The occurrence of conglomerate mergers is somewhat of a mystery. This paper presents a model demonstrating a tax motive for these mergers. Specifically, conglomerate mergers are unions between firms with not highly correlated earning prospects—when one merger partner underperforms (earning inadequate income) in the future, the other is likely to overperform. By amalgamating such firms into common taxable entities, conglomerate mergers create several tax benefits: (1) improved chances that future tax write‐offs and credits will be immediately utilized in full rather than deferred as less valuable loss‐carryforwards; (2) reduced chances that tax write‐offs and credits are permanently lost in bankruptcy; and (3) an enhanced ability to write off the interest on additional debt Empirical support for these results are presented. Given (1) and (2), the U.S. tax law changes in 1981 and 1986 would respectively encourage and discourage merger activity, outcomes that were indeed observed. Consistent with (3), a cross‐sectional examination of U.S. mergers shows that mergers were more likely to increase consolidated leverage when earnings of the predecessor firms were less highly correlated. Nontax‐related bankruptcy costs are not specifically modeled, but firms whose potential tax write‐offs and credits are larger tend to have lower preference for leverage. Thus, in many instances diminishing bankruptcy risk is not a motive for conglomeration, but full utilization of tax write‐offs is. Résumé. L'occurrence de certaines fusions par conglomérat demeure toujours inexpliquée. L'auteur expose un modèle attribuant les fusions de cette nature à des motifs fiscaux. Selon ce modèle, il en serait ainsi lorsque les fusions par conglomérat touchent des entreprises dont les perspectives de gains ne présentent pas de corrélation très élevée — le rendement escompté de l'une des entreprises qui fusionnent est plutôt mince (ses bénéfices étant insatisfaisants), alors que le rendement escompté de l'autre est assez exceptionnel. Le regroupement de ces entreprises sous forme d'entités imposables grâce à la fusion par conglomérat donnerait lieu, toujours selon ce modèle, aux avantages fiscaux suivants: (1) l'augmentation des chances que les éléments susceptibles d'être passés en charges aux fins de l'impôt ou de donner droit à des dégrèvements soient aussitôt utilisés intégralement plutôt que de faire l'objet de reports de perte prospectifs dont la valeur serait diminuée; (2) la réduction des risques que les éléments susceptibles d'être passés en charges aux fins de l'impôt ou de donner droit à des dégrèvements soient perdus à jamais à la suite d'une faillite; et (3) la possibilité accrue de passer en charges l'intérêt sur la dette supplémentaire. Les constatations empiriques confirment ces hypothèses. Étant donné les hypothèses 1 et 2, les modifications apportées à la loi fiscale aux États‐Unis en 1981 et 1986 encourageraient, dans le premier cas, et décourageraient, dans le second, les fusions, ce qui a été observé dans les faits. Conformément à l'hypothèse 3, un examen transversal des fusions ayant eu lieu aux États‐Unis a démontré qu'elles étaient davantage susceptibles d'augmenter l'effet de levier consolidé lorsque les bénéfices des entreprises constituantes présentaient une corrélation moins élevée. Les coûts des faillites qui ne sont pas d'ordre fiscal ne sont pas spécifiquement intégrés au modèle, mais les entreprises dont les possibilités de passation en charges et de dégrèvements sont plus élevées ont tendance à afficher une préférence moins prononcée pour l'effet de levier. À maints égards, donc, la réduction du risque de faillite n'est pas un motif de fusion par conglomérat, tandis que les possibilités de passation en charges le sont.

There are frequent expressions of concern in the accounting, economics, and legal literature about managers' conflicting duties and incentives in management buyouts. This study is motivated by a concern about the managerial incentive to reduce reported earnings prior to the announcement of the buyout proposal. Our analysis of a sample of 175 management buyouts during 1981-88 provides evidence of manipulation of discretionary accruals in the predicted direction in the year preceding the public announcement of management's intention to bid for control of the company.

I examine the capital expenditures of a sample of 700 takeover targets and firms that went private over the period 1972–1987. For the complete sample, I do not find evidence that takeover targets increase their capital expenditures over the four-year period before the acquisition or that they overinvest in capital expenditures relative to several benchmarks. Subsample results provide some evidence of overinvestment in oil and gas firms and large firms. There is no evidence of overinvestment, however, for firms acquired in a hostile takeover or firms that went private. In general, these results are not consistent with the conjecture that takeovers are motivated by the need to reduce excess investment in capital expenditures in target firms.

This study shows real estate investment trusts' (REITs) characteristics and compensation incentives vary with compensation method. Formula-based compensation encourages advisors to generate cash from their assets, whereas discretion-based compensation encourages cash conservation. Consequently, dividend yields are 82 percent of formula REITs' total returns, but only 33 percent of discretion REITs'. Partly due to REITs switching from formula-based to discretion-based compensation, the number of discretion REITs has grown while the number of formula REITs has declined. Average formula REIT return performance is inferior and switches tend to follow a period of poor financial performance; performance improves after such changeovers.

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.

[This study examines common stock prices around ex-dividend dates. Such price data usually contain a mixture of observations--some with and some without arbitrageurs and/or dividend capturers active. Our theory predicts that such mixing will result in a nonlinear relation between percentage price drop and dividend yield--not the commonly assumed linear relation. This prediction and another important prediction of theory are supported empirically. In a variety of tests, marginal price drop is not significantly different from the dividend amount. Thus, over the last several decades, one-for-one marginal price drop has been an excellent (average) rule of thumb.]

[We test the empirical implications of several models of IPO underpricing. Consistent with the winner's-curse hypothesis, we show that in markets where investors know a priori that they do not have to compete with informed investors, IPOs are not underpriced. We also show that IPOs underwritten by reputable investment banks experience significantly less underpricing and perform significantly better in the long run. We do not find empirical support for the signaling models that try to explain why firms underprice. In fact, we find that (1) firms that underprice more return to the reissue market less frequently, and for lesser amounts, than firms that underprice less, and (2) firms that underprice less experience higher earnings and pay higher dividends, contrary to the models' predictions.]