Focussing on takeover bids whose outcome can be predicted in advance with certainty, Grossman and Hart estsblished the proposition, which subsequent work accepted, that successful bids must be made at or above the expected value of minority shares.This proposition provided the basis for Grossman and Hart's identification of a free-rider problem and became a major premise for the analyaia of takeovers.This paper showa that this important proposition does not always hold once we drop the assumption that the only successful bida are those whose success could have been predicted with certainty.In particular, it is shown that any unconditional bid that is below the expected value of minority shares but above the independent target's per share value will succeed with a certain positive probability; that the bidder's expected payoff from such a bid (not counting the transaction costs of making the bid) is always positive; and that bidders might elect to make such bids.These results have implications for the nature of the free-rider problem and for the operation of takeovers; in particular, it ia shown that, when a raider can increaae the value of a target's assets, the raider might elect to bid even if no dilution of minority shares is possible and it holds no initial stake in the target.

A basic question for the design of bankruptcy law concerns whether value should be divided in accordance with absolute priority. Research done in the past decade has suggested that deviations from absolute priority have beneficial ex ante effects. In contrast, this paper shows that ex post deviations from absolute priority also have negative effects on ex ante decisions taken by shareholders. Such deviations aggravate the moral hazard problem with respect to project choice‐increasing the equityholders incentive to favor risky projects‐as well as with respect to borrowing and dividend decisions.

The concern of this paper is with the effects of insider trading on ex ante managerial behavior. Specifically, the paper focuses on how insider trading affects insiders ' choice among investment projects. Other things equal, insider trading leads insiders to choose riskier investment projects, because increased volatility of results enables insiders to make greater trading profits if they learn these results in advance of the market. This effect might be beneficial, however, because insiders ' risk aversion pulls them toward a conservative investment policy. Insiders ' choices of projects are identified and compared with insider trading and those without such trading. Using these results, the conditions under which insider trading increases or decreases corporate value by affecting the choice of projects with uncertain returns are identified. I.

This paper investigates empirically how the value of publicly traded firms is affected by arrangements that protect management from removal. Staggered boards, which a majority of U.S. public companies have, substantially insulate boards from removal in either a hostile takeover or a proxy contest. We find that staggered boards are associated with an economically meaningful reduction in firm value (as measured by Tobin's Q). We also provide suggestive evidence that staggered boards bring about, and not merely reflect, a reduced firm value. Finally, we show that the correlation with reduced firm value is stronger for staggered boards that are established in the corporate charter (which shareholders cannot amend) than for staggered boards established in the company's bylaws (which shareholders can amend).

[This article develops a model of a self-fulfilling credit market freeze and uses it to study alternative governmental responses to such a crisis. We study an economy in which operating firms are interdependent, where their success depends on the ability of other operating firms to obtain financing. In such an economy, an inefficient credit market freeze may arise in which banks abstain from lending to operating firms with good projects because of their self-fulfilling expectations that other banks will not be making such loans. Our model enables us to study the effectiveness of using alternative measures as a means of getting an economy out of an inefficient credit market freeze. In particular, we study the effectiveness of interest rate cuts, an infusion of capital into banks, direct lending by the government to operating firms, and the provision of government capital or guarantees to encourage privately managed lending. Our analysis provides a framework for analyzing and evaluating the standard and nonstandard instruments used by authorities during the 2008-2009 financial crisis. Our analysis also provides testable implications for how firms, banks, and economies can be expected to be affected by shocks to the banking system.]

[This article, which introduces the special issue on corporate governance cosponsored by the Review of Financial Studies and the National Bureau of Economic Research (NBER), reviews and comments on the state of corporate governance research. The special issue features seven articles on corporate governance that were presented in a meeting of the NBER's corporate governance project. Each of the articles represents state-of-the-art research in an important area of corporate governance research. For each of these areas, we discuss the importance of the area and the questions it focuses on, how the article in the special issue makes a significant contribution to this area, and what we do and do not know about the area. We discuss in turn work on shareholders and shareholder activism, directors, executives and their compensation, controlling shareholders, comparative corporate governance, cross-border investments in global capital markets, and the political economy of corporate governance.]

We investigate the relative importance of the twenty-four provisions followed by the Investor Responsibility Research Center (IRRC) and included in the Gompers, Ishii, and Metrick governance index (Gompers, Ishii, and Metrick 2003). We put forward an entrenchment index based on six provisions: staggered boards, limits to shareholder bylaw amendments, poison pills, golden parachutes, and supermajority requirements for mergers and charter amendments. We find that increases in the index level are monotonically associated with economically significant reductions in firm valuation as well as large negative abnormal returns during the 1990–2003 period. The other eighteen IRRC provisions not in our entrenchment index were uncorrelated with either reduced firm valuation or negative abnormal returns.

[We investigate the relative importance of the twenty-four provisions followed by the Investor Responsibility Research Center (IRRC) and included in the Gompers, Ishii, and Metrick governance index (Gompers, Ishii, and Metrick 2003). We put forward an entrenchment index based on six provisions: staggered boards, limits to shareholder bylaw amendments, poison pills, golden parachutes, and supermajority requirements for mergers and charter amendments. We find that increases in the index level are monotonically associated with economically significant reductions in firm valuation as well as large negative abnormal returns during the 1990-2003 period. The other eighteen IRRC provisions not in our entrenchment index were uncorrelated with either reduced firm valuation or negative abnormal returns.]

The authors examine managerial investment decisions in the presence of imperfect information and short-term managerial objectives. Prior research has argued that such an environment induces managers to underinvest in long-run projects. The authors show that short-term objectives and imperfect information may also lead to overinvestment and they identify how the direction of the distortion depends upon the type of informational imperfection present. When investors cannot observe the level of investment in the long-run project, suboptimal investment will be induced. When investors can observe investment but not its productivity, however, overinvestment will occur.