Working Capital Management,the Credit Crisis,and Hedging Strategies: Canadian Evidence

This study uses a sample of Canadian natural resource firms during the global financial crisis (GFC) of 2007–2008 to examine the influence of firm hedging strategies on their working capital management. Our evidence implies that increased cash holdings and derivatives are alternative ways of hedging risk, and also provides another perspective on the U.S. “trapped cash” controversy as our sample firms are not R&D intensive and do not face the same tax regime as U.S. multinationals.     

Managerial shareholdings, firm value, and acquired corporations

Prior research on the relationship between managerial shareholdings and firm value provides conflicting evidence. We take a different approach to its analysis and focus on managerial shareholdings in acquired firms. We argue that in a relatively unfettered market for corporate control, prior evidence of a nonlinear relationship between moral hazard costs and managerial shareholdings suggests that acquired corporations can be segmented according to managerial shareholdings, and that these segments will differ according to the source of wealth gains, managerial resistance, who acquires the company, and how target shareholders are paid. We find evidence consistent with these predictions.     

Determinants of financial distress and bankruptcy in highly levered transactions

Prior literature on highly levered transactions (levered buyouts or levered recapitalizations) has emphasized either changes in governance or the structuring of their financing in helping these firms avoid financial distress or bankruptcy. Observing a sample of HLTs over time, we observe that debt composition is a more critical influence than proposed changes in governance for the likelihood of an HLT avoiding financial distress or bankruptcy. Such evidence is consistent with the [Chemmanur, T. & Fulghieri, P. (1994). Reputation, renegotiation, and the choice between bank loans and publicly traded debt. Review of Financial Studies 7, 475–506] model and suggests that the critical factor is the ability to informally renegotiate debt terms with a few lenders.     

The Real Effects of Real Earnings Management: Evidence from Innovation

We examine the consequences of real earnings management from an innovation perspective and investigate the patent output of firms likely to be managing earnings through altering their R&D expenditures. We find that R&D cuts related to earnings management lead to fewer patents, less influential patent output, and lower innovative efficiency compared to other R&D cuts. Our results thus suggest that real earnings management may obstruct firms’ technological progress and highlight the potential costs of managerial manipulation of R&D expenditures to alter reported earnings.     

Shareholder-value maximization and product-market competition

We investigate product-market competition when managers maximizeshareholder value rather than their expected discounted valueof profits. If share-holders are imperfectly informed aboutfuture profitability, shareholder-value maximization can leadto either more or less aggressive product-market strategies.Lower rivals' profits lead investors to believe that the firm'scosts are low relative to those of its rivals and that the industry'sprospects are poor. If the former (latter) inference dominates,each firm tries to lower (raise) its rival's profits to increaseits own stock price. We also consider implications for corporatefinancial structure.     

On the heterogeneity of leveraged going private transactions

In contrast to previous literature, we argue that are two typesof poorly performing firms going private through a leveragedbuyout (LBO). One group consists of firms in which managersown an insignificant fraction of their firm's stock and arevulnerable to a hostile takeover. The other group consists offirms in which managers own a significant fraction of theirfirm's stock and so face little risk of hostile takeover. Ourevidence indicates that there are two such groups of LBOs andthat their motivations and posttransaction actions are different.