Knowledge that Transforms

This paper discusses the main findings in three statistical studies: ‘ESOPs and Corporate Control’ by Gordon and Pound, ‘…The Choice Between Dual-Class Recapitalizations and Leveraged Buyouts’ by Lehn, Netter, and Poulsen, and ‘Outside Directorships and Corporate Performance’ by Kaplan and Reishus. I conclude that, despite the sophisticated design and execution of the three studies, the amount of important new information they provide is small. Specific problems regarding their methodologies and interpretation are discussed. I question the fruitfulness of an exclusively statistical approach to corporate governance research.

To provide a framework for judging the economic significance of departures from the arbitrage pricing theory, we adopt a utility-based metric based on optimal portfolio choices. This measure is examined using both predictive and posterior analysis. Our predictive analysis shows very large and economically significant departures from the model restrictions. However, the high level of parameter uncertainty suggests that we cannot conclusively either affirm or reject the APT. Our conclusions differ markedly from other studies which employ traditional significance-testing procedures and, in many instances, fail to reject the APT restrictions.

We examine two Anglo-Dutch groups the shares of whose parents trade on several international exchanges. Within each group, the parents' corporate charters mandate the division of cash flows available for distribution. This implies a specific ratio for the market prices of their securities. We document persistent deviations from these ratios on both the New York and London exchanges. The direction and magnitude of the mispricing are common to both pairs of stocks and both markets. Nevertheless, we find no evidence of profitable intra- or intermarket trading rules.

This paper investigates how an established borrowing relationship affects the costs associated with initial public offerings of equity. Our model illustrates how the existence of a borrowing relationship reduces the ex ante uncertainty about the value of the issuing firm's equity in the secondary market. If underpricing is related to uncertainty, a borrowing relationship can reduce underpricing. Empirically, we find that, other things equal, IPOs of firms with previously established borrowing relationships are underpriced substantially less than other IPOs.

We study the effect on IPO proceeds of uniform-price restrictions and restrictions on the allocation of oversubscribed issues. Our model suggests that underwriters, given the opportunity to allocate IPOs among both regular and retail investors, would maximize proceeds by using a combination of price and allocation discrimination. Uniform-price restrictions increase the cost of soliciting information from regular investors and, when combined with evenhanded distribution restrictions, make information gathering impossible. We also provide conditions under which either adverse selection or the cost of soliciting information is likely to be the dominant force behind IPO discounting.

In 111 publicly traded firms that either file for bankruptcy or privately restructure their debt between 1979 and 1985, bank lenders frequently become major stockholders or appoint new directors. On average, only 46% of incumbent directors remain when bankruptcy or debt restructuring ends. Directors who resign hold significantly fewer seats on other boards following their departure. Common-stock ownership becomes more concentrated with large blockholders and less with corporate insiders. Few firms are acquired. Collectively, these results suggest that corporate default leads to significant changes in the ownership of firms' residual claims and in the allocation of rights to manage corporate resources.

This paper examines the relation between a company's performance and its top executives' service on other boards of directors. Using dividend cuts to measure performance, we find that top executives of companies that reduce their dividends are approximately 50% less likely to receive additional outside directorships than are top executives of companies that do not reduce their dividends (significant at 1% level). The probability that top executives will resign from or lose outside directorships they already hold is negatively, but not significantly, related to the performance of their own firms.

Empirical analysis reveals that investment-banker advisory fees in tender offers average 1.29% of the value of a completed transaction, far below the levels often alluded to in the business press. Most fees are contingent on offer outcome, with target-firm fees typically contingent on transaction value and bidding-firm fees on the number of shares purchased. Although these contingent contracts motivate investment bankers to satisfy some client objectives, many also create conflicts of interest between banker and firm. These incentive problems are apparent in offer evaluation, in hostile offers, and in the price paid by bidding firms.

We reason that dividend-yield surprises are perfectly correlated with dividend surprises. If investors with preference for dividends are the marginal investors in high-yield stocks, the price reaction to a dividend change should be larger, the higher the anticipated yield of the stock. An examination of over 8,500 dividend changes shows that price reactions to dividend increases are significantly more positive and to dividend decreases significantly more negative for high-yield stocks. Also, the price reactions to dividend changes are larger and the yield effect is stronger for low-priced and small-firm stocks, perhaps because of greater information content and higher transaction costs.

Share-price responses to 95 announcements of increased research and development (R & D) spending are significantly positive on average, even when the announcement occurs in the face of an earnings decline. High-technology firms that announce increases in R & D spending experience positive abnormal returns on average, whereas announcements by low-technology firms are associated with negative abnormal returns. Further, in our cross-sectional analyses we find that higher R & D intensity than the industry average leads to larger stock-price increases only for firms in high-technology industries.