Anticompetitive Effects of Common Ownership

Many natural competitors are jointly held by a small set of large institutional investors. In the U.S. airline industry, taking common ownership into account implies increases in market concentration that are 10 times larger than what is “presumed likely to enhance market power” by antitrust authorities. 1 Within‐route changes in common ownership concentration robustly correlate with route‐level changes in ticket prices, even when we only use variation in ownership due to the combination of two large asset managers. We conclude that a hidden social cost—reduced product market competition—accompanies the private benefits of diversification and good governance.     

Does common ownership constrain managerial rent extraction? Evidence from insider trading profitability

This study identifies a new economic benefit of common institutional ownership, which refers to the increasingly contentious phenomenon of U.S. firms sharing stockholders with their industry competitors. We find a significantly negative relation between common ownership and insider trading profitability. The disciplinary effect of common ownership on opportunistic insider trading is particularly evident when the information effects of common ownership are greater, when common owners are more likely to benefit from positive governance externalities, and in the subset of trades made by opportunistic insiders. Using the exogenous variations in common ownership induced by financial institution mergers, we conduct a difference-in-differences analysis and find consistent results. We also provide evidence that common owners encourage firms to impose ex-ante restrictions on insider trading and take ex-post actions to discipline opportunistic insiders by voting against management. Overall, our findings suggest that common institutional shareholders have information advantages, governance incentives, and effective means to constrain opportunistic insider trading.     

Ownership and Performance in a Lightly Regulated Environment

This article examines the relation between ownership and performance for New Zealand electricity lines firms over the period 1998 to 2006. The sample is of interest because it represents all firms within a single product industry (local electricity distribution), which is a natural monopoly subject to a light‐handed regulatory regime. Thus we are able to examine the theories of ownership on performance, while controlling for regulation, industry, product market competition, accounting methods and other factors that might impact profitability, such as network reliability and network density. The results suggest that listed firms have similar profitability to council‐owned firms and both listed and council‐owned firms outperform trust‐owned firms. The likely reason for the poorer performance of trust‐owned firms is that they have different agency costs than listed and council‐owned firms and the trustees have lower responsibility than directors. Hence, they have lower incentives to be profitable.     

An Empirical Investigation of the Demand for Bank‐Owned Life Insurance

Key employee life insurance in the banking industry is called bank‐owned life insurance (BOLI). Banks use BOLI to provide financial support to help reduce disruptions due to the death of a key executive and as a part of the executive compensation package. We investigate the characteristics of banks related to the amount of BOLI purchased. We find that BOLI purchases are positively related to bank size and leverage and negatively related to tax rates and employee salaries. We also find that BOLI purchases are related to bank ownership structure and profitability.     

Capital Structure Choice in a Nascent Market: Evidence from Listed Firms in China

We study the capital structure decisions of listed firms in China between 1992 and 2001. The Chinese market exhibits high information asymmetry, phenomenal growth, highly concentrated ownership, and a lack of external market for corporate control. We find that Chinese firms use little long-term debt, which is positively (negatively) related to firm size and tangibility (profitability and growth options). These results are robust to the degree of seasoning after the initial public offering and private versus State ownership. Although industry membership is important, the development and growth of the stock market did not affect the long-term debt ratios over the years.     

市场结构、股权结构与证券公司成本效率——基于PR模型的静态、动态考察

本文基于静态、动态PR模型,对我国证券业、创新类及规范类证券公司的市场结构进行测度,运用SFA法测度证券公司的成本效率,进而实证分析市场结构、股权结构与证券公司成本效率之间的关系。结果显示:2006-2010期间我国证券业的市场结构为垄断竞争,且创新类证券公司之间的市场竞争比规范类证券公司之间的竞争要激烈得多。市场结构指标——市场竞争度与证券公司效率之间是一种倒U型关系。国有性质证券公司的效率低于非国有性质证券公司的效率,股权性质对规范类证券公司效率的影响更明显;股权集中度与证券公司效率之间是一种U型关系,并且,股权集中度对创新类证券公司影响较大。     

A Measure of Competition Based on 10‐K Filings

In this paper we develop a measure of competition based on management's disclosures in their 10‐K filing and find that firms’ rates of diminishing marginal returns on new and existing investment vary significantly with our measure. We show that these firm‐level disclosures are related to existing industry‐level measures of disclosure (e.g., Herfindahl index), but capture something distinctly new. In particular, we show that the measure has both across‐industry variation and within‐industry variation, and each is related to the firm's future rates of diminishing marginal returns. As such, our measure is a useful complement to existing measures of competition. We present a battery of specification tests designed to explore the boundaries of our measure and how it varies with the definition of industry and the presence of other measures of competition.     

Multidimensional Competition and Corporate Disclosure

In this paper, we argue that the influence product market competition exerts on disclosure is defined by the combined effect of the incentives and disincentives to disclose raised by the multiple competition dimensions. We distinguish between firm‐ and industry‐level competition measures, and we hypothesize that the former raises agency and proprietary costs, whereas the latter creates incentives to disclose either to fulfil the owners’ need for information to monitor managers or to deter the entrance of new competitors in the industry. Our research design allows for non‐monotonic relationships between competition and disclosure as well as for interactions between competition dimensions. Using a sample of US manufacturing companies, we gather evidence that is consistent with our hypotheses. First, we find an inverted U‐shape relationship between corporate disclosure and a firm's abnormal profitability, which is suggestive of firms being reluctant to disclose when they are underperforming (outperforming) their rivals because of the fear of unveiling agency conflicts (raising proprietary costs). Second, we observe a U‐shape relationship between corporate disclosure and industry profitability, although this U design evolves to approximate a rising function as the protection provided by entry barriers increases.     

Board Composition in New Zealand: An Agency Perspective

This paper looks at board composition determinants in New Zealand. We document that the proportion of outside board members is inversely related to insider equity ownership supporting the notion that these variables are substitute mechanisms in controlling agency problems. We also find that board composition is directly related to debt, ownership concentration, and profitability and inversely related to growth and firm size. There is evidence that firms with influential CEOs have lower outside board representation. Finally, we document that the passage of the legislation reforming company and securities laws in 1993 was associated with increased outside members on the board.     

Competition within the firm: theory plus some evidence from medical group practice.

Recent work on the economics of the firm and other organizations has emphasized the importance of internal organization and incentives. The issue of competition within the firm has not arisen, however. In this article I construct a model of nonprice competition among members of a professional partnership and test the model with data on medical group practice. The empirical results are consistent with the hypothesis of nonprice competition among members of the firm.     

Competition For Board Seats Following Stock‐For‐Stock Mergers

We examine the board structure of firms following stock‐for‐stock mergers. We find that former target inside (outside) directors are more likely to join the combined firm board when target insiders (outsiders) have a relatively strong position on the pre‐merger target board. The relative size of the target firm, target firm profitability, and target blockholder ownership also influence whether target directors join the combined board. We conclude that competition for board seats on the combined board is won by target directors with greater bargaining positions.     

Why do accruals predict earnings?

Higher accruals are associated with lower subsequent earnings. We show this phenomenon can be explained by the way sales, profits, and working capital respond to changes in a firm's product markets. Empirically, high accruals predict high subsequent sales growth but a long-lasting drop in both profits and profitability. Accruals also predict an increase in future competition, suggesting that accruals are correlated with abnormally high—and, in equilibrium, transitory—true profitability that attracts new entrants to the industry. Overall, the predictive power of accruals is better explained by product-market effects than by measurement error in accruals or diminishing returns from investment.     

Political Patronage and Capital Structure in China

In this paper, we empirically examine the determinants of capital structure in China, using 1,006,395 firm-year observations spanning 1998-2007. Consistent with the general findings in developed markets, we find that the long-term debt ratio is positively related to firm size and asset tangibility while negatively related to profitability and growth opportunities. We also conclude that the long-term debt ratio is positively related to state ownership and legal-person institutional ownership, consistent with the political patronage hypothesis that firms in which the government has more of a stake are more likely to incur long-term debts. These results are robust to a battery of validity checks.     

Ownership Differences and Firms' Income Smoothing Behavior

This paper examines the association between differences in ownership structure and income smoothing behavior in firms. The underlying constructs affecting this association include agency relationships, managerial incentives, information asymmetry, and firm profitability. A logistic regression model is used to test the association between income smoothing and variables related to inside ownership, institutional holdings, leverage, managerial compensation, profitability, and firm size. The evidence suggests that ownership differences, managers' incentive structures, and firm profitability are important in explaining income smoothing behavior in firms. By separating inside ownership and levels of debt into different levels, we are able to show the existence of a non-monotonic relationship between ownership differences and firms' income smoothing behavior.     

Nonprofit executive incentive pay

We utilize information only recently disclosed on Form 990 to examine the use, and consequences of, incentive pay at nonprofit organizations. Bonuses are common in nonprofits, as we observe that approximately 45% of the 44,000 organization-year observations in our sample reported paying CEO bonuses. We find that the bonuses are positively associated with profitability, competition from other nonprofits, firm size, available cash, and use of compensation consultants and committees, while negatively related to board oversight, donations, and grants. Our results also suggest that donors look unfavorably at the payment of bonuses; that is, bonuses are associated with lower future donations. Nonetheless, we find evidence consistent with the payment of bonuses incentivizing nonprofit executives, as despite reduced fundraising, future profitability and program services are positively associated with current bonus compensation.     

On-balance-sheet duration hedging and firm value

In this study we consider the determinants and effects of on-balance-sheet duration hedging for non-financial US firms. The difference between the duration of assets and liabilities, or duration gap, is negatively related to growth opportunities, and positively related to profitability, corporate cash holdings, and managerial ownership. We find that both a lower duration gap and a lower absolute value of duration gap are associated with higher firm values. Moreover, we find some evidence that firms with larger duration gaps performed worse during the market-wide liquidity shock accompanying the Lehman Brothers bankruptcy.     

Do Industry‐Level Analyses Improve Forecasts of Financial Performance?

Prior research documents mean reversion in firm profitability and growth under the implicit assumption that profitability and growth of all firms revert to a common benchmark at the same rate. However, a large body of academic research suggests that there are systematic interindustry differences (e.g., industry barriers to entry) that differentially affect firm performance based on industry membership. We evaluate the relative forecast accuracy of mean reverting models at the industry and economywide levels and find that industry-specific models are generally more accurate in predicting firm growth but not profitability.     

The effect of major customer concentration on firm profitability: competitive or collaborative?

We test two potential hypotheses regarding the effects of major customer concentration on firm profitability. Under the collaboration hypothesis, customer power facilitates collaboration, and both the supplier firm and its major customers obtain benefits. Under the competition hypothesis, customer power results in rent extraction, and the major customers benefit at the expense of the supplier firm. We document that major customer concentration is negatively associated with the supplier firm’s profitability but positively associated with the major customers’ profitability. We demonstrate that these effects weaken as the supplier firm’s own power grows over its relationship with major customers, supporting the competition hypothesis. We carefully reconcile our results with prior studies’ findings that focus only on the supplier firm’s profitability and identify their research design and interpretation problems. We obtain similar inferences in a setting of major customers’ horizontal mergers and when we use an alternative measure of major customer power.

     

The voluntary adoption of International Financial Reporting Standards and loan contracting around the world

Using a sample of non-U.S. borrowers from 40 countries during 1997 through 2005, this paper investigates the effect of the voluntary adoption of International Financial Reporting Standards (IFRS) on price and nonprice terms of loan contracts and loan ownership structure in the international loan market. Our results reveal the following. First, banks charge lower loan rates to IFRS adopters than to non-adopters. The difference in loan rates in excess of a benchmark rate between the two groups is about 20 basis points for all loans and nearly 31 basis points for London Interbank Offered Rate (LIBOR)-based loans. Second, banks impose more favorable nonprice terms on IFRS adopters, particularly less restrictive covenants. We also provide evidence suggesting that banks are more willing to extend credit to IFRS adopters through larger loans and longer maturities. Finally, IFRS adopters attract significantly more foreign lenders participating in loan syndicates than non-adopters.     

The performance of newly privatized firms in selected MENA countries: The role of ownership structure, governance and liberalization policies

The paper analyzes 95 newly privatized firms (NPFs) in four Middle Eastern and North African countries (Egypt, Morocco, Tunisia, and Turkey). We find that these firms experienced significant increases in profitability and operating efficiency, and significant declines in employment and leverage. We also document strong performance improvements for firms that did remain state-owned, that were not sold to foreigners, and that came from Egypt. Job losses are higher in Egypt and in firms where the state is no longer in control. Also, the results indicate that revenue firms and NPFs in Morocco display significantly less leverage than control firms and those from other countries. We find that profitability changes are negatively related to state control and positively related to foreign ownership. Trade openness, change in real GDP over the privatization window, index of investor protection, and foreign ownership are important determinants of the changes in sales efficiency and output. These findings suggest that NPFs become more productive in environments where property rights are better protected and enforced and that foreign investors influence firms' productivity through their monitoring role.