Previous studies report that cash holdings are more valuable for financially constrained firms than for unconstrained firms. We examine (i) why this is so and (ii) why some constrained firms appear to hold too little cash. Our results indicate that greater cash holdings are associated with higher levels of investment for constrained firms with high hedging needs and that the association between investment and value is stronger for constrained firms than for unconstrained firms. These findings imply that higher cash holdings allow constrained firms to undertake value-increasing projects that might otherwise be bypassed. We further find that some constrained firms exhibit low cash holdings because of persistently low cash flows. Overall, our findings support the view that greater cash holdings of constrained firms are a value-increasing response to costly external financing.

[Previous studies report that cash holdings are more valuable for financially constrained firms than for unconstrained firms. We examine (i) why this is so and (ii) why some constrained firms appear to hold too little cash. Our results indicate that greater cash holdings are associated with higher levels of investment for constrained firms with high hedging needs and that the association between investment and value is stronger for constrained firms than for unconstrained firms. These findings imply that higher cash holdings allow constrained firms to undertake value-increasing projects that might otherwise be bypassed. We further find that some constrained firms exhibit low cash holdings because of persistently low cash flows. Overall, our findings support the view that greater cash holdings of constrained firms are a value-increasing response to costly external financing.]

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.

Firms with negative net cash flows (NCFs) play an empirically important role in recent decades’ increase in the average cash-balance ratio of publicly held non-financial firms. Since 1971, negative NCFs have become much more pervasive, persistent, and greater in magnitude, and these patterns hold within the growing set of firms that have high intangible capital. In recent years, firms with negative NCFs tend to build cash balances through frequent equity offerings. The high cash balances tend to be transitory as subsequent negative NCFs lead firms to rapid cash-balance drawdowns, often followed by new stock sales and cash stockpiling of the proceeds. We conclude that funding needs and staged equity financing by negative NCF firms are central features of the secular rise in the average cash-balance ratio.

We report that 34% of targets of unsuccessful control contents between 1983 and 1989 experience a change in top manager within two years following the contest. Management turnover is concentrated among poorly performing firms in which outside blockholders acquire an ownership stake. These blockholders appear to facilitate post-contest asset restructurings that increase the value of the target and improve operating performance. In the absence of an outsider blockholder, managers typically retain their positions despite poor pre-contest performance and the use of value-reducing defensive tactics during the control contest. We conclude that monitoring by active outside investors facilitates valuable internal control efforts.

We report that 31% of the firms completing leveraged recapitalizations between 1985 and 1988 subsequently encounter financial distress. Following their recaps, the distressed firms exhibit (1) poor operating performance due largely to industry-wide problems, (2) surprisingly low proceeds from asset sales, and (3) negative stock price reactions to economic and regulatory events associated with the demise of the market for highly-leveraged transactions. The incidence of distress is not related to several characteristics that have previously been linked with poorly-structured deals. We thus attribute the high rate of distress primarily to unexpected macroeconomic and regulatory developments.

Firms that intentionally increase leverage through substantial debt issuances do so primarily as a response to operating needs rather than a desire to make a large equity payout. Subsequent debt reductions are neither rapid, nor the result of proactive attempts to rebalance the firm’s capital structure toward a long-run target. Instead, the evolution of the firm’s leverage ratio depends primarily on whether or not the firm produces a financial surplus. In fact, firms that generate subsequent deficits tend to cover these deficits predominantly with more debt even though they exhibit leverage ratios that are well above estimated target levels. Our findings are broadly consistent with a capital structure theory in which financial flexibility, in the form of unused debt capacity, plays an important role in capital structure choices. (JEL G32) The search for an empirically viable capital structure theory has confounded financial economists for decades. Standard trade-off models of capital structure have been criticized on the grounds that they do a poor job of explaining observed debt ratios. For example, traditional trade-off models have difficulty explaining why firms tend to issue stock after exogenous decreases in leverage

[Firms that intentionally increase leverage through substantial debt issuances do so primarily as a response to operating needs rather than a desire to make a large equity payout. Subsequent debt reductions are neither rapid, nor the result of proactive attempts to rebalance the firm's capital structure toward a long-run target. Instead, the evolution of the firm's leverage ratio depends primarily on whether or not the firm produces a financial surplus. In fact, firms that generate subsequent deficits tend to cover these deficits predominantly with more debt even though they exhibit leverage ratios that are well above estimated target levels. Our findings are broadly consistent with a capital structure theory in which financial flexibility, in the form of unused debt capacity, plays an important role in capital structure choices.]

Corporate Restructuring examines the impact of financial restructuring on corporate priorities and performance. Countering the notion that an actual or threatened hostile takeover is needed to induce managers to restructure their firms, Donaldson claims that many companies have successfully restructured voluntarily. Drawing on a series of field studies and close examinations of three companies - General Mills, Burlington Northern, and CPC International - Donaldson shows how firms have implemented radical change through an internal discipline. The factual evidence demonstrates why and how voluntary restructuring works just as well - indeed better - than hostile takeovers, without the trauma of external intervention and disruption to day-to-day operations. Challenging many assumptions of current financial literature on how firms achieve increased efficiency, this book is bound to provoke controversy.

The use of equity incentives is significantly greater in countries with stronger insider trading restrictions, and these higher incentives are associated with higher total pay. These findings are robust to alternative definitions of insider trading restrictions and enforcement, and to panel regressions with country fixed effects. We also find significant increases in top executive pay and the use of equity-based incentives in the period immediately following the initial enforcement of insider trading laws. We conclude that insider trading laws are one channel through which cross-country differences in pay practices can be explained.