Knowledge that Transforms

We explore the impact of strategic behaviour of equity holders, debt holders and an opportunistic supplier of a critical input on the firm's capital structure, organisational design, and its outsourcing decision. We show that the supplier can trigger strategic bankruptcy even when the firm is solvent. Equity holders respond to this either by eliminating the supplier and producing the input in-house or by reducing their exposure to debt by using equity-financing. Both responses introduce inefficiency since input costs are higher with in-house production, and debt is cheaper than equity. We show that the equilibrium debt-equity ratio varies positively with cash-flow profitability and the marginal cost of the supplier's input, but negatively with the riskiness of the cash flow and the equity holders' in-house input production costs.

This paper examines the relation between managerial power and compensation for Chief Executive Officers of S&P 500 companies from 1993 through 2012. We find that more-powerful CEOs earn more than less-powerful CEOs. We refer to this additional compensation as a “power premium” and investigate this power premium based on two competing views. The managerial ability view argues that the power premium compensates CEOs for their better managerial talent while the managerial power view argues that the power premium reflects the CEO's ability to extract excessive compensation. Overall, our results are more consistent with the managerial ability view. Empirically, we find that the power premium and the fraction of equity-based compensation are invariant to whether the CEO is newly hired or not. We also find that the likelihood of having an explicit employment contract is similar between new and incumbent CEOs.

This paper provides an overview of the academic literature on the market for corporate control, and focuses specifically on firms' performance around and after a takeover. Despite the aggregate M&A market amounting to several trillions USD on an annual basis, acquiring firms often underperform relative to non-acquiring firms, especially in public takeovers. Although hundreds of academic studies have investigated the deal- and firm-level factors associated with M&A announcement returns, short-run returns are often not sustained in the long run. Moreover, the wide variety of performance measures and heterogeneity in sample sizes complicates the drawing of accurate and unambiguous conclusions. In this light, our survey compiles the recent literature and aims to identify the areas of research for which short-run returns predict (or fail to predict) long-run performance. We find that post-takeover deal performance is affected by key determinants including serial acquisitions, CEO overconfidence, acquirer-target relatedness and complementarity, and shareholder intervention in the form of voting or activism.

This paper explores whether and how political connections affect the likelihood of completing a cross-border M&A deal for Chinese publicly listed, but privately-owned enterprises (POEs) and the resulting firm performance. In line with our proposed political connection trade-off theory, we find that POEs with politically connected top managers are more likely to complete a cross-border M&A deal than POEs with no such connections, but that this comes at the cost of negative announcement returns and subsequent lower accounting performance. These findings support the idea that politically connected top managers engage in “political empire building” behavior at the cost of shareholders' wealth.

We study whether formal enforcement actions, imposed on U.S. banks during 2000–2014 for serious financial safety and internal control problems, affect the probability that punished banks become targets of mergers and acquisitions (M&As). We find an increase in the probability of punished banks' acquisitions of at least 0.7%. A similar pattern is identified during both the financial crisis period of 2008–2009 and beyond the 2008–2009 period. Furthermore, these acquisitions improve the operating performance of post-acquisition combined entity, lending support to the hypothesis that punished banks' M&As serve as a means to replace inefficient management and restore the target banks' performance.

We investigate the principal-principal (PP) conflicts between large blockholders in the context of cross-border acquisitions (CBAs). We focus on the conflicts between family blockholders and two groups of financial institutional investors – banks and mutual funds. We hypothesize that different types of blockholders have heterogeneous preferences with respect to the CBA decision and outcomes. We suggest that the PP conflicts in CBA differ across the blockholders. Banks are pressure sensitive and cooperative with the management because of their clientele relationship with firms, while mutual funds are subject to more financial scrutiny and independent from the management, making them pressure resistant. When in conflict with more powerful family blockholders, mutual funds will choose to exit after a CBA decision, whereas banks are more likely to stay. With an equally distributed voting power, family and mutual fund blockholders will be more motivated to monitor over each other and jointly discipline the management, leading to more careful selection of CBAs and higher overall shareholder value. However, such effects are weak in the case of family and banks. We find support for these conjectures using data on CBAs undertaken by US public firms over the period 2003–2016.

We assess the impact of the corporate sector purchase programme (CSPP), the corporate arm of the ECB's quantitative easing, over its first year of activity (June 2016 – June 2017). Focusing on the primary bond market, we find evidence of a significant impact of the CSPP on yield spreads, both directly on purchased and targeted bonds and indirectly on all other bonds. The magnitude and the timing of the changes in yield spreads, coupled with the evolution of bond placements, are fully consistent with the proper unfolding the portfolio rebalancing channel.

We use an experimental conjoint analysis to investigate the investment criteria of 749 private equity investors, distinguishing between family offices, business angels, venture capital funds, growth equity funds, and leveraged buyout funds. Our results indicate that revenue growth is the most important investment criterion, followed by the value-added of product/service, the management team's track record, and profitability. Regarding differences across investor types, we find that family offices, growth equity funds, and leveraged buyout funds place a higher value on profitability as compared to business angels and venture capital funds. Venture capital funds, in turn, pay more attention to companies' revenue growth, business models, and current investors. With these results, our study contributes to the corporate finance literature by deepening our understanding of how different types of private equity investors make investment decisions.

Using the staggered enactment of constituency statutes across US states, we find that banks with directors whose legal duties are expanded to consider stakeholder and long-term interests significantly reduce risk-taking by increasing capital and shifting to safer borrowers. Additionally, we find that the effect of statute enactment on bank performance is insignificant on average but significantly positive for banks that take excessive risk. Furthermore, we find that banks that previously received a statute enactment fared significantly better during the crises. Our findings support the increasing calls for greater emphasis on stakeholder interests amidst the current bank regulatory and governance reforms.