Knowledge that Transforms

This paper compares the leveraged recapitalization of Kroger Co. with the leveraged buyout of Safeway Stores. While both transactions dramatically increased leverage, Safeway's also altered managerial ownership, board composition, and executive compensation, while Kroger's did not. My analysis suggests that these differences in organizational form lead to large differences in post-HLT restructuring actions and value creation. I conclude that the improved incentive structure and increased monitoring provided by the LBO specialist at Safeway lead managers to generate cash in a more productive manner than the organizational structure employed by Kroger.

We examine the influence of industrial structure on the cross-sectional volatility and correlation structure of country index returns for 12 European countries between 1978 and 1992. We find that industrial structure explains very little of the cross-sectional difference in country return volatility, and that the low correlation between country indices is almost completely due to country-specific sources of return variation. Diversification across countries within an industry is a much more effective tool for risk reduction than industry diversification within a country.

This paper investigates the determinants of appointments of outsiders — directors previously employed by banks (bank directors) or by other nonfinancial firms (corporate directors) — to the boards of large nonfinancial Japanese corporations. Such appointments increase with poor stock performance; those of bank directors also increase with earnings losses. Turnover of incumbent top executives increases substantially in the year of both types of outside appointments. We perform a similar analysis for outside appointments in large U.S. firms and find different patterns. We conclude that banks and corporate shareholders play an important monitoring and disciplinary role in Japan.

We present empirical evidence on the relation between changes in managerial wealth and tender offer characteristics. Changes in managerial wealth resulting from a tender offer are negatively related to the likelihood of managerial resistance to a tender offer and positively related to the likelihood of tender offer success. We also document that the abnormal returns to tender offers are lower for hostile than for friendly offers if we control for the tender offer premium. Finally, we find that the top executive gains, whereas outside shareholders do not gain, from management's decision to resist the tender offer.

We find that the average stock-market reaction to announcements of poison pills is positive when the board has a majority of outside directors and negative when it does not. The probability that a subsequent control contest is associated with an auction is also positively related to the fraction of outsiders on the board. These results are largely driven by directors who are retired executives from other companies. The evidence suggests that outside directors serve the interests of shareholders.

We test six term structure models in the Heath, Jarrow, and Morton (1992) class using Eurodollar futures and options data from 1987∗1992. We study the time series of implied interest rate volatilities from these models. Using one-day lagged implied volatilities, our one-and two-parameter models simultaneously price an average of 18.5 options each day with an average absolute error of one-and-a-half to two basis points. Although the models fit well, we document systematic strike- price and time-to-maturity biases for all models. We also implement simple trading strategies to test whether the models identify genuine biases.

We rationalize the cross-holdings of debt and equity within the Japanese keiretsu as a contingent governance mechanism through which internal discipline is sustained over time. The reciprocal allocation of control rights supports cooperation and mutual monitoring among managers through a coalition-enforced threat of removal from control. In financial distress this threat is less effective, and the governance mode shifts to hierarchical enforcement under main bank leadership. The model is consistent with the capital structure, the distribution of claims, the extent of intragroup trading, and patterns of investor intervention within the groups.

This paper estimates real term structures from cross-sections of British government index-linked (‘realrd) bond prices. The Cox, Ingersoll, and Ross (1985) model is then fitted to the same data; the model closely approximates the shapes of the directly-estimated term structures. In contrast to similar studies of the nominal term structure, the long-term zero-coupon yield is quite stable, as the CIR model predicts, and in common with previous studies, the level of implied short rate volatility corresponds well with time series estimates. The other parameters, however, are often highly correlated and intertemporal parameter stability is rejected.

We investigate contagion effects in the stock returns of life insurance companies at the time of announcements by First Executive and Travelers of significant problems in their investment portfolios. We first demonstrate that investments in junk bonds or commercial mortgages are important for the shareholder wealth effects of other life insurance companies. We then directly link the shareholder wealth effects to characteristics of firms' customers. Our evidence shows that effects on shareholder wealth are larger for companies with significant junk bond/commercial mortgage assets and readily mobile customers as represented by guaranteed investment contracts (GICs).

We develop evidence on the finite sample properties of the Generalized Method of Moments (GMM) in an asset pricing context. The models imply nonlinear, cross-equation restrictions on predictive regressions for security returns. We find that a two-stage GMM approach produces goodness-of-fit statistics that reject the restrictions too often. An iterated GMM approach has superior finite sample properties. The coefficient estimates are approximately unbiased in simpler models, but their asymptotic standard errors are understated. Simple adjustments for the standard errors are partially successful in correcting the bias. In more complex models the coefficients and their standard errors can be highly unreliable. The power of the tests to reject a single-premium model is higher against a two-premium, fixed-beta alternative than against a conditional Capital Asset Pricing Model with time-varying betas.