[We find that repeated borrowing from the same lender translates into a 10—17 bps lowering of loan spreads and that relationships are especially valuable when borrower transparency is low. These results hold using multiple approaches (propensity score matching, instrumental variables, and treatment effects model) that control for the endogeneity of relationships. We also provide a demarcation line between relationship and transactional lending. Spreads charged for relationship loans and nonrelationship loans are statistically identical if the borrower is in the largest 30% by asset size; has public rated debt; or is part of the S&P 500 index. Past relationships reduce collateral requirements and are also associated with obtaining larger loans. Our results imply that, even for firms that have multiple sources of outside financing, borrowing from a prior lender obtains better loan terms.]

How capital structure, dividend policy, and corporate governance vary across countries has been the focus of recent studies, but how resources are reallocated in response to poor performance has not received as much attention. This paper argues that the market for corporate control and the formal bankruptcy/liquidation processes of a country are two key mechanisms through which corporate assets are reallocated. Ideally, an economy would only allow the best users of economic resources to retain the right to use those assets and any sub-optimal use would result in either a take-over by a more proficient owner or an asset sale. We present evidence that equity market delistings occur more frequently in countries with strong shareholder rights. Furthermore, both strong creditor and shareholder rights increase the use of bankruptcy, relative to acquisitions, as a mechanism to resolve financial distress. We also present some evidence that these mechanisms are not as effective in Japan.

Firms with greater shareholder rights have a greater risk-shifting incentive, requiring more lender monitoring. Thus, a reduction in shareholder rights implies more diffused (less monitoring-intensive) loan syndicates. Using the passage of U.S. second-generation antitakeover laws as an exogenous shock that reduces shareholder rights as a natural experiment, we find that loan syndicates become significantly more diffuse after the passage of these laws. These results are confirmed in a large sample of bank loans made during the 1990–2007 period when the loan syndicate market matured. Our results show how corporate governance causally affects financial contracting and creditor control in firms.

Venture capitalists deliver investments to entrepreneurs in stages. This paper shows staged financing is efficient. Staging lets investors abandon ventures with low early returns, and thus sorts good projects from bad. The primary implication from staging is that it is efficient to invest more in later rounds. The model yields a number of predictions on how the ratio of early to late round financing varies with uncertainty, the outside options of both parties, the value of the venture, the costs of investment, and project difficulty. We test these predictions against data on venture capital financings and find significant empirical support for the theory.

Company stock option plans have diverse “sunset” policies for modifying terms of options held by managers who exit the firm. In our S&P 500 sample, these forfeiture, vesting, and expiration provisions are less generous in companies characterized by fast growth, dependence on skilled human capital, and high strategic interaction with competitors. While these results apply for workers who retire at the end of their careers, almost no variation exists in the treatment of workers who resign with the possibility of working elsewhere. For CEOs over age 60, companies' sunset rules imply large discounts to option award values and estimates of total compensation.

We examine value creation and destruction in the tobacco industry due to the radical litigation strategy of Brooke Group CEO Bennett LeBow. Brooke Group had tiny market share, low margins, high leverage and highly concentrated management ownership. Beginning in 1996, the firm reached settlements in lawsuits brought against all cigarette companies by class action plaintiffs and US state governments. Brooke Group's actions, which included promises to cooperate in litigation against its rivals, spurred other companies to reach settlements on less favorable terms. These events led to massive wealth destruction within the industry but impressive returns for shareholders of Brooke Group.

We use a unique data set of bank loans to examine the wealth effects on lead lending banks when their borrowers suffer financial distress. We find a significant negative announcement return for the lead lending bank when a major corporate borrower announces default or bankruptcy. Banks with higher exposure to the distressed firm have larger negative announcement‐period returns. The existence of a past lending relationship with the distressed firm results in larger wealth declines for the bank shareholders. Finally, financial distress also has a significant negative effect on borrower's returns.

We examine the effect of relationship lending on a firm’s cash-holding levels. Relationship lending allows lenders to generate private information about borrowers, which mitigates their financial constraints. Using exogenous shocks to identify stress to lending relationships, we show that strong lending relationships translate into lower cash holding for borrowers. We also show that the impact of lending relationships on cash holdings is greatest for firms faced with high information asymmetry. Thus, opaque firms are more likely to use their borrowing relationship as a substitute for cash holdings. We find that relationships have a negative impact on the market value through a firms’ level of cash holding. This impact is significantly greater when firms experience a large change in their cash holdings.

Do banks worry about expropriation when an activist hedge fund targets their borrowers or are they reassured that their borrowers will perform better after such targeting? We study 1435 events during the 1996–2013 period in which an activist targeted a US corporation, to examine what happens to loan contract terms post-targeting. We present two new results. First, we show that when a firm is targeted by an activist hedge fund, the lenders of that firm charge a significantly higher rate on future loans and demand collateral more frequently than the loans made to risk- and industry-matched non-targeted firms. Second, we find that this increase in loan rate and the likelihood of collateral demand is limited only to those targets that experience a large positive announcement return when the news of an activist's involvement is first announced. We argue that higher interest rates and greater collateral requirements reflect the increased credit risk for these borrowers due, in part, to the possibility of wealth expropriation by the shareholders. Thus, we provide empirical evidence that an increase in equity value due to an activist's targeting may partially be due to wealth expropriation from creditors.

Why do some firms raise equity capital from a small number of “private” investors (e.g. Private Investment in Public Equities–PIPE), while other firms do so from a large number of small investors (e.g. Seasoned Equity Offering–SEO)? Recent studies list market timing, asymmetric information, and financial distress as the primary motives that drive the choice of equity raising mechanism. However, these results are based exclusively on the experience of US-based firms. This study examines 456 PIPE and 1910 SEO transactions of firms based in nine Asian countries to assess if the results reported for the US-based issuers are applicable to a wider set of firms. While market timing continues to be a significant driver of how firms choose between PIPE and SEO, unlike the US issuers, there is little evidence that Asian firms in our sample make this choice based on either asymmetric information or financial distress. As with the US firms, private investment provides significant certification for PIPE issuers. Finally, we find that both the operating performance as well as the stock price returns show little improvement for both PIPE as well as SEO issuers. Moreover, the difference between performance change of PIPE issuers is statistically indistinguishable from that of SEO issuers. This implies that PIPE investors do not provide meaningful benefits to the firms they invest in. Overall, our findings suggest that determinants for choosing specific equity issuance mechanism for international firms do not overlap completely with those for US-based firms.