Firms in performance decline may choose a variety of restructuring strategies for recovery with conflicting welfare implications for different stakeholders such as shareholders, lenders and managers. Choice of recovery strategies is therefore determined by the complex interplay of ownership structure, corporate governance and lender monitoring of such firms. For a sample of 297 U.K. firms experiencing relative stock return decline during 1987–93, we examine the impact of these factors as well as other control factors on their turnaround strategies. Strategy choices during the decline year and two post-decline years are modelled with logit regressions. Our results show that turnaround strategy choices are significantly influenced by both agency and control variables. While there is agreement among stakeholders on certain strategies there is also evidence of conflict of interests among them. Thereis further evidence of shifting coalitions of stakeholders for or against certain strategies.

We examine the relationship between top management compensation and the structure of the board of directors for a sample of commercial banks. We find that boards with more reputable outside directors compensate managers more heavily with long-term incentives (stock and stock options) than with cash (salary and bonus). We also find a significant positive correlation between the future performance of our sample banks and the proportion of their managers’ compensation in the form of long-term incentives. Taken together, these results suggest that boards with highly reputed outside directors are more effective in providing managers with the appropriate incentives and thus ensuring better future firm performance. Another indication of the effectiveness of these boards is our finding that they compensate managers more heavily with long-term incentives (instead of cash) when these managers are more entrenched. We also find very little evidence of mutually beneficial back-scratching or collusion between outside directors and senior managers when setting management compensation. But boards with long-serving outside directors are less effective in creating appropriate management incentives.

To create value and reduce agency costs, firms adopt available organizational structures that match their attributes. This paper studies the characteristics of firms that choose to become master limited partnerships (MLPs). The MLP sample is dominated by firms in low-growth industries that have highly focused operations and superior profitability compared to their industry peers. After becoming an MLP, sample firms reduce capital expenditures and increase cash distributions, taking advantage of their focus, profitability, and status as non-taxable entities. A subsample of MLPs subsequently change back to corporate form. After becoming corporations, these firms reverse course by cutting cash distributions and increasing capital spending. This cycle demonstrates how firms restructure to adopt organizational forms that best fit their needs

This paper empirically investigates whether illegal insider trading increases the premium a bidder pays for a target. Illegal insider trading is trading by traditional corporate insiders, as well as others in a position of trust and confidence (e.g. investment bankers, lawyers), based on material, non-public information (‘inside information’). The paper examines the premia of takeovers with known illegal insider trading and compares them to a control sample of takeovers matched by industry, time period, and size that do not have detected illegal insider trading. After controlling for differences in merger characteristics, such as number of bidders, type of offer, form of payment, etc., we find that takeovers with detected illegal insider trading have takeover premia which are approximately 10 percentage points, or almost one-third, higher than the control sample. We conduct additional tests in an attempt to determine the direction of causality between illegal insider trading and takeover premia size and explore the effect of potential detection bias. The results suggest both that illegal inside traders base their trades on factors other than premia size, and that illegal insider trading in takeovers with large premia is not necessarily more likely to be detected. Our findings are consistent with the hypothesis that the illegal insider trading itself tends to create larger takeover premia

As discussed in Merton (1993, Sections 5 and 6) and here in the section to follow, the effective delivery of many financial services depends critically on the credit-worthiness of the provider financial institution. Such service activities are said to be 'credit-sensitive'. The intermediary's credit standing can cause significant extemality-like effects on the various business activities of the intermediary, even when there are no interconnections among them. For example, the announcement by a U.S. investment bank that it is even thinking of entering into a new merchant-banking activity of extending bridge financing and other interim risk-taking positioning for restructuring firms can materially and negatively affect its over-the-counter derivatives-products business for corporate customers because those customers may perceive the risk of the merchant-banking involvement as jeopardizing the bank's ability to fulfill its obligations on its long-dated contractual agreements. Thus the potential merchant-banking business affects the derivative-products business although there is no overlap of personnel, customer base, location, or employee skill sets between them. The shared credit standing of the institution's individual businesses can therefore cause a significant failure ofthe principle of 'value-additivity', which complicates decentralization of the capital budgeting and financial decisions. The issue of monitoring credit quality are made more complex because those intermediaries such as banks and insurance companies that are principals to customer contractual agreements tend to be 'opaque' institutions, as defined in Ross (1989) and Merton

We show in any economy trading options, with investors having mean-variance preferences, that there are arbitrage opportunities resulting from negative prices for out of the money call options. The theoretical implication of this inconsistency is that mean-variance analysis is vacuous. The practical implications of this inconsistency are investigated by developing an option pricing model for a CAPM type economy. It is observed that negative call prices begin to appear at strikes that are two standard deviations out of the money. Such out-of-the money options often trade. For near money options, the CAPM option pricing model is shown to permit estimation of the mean return on the underlying asset, its volatility and the length of the planning horizon. The model is estimated on S&P 500 futures options data covering the period January 1992–September 1994. It is found that the mean rate of return though positive, is poorly identified. The estimates for the volatility are stable and average 11%, while those for the planning horizon average 0.95. The hypothesis that the planning horizon is a year can not be rejected. The one parameter Black–Scholes model also marginally outperforms the three parameter CAPM model with average percentage errors being respectively, 3.74% and 4.5%. This out performance of the Black–Scholes model is taken as evidence consistent with the mean-variance analysis being vacuous in a practical sense as well.

As argued by Jensen (1993), the primary tasks of a firm’s board of directors are to advise, hire, fire and determine the level and form of managerial compensation. Managerial pay can be structured as part cash and in part be tied to a performance index, such as corporate earnings or the firm’s stock price. The latter effectively aligns the interest of managers with those of stockholders, which in turn reduces agency problems related to free cash flow, managerial time horizons and effort levels. At the same time, stock-based compensation increases managerial exposure to non-diversifiable risk, which may cause risk-averse managers to underinvest in risky projects. The trade-off between the benefits of managerial incentive alignment and the cost of underinvestment is largely an empirical issue, and the widespread observation that managerial compensation is primarily paid in cash 1 suggests that managerial risk aversion weighs heavily or that boards generally resort to substitute monitoring mechanisms. The paper by Angbazo and Narayanan (1997) is part of a rapidly growing empirical literature attempting to identify important cross-sectional determinants

This paper examines why firms choose to spend resources on acquiring ownership rights in other firms. Based on a unique data base of every individual intercorporate shareholding on the Oslo Stock Exchange during the period 1980–1994, we find that such investments serve at least three functions. First, they play a role incorporate governance, as managers in firms with low insider holdings, diffuse ownership structure and high free cash flow tend to mutually acquire equity stakes in each other, possibly in a collective attempt to protect their human capital in the market for corporate control. Second, interfirm equity holdings serve as financial slack for growing firms, reducing potential adverse selection costs by providing an internal funding source for new investments in long-term assets. Finally, our findings also suggest that intercorporate shareholdings are an integrated part of the investor’s cash flow management system by being a liquidity buffer when cash inflows and cash outflows are non-synchronous