We examine a sample of 5896 stocks listed on Nasdaq between 1974 and 1988 to see whether the price per share has significant statistical power in forecasting subsequent returns and attrition rates. Consistent with anecdotal evidence, we document a higher mortality rate for lower-priced stocks than for higher-priced issues. Surprisingly, mortality is not related to market capitalization. Our results also hold for subsamples partitioned by industry and issue year. On average, investors are not adequately compensated for this additional mortality risk, earning lower risk-adjusted rates of return on portfolios of lower-priced shares than on portfolios of higher-priced shares.

We compare top management turnover in unacquired U.S. industrial companies during an active takeover market (1984–1988) and a less active takeover market (1989–1993). For firms in the lowest quartile of performance (measured by operating income scaled by assets). 33% experience complete turnover of the president, CEO, and board chair during the active takeover period and only 17% experience complete turnover during the less active period. Controlling for various determinants of management turnover, we provide evidence that turnover and performance are related only in the active takeover period, and conclude that takeover activity affects the intensity of managerial discipline.

We analyze the empirical power and specification of test statistics in event studies designed to detect long-run (one- to five-year) abnormal stock returns. We document that test statistics based on abnormal returns calculated using a reference portfolio, such as a market index, are misspecified (empirical rejection rates exceed theoretical rejection rates) and identify three reasons for this misspecification. We correct for the three identified sources of misspecification by matching sample firms to control firms of similar sizes and book-to-market ratios. This control firm approach yields well-specified test statistics in virtually all sampling situations considered.

This paper develops a model of the optimal investment strategy for a firm confronted with a sequence of technological innovations. We incorporate many of the most important characteristics of real-world technology markets. For example, we permit innovations to be stochastic in their arrival times and their profitability. We also incorporate learning so that firms adopting current innovations become better able to benefit from future innovations. The model yields four distinct investment strategies. The model is then used to predict actual firm policy. These implications are discussed and compared with observed firm behavior.

Going public typically leads to a separation of managerial control and stock ownership, and potentially worsens managerial incentives. We document that the median ownership stake of officers and directors declines significantly from the year before going public to ten years later. Median operating return on assets also declines from the year before the offering to the end of the first year of public trading, but performance declines no further in ten years. In general, operating performance both within one year of the offering and during the first ten years of public trading is unrelated to ownership of officers and directors.

This study uses a new database to describe the composition and compensation of boards of directors of U.S. open-end mutual funds. We use these data to examine the relation between board structure and the fees charged by a fund to its shareholders. We find that shareholder fees are lower when fund boards are smaller, have a greater fraction of independent directors, and are composed of directors who sit on a large fraction of the fund sponsor's other boards. We find some evidence that funds whose independent directors are paid relatively higher directors' fees approve higher shareholder fees.

This paper investigates the role of vulture investors in the governance and reorganization of a sample of 288 firms that default on their public debt. The improvement in post-restructuring operating performance relative to the pre-default level is greater when the vulture investor becomes CEO or chairman or gains control of the target firm. We also find positive abnormal returns for the target's common stock and bonds in the two days surrounding the announcement of a vulture purchase of public debt or equity. Our evidence suggests that vulture investors add value by disciplining managers of distressed firms.

In this paper we examine how separation of ownership and control evolves as a result of an Initial Public Offering (IPO) and how the underpricing of the issue can be used by insiders to retain control. Using data from a sample of 69 IPOs in the UK, we show that underpricing is used to ensure oversubscription and rationing in the share allocation process so as to allow owners to discriminate between applicants for shares and to reduce the block size of new shareholdings. We find that of the pre-IPO shareholders in a firm, directors sell only a modest fraction of their shares at the time of the offering and in the seven subsequent years. In contrast, holdings of non-directors are virtually eliminated during the same period. As a result, in less than seven years, almost two-thirds of the offering company's shares have been sold to outside shareholders, thereby substantially advancing the process of separation of ownership and control. Additional evidence in the paper suggests that rationing in the IPO discriminates against applicants who apply for large blocks, and that larger under-pricing is associated with smaller blocks being held by new investors some seven years after the IPO. Also, there is a low level of hostile takeovers in the period of up to ten years after the IPO, which is consistent with effective protection by insiders against hostile changes of control.

Because of its institutional features, the Nasdaq market does not fit the standard competitive model. We construct a model that reflects the distinguishing characteristics of the Nasdaq market. This model implies that in dealer markets with a minimum price increment, competition among market-makers does not necessarily drive spreads down to the level of marginal cost. Using this result, we provide an explanation for the odd-eighth avoidance documented in Christie and Schultz (1994). We show that market-makers can use odd-tick avoidance as a coordination device to increase spreads. Evidence from Nasdaq supports our hypotheses.

This paper studies stock ownership in Japanese firms by non-Japanese investors from 1975 to 1991. Existing models predicting that foreign investors hold national market portfolios or portfolios tilted towards stocks with high expected returns are inconsistent with our evidence. We document that foreign investors hold disproportionately more shares of firms in manufacturing industries, large firms, and firms with good accounting performance, low unsystematic risk, and low leverage. Controlling for size, there is evidence that small firms that export more firms with greater share turnover, and firms that have ADRs have greater foreign ownership.