Knowledge that Transforms

For 307 firms over the 1990–1994 period, I find that board meeting frequency is related to corporate governance and ownership characteristics in a manner that is consistent with contracting and agency theory. The annual number of board meetings is inversely related to firm value. This result is driven by increases in board activity following share price declines. I further find that operating performance improves following years of abnormal board activity. These improvements are most pronounced for firms with poor prior performance and firms not engaged in corporate control transactions. Overall, my results suggest that board activity, measured by board meeting frequency, is an important dimension of board operations.

This paper examines the stock price impact of international dual listings. The sample consists of 181 firms from 35 countries that instituted their first Depositary Receipt program over the period 1985–1995. The market reaction to a Depositary Receipt program is larger in magnitude and more pervasive than previously reported. The stock price reaction is related to choice of exchange, geographical location (i.e., emerging or developed markets), and avenues for raising equity capital (i.e., public versus private offerings).

We examine the loss in utility for a consumer who ignores any or all of the following: (1) the multi-period nature of the consumer's portfolio-choice problem, (2) the empirically documented predictability of asset returns, or (3) transaction costs. Both the costs of behaving myopically and ignoring predictability can be substantial, although allowing for intermediate consumption reduces these costs. Ignoring realistic transaction costs (fixed and proportional) imposes significant utility costs that range from 0.8% up to 16.9% of wealth. For the scenarios that we consider, the presence of transaction costs always increases the utility cost of behaving myopically, but decreases the utility cost of ignoring predictability.

Pension funds have pursued an active role in corporate governance, although some question their effectiveness and motivations. We examine the impact and motivation of pension fund activism by studying the shareholder proposals of the largest, most active funds from 1987 through 1993. We find significant heterogeneity across funds in activism objectives, tactics, and impact on target firms, consistent with differing investment strategies. We find the funds are more successful at monitoring and promoting change in target firms than previously recognized. We also find no evidence to support motivations other than fund value maximization.

Christie and Schultz (1994), (Journal of Finance, 49, 1813–1840) find that market makers in many active Nasdaq stocks avoid odd-eighth quotes. This paper studies 67 (58) Nasdaq stocks whose market makers initiate (withdraw) odd-eighth quotes. These regime shifts are often completed within the span of a day, and coincide with dramatic changes in dollar, percentage and effective spreads. In most cases, we are unable to identify comparable changes in the costs of making markets. We do identify long-run changes in average prices that may provide a partial explanation. However, we also find that these patterns are not shared by stocks traded in auction markets.

We examine pairs of large, `Siamese twin’ companies whose stocks are traded around the world but have different trading and ownership habitats. Twins pool their cash flows, so, with integrated markets, twin stocks should move together. However, the difference between the prices of twin stocks appears to be correlated with the markets on which they are traded most, i.e., a twin's relative price rises when the market on which it is traded relatively intensively rises. We examine several explanations of this phenomenon including: the discretionary use of dividend income by parent companies: differences in parent expenditures; voting rights; currency fluctuations; ex-dividend date timing issues; and tax-induced investor heterogeneity. Only the last hypothesis can explain some, but not all, of the empirical facts. We conjecture that: (a) country-specific sentiment shocks might affect share intensity, (b) investors are rational, but markets are segmented by frictions other than international transactions costs, such as agency problems.

Using a sample of 628 carveouts during 1981–1995, this paper finds that the newly issued subsidiary stocks do not underperform appropriate benchmarks over a three-year period following the carveout. This result is in striking contrast with the documented poor performance of initial public offerings and seasoned equity offerings. I conjecture that the superior performance of subsidiary stocks arises because the subsidiary and parent firms can focus on fewer business segments after carveout, and because the parent firms continue to own a monitoring position in the subsidiary firms. I test whether the subsidiary stock performance is related to the number of business segments the parent firm has before carveout. The relationship is not always significant, which suggests another possible explanation, that the market may react efficiently to the likely future performance of carveouts.

We examine whether an increase in focus is an explanation for the stock market gains associated with spinoffs. For a sample of 155 spinoffs between the years 1975 and 1991, we find that the announcement period as well the long-run abnormal returns for the focus-increasing spinoffs are significantly larger than the corresponding abnormal returns for the non-focus-increasing spinoffs. The results for the change in operating performance are consistent with those for the stock market performance. Cross-sectionally, the stock market performance as well as the operating performance are positively associated with change in focus. An analysis of the non-focus-increasing spinoffs shows that the firms are likely to undertake these spinoffs to separate underperforming subsidiaries from the parents.

We examine firm debt maturity in 30 countries during the period 1980–1991. In countries with active stock markets, large firms have more long-term debt. Stock market activity is not correlated with debt levels of small firms. By contrast, in countries with a large banking sector, small firms have less short-term debt and their debt is of longer maturity. Variation in the size of the banking sector is uncorrelated with the capital structures of large firms. Government subsidies to industry are positively related and inflation is negatively related to the use of long-term debt. We also find evidence of maturity matching.

This paper analyzes the recommendations of common stocks made by the investment newsletters followed by the Hulbert Financial Digest. We conclude that, taken as a whole, the securities that newsletters recommend do not outperform appropriate benchmarks. Our data provide modest evidence that the future performance of a newsletter is related to its past performance, when performance is measure by raw returns. Evidence of persistence vanishes, however, when performance is measured by abnormal returns. We find little, if any, evidence of herding, i.e., cross-sectional dependence of recommendations, across newsletters. Newsletters tend to recommend securities that have performed well in the recent past. Finally, newsletters with poor past performance are more likely to go out of business.