Corporate Acquisitions,Diversification, and the Firm's Life Cycle

Agency theories predict that older firms make value‐destroying acquisitions to benefit managers. Neoclassical theories predict instead that such firms make wealth‐increasing acquisitions to exploit underutilized assets. Using IPO cohorts, we establish that, while younger firms make more related and diversifying acquisitions than mature firms, the acquisition rate follows a U‐shape over firms’ life cycle. Consistent with neoclassical theories, we show that acquiring firms have better performance and growth opportunities and create wealth through acquisitions of nonpublic firms throughout their life. Consistent with agency theories, older firms experience negative stock price reactions for acquisitions of public firms.     

Finance,Firm Size,and Growth

Although research shows that financial development accelerates aggregate economic growth, economists have not resolved conflicting theoretical predictions and ongoing policy disputes about the cross‐firm distributional effects of financial development. Using cross‐industry, cross‐country data, the results are consistent with the view that financial development exerts a disproportionately positive effect on small firms. These results have implications for understanding the political economy of financial sector reform.     

Financial and Legal Constraints to Growth: Does Firm Size Matter?

Using a unique firm‐level survey database covering 54 countries, we investigate the effect of financial, legal, and corruption problems on firms' growth rates. Whether these factors constrain growth depends on firm size. It is consistently the smallest firms that are most constrained. Financial and institutional development weakens the constraining effects of financial, legal, and corruption obstacles and it is again the small firms that benefit the most. There is only a weak relation between firms' perception of the quality of the courts in their country and firm growth. We also provide evidence that the corruption of bank officials constrains firm growth.     

Bank Capital: Lessons from the Financial Crisis

Using a multicountry panel of banks, we study whether better capitalized banks experienced higher stock returns during the financial crisis. We differentiate among various types of capital ratios: the Basel risk‐adjusted ratio, the leverage ratio, the Tier 1 and Tier 2 ratios, and the tangible equity ratio. We find several results: (i) before the crisis, differences in capital did not have much impact on stock returns; (ii) during the crisis, a stronger capital position was associated with better stock market performance, most markedly for larger banks; (iii) the relationship between stock returns and capital is stronger when capital is measured by the leverage ratio rather than the risk‐adjusted capital ratio; (iv) higher quality forms of capital, such as Tier 1 capital and tangible common equity, were more relevant.