dominant role in selecting outside directors, inviting skepticism about outsiders' ability to make independent judgments on firm performance. Our examination of wealth effects surrounding outside director appointments finds significantly positive share-price reactions. We find no clear evidence that outside directors of any particular occupation are more or less valuable than others. The results are consistent with the hypothesis that outside directors are chosen in the interest of shareholders.

Many contingent claims incorporate options on yield levels. I derive closed-form expressions for European yield-option prices using a general equilibrium model in which the underlying yield is the relevant state variable. The properties of these options differ markedly from those of conventional options on traded assets. For example, yield-call values can be less than their intrinsic value and can be decreasing functions of the underlying yield. These features have important hedging implications. I examine the empirical implications of the model using price data for the 13-week T-bill options traded on the Chicago Board Options Exchange.

This paper estimates the systematic risk of the debt in public leveraged recapitalizations. We calculate this risk as a function of the difference in systematic equity risk before and after the recapitalization. The increase in equity risk is surprisingly small after a recapitalization, ranging from 37% to 57%, depending on the estimation method. If total company risk is unchanged, the implied systematic risk of the post-recapitalization debt in twelve transactions averages 0.65. Alternatively, if the entire market-adjusted premium in the leveraged recapitalization represents a reduction in fixed costs, the implied systematic risk of this debt averages 0.40.

Exchangeable debt is convertible into the common stock of a target firm in which the issuing firm has an ownership position. It signifies a potential change in the issuing firm's asset composition through the divestiture of the ownership stake in the target firm. We find that announcements of exchangeable debt offers are associated with insignificant abnormal returns for the shareholders of issuing firms. The target firm's share price declines, however, when an exchangeable debt offer is announced. This result is consistent with the offer's potential to reduce the ownership concentration of the target firm's common stock.

This research investigates the influence of market microstructure on liquidity premiums. Premiums of a competitive, multiple-dealership market (NASDAQ) are contrasted with those of a monopolistic, specialist system (NYSE). Differences in liquidity premiums are estimated from monthly stock returns. For small firms, the average returns of NYSE securities exceed the average returns of NASDAQ securities. This return differential persists after controlling for size, risk, and liquidity-related variables. Neither the NYSE nor NASDAQ dominates the other in providing liquidity. The NASDAQ appears to have a liquidity advantage over the NYSE for small firms but not for large companies.

This paper presents a detailed case history of voluntary restructuring by General Mills. During the 1980s the company reversed the extensive diversification of the two preceding decades by returning to its traditional core of packaged foods and food-related services. Drawing extensively on field interviews with the parties directly involved in the decision process, the paper explains the rationale behind both the structuring and the restructuring process. It highlights the role of the internal corporate governance process, the internal and external forces for change, and the consequences for financial performance and shareholder value.

A portfolio formed from a given list of assets is defined as a numeraire portfolio for the list if (a) it is self-financing, (b) its value is always positive, and (c) zero is always the best conditional forecast of the numeraire-dominated rate of return of every asset on the list. The numeraire portfolio exists if and only if there are no profit opportunities from trading assets on the list. For a sample list of heterogeneous assets (NYSE size-quintile portfolios, corporate bonds, and short-term bills), numeraire-dominated returns are similar to market-model forecast errors and, as abnormal return measures, clearly dominate market-adjusted returns.

In 1972 a group of electric utilities announced plans to construct Seabrook Station, a nuclear generating facility. In 1988, the lead partner in the venture, Public Service Company of New Hampshire (PSNH), filed for bankruptcy. Examination of the stock price effects of a variety of financial events preceding the bankruptcy filing shows that information about cash flows paid to PSNH security holders affected the common stock prices of PSNH and its Seabrook partners. whereas information about investment and operating cash flows had little or no effect.

We examine an exhaustive set of initial public offerings (IPOs) by venture-capital-backed companies between 1978 and 1987. We find that venture capitalists specialize their investments in firms to provide intensive monitoring services. Consistent with their monitoring role, the venture capitalists take concentrated equity positions, maintain their investment beyond the IPO, and serve on the boards of their portfolio firms. The quality of their monitoring services appears to be recognized by capital markets through lower underpricing for IPOs with better monitors.

This paper investigates whether union wealth concessions caused by changes in real wage growth following takeovers explain target-firm share-price premiums. Point estimates imply that union wealth changes in the six years following the acquisition account for 1% to 2% of shareholder premiums. This figure rises to 5% over 18 years. For hostile takeovers, union wealth increases by roughly 3% and 10% of shareholder gains over 6- and 18-year periods. The 95% confidence interval for wage changes implies that unions may lose up to a quarter, or gain up to a fifth, of what target shareholders gain.