Knowledge that Transforms

This paper models the maintenance of management quality through the simultaneous functioning of internal and external corporate control mechnism—board dismissals and takeovers. We examine how the information sets of the board and the acquiror are noisily aggregated, and how this affects the behaviour of the board and the acquiror. The board of directors, acting ion shareholders' interests will sometimes oppose a takeover, and this opposition can be good news for the firm. An unsuccessful takeover attempt may be followed by a high rate of management turnover, because a takeover attempt conveys adverse information possessed by the bidder about the manager. If there is a probability that the board is ineffective, then a forced resignation of the manager can be either good or bad news for the firm. A positive effect is predicted to dominate when there is more adverse public information avilable about the manager's performance and when there is a higher ex ante probability that the board is ineffective, for example, of the board is management-dominated rather than outsider-dominated.

Some argue that managers effectively control corporate voting: hence the process is meaningless. Others contend that shareholder voting motivates managers to maximize firm value. We provide evidence on this debate by analyzing the results from a large sample of management-sponsored anti-takeover amendments. Our results do not support the extreme form of either hypothesis. The evidence suggests that shareholder voting is important and indicates the circumstances where voting is most likely to constrain managers. Our results also have implications for the use of voting in political and other non-corporate contexts.

We study the joint distribution of ownership, performance, managerial turnover, and takeover activity at repurchasing firms during a five-year period centered on the repurchase, and compare this to the distribution of these variables for a control sample selected on the basis of size and industry. This evidence illuminates the link between defensive activity and performance, as well as the impact of defensive activity on the experience of firms and managers. We find that the performance of firms that pay greenmail is no worse than the performance of firms of similar size that operate in the same industry, either prior to the repurchase or following the repurchase. The fate of managers at firms that pay greenmail appears to reflect their performance, as does the occurence of takeover activity. The frequency of takeover activity cannot be distinguished from the frequency of takeover activity at firms involved in a 13-D filing. Bid premia appear to be unaffected by the payment of greenmail.

While the classical dividend irrelevance theory implies that shareholders unanimously support the firm's dividend policy, managerial benefits from free cash flow, heterogenous personal tax rates and information asymmetries give rise to internal shareholder conflicts over the dividend decision. We conjecture that observed dividends resolve this conflict by consensus across heterogenous shareholder groups. We develop and test this consensus-dividend hypothesis using Canadian firms where managers tend to own a large amount of voting stock. The empirical evidence indicates that cash dividends decrease as the voting power of owner-managers increases, and are almost always zero when owner-managers have absolute voting control of the firm. Panel data estimation as well as factor-analytic techniques give further empirical support for the consensus-dividend hypothesis.

It is now customary to view the corporation as nexus of explicit and implicit contracts. Governance determines how the firm's top decision makers (executives) actually administer such contracts. We survey recent theory and evidence on executive behaviour and incentives and reject the standard assumption of shareholder-wealth-maximisation, either in its strict sense or in the sense implied by standard principal-agent models. Explanations for this state of affairs as an inefficient, rent-seeking outcome are contrasted with efficiency explanations, particularly those that explicitly consider the diverse claims of employees, customers, and suppliers as well as those of investors.

This paper examines asset sales by financially distressed firms. Contrary to the results for healthy firms, we find significantly lower returns to shareholders when asset sales proceeds are used to repay debt than when sales proceeds are retained by the firm. We find that asset sales proceeds are more likely to be paid out to creditors, as opposed to being retained by the firm, the larger the proportion of short-term senior bank debt in the firm's capital structure and the poorer the selling firm's investment opportunities. Our results suggest that creditors significantly influence the liquidation decisions of financially distressed firms.

By virtue of their ownership position, majority owner-managers appear to be less constrained than managers of firms with more diffuse ownership structures. Despite this, there is no evidence that majority-owned firms perform poorly and there is evidence that majority ownership is surviving as an organizational form. This implies that either these firms substitute other organizational constraints on managerial behavior or that majority control is efficient for some firms. Our analysis uncovers no evidence that majority owner-managers are constrained by other organizational mechanisms. We find that the choice of majority ownership is related to owner-specific rather than firm-specific characteristics. Approximately 80% of the sample majority-owned firms are either characterized by family involvement or are managed by the founder of the firm. Once this family/founder involvement in managing the firm diminishes, the firm is significantly less likely to be majority-controlled.

Managers typically increase their voting power following the creation of two classes of common stock and the adoption of an employee stock ownership plan. These changes can worsen managers' incentives and lead to a decline in performance. Alternatively, two classes of stock and ESOPs can allow managers to adopt value-maximizing policies that would not be possible in the face of takeover pressure. We find that these events are followed by below normal operating income. However, we find no reliable evidence that the increase in managers' voting power and the resulting divergence between managers' voting power and ownership of equity claims is related to subsequent operating performance.

Sellers who extend trade credit to their business customers choose whether to integrate the management of trade credit or to enter into specialized factoring contracts. Using original data from a broad cross-section of firms we test a model of this decision. The model is based on a theory of the firm that stresses transactions costs (including information costs) as determinants of vertical integration. Consistent with expectations, we find that specificity of assets to the buyer-seller relationship is negatively related to the decision to factor and that factors are more likely to be used when information and monitoring costs are high.

This study investigates the effects of organizational sub-unit age and size on three dimensions of customer relationships: response satisfaction, service-depth satisfaction, and perceived cooperation. The study is motivated by the frequent suggestion that one way to introduce an entrepreneurial climate into large and/or old organizations is to create small, autonomous sub-units. By establishing internal start-ups, mature organizations can achieve the flexibility and innovation associated with youth and small size. However, this argument only holds if it is found that being embedded in an established firm enables the sub-units to overcome some of the problems normally experienced by independent start-ups. Liabilities of age and size hypotheses suggest that there are advantages and disadvantages to youth and old age, and correspondingly, to small and large size. Often these advantages and disadvantages are complementary. Consistent with these insights we offer the following three sets of hypotheses on the effects of sub-unit age and size on the relationships between an organizational sub-unit and its customer population.