Knowledge that Transforms

An active market for corporate control has prompted corporate managers to lobby for measures that protect their positions. It has been argued that corporate managements have worked to entrench themselves at the expense of outside shareholders and have pressured institutional investors (including banks) to vote on corporate matters in a manner supportive of managements' proposals. One source of potential pressure arises when bank fiduciaries manage employee savings plans, pension funds, and engage in other fee generating corporate trust activities for firms whose shares they vote. In addition, banks often extend commercial credit to firms whose shares the trust division votes. Finally, director interlock between banks and corporations is likely to bias voting behavior. Fiduciary loyalty may be compromised by bankers' concern that failure to support management can threaten business relationships. The objective of this study is to investigate the effects of conflicting relationships on the voting behavior of banks as fiduciaries. The empirical results indicate that where director interlock and income-related relationships exist, banks tend to vote in favor of management antitakeover proposals; however, where these business relationships do not exist banks tend to vote against such proposals.

This study examines the use of dividend provisions in executive compensation contracts to influence dividend policy. A sample is constructed with the largest companies in the oil and gas, defense/aerospace and food processing industries, where dividend-related agency costs are expected to be high. The results indicate that the existence of a dividend incentive in the compensation plan is positively associated with higher dividend payouts and yields, and higher annual changes in dividend levels. Evidence is also provided on firm characteristics associated with the use of a compensation contract with a dividend provision. The results are consistent with the theory that firms link compensation incentives to dividend payments to reduce conflicts between shareholders and management over dividend decisions.

Laws prescribing public disclosure of firms' financial performance create asymmetries between integrated multi-plant organizations and independent single-plant firms as to the release of information about firm profitability. The paper analyses how such asymmetries affect the merger choice through their impact on union power. Merging different production units into one firm has the effect of reducing plant unions' information about the surplus their members help produce. This in turn reduces their bargaining power and hence there arises an incentive for firm owners to merge their assets even in the absence of pecuniary or technical externalities between plants.

This study offers several new perspectives on the effects of competition in takeover contests on bidder returns. Using a more extensive database than existing studies and employing several different measures of success in takeovers, we find that success in competitive acquisitions decreases shareholder wealth relative to both failure and success in observed single-bidder takeovers. Further, we consider and test hypotheses regarding bidder returns, including hypotheses suggested by the preemptive bidding theory. In general, our results neither support the preemptive bidding theory nor the hypotheses linking the method of payment and the observed level of competition. We also test hypotheses relating to returns across the multiple events in a multiple-bid contest that competition among bidders generates. The results of these tests underscore the importance of timing as well as success of a bid to the bidder's subsequent performance.

This study examines some economic and organizational changes resulting from the conversion of mutual thrift institutions (MTI) to publicly traded stock charter corporations. We focus on the relation between the initial value of the converted firm and (i) subscription decisions by management and by regular depositors, and (ii) the employment of a prestigious underwriter or auditor. Whereas the proportion of managerial subscriptions displays a convex relation with the firm's initial value, the relation between the regular depositor subscription and the converted firm's value is linear and positive. The status of the underwriter or auditor is unrelated to the value of the converted firm. These findings are attributed to the regulatory setting governing the MTI conversion process, constraints on ownership holdings and the oversight function of the regulator.

This paper examines the relation between commodity futures trading and the real side contracting behavior of firms dealing in the commodity. I argue that futures serve as a flexible form of physical contracting and should be examined in the context of the firm's contracting activities, and not strictly in the context of its financial activities. Data from an oil refining company are used to empirically study this relation. The results are consistent with a contracting view of futures use and appear inconsistent with implications of hedging theories.

The takeover boom of the 1980s was accompanied by a series of innovations in debt contracts, including the poison put that allows bonds to be redeemed in the event of a corporate control change. The poison put was included in a large majority of convertible debt offerings, shortly after the first issues with such provisions. We attempt to understand the factors that contributed to the widespread adoption of this innovation in convertible bonds and the consequences for shareholder wealth. Our findings suggest that by reducing the potential for bondholder-shareholder conflicts and by conveying positive information about future takeover prospects, poison puts result in significant benefits to issuing firm shareholders, particularly if the firm is under takeover speculation. There are, however, no benefits when a firm has adopted antitakeover measures prior to the offering. There is weaker evidence that existing bondholders do worse when poison puts are present.

In this paper, we test the hypothesis that the probability of the target's board of directors resisting a takeover bid can be explained by two factors, transaction-specific variables and distribution of voting rights. Our study is conducted in Canada where the distribution of ownership and especially voting rights is more concentrated than in the United States. We find first that some transaction-specific variables are relevant. The past performance of the target, the premium and prior negotiations are negatively associated with the probability of resistance by the managers. Competing bids cause it to increase, but their effect is felt through their interaction with the premium. Given our specific information on prior negotiations, we interpret their effect as unambiguous evidence of risk-reducing behavior on the part of the board. The distribution of voting rights is also relevant: blocks of shares held by the directors are associated with an increase in the probability of resistance. This may be seen as evidence of managerial entrenchment. We document the degree to which these findings differ from those in the United States and seek to explain these differences. Our proxies for board composition are not statistically significant.

The basis in stock index futures markets is analytically and empirically studied in this paper within a no-arbitrage/cost of carry framework. Explanatory power improved when the implications of the U.K. Stock Exchange settlement system were introduced into the modelling process and, until recently, with the maturity of the market. Evidence indicating the presence of non-synchronicities between the cash and futures markets was found. strong evidence for tax effects upon the basis was not found to be present in the data analysed. Statistically significant relationships between basis mispricing and volume and volatility were found.

This paper compares an international two-index model to an International Arbitrage Pricing Theory (IAPT) two-factor model to evaluate the performance of 37 U.S.-based international mutual funds over the 1985–1993 period. Results from the index model confirm prior research that international funds perform as well as the market proxy. In contrast, the IAPT model implies superior investment performance by the international funds. Moreover, the two models produce different relative performance rankings. Intertemporal comparisons of the models indicate that the multifactor IAPT model better reflects the international equity return-generating process.