We examine the effects of cultural differences on the outcome of takeover contests. Our main focus is on individuality, which we posit to have an effect on firm behavior in international takeover contests. In a sample of international acquisitions with bidders from multiple countries, we find that individuality positively relates to the probability of placing the winning bid. We further find that takeover contest winners with high individuality scores experience lower announcement returns. Our results are consistent with the literature that links individuality to overconfidence. Our evidence suggests that firms should control culture-related behavioral biases in their M&A activity.
We explore how various aspects of corporate governance influence the likelihood of a public corporation surviving as a separate public entity, after addressing potential endogeneity that arises from the competing corporate exit outcomes: acquisitions, going private transactions, and bankruptcies. We find that some corporate governance features are more important determinants of the form of a firm’s exit than many economic factors that have figured prominently in prior research. We also find evidence that outsider-dominated boards and lower restrictions on internal governance play major roles in the way firms exit public markets, particularly when a firm’s industry suffers a negative shock.
We study whether corporate governance and social responsibility are related to data breaches. We find that socially responsible companies with smaller boards and greater financial expertise are less likely to be breached. The financial impact of a breach is visible in the long-term. Specifically, data breach firms have -3.5% one year buy-and-hold abnormal returns. Additionally, banks with breaches have significant declines in deposits and nonbanks have significant declines in sales in the long run. Finally, we find that following a data breach, companies are more likely to replace their chief executive officer and chief technology officer as well as improve their governance and social responsibility.
We propose a dynamic version of the dividend discount model, solve it in closed-form, and assess its empirical validity. The valuation method is tractable and can be easily implemented. We find that our model produces equity value forecasts that are very close to market prices, and explains a large proportion of the observed variation in share prices. Moreover, we show that a simple portfolio strategy based on the difference between market and estimated values earns considerably positive returns. These returns cannot be simply explained neither by the Fama French 3-factor model (even after adding a momentum factor) nor the Fama French 5-factor model.
The events surrounding the stock-price peak of March 2000 are commonly interpreted as the bursting of a technology or Internet bubble, with some researchers pointing out that the pattern could also arise in fundamental models. We inform the debate by studying the long-run performance of Internet and technology stocks from March 2000 onward. Using calendar-time regressions, we do not find conclusive evidence of negative abnormal returns. The results are consistent with a new interpretation of the events; namely, the price drop of the early 2000s was not warranted in light of future cash flows and risk.
We explore the effect of director social capital, directors with large and influential networks, on credit ratings. Using a sample 11,172 firm-year observations from 1999 to 2011, we find that larger board networks are associated with higher credit ratings than both firm financial data and probabilities of default predict. Near-investment grade firms improve their forward-looking ratings when their board is more connected. Lastly, we find that larger director networks are more beneficial during recessions, times of increased financial uncertainty. Our results are robust to controls for endogeneity and tests confirm that causality runs from connected boards to credit ratings.
This paper studies a dynamic investment model with moral hazard. The moral hazard problem implies an endogenous financial constraint on investment that makes the firm’s investment sensitive to cash flows. I show that the production technology and the severity of the moral hazard problem substantially affect the dependence of the investment-cash-flow sensitivity on the financial constraint. Specifically, if the production technology exhibits almost constant returns to scale in capital or the moral hazard problem is relatively severe, the dependence is negative. Otherwise, the pattern is reversed to some extent. Moreover, the calibrated benchmark model can quantitatively account for the negative dependence of investment and Tobin’s Q on size and age observed in the data.
cash flow sensitivity
ly chain relationships are sometimes detrimental to the partnering firms, and short sellers recognize this before the rest of the market. Suppliers and customers that are in linked, close supply chain relationships have higher short interest on average. Further, higher short interest increases the likelihood of large, linked customers reporting negative earnings surprises, whereas suppliers with high short interest are more likely to report negative earnings surprises, irrespective of the supply chain structure. Short selling is informative to capital markets because these suboptimal relationships eventually lead to dependent suppliers being delisted from a stock exchange for financial distress reasons.
Using a sample of syndicated loans to private equity (PE)-backed IPO companies, we examine how a third-party bank relationship influences the syndicate structure of a loan. We find that a stronger relationship between the lead bank and the borrower’s PE firm enables the lead bank to retain a smaller share of the loan and form a larger and less concentrated syndicate, especially when the borrower is less transparent. A stronger PE-bank relationship also attracts greater foreign bank participation. Our findings suggest that the lead bank’s relationship with a large equity holder of the borrower facilitates information production in lending.
Using scaled wealth-performance sensitivity as our measure of CEO incentives, and utilizing cross-sectional variations in industry innovativeness, product market competition and firms’ degree of exposure to the market for corporate control for identification purposes, we find that higher long-term incentives that stem from CEO holdings of unvested options are associated with greater subsequent corporate innovation, exactly where incentivizing innovation is a matter of necessity. We address the endogeneity concern with systems of simultaneous equations estimated using 3SLS. A possible channel for the observed relation is that unvested-options-based incentives encourage managers to undertake riskier projects to achieve long-term economic benefits.