We examine analysts' earnings forecasts for a sample of takeover targets and document that the announcement-month forecasts are systematically revised upward, supporting the hypothesis that a takeover announcement conveys favorable information about the target firm. In addition, we find that abnormal forecast revisions of future stand-alone earnings are significantly greater for targets with low Tobin's q-ratios relative to targets with high q-ratios, lending further support to the information hypothesis. Finally, we provide evidence that managerial resistance to the takeover does not destroy value. Our results are in direct contrast to Pound (1988).

This paper examines the relation between corporate takeovers and the board of directors as alternative control mechanisms to discipline top management. Previous research shows that CEO turnover subsequent to corporate takeovers is inversely related to pre-takeover market-related performance. We find this relation is concentrated in targets with inside-dominated boards of directors. Our results support the notion that, as an alternative control device, takeovers serve as a “substitute” for outside directors. Further, we show that the discipline associated with corporate takeovers extends beyond top management to effect restructuring of the entire board. The nature of the discipline depends on the composition of the target board prior to the takeover. Disciplinary takeovers result in two general effects: (1) for inside-dominated targets, the number of inside directorships decreases while the number of outside directorships remains about the same; and (2) for outside-dominated boards, the number of inside directorships increases while the number of outside directorships decreases. As a result, the board is recomposed toward a more even balance between inside and outside directorships.

This article primarily addresses two largely unanswered questions in the financial economics literature: (i) is there a demand for lead bank monitoring in the initial public offering (IPO) market?, and (ii) does monitoring by the lead investment banker lead to better post-issue performance? We find evidence consistent with the demand for underwriter monitoring in the IPO market. We examine variables which proxy for the incentives of lead underwriters to supply monitoring post-issue. These variables include lead investment bank reputation and whether warrants are issued to the underwriter by the issuing firm. We find that lead bank reputation is positively associated with the post-issue performance of IPO firms. We also examine whether additional value added monitoring is provided by unaffiliated analysts. The number of unaffiliated analysts following is positively correlated with post-issue performance. Our results are consistent with third party monitoring in the new issues market.

This article investigates the change in operating performance of firms as they make the transition from private to public ownership. A significant decline in operating performance subsequent to the initial public offering (IPO) is found. Additionally, there is a significant positive relation between post‐IPO operating performance and equity retention by the original entrepreneurs, but no relation between post‐IPO operating performance and the level of initial underpricing. Post‐issue declines in the market‐to‐book ratio, price/earnings ratio, and earnings per share are also documented.

The leading explanation for the post-issue long-run stock return underperformace of seasoned equity offering firms is that investors have optimistic expectations regarding future earnings and the underperformance occures as these expectations are corrected over time. To directly test this hypothessis, we examine investors' reaction to quarterly earnings announcements over a five-year period following the offering for a large sample of seasoned equity issuing firms. In general, our evidence suggests that investorsare not disappointed by earnings announcements that follow seasoned equity offerings. This result is not sensitive to widening the windown over which earnings announcement returns are computed. This result also holds true for subsets of equity issuing firms. The choice fo these three subsets is predicated by extant evidence that these firms are likely to convey relatively more unfavorable information throung their earnings announcements. Overall, our findings are inconsistent with the optimistic expectations hypotgesis.

This paper provides a comprehensive examination of the disciplinary role of the corporate takeover market using a sample of U.S. target firms over the period 1979 to 1998. The time period spanned allows a broader study not only of the disciplinary role of the takeover market in general, but also of the interaction between the takeover market and alternative governance mechanisms during the 1980s and 1990s. Overall, our evidence is consistent with the view of the corporate takeover market as a “court of last resort,” that is, it is an external source of discipline that intercedes when internal control mechanisms are relatively weak or ineffective.

This paper tests the proposition that higher tournament incentives will result in greater risk-taking by senior managers in order to increase their chance of promotion to the rank of CEO. Measuring tournament incentives as the pay gap between the CEO and the next layer of senior managers, we find a significantly positive relation between firm risk and tournament incentives. Further, we find that greater tournament incentives lead to higher R&D intensity, firm focus, and leverage, but lower capital expenditures intensity. Our results support the hypothesis that option-like features of intra-organizational CEO promotion tournaments provide incentives to senior executives to increase firm risk by following riskier policies. Finally, the compensation levels and structures of executives of financial institutions have received a great deal of scrutiny after the financial crisis. In a separate examination of financial firms, we again find a significantly positive relation between firm risk and tournament incentives.

Using hand-collected data on CEO noncompete agreements (NCAs), we find that NCAs are less common when CEOs expect to incur greater personal costs from reduced job mobility and more common when firms expect to suffer greater economic harm if departing CEOs leave to work for a competitor. Additionally, turnover-performance sensitivity is stronger when CEOs have NCAs. Finally, total compensation and incentive pay are higher if CEOs have more enforceable NCAs. Our identification strategy exploits staggered state-level changes in NCA enforceability. Overall, our findings suggest that restrictions on job mobility have important implications for how CEOs are monitored and compensated.

We evaluate the link between chief executive officer (CEO) industry tournament incentives (ITIs) and the product-market benefits of corporate liquidity. We find that ITIs increase the level and marginal value of cash holdings. Furthermore, ITIs strengthen the relation between excess cash and market-share gains, especially for firms that face significant competitive threats. Additionally, for firms with excess cash, higher ITIs lead to increased research and development (R&D) expenses, capital expenditures, and spending on focused acquisitions as well as reduced payouts. Overall, our findings suggest that ITIs increase the value of cash by incentivizing CEOs to deploy cash strategically to capture its product-market benefits.