Knowledge that Transforms

We operationalize a firm's competitive strategy through a new empirical measure, and develop a framework for empirical analysis of the market value of strategic behavior. Using this framework, we study announcement effects of R&D spending. The announcing firm's stock prices are positively influenced by a change in spending, and negatively by our competitive strategy measure (CSM). Competitors' stock prices are positively influenced by the interaction between the market's reaction to the announcing firm and the CSM. Our results are consistent with positive effects of ‘accommodating’ competition with strategic substitutes, and nonpositive effects of ‘tough’ competition with strategic complements.

We examine the evidence that expected security returns can be forecasted by the term premium, default premium, and dividend yield, in light of recent findings that similar security return patterns are associated with Federal Reserve monetary policy developments. We extend Fama and French's (1989) analysis by suggesting that the monetary environment influences investors' required returns, and hence the robustness of the models they propose. Our findings indicate that Fama and French's results vary dramatically across monetary environments; that is, the behavior of the business-conditions proxies and their influence on expected security returns is significantly affected by the monetary sector.

I examine the effect of prudent-man laws on the behavior of institutional investors. Variation in exposure to legal liability across types of investment managers allows me to disentangle the effect of the prudent-man laws from other potential influences on manager behavior. Bank managers significantly tilt the composition of their portfolios toward stocks that are viewed by the courts as prudent, while mutual fund managers choose not. I show that differences in the direction that bank and mutual fund managers choose to tilt may explain their portfolio performance differences over time.

We provide comprehensive data on the attributes and outcomes of the restructuring process for a sample of 49 financially distressed firms that restructured by means a prepackaged bankruptcy. Our findings complement previous research on out-of-court restructurings and traditional Chapter 11 filings. By most measures, including the time spent in reorganization, the direct fees as a percent of pre-distress assets, the recovery rates by creditors, and the incidence of violation of absolute priority of claimholders, we find that prepacks lie between out-of-court restructurings and traditional Chapter 11 bankruptcies.

We analyze the advice contained in a sample of 237 investment newsletter strategies over 1980-1992. Each newsletter strategy recommends a mix of equity and cash. We find no evidence that letters systematically increase equity weights before market rises or decrease weights before market declines. While there is no information in the newsletter strategies about future market returns, we document that disagreement among the newsletters is correlated with future realized and implied volatility.

We investigate the relations between trading volumes and our proxies for information flows and divergences in opinions. We view S&P 500 Index futures' open interest as a useful proxy for divergences of traders' opinions, and find that volumes are higher on days when open interest increases than on days with declines. Volume in individual equities is more closely related to firm-specific information flows, while equity basket volume is more closely associated with market information. This differential impact is greatest for small capitalization stocks where market-wide news has no explanatory power.

We investigate factors affecting the number of outside directorships held by CEOs. CEOs of firms with growth opportunities hold fewer outside directorships than CEOs of firms consisting primarily of assets-in-place. We find evidence consistent with CEOs holding more outside directorships as they transfer decision rights to their eventual successors. We also find that when employees (not necessarily CEOs) of two different firms sit on each other's boards, CEOs hold more outside directorships, suggesting CEO participation bonds the relationship between the two firms. We find little evidence that outside directorships represent unchecked perquisite consumption on the part of CEOs.

In May 1991, one month after seizing Executive Life, California regulators seized First Capital Life (FCLIC). Both insurers were Drexel clients with large junk bond holdings, and both had experienced ‘bank runs’. FCLIC's run followed regulators' televised comments that its poor condition necessitated a substantial cash infusion. Yet FCLIC's statutory capital — with junk bonds, real estate, and mortgages marked to market — was far from lowest among major insurers with California policyholders. It becomes lowest if junk bonds alone are marked to market at year-end 1990 (ignoring larger market declines in real estate/mortgages and the junk bond market's 21% return in early 1991). Our findings suggest a regulatory bias against junk bonds in the political backlash against the 1980s.

Shareholder-initiated proxy proposals on corporate governance issues became popular in the late 1980s as corporate takeover activity declined. We find firms attracting governance proposals have poor prior performance, as measured by the market-to-book ratio, operating return, and sales growth. There is little evidence that operating returns improve after proposals. The proposals also have negligible effects on company share values and top management turnover. Even proposals that receive a majority of shareholder votes typically do not engender share price increases or discernible changes in firm policies.