We find that asset sales lead to an improvement in the operating performance of the seller's remaining assets in each of the three years following the asset sale. The improvement in performance occurs primarily in firms that increase their focus; this change in operating performance is positively related to the seller's stock return at the divestiture announcement. The announcement stock returns are also greater for focus-increasing divestitures. Further, we find evidence that some of the seller's gains result from a better fit between the divested asset and the buyer.

In this paper, we study how risk-shifting incentives and the design of debt covenants are affected by the pattern of temporal resolution of uncertainty (TRU) in the underlying technology of the firm. We show that the extent of risk-shifting as well as the yield demanded on corporate debt are larger the later the resolution of uncertainty (thus providing one explanation for the empirical evidence of Reisz and Perlich (2006)). We allow for contracting based on verifiable information disclosed by the manager. In this context, we characterize optimal covenants restricting investment. The effects of these covenants on the firm's investment policy and corporate bond yields under different disclosure policies and patterns of TRU are studied. Empirical implications are derived and discussed.

In the Arrow-Debreu approach to uncertainty it has been recognized that an inadequate number of markets in contingent claims would be a source of inefficiency. Several researchers have studied the allocative inefficiencies resulting from incomplete markets, i.e., when the number of independent securities is less than the number of states and therefore the state-space cannot be “spanned” by those securities. In a situation where the number of primitive assets is inadequate to span the state-space, the new spanning opportunities opened up by derived assets written on the primitives is an interesting question.

We examine a sample of 1458 divestitures of domestic assets by U.S. firms to foreign and domestic buyers over the period 1998–2008. Cross-border asset sales yield higher abnormal returns to the seller than domestic sales. This incremental return is driven by liquidity-seeking sellers engaging in cross-border transactions. Larger seller returns in these international deals are associated with favorable economic conditions in foreign buyers' home markets relative to the U.S. We also find positive abnormal returns for buyers, albeit smaller than seller returns, but no significant difference between buyer returns in cross-border and domestic transactions.

This paper considers the impact of the takeover likelihood on firm valuation. If firms are more likely to acquire when there is more free cash or lower required rates of return, the targets become more sensitive to shocks to cash flows or the price of risk. Ceteris paribus, firms exposed to takeovers have different rates of return than protected firms. Using takeover likelihood estimates, we create a “takeover factor, ” buying (selling) firms with a high (low) takeover likelihood, which generates “abnormal ” returns. Several tests confirm that the takeover factor helps explaining cross-sectional differences in equity returns and is related to takeover activity. This paper considers the impact of the takeover channel on valuation. While it is well known that target shareholders receive a large premium on a takeover, how expectations about takeover premiums affect firm valuation has not been investigated. One possible reason for this lack of interest may be the assumption that differences in takeover exposure are purely idiosyncratic, and hence do not affect a firm’s cost of capital. In that case, the issue of incorporating the takeover channel into valuation is solved by simply adding the expected

[This paper considers the impact of the takeover likelihood on firm valuation. If firms are more likely to acquire when there is more free cash or lower required rates of return, the targets become more sensitive to shocks to cash flows or the price of risk. Ceteris paribus, firms exposed to takeovers have different rates of return than protected firms. Using takeover likelihood estimates, we create a "takeover factor," buying (selling) firms with a high (low) takeover likelihood, which generates "abnormal" returns. Several tests confirm that the takeover factor helps explaining cross-sectional differences in equity returns and is related to takeover activity.]

We analyze the interrelationships among the corporate organization structure, the capital structure, and the ownership structure of a firm with multiple projects, when incumbent management derives control benefits. The choices made by firm management are: (1) Whether to set up projects as a joint firm or as separate firms (spin-off), (2) the amount of debt financing to use, (3) the structure of the debt contract (e.g., straight debt on the joint firm, limited-recourse project financing, or spin-off with straight debt), and (4) the fraction of equity to hold in each firm (ownership structure). Differences in managerial ability across projects, benefits of control, and the probability of loss of control through a takeover or through bankruptcy are driving factors in this model. We relate the project characteristics to the optimality of spin-offs and limited-recourse project financing arrangements, and derive implications for the allocation of debt and the ownership structure across projects.Journal of Economic LiteratureClassification Numbers: G32, G34, D21.

This paper surveys the empirical and theoretical literature on the mechanisms of corporate governance. We focus on the internal mechanisms of corporate governance (e.g., corporate board of directors) and their role in ameliorating various classes of agency problems arising from conflicts of interests between managers and equityholders, equityholders and creditors, and capital contributors and other stakeholders to the corporate firm. We also examine the substitution effect between internal mechanisms of corporate governance and external mechanisms, particularly markets for corporate control. Directions for future research are provided.

We test several hypotheses on how takeover premium is related to investors' divergence of opinion on a target's equity value. We show that the total takeover premium, the pre-announcement target stock price run-up, and the post-announcement stock price markup are all higher when investors have higher divergence of opinion. We obtain identical results with higher market-level investor sentiment. When divergence of opinion is higher, a firm is less likely to be a takeover target, although takeover synergy in successful takeovers is higher. Our results suggest that takeovers may play a role in explaining high contemporaneous stock prices in the presence of high divergence of investor opinion.