This paper investigates the wealth effects of 134 divestments by 41 firms that underwent leveraged buyouts in the 1980s. Stock in these companies is privately owned. Bond returns for publicly traded debt are used to measure the wealth effects of the divestment announcement. These divestments are, on average, not associated with significant wealth effects for the full sample. However, firms that experience financial distress have negative and significant abnormal returns associated with their divestments, while returns in non-event months are insignificant. In contrast, non-distressed firms gain when asset sales are announced. The losses suffered by bondholders in distressed sellers are large and significant when core assets are divested. Bondholders in these firms do not suffer significant losses when non-core assets are divested. Finally, abnormal bond returns are related to the structure of the firms' post-buyout debt. Returns are negatively related to the use of private debt in the capital structure and positively related to the use of subordinated debt.

A rational analysis of analyst behavior predicts that analysts immediately and without bias incorporate information into their forecasts. Several studies document analysts' tendency to systematically underreact to information. Underreaction is inconsistent with rationality. Other studies indicate that analysts systematically overreact to new information or that they are systematically optimistic. This study discriminates between these three hypotheses by examining the interaction between the nature of information and the type of reaction by analysts. The evidence indicates that analysts underreact to negative information, but overreact to positive information. These results are consistent with systematic optimism in response to information.

A rational analysis of analyst behavior predicts that analysts immediately and without bias incorporate information into their forecasts. Several studies document analysts' tendency to systematically underreact to information. Underreaction is inconsistent with rationality. Other studies indicate that analysts systematically overreact to new information or that they are systematically optimistic. This study discriminates between these three hypotheses by examining the interaction between the nature of information and the type of reaction by analysts. The evidence indicates that analysts underreact to negative information, but overreact to positive information. These results are consistent with systematic optimism in response to information.

This article examines the effect of issuing debt with and without 'poison put' covenants on outstanding debt and equity claims for the period 1988 to 1989. The analysis shows that poison put covenants affect stockholders negatively and outstanding bondholders positively, while debt issued without such covenants has no effect. The study also finds a negative relationship between stock and bond returns for firms issuing poison put debt. These results are consistent with a 'mutual interest hypothesis,' which suggests that the issuance of poison put debt protects managers and, coincidentally, bondholders at the expense of stockholders.

This paper examines the evolution of corporate boards following a large performance decline. Over 40% of the original directors depart the board during the three years following underperformance. Measures of initial CEO influence over the board such as CEO ownership are associated with smaller increases in board independence and less board turnover. The underperforming firms undergo a strong recovery subsequently, with the largest performance improvement occurring among firms that experience no turnover on their boards and among firms that do not change their board independence. We conclude that the large board turnover experienced by underperforming firms presents significant challenges for subsequent recovery.

This article examines the effect of issuing debt with and without “poison put” covenants on outstanding debt and equity claims for the period 1988 to 1989. The analysis shows that “poison put” covenants affect stockholders negatively and outstanding bondholders positively, while debt issued without such covenants has no effect. The study also finds a negative relationship between stock and bond returns for firms issuing poison put debt. These results are consistent with a “mutual interest hypothesis,” which suggests that the issuance of poison put debt protects managers and, coincidentally, bondholders, at the expense of stockholders.

We study the interaction between firm uncertainty and corporate policies, emphasizing the role of skewness in the distribution of performance shocks reflected in stock returns. Conditional on volatility and other characteristics, firms with more negatively skewed performance shocks adopt more conservative policies, including greater cash holdings, a lower likelihood of dividend payments and increases in payout levels, and less financial leverage. These relationships are significant and robust for asymmetry proxies constructed from stock return innovations, in contrast to results for measures based on accounting performance shocks. This disparity highlights the importance of asymmetries in long-run performance shocks for corporate policy choices.

A controversial aspect of the management buyouts that were popular throughout the 1980s is the potential for a conflict of interest to arise when a manager bids to acquire the firm he manages. This study examines 184 management buyouts and reports three findings. First, returns to prebuyout shareholders are greater when managers must bid against outside acquirers. Second, bid revisions in the face of competition exceed revisions due to shareholder litigation and negotiations with boards. Third, the incidence of competition is negatively related to the prebuyout share holdings of managers. Coauthors are Ronald F. Singer, Anju Seth, and Darla F. Lang.