Institutional investors, antitakeover defenses and success of hostile takeover bids

In this study we investigate the question of whether institutional investors enhance or reduce efficiency in the market for corporate control. In particular, given unequivocal evidence that target stockholders gain in successful takeover bids, we investigate the impact of institutional ownership in target firms on the adoption of the type of antitakeover defense as well as the outcome of takeover bids. We find that target firms are more likely to adopt value-reducing antitakeover defenses and successfully thwart takeover bids when a higher percentage of target common stock is owned by ‘pressure-indeterminate’ investors (investment counsel firms in particular). On the other hand, the probability of a successful takeover rises with the ownership of both ‘pressure-sensitive’ and ‘pressure-resistant’ investors. The above findings support the view that institutional investors do not play a homogeneous role in the market for corporate control.     

ESOPs, takeover protection, and corporate decision-making

ESOPs have the potential to align the interests of employees and owners and may increase firm value. However, employee ownership may also strengthen the position of entrenched management. The literature predicts that firms newly protected from takeover threat will tend to (1) increase long-term investment and (2) require additional external monitoring, and/or (3) may use leverage as part of an overall antitakeover strategy. We examined firms that have adopted ESOPs and find that firms raise the level of capital expenditures, research and development expenditures, and dividends. (JEF G320)     

The effect of ESOP adoptions on corporate performance: are there really performance changes?

Employee Stock Ownership Programs (ESOPs) have long been promoted as a motivational tool: employees become profit‐minded owners. Latterly, however, more ESOPs are being used as part of a takeover defense: here the ESOPs main purpose is to put more company stock in friendly hands—the employees—who, like existing management, could suffer layoffs, etc. in a hostile takeover. We find that, as a group, only the takeover‐related ESOPs are associated with increased leverage (itself a takeover defense). Non‐target firms show no long‐term increase in debt‐to‐assets. We find little evidence to support the motivation hypothesis: while actual labor costs are lower for ESOP firms, after industry‐adjusting they tend to be unaffected or higher. We find that a few measures of firm financial performance [return‐on‐equity (ROE), return‐on‐assets (ROA), net profit margin (NPM)] do improve significantly, but this appears to be largely a short‐term effect. Industry‐adjusted holding period returns appear to be unaffected by the ESOP; however, ESOP firms that leverage show evidence of long‐term market underperformance. We conclude that ESOPs provide, at best, only a short‐term boost to corporate performance. Copyright © 2000 John Wiley & Sons, Ltd.     

股权激励与投资行为:以光明乳业为例

投资决策是决定公司价值创造的重要因素之一,作为公司价值和经济增长的源泉,必然也受到管理层动机的影响。由所有权和经营权分离所导致的代理问题会影响高管人员的投资决策,导致公司过度投资或投资不足。由于投资对经理人兼具私人收益与私人成本,股权激励作为解决代理问题的一种长期激励方式,可能改变上述成本与收益的对比,其设计、实施是否合理会直接影响高管人员的行为,进而影响公司的投资行为。本文以光明乳业为例,分析股权激励如何影响国有上市公司的投资行为,并给出对策性建议。     

Managerial Incentives for Takeovers

The paper studies managerial incentives in a model where managers choose product market strategies and make takeover decisions. The equilibrium contract includes an incentive to increase the firm's sales, under either quantity or price Competition. This result contrasts with previous findings in the literature, and hinges on the fact that when managers are more aggressive, rival firms earn lower profits and thus are willing to sell out at a lower price. However, as a side effect of such a contract, the manager might undertake unprofitable takeovers.     

An empirical analysis of the corporate control,tax and incentive motivations for adopting leveraged employee stock ownership plans

This paper examines three motivations for leveraged ESOP adoption: as a takeover defense, as a mechanism for providing incentives to employees and as a vehicle for tax savings. ESOP adoption is more likely for companies with a higher predicted probability of takeover, but ESOP adopters have many characteristics that are different from takeover targets. Companies that adopt ESOPs can be distinguished from non-adopting companies based on characteristics associated with the tax and incentive effects of these plans. The size of the ESOP is shown to depend primarily on the tax and incentive characteristics.     

Debt finance and the cost of management ownership: Some elementary results

Increased debt reduces a company's equity base, which reduces the dollar investment a manager must make to hold a given proportion of stock. Therefore, it is often argued, managers' effort incentives are improved by high leverage. This paper shows that while risky debt reduces the cost of providing managers with substantial equity ownership, the cheaper equity captures less of the fruits of the manager's effort. Managers' effort incentives are improved by high debt levels only under quite restrictive conditions. These conditions are more plausible when agency problems are due to a managerial propensity to expand size by investing in negative net present value projects. The results also imply that when debt is increased to reduce the agency costs of free cash flow, the accompanying covenants should allow for substantial cash distributions to shareholders even before bondholder claims are satisfied.     

Incentives Management During Privatization: An Agency Perspective

abstract    This paper explains, through a field study and from an agency perspective, how monitoring and incentive alignment mechanisms change to support the interests of a privatized firm's new ownership. In this case, privatization led to important changes in the board of directors and to more formal performance evaluation and compensation systems for top managers, as profitability and financial control gained relevancy with the firm ownership change. Our results show that differences in incentives management before and after privatization are due to different agency relations in the two periods. We also argue that in a privatization framework the relation between monitoring and incentive alignment mechanisms is complex, not simply substitutive as agency theory would predict, and this finding allows us to refine and extend agency theory for this specific context.     

Unshrouding for Competitive Advantage

In a market with hidden product details and systematic consumer biases, firms have the possibility to unshroud and thereby to rectify such market obliquities. While the classical view was that firms will have an incentive to unshroud, Gabaix and Laibson (2006) show that there exist constellations in which firms prefer to leave the market shrouded. Building on that model I introduce a more strategic and long‐term dimension of unshrouding which turns out to fundamentally alter the underlying incentives to unshroud. In particular, I show that there exists an incentive to unshroud that stems from differences in add‐on profitability and that it is dependent on parameter constellations whether a more profitable or a less profitable firm will want to unshroud.     

The effect of takeover defenses on the dividend decision

Many firms have sought protection from hostile takeovers by passing defensive amendments to their corporate charter and/or lobbying their state legislatures for statutory protection. Agency theory would suggest that any such takeover defenses alter the principal-agent relationship. A consequence of such a change may be a change in corporate decision making. The objective of this research is to test the effect that passage of antitakeover amendments has on a firm's dividend policy. We use six alternate measures of dividend activity: total dividends paid, dividends per share and dividends relative to earnings, cash flow, market value, and book value. Our results indicate that firms that adopt antitakeover amendments, when compared to an industry control sample, tend to have a slower rate of growth in dividend payout as measured by the proxy variables. These results suggest that entrenchment is not a likely outcome of such amendments.     

Equilibrium Principal‐Agent Contracts: Competition and R&D Incentives

We analyze competition between firms engaged in R&D activities and market competition to study the choice of the incentive contracts for managers with hidden productivity. Oligopolistic screening requires extra effort/investment from the most productive managers: under additional assumptions on the hazard rate of the distribution of types we obtain no distortion in the middle rather than at the top. The equilibrium contracts are characterized by effort differentials between (any) two types always increasing with the number of firms, suggesting a positive relation between competition and high‐powered incentives. An inverted U curve between competition and absolute investments can emerge for the most productive managers.     

Capital expenditure announcements and anti-takeover barriers

In this paper, we compare capital budget announcements by firms with anti-takeover mechanisms in place to announcements by firms without takeover barriers during the period 1980 to 1995. We find that anti-takeover provisions do not affect investors’ average reactions to investment choices. Market responses are heterogeneous; however, and differ according to size, growth opportunity, the availability of free cash flow and exposure to the capital markets. We find evidence consistent with managerial entrenchment when firms are insulated from the threat of takeover and have enough free cash flow to avoid raising external capital. We also find that for small firms, the reaction to capital investment announcements are positively related to free cash flow when managers have high growth opportunities, but negatively related when investment opportunity is small. This result is consistent with Noe (1988), who shows that restricting managers’ investment choices to positive NPV projects is necessary to obtain the pecking order results of Myers and Majluf (1984).     

Investment and financing choices by time-inconsistent managers

This paper provides an analytically tractable continuous-time model in which a time-inconsistent manager can divert part of the firm’s cash flows as private benefits at the expense of outside shareholders. We endogenously determine the investment scale, investment threshold, optimal coupon and default threshold under managerial discretion. We demonstrate that time-inconsistent managers each have a trade-off between the timing and scale of investment.Among a number of important implications, by exploring agency costs of equity as deviations from the investment and financing policies that maximize equity value, our analysis reveals that a certain degree of time inconsistency in managerial preferences decreases the agency costs of equity. We also find that a naive manager more severely distorts the investment and financing policies than does a sophisticated manager, which leads to higher agency costs of equity. Finally, we document that the impacts of corporate governance variables, such as the managers’ property parameter and/or the level of managers’ ownership, depend on the managers’ beliefs regarding their future time-inconsistent behavior; this prediction provides novel empirical tests.     

Disciplinary Takeovers and Industry Effects

This paper presents a disciplinary explanation for some seemingly paradoxical stylized facts from the takeover literature. Most notable among these are: (1) hostile takeovers are predicted better by industry-wide than by firm-specific performance failures; and (2) gains from a successful bid for a specific firm extend to other firms in the same industry. Our explanation is based on the idea that managerial incentives based on relative performance evaluation may induce an inefficient industry-wide equilibrium in which all firms underperform with respect to a value-maximizing firm, but no firm underperforms with respect to the industry average. A takeover can serve as a means to destroy such an inefficient industry-wide incentive equilibrium.     

Employee Shareholders Or Institutional Investors? When Corporate Managers Replace Their Stockholders*

During the past decade, the shares of publicly traded companies moved increasingly into the hands of institutional investors. As large investors pressed companies to restructure, companies were observed in turn to restructure their shareholder base. Drawing on a 1989 survey of 761 US publicly traded companies, firms facing a hostile takeover environment or with large institutional holdings are found to seek greater employee stockholding. Large firms and those that had adopted takeover defences are more likely when threatened with takeovers or short-term pressures to seek more employee and less institutional stockholding. Though managers are employed by owners, investor efforts to discipline their managers can lead the latter to replace the former.     

Equity‐based incentive contracts and behavior: Experimental evidence

Equity ‐ based incentive contracts provide managers with dual incentives, motivating both effort and fraud. We report the results from an experiment in which manager subjects make effort and fraud decisions that affect a firm's value. The main treatment variable is the incentive contract, which can be of either the simple equity or stock option type. We find that both effort and fraud are increasing in a manager's share of equity and decreasing in the strike price of an option. Interestingly, the stock option contract induces relatively more fraud than the simple equity contract, even though the two induce the same effort.     

Asymmetric information and inside management trading in the Chinese market

Insider trading incentives have been widely examined in stock markets, but mainly in developed countries. Given the fact that the volatility of stock exchange markets in emerging economies is typically even higher, there is a need for research to explore the extent to which information asymmetry plays a role in management trading incentives in emerging economies. To address this research need, this study examines management trading incentives in relation to investment efficiency in Chinese listed firms on the main board and on the small- to medium-enterprises (SME) board in the period 2006 to 2017. We find that executives buy shares when firms’ investments are more efficient. The frequency of management buying also increases with investment efficiency. However, managers do not sell their shares according to firms’ investment efficiency. Moreover, executives of firms listed on the main board trade more on the asymmetric information of investment efficiency than those on the SME board.     

股权激励经理人道德风险的化解——全面风险管理视角

股权激励依据激励相容原理,为降低公司管理层的代理成本,俘获优质人力资本,激励核心人才而设计,属于薪酬的长期激励部分,其成败关系到公司高管激励约束机制的建设、薪酬制度的完善、企业的长远发展。在我国上市公司股权激励实践中,出现了实施条件过宽、业绩考核不严、预期收益失控、侵蚀股东和公司权益、高管离职减持股份等偏差,是公司经理人产生道德风险的表现。公司治理中的道德风险问题,既要依靠有效的激励机制,又要依靠内部监督、制衡和外部约束来防范。道德风险具有内生性、潜在性、控制艰巨性,单点防范、应急管理不能有效地化解这些问题,只有用全面风险管理的理念进行系统治理,才能有效抑制经理人道德风险的发生和扩散,释放股权激励的正能量,实现股权激励的本来目的。     

Environmental Policies for Sustainable Development: An Analysis of the Drivers of Proactive Environmental Strategies in the Service Sector

This article examines the drivers of environmental proactivity in the service sector. Hypotheses were tested using multiple hierarchical regression analysis with data from a sample of 41 managers in Spanish environmental consulting companies. Results show statistically significant relationships between (1) managers’ attitude towards sustainable development, (2) positive short‐term firm performance and (3) the strategic attitude of environmental consulting firms and the adoption of proactive environmental strategies by the studied companies. This article is pioneering in the analysis of drivers of corporate proactive environmental strategies in the consultancy sector. The findings have practical implications for policy‐makers, investors and other agents interested in a better management of the environment. Economic incentives such as subsidies to environmental training programmes for managers can induce changes in cognitive components of managers’ attitudes. Education policies could also affect managers’ attitudes towards the environment. Companies may also encourage attitude change by providing their managers with financial assistance to receive environmental training. External assistance to develop a strategic attitude could be an interesting policy to encourage voluntary environmental initiatives. Finally, fiscal deductions, tax breaks or subsidies to those companies interested in managing the environment can be effective incentives for those firms facing a weak short‐term financial situation. Copyright © 2014 John Wiley & Sons, Ltd and ERP Environment     

Determinants of Conflict Minerals Disclosure Under the Dodd–Frank Act

This paper examines conflict minerals disclosure (CMD) as mandated by the Dodd–Frank Act. We rely on a thorough content analysis conducted by the Responsible Sourcing Network on a sample of 122 firms that filed CMDs with the US Securities and Exchange Commission in 2015. We document that firms with long‐term oriented incentives, a greater number of board meetings, strong corporate governance systems and inclusion in a sustainability index are associated with higher levels of CMD. Our results suggest that in the presence of enforcement leniency, both internal and external firm‐specific factors affect strategic (non‐)compliance with a mandatory social disclosure regime. We provide implications for supply chain managers, corporate reporters and policy‐makers involved in the adoption of responsible sourcing strategies. © 2018 The Authors. Business Strategy and The Environment published by ERP Environment and John Wiley & Sons Ltd