R&D investment as a signal in corporate takeovers

The purpose of this paper is to analyze the effects that takeover threats have on firms' preacquisition R&D intensity. Critics of takeovers usually argue that takeover threats may reduce target firms' R&D investments. However, I find that target firms may increase R&D investment in order to signal their compatibility with the acquiring firm. The identity of the acquired firm depends on the market size and target firms' efficiency and compatibility. Through R&D investments, target firms may affect this result, signaling potential outsiders the kind of competition they may face, and forcing them to accept lower takeover offers. Copyright © 2009 John Wiley & Sons, Ltd.     

Location,Proximity, and M&A Transactions

In this paper, we examine how the geographic location of firms affects acquisition decisions and value creation for acquirers in takeover transactions. We find that firms located in an urban area are more likely to receive a takeover bid and complete a takeover transaction as a target than firms located in rural areas, and takeover deals involving an urban target are associated with higher acquirer announcement returns, after controlling for the proximity between the target and the acquirer. In addition, a target's urban location significantly attenuates the negative effect of a long distance between the target and the acquirer on acquirer returns, a fact that is documented in the existing literature. Our findings reveal a previously underexplored force—firm location—that can affect takeover transactions, in addition to proximity. Our paper suggests that a firm's location plays an important role in facilitating the dissemination of soft information and enhancing information‐based synergies.     

Takeover threats,antitakeover amendments and stock price reaction

We examine the influence of takeover threats on the stock price of firms proposing antitakeover amendments. Stock prices of the majority of firms, which are not takeover targets during the four years surrounding the amendments, are unaffected, while prices of firms that become takeover targets within two years increase significantly. We document weak evidence of wealth losses only for a sample of prior targets. Our findings suggest that shareholders of the average firm are not harmed by antitakeover amendments because they provide either a better bargaining position or an information signal to the market.     

Value Added and Corporate Control in the U.S.

This paper examines the ability of value added to assess the differences between target firms and their industries and to explain target firms' abnormal returns during the takeover period. In a sample of 234 completed takeovers over the period 1977 to 1989, takeover targets have lower value added to total assets ratios than other firms in their industries in the year preceding the year in which the takeover is completed. Target firm abnormal returns observed during the takeover period are positively related to the difference between target Firm and average industry value added to total assets. This suggests that while acquired firms are on average underperformers, acquiring firms value the access to, and possibly the ability to redistribute, the resources of target firms.     

The impact of anti‐takeover charter amendments on expectations of future earnings and takeover activity

In this study, additional evidence of the impact of anti‐takeover amendments on firm earnings and subsequent takeover activity is presented. It is found that analysts’ projections of financial performance measures do not appear to be altered by the adoption of anti‐takeover amendments. Additionally, it is found that the anti‐takeover charter amendments do not impact either takeover activity or takeover premiums following their adoption. Thus, anti‐takeover amendments appear to have few, if any, consequences to shareholders. Copyright © 1999 John Wiley & Sons, Ltd.     

Real options signaling game models for dynamic acquisition under information asymmetry

We construct a real options signaling game model to analyze the impact of asymmetric information on the dynamic acquisition decision made by the aggressive acquirer firm and passive target firm in the takeover terms and timing. The target firm is assumed to have partial information on the synergy factor of the acquirer firm in generating the surplus value. Our dynamic acquisition game models are based on the market valuation of the surplus value of the acquirer and target firms, where the restructuring opportunities are modeled as exchange options. We analyze the various forms of equilibrium strategies on the deal and timing of takeover in the acquisition game and provide the mathematical characterization of the pooling and separating strategies adopted by the acquirer firm. We also determine the terms of takeover in the signaling game under varying levels of information asymmetry and synergy.     

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.     

An explanation for recapitalization in corporate control contests

This paper examines the role of corporate financial policy in determining the equilibrium allocation of takeover gains in corporate control contests. The model justifies capital-structure changes in response to a takeover bid, and shows how recapitalization can be used as a strategic device to alter the price a bidding firm pays to acquire the target firm.     

Panel data estimates of the production function and product and labor market imperfections

Consistent with two models of imperfect competition in the labor market—the efficient bargaining model and the monopsony model—we provide two extensions of a microeconomic version of Hall's framework for estimating price‐cost margins. We show that both product and labor market imperfections generate a wedge between factor elasticities in the production function and their corresponding shares in revenue, which can be characterized by a ‘joint market imperfections parameter’. Using an unbalanced panel of 10,646 French firms in 38 manufacturing industries over the period 1978–2001, we can classify these industries into six different regimes depending on the type of competition in the product and the labor market. By far the most predominant regime is one of imperfect competition in the product market and efficient bargaining in the labor market (IC‐EB), followed by a regime of imperfect competition in the product market and perfect competition or right‐to‐manage bargaining in the labor market (IC‐PR), and by a regime of perfect competition in the product market and monopsony in the labor market (PC‐MO). For each of these three predominant regimes, we assess within‐regime firm differences in the estimated average price‐cost mark‐up and rent sharing or labor supply elasticity parameters, following the Swamy methodology to determine the degree of true firm dispersion. To assess the plausibility of our findings in the case of the dominant regime (IC‐EB), we also relate our industry and firm‐level estimates of price‐cost mark‐up and extent of rent sharing to industry characteristics and firm‐specific variables respectively. Copyright © 2011 John Wiley & Sons, Ltd.     

Asset sales and takeover threats

This research addresses the question of whether the existence of a recent takeover threat affects the market reaction to a subsequent sale of assets. The effect of a prior takeover threat on the stock price reaction to an asset sale is examined from the perspective of both the buying firm and the selling firm. The total gains to the transaction are estimated as a market weighted average of the abnormal returns to the two firms. The results show that when there has not been a recent takeover threat on the selling firm, abnormal returns are significantly positive for the seller, the buyer and in total. However, if the selling firm has faced a takeover threat within the previous year, the abnormal returns upon announcement of an asset sale are insignificant for the seller, negative for the buyer, and negative for a portfolio of the two. Hence, the market has a lower estimate of the overall gains in transactions that follow takeover threats on the selling firm; in fact, these transactions result in a net wealth reduction.     

Defensive acquisitions in the banking industry: The takeover premium hypothesis

We define defensive acquisitions as takeovers made by a firm so as to become so large that it becomes an unattractive target itself. A sample of defensive acquisitions in the banking industry is used to test the takeover premium hypothesis. Under this hypothesis, the defensive acquirers lose because a takeover premium that previously existed in their prices is deflated while the takeover premium increases for smaller competitors because they become more likely targets. We find that the defensive acquirers experience significant negative abnormal returns on the announcement day, and that smaller competitors have positive abnormal returns on the announcements of defensive acquisitions. In contrast, larger competitors do not react to the announcements. The results are consistent with the takeover premium hypothesis.     

Wage‐setting Decisions on Newly Hired Employees: Survey Evidence from Colombian Firms

This paper uses a survey on wage formation applied to 1305 Colombian firms to study wage‐setting decisions of newly hired employees. The survey indicates that wages of the newly hired are based mainly on a predefined wage structure. This may help to explain, in part, the presence of downward nominal wage rigidities in the Colombian formal labour market, since firms are unwilling to differentiate the pay of new hires from the wages of existing workers. Using multinomial logit models, we find that firm size and the share of temporary workers increase the relative risk of using a predefined internal structure over bargaining between employee and employer when setting the wages of the newly hired employees. Copyright © 2013 John Wiley & Sons, Ltd.     

Endogenous scope of bargaining in a union–oligopoly model: when will firms and unions bargain over employment?

The scope of firm–union bargaining is shown to be endogenously determined in a union–oligopoly model with decentralized negotiations. If the unions' power is sufficiently high, all bargaining units choose to negotiate over wages alone, i.e., universal right-to-manage bargaining emerges in equilibrium. Otherwise, wage/employment bargaining and right-to-manage bargaining coexist in the same industry. In equilibrium, some firm–union pairs will always choose to bargain over employment as well, since the firms become Stackelberg leaders in the market by committing to a particular output during the negotiations. The firms and their unions both benefit from the additional Stackelberg rents, provided that the unions' power is small enough. Our analysis suggests that there is not necessarily a negative relationship between unions' power and sectoral employment rates.     

The ‘winner's curse’ hypothesis and corporate takeovers

The winner's curse hypothesis states that, in any bidding situation, a party which unknowingly overestimates the value of a given object tends to bid higher than its competitors and is, therefore, more likely to win it. In a takeover the magnitude of the winner's curse is defined as the difference between the bid premium of the winning bidder and the maximum offerable premium conditional on the capital market's estimate of expected takeover gains. The magnitude of the winner's curse is predicted to increase with (1) increase in the divergence of opinion amongst acquirers with respect to the size of takeover gains, (2) increase in the degree of competition for control of the target firm and (3) increase in the pre-acquisition profitability of the winning bidder. The empirical results provide support for the winner's course hypothesis.     

Bilateral Delegation in Duopoly Wage and Employment Bargaining

We study bilateral delegation in wage and employment bargaining between firms and unions in a Cournot duopoly. Incentive delegation creates frictions for each party between its objectives of within‐firm rent extraction and market/job stealing from the rival firm. The net effect is restraint in production, resulting in a larger bargaining pie. But each player's payoff will be inversely related to his bargaining power. We also show that if players are given a choice to delegate, they will not resort to delegation when their bargaining power is sufficiently high. This is in contrast to the scenarios commonly assumed in many models. Copyright © 2016 John Wiley & Sons, Ltd.     

Price versus Quantity in a Duopolistic Market with Bargaining over Managerial Delegation Contracts

This paper studies the endogenous choices of strategic contracts in a duopoly with bargaining between the owner and manager of each firm over the content of the managerial delegation contract. We show that when the bargaining power of the manager relative to that of the owner within each firm is sufficiently high, quantity competition based on the quantity contracts chosen by the owners of both firms can be uniquely observed in the equilibrium, whereas quantity competition and price competition can be observed in the equilibrium when this relative bargaining power is sufficiently low. Copyright © 2015 John Wiley & Sons, Ltd.     

Why do merger premiums vary across industries and over time?

We identify time-varying industry and macroeconomic factors that explain the observed variation in takeover premiums over time. Results support our hypotheses that some industry and economic factors can increase the growth prospects in an industry, which boosts expected synergies and/or demand for the target firm, and therefore increases the merger premiums. Merger premiums are higher when the target's corresponding industry experiences higher growth, has more research and development (a proxy for expected growth), and has less dispersion in performance among firms within the industry. Merger premiums are also positively related to capital liquidity, which can enhance economic growth and competition for target firms, and positively related to volatility in economic growth, which affect merger waves and the demand for target firms over time.     

Bargaining power in alliance governance negotiations: evidence from the biotechnology industry

Alliance partners negotiate how they will govern their alliance. This study shows bargaining power, not just efficiency considerations, influences the outcome of this negotiation. Whereas previous research on this phenomenon associates bargaining power with firm size, this study employs more nuanced measures of bargaining power applicable to biotechnology firms while controlling both absolute and relative firm size. We find small biotechnology firms with partners that are over five times larger can still have the bargaining power to get their interests met when the two parties have opposing governance interests.     

Broad Cross‐License Negotiations

In many industries, broad cross‐license agreements are considered a useful method to obtain freedom to operate and to avoid patent litigation. In this paper, I study firm incentives to sign a broad cross‐license as well as the duration of broad cross‐license negotiations. I develop a model of bargaining with learning, which predicts that two firms will enter a broad cross‐license agreement only if their capital intensities are large enough. The model also predicts faster negotiations when firms have high capital intensities and when the frequency of future disputes is low. I confirm these predictions empirically using a novel data set on cross‐licensing and litigation in the US semiconductor industry.     

The Bargaining–sales‐delegation Game

This article revisits the managerial delegation literature led by Vickers ( 1985 ), Fershtman and Judd ( 1987 ) and Sklivas ( 1987 ) by introducing a bargaining mechanism between owners and managers over managerial contracts. It shows that the degree of bargaining interacts with the extent of product differentiation in determining whether the sub‐game perfect Nash equilibrium is sales delegation or profit maximisation. In contrast with the classical result, no sales delegation emerges and the typical prisoner's dilemma of the managerial delegation literature is solved. This holds in both contexts of Cournot and Bertrand rivalries. The article also provides results for the more general cases with heterogeneous managerial bargaining power and endogenous decisions of the owners regarding the bargaining power of the manager that should be or not be hired in a firm. Copyright © 2016 John Wiley & Sons, Ltd.