Spatial organization of firms: the decision to split production and administration

A firm's production activities are often supported by nonproduction activities, such as administrative units including headquarters, which process information both within and between firms. Firms may physically separate such administrative units from their production activities and create stand‐alone central administrative offices (CAOs). However, activities in multiple locations may cause internal communication costs. What types of firms are more likely to separate such functions? If firms separate administration and production, where do they locate CAOs? This paper examines firms' spatial organization using microlevel data from the US Census Bureau.     

Captive finance and firm's competitiveness

We study the effects of establishment of a captive finance subsidiary on parent firm's competitiveness. Firms with captives have higher profitability, larger market share, lower volatility of sales, and maintain lower cash balances. Following the establishment of a captive, a firm's profitability and its industry market share gradually increase, but it takes about four years to become economically relevant. Stock returns of companies with captive finance subsidiaries correlate more with finance industry returns than stock returns of companies without captives. We estimate that captives generate about 17% of parents' net income. Thus, significant part of profits of the largest U.S. industrial corporations comes from what in essence are financial services.     

Capital Structure and Assets: Effects of an Implicit Collateral

This paper analyses a firm's capital structure choice when assets have outside value. Valuable assets implicitly provide a collateral and increase tax shield exploitation. The key feature in this paper is asset value uncertainty, implying that it is unknown ex ante whether the equity holders ex post optimally sell the assets or re‐optimise the capital structure. Ex ante, more uncertain asset value decreases leverage, but not firm value, and selling the assets becomes less likely. Firms should tend to invest in assets whose value is less correlated to changes in earnings and, in addition, asset sales are less likely when this correlation is low.     

Bailouts,the incentive to manage risk,and financial crises

A firm's termination leads to bankruptcy costs. This may create an incentive for outside stakeholders or the firm's debtholders to bail out the firm as bankruptcy looms. Because of this implicit guarantee, firm shareholders have an incentive to increase volatility in order to exploit the implicit protection. However, if they increase volatility too much they may induce the guarantee-extending parties to “walk away.” I derive the optimal risk management rule in such a framework and show that it allows high volatility choices, while net worth is high. However, risk limits tighten abruptly when the firm's net worth declines below an endogenously determined threshold. Hence, the model reproduces the qualitative features of existing risk management rules, and can account for phenomena such as “flight to quality.”     

Market Feedback,Investment Constraints,and Managerial Behavior

This paper examines the joint role of market feedback and investment constraints on managerial behavior. Using a sample of UK fixed price initial public offerings, we show that underperformance of share returns at the IPO significantly affects managerial investment decisions in the period after the offering. Firms with better investment opportunities and proportionately lower fixed (higher intangible) assets are more sensitive to negative market feedback. Over the longer term, the more responsive firms perform significantly better than their non‐responsive counterparts. The findings contribute to the debate on the informational advantage of managers over investors and present strong evidence that the market, on aggregate, can provide a superior assessment of a firm's opportunities. Managers who are able to respond to negative market feedback can significantly improve their firm's future prospects.     

Why do CEOs agree to the discipline of dividends?

This study investigates dividend initiation as the product of the imbalance of power between shareholders and management in U.S. firms from 2003 to 2012. We find that dividend initiation is associated with a stronger governance structure (strong shareholders' rights and board independence), in accordance with the outcome model. We do not identify a single motivation for dividend initiation. Dividend-initiating firms tend to rely on various forms of governance balanced by the interests and ownership of CEOs and directors. Firms with institutional owners are more likely to initiate dividends concurrent with the turnover of the CEO. Dual CEOs initiate dividends when they own more shares, and boards of directors initiate dividends with a higher personal ownership stake when shareholders' rights are weak. We also find that when initiation is due to stronger governance, it is significantly related to the firm's investment opportunities, while for weak governance firms, that relationship is not observed. We interpret this as evidence that, under weaker governance, the decision to initiate dividends is motivated by agency conflicts rather than investment or capital structure considerations.     

Seasoned equity offerings: Quality of accounting information and expected flotation costs

Flotation costs represent a significant loss of capital to firms and are positively related to information asymmetry between managers and outside investors. We measure a firm's information asymmetry by its accounting information quality based on two extensions of the Dechow and Dichev [2002. The quality of accruals and earnings: the role of accrual estimation errors. Accounting Review 77, 35–59] earnings accruals model, which is a more direct approach to assessing the information available to outside investors than the more commonly used proxies. Our main hypothesis is that poor accounting information quality raises uncertainty about a firm's financial condition for outside investors, though not necessarily for insiders. This accounting effect lowers demand for a firm's new equity, thereby raising underwriting costs and risk. Using a large sample of seasoned equity offerings (SEOs), we show that poor accounting information quality is associated with higher flotation costs in terms of larger underwriting fees, larger negative SEO announcement effects, and a higher probability of SEO withdrawals. These results are robust to joint determination of offer size and flotation cost components and to adjustments for sample selection bias.     

Organization Capital and the Cross‐Section of Expected Returns

Organization capital is a production factor that is embodied in the firm's key talent and has an efficiency that is firm specific. Hence, both shareholders and key talent have a claim to its cash flows. We develop a model in which the outside option of the key talent determines the share of firm cash flows that accrue to shareholders. This outside option varies systematically and renders firms with high organization capital riskier from shareholders' perspective. We find that firms with more organization capital have average returns that are 4.6% higher than firms with less organization capital.     

Asymmetric Information and Risky Debt Maturity Choice

When capital market investors and firm insiders possess the same information about a company's prospects, its liabilities will be priced in a way that makes the firm indifferent to the composition of its financial liabilities (at least under certain, well-known circumstances). However, if firm insiders are systematically better informed than outside investors, they will choose to issue those types of securities that the market appears to overvalue most. Knowing this, rational investors will try to infer the insiders' information from the firm's financial structure. This paper evaluates the extent to which a firm's choice of risky debt maturity can signal insiders' information about firm quality. If financial market transactions are costless, a firm's financial structure cannot provide a valid signal. With positive transaction costs, however, high-quality firms can sometimes effectively signal their true quality to the market. The existence of a signalling equilibrium is shown to depend on the (exogenous) distribution of firms' quality and the magnitude of underwriting costs for corporate debt.     

Debt and managerial rents in a real-options model of the firm

We present a theory of capital investment and debt and equity financing in a real-options model of a public corporation. The theory assumes that managers maximize the present value of their future compensation (managerial rents), subject to constraints imposed by outside shareholders’ property rights to the firm's assets. Absent bankruptcy costs, managers follow an optimal debt policy that generates efficient investment and disinvestment. We show how bankruptcy costs can distort both investment and disinvestment. We also show how managers’ personal wealth constraints can lead to delayed investment and increased reliance on debt financing. Changes in cash flow can cause changes in investment by tightening or loosening the wealth constraints. Firms with weaker investor protection adopt higher debt levels.     

Determinants of the guarantee circles: The case of Chinese listed firms

China's external capital market has been developing rapidly since the establishment of its stock markets. However, financing from the internal capital market, especially through the guarantee system provided by other associated firms (the guarantee circle), remains significant for some Chinese firms. We analyze the importance associated with the guarantee system in China with a focus on the macro and micro determinants that affect Chinese firms' participation in the guarantee circle. Our findings suggest that both macroeconomic and microeconomic factors have significant impact on a firm's involvement in the guarantee circle. Firms in regions with higher economic growth, less developed banking system and worse legal protection are more likely to receive guarantee from firms associated with the controlling shareholders. On the other hand, firms controlled by the state are less likely to receive guarantee but more likely to provide guarantee, while firms with alternative financing sources are more likely to provide guarantee. Firms within a complex group with more pyramidal layers are more likely to get involved in the guarantee circle, either as a guarantor or a guarantee. Our findings have implications to general guarantee systems with the presence of agency and moral hazard problems.     

土地财政抑制了企业创新吗?——基于信贷错配视角的分析

基于一般均衡框架,考量房价、土地财政与企业创新之间的关系。研究发现：金融市场存在摩擦时,土地作为重要的抵押资产,房价波动和土地财政会扭曲创新资源的配置,在短期和长期对创新产生不同的影响。短期房价上升通过土地财政推动政府支出增加和总产出扩张,同时带动了企业的研发投入。当面临新的投资机会时,企业可以通过出售房产,缓解流动性约束。但在长期,土地财政引致的政府债务挤出了企业信贷,部门间信贷错配抑制了企业研发投入,同时高房价会导致企业转移部分资源投资房产,部门内资源错配进一步抑制了企业创新,从而降低了长期经济增长率,政府增加土地供给,则会弱化政府债务对企业创新要素的挤出效应。     

An analysis of majority owner‐managed companies in the UK

This paper investigates the characteristics of 73 UK companies in which managers have an ownership stake of greater than 50 per cent. We find that majority owner‐managed companies make less use of alternative corporate control systems and are less likely to remove their chief executive officer or other board members following poor performance. However, our sample firms actually outperform diffusely held companies of similar size in the same industry. The determinants of majority control appear more closely related to the characteristics of the controlling shareholders rather than the firm's operating environment. Changes in the ownership structure of our sample companies owe more to changes in owner‐specific characteristics and security issuance than they are related to changes in the company's operating environment or company performance. We conclude that despite the obvious agency costs of managerial entrenchment for closely held companies, for the present sample at least the incentive alignment benefits of large director shareholdings are beneficial to outside shareholders.     

Leveraged buybacks

Debt-financed share buybacks generate positive short-term and long-run abnormal stock returns. Leveraged buyback firms have more debt capacity, higher marginal tax rate, lower excess cash and lower growth prospects ex ante, increase leverage and reduce investments more sharply ex post than cash-financed buyback firms. Firms that are over-levered ex-ante are associated with lower returns and real investments following leveraged buybacks. The lower announcement returns of over-levered firms are concentrated on firms with weaker corporate governance. The evidence is consistent with leveraged buybacks enabling firms to optimize their leverage, on average benefiting shareholders. The benefits decrease with a firm's leverage ex ante.     

Dividend Policy under Asymmetric Information

We extend the standard finance model of the firm's dividend/investment/financing decisions by allowing the firm's managers to know more than outside investors about the true state of the firm's current earnings. The extension endogenizes the dividend (and financing) announcement effects amply documented in recent research. But once trading of shares is admitted to the model along with asymmetric information, the familiar Fisherian criterion for optimal investment becomes time inconsistent: the market's belief that the firm is following the Fisher rule creates incentives to violate the rule. We show that an informationally consistent signalling equilibrium exists under asymmetric information and the trading of shares that restores the time consistency of investment policy, but leads in general to lower levels of investment than the optimum achievable under full information and/or no trading. Contractual provisions that change the information asymmetry or the possibility of profiting from it could eliminate both the time inconsistency and the inefficiency in investment policies, but these contractual provisions too are likely to involve dead-weight costs. Establishing which route or combination of routes serves in practice to maintain consistency remains for future research.     

Policy Uncertainty and the Dual Role of Corporate Political Strategies

Firms use active political strategies not only to mitigate uncertainty emanating from legislative activity, but also to enhance their growth opportunities. We find that a firm's systematic risk (beta) can be hedged away by employing various political strategies involving the presence of former politicians on corporate boards of directors, contributions to political campaigns, and corporate lobbying activities. The hedging effect is greater when firms operate in more uncertain industries. In addition, active political strategies are associated with greater firm heterogeneity and make real options more value relevant as potential drivers of competitive advantages in uncertain environments.     

CEO internal experience and voluntary disclosure quality: Evidence from management forecasts

Internally‐promoted CEOs should have a deep understanding of their firm's products, supply chain, operations, business climate, corporate culture, and how to navigate among employees to get the information they need. Thus, we argue that internally‐promoted CEOs are likely to produce higher quality disclosure than outsider CEOs. Using a sample of US firms from the S&P1500 index from 2001 to 2011, we hand‐collect whether a CEO is hired from inside the firm and, if so, the number of years they worked at the firm before becoming CEO. We then examine whether managers with more internal experience issue higher quality disclosures and offer three main findings. First, CEOs with more internal experience are more likely to issue voluntary earnings forecasts than those managers with less internal experience as well as those managers hired from outside the firm. Second, CEOs with more internal experience issue more accurate earnings forecasts than those managers with less internal experience as well as those managers hired from outside the firm. Finally, investors react more strongly to forecasts issued by insider CEOs than to those issued by outsider CEOs. In additional analysis, we find no evidence that these results extend to mandatory reporting quality (i.e., accruals quality, restatements, or internal control weaknesses), perhaps because mandatory disclosure is subjected to heavy oversight by the board of directors, auditors, and regulators. Overall, our findings suggest that when managers have work experience with the firm prior to becoming the CEO, the firm's voluntary disclosure is of higher quality.     

Disagreement and the Cost of Capital

We assess how forms of disagreement among investors affect a firm's cost of capital. Firms experience a lower cost of capital if investors perceive that other investors are ignoring relevant disclosures (perceived errors of omission), but a higher cost of capital if investors perceive that others are responding to irrelevant disclosures (perceived errors of commission). The impact of these two sources of disagreement on the cost of capital is determined by the distribution of opinion and the nature of disclosure. For example, even though aggregated disclosures reveal less to investors, aggregated disclosures may decrease the cost of capital by eliminating disagreement associated with perceived errors of commission. These and additional results arise because the cost of capital is driven not only by investors’ uncertainty about the firm's future earnings performance, but also by investors’ uncertainty about the evolution of beliefs, which partly determines the path of prices.     

Analyst talent,information, and insider trading

We examine 1984–2018 data and show that the talent or ability of sell-side financial analysts affects a covered firm's information environment—more so than the simple number of analysts covering a firm. We find that while analysts in general produce market and industry-level information, high-ability analysts contribute more firm-specific information. Firms covered by high-ability analysts experience significantly less insider trading prior to positive earnings news. Results only reside in opportunistic (not routine) trades. When an analyst initiates (terminates) coverage we find decreased (increased) subsequent insider trading. Both changes are primarily driven by analyst talent. Analyst ability also negatively relates to insider trading profitability.     

Decisions of Initial Public Offering Review Committees: Causes and Consequences

We investigate the causes and consequences of the decisions made by an initial public offering (IPO) reviewing committee using a unique data set from Taiwan. Firms that were approved for listing are associated with better financial performance measures and are larger in equity size. Whether the committee unanimously approves an IPO firm depends on whether the firm's associated auditor changes or gives a nonunqualified report. The voting outcome has a discernable effect in the sense that unanimously approved firms are associated with higher financial performance measures (returns on equity, returns on assets, earnings per share, and the price-to-earnings ratio) than are nonunanimously approved firms, with the differences being more significant in the two years after the IPO.