To live or let die? An empirical analysis of piecemeal voluntary corporate liquidations

This paper is an in-depth investigation of 61 publicly-traded firms that chose to liquidate voluntarily on a piecemeal basis during the 1970s and 1980s. In comparison with their industry peers, these firms have lower Tobin's Q, a higher percentage of equity ownership by management and the board, a higher incidence of a member of the corporation's founding family in a key executive position or on the board, and a higher incidence of asset sales and prior attempts to transfer control of the firm. The average excess stock return of 20% around liquidation announcements is positively correlated with the fraction of stock owned by management and the board. These results suggest that firms that make the value enhancing decision to voluntarily liquidate confront low future growth opportunities, but the absence of future growth opportunities is not sufficient to bring about this decision. It is also necessary that decision makers have a vested interest in the outcome, either because of their ownership stake or because of their family affiliation with the business, and that the valuation consequences of the decision are greater, the more closely aligned are managerial and shareholder interests.     

Managerial ownership and firm valuation: Evidence from Japanese firms

We study the relation between managerial ownership and Tobin's q (Q) for 123 Japanese firms from 1987 to 1995. Managers in Japanese firms own a smaller stake in their firms relative to their US counterparts. Our initial analyses using an Ordinary Least Squares (OLS) regression model show a negative (positive) relation between Q and managerial ownership at low (high) levels of ownership. However, we argue that this finding is most likely a statistical artifact. When we control for firm fixed effects, suggested by recent literature, we reach a different conclusion. Specifically, we find that Q increases monotonically with managerial ownership. Our findings, therefore, suggest that as ownership increases, there is a greater alignment of managerial interests with those of stockholders. This conclusion remains when both managerial ownership and Q are treated as endogenous variables in a simultaneous equation system.     

Takeovers,market monitoring,and international corporate governance

We theoretically and empirically examine the role of international takeover markets in curtailing dominant shareholder moral hazard for firms with higher value‐added from acquisitions. In equilibrium, such firms strategically list shares in the markets of their targets and voluntarily dilute dominant shareholder control through capital‐raising events to lower their expected acquisition costs. Empirical tests, using a sample of foreign firms cross‐listing on U.S. stock exchanges during 1990–2003, support the framework. We find a strong influence of post‐listing dilution of dominant shareholder control through capital‐raising events on the likelihood of acquisitions and their cost to the acquirers, in both U.S. and non‐U.S. markets.     

Large shareholders, board independence, and minority shareholder rights: Evidence from Europe

We examine the relation between minority shareholder protection laws, ownership concentration, and board independence. Minority shareholder rights is a country-level governance variable. Ownership structure and board composition represent firm-level governance variables. Prior research hypothesizes and documents a negative relation between countries' minority shareholder rights quality and firms' ownership concentration. We introduce the hypothesis that shareholder protection rights and firms' board independence are positively related. When a country's minority shareholder rights are strong, then minority shareholders should have the legal power to affect board composition. Using a sample of large firms from 14 European countries, we test both hypotheses and find that countries with stronger shareholder protection rights have firms with lower ownership concentrations and with more independent directors, consistent with both hypotheses. We also find evidence that ownership concentration and board independence are negatively related.     

Do Corporate Governance Motives Drive Hedge Fund and Private Equity Fund Activities?

We document empirical evidence that both hedge fund (HF) and private equity fund (PE) investments are driven by corporate governance improvements, but address different types of agency conflicts. Whereas HFs focus on firms without a controlling shareholder, in particular family shareholders, PEs invest in firms with low managerial ownership. Both appear to address free cash flow problems differently. Aiming at increasing dividends, HFs tend to use commitment devices that can be implemented over a short horizon. PEs are inclined to longer‐term strategies: they target firms that are particularly well suited for leverage increases because of low expected financial distress costs.     

Equity-for-Debt Exchange Offers: Theory, Practice, and Evidence

Studies of investor responses to exchange offer (EO) announcements find a positive relation between abnormal returns and the proposed change in leverage: a result consistent with the performance signaling hypothesis. In this study of equity-for-debt EO announcements, shareholder wealth declines and the relation between Tobin's Q and announcement effects is consistent with the free cash flow hypothesis. There is no pattern of contemporaneous and subsequent performance of EO firms that systematically supports the signaling, income smoothing, or free cash flow hypotheses. We infer that EOs are motivated by sinking fund considerations, rather than signaling or compensation motives.     

Investor protection and convertible debt design

An important issue that firms consider when designing convertible debt is to specify security features such as conversion ratio, maturity date and call period. Following Lewis et al. [Lewis, M., Rogalski, R., Seward, J., 2003. Industry conditions, growth opportunities and market reactions to convertible debt financing decisions. Journal of Banking and Finance 27, 153–181], we employ a single measure that simultaneously considers all of these features: the expected probability (measured at issue date) that the convertible will be converted to equity at maturity. We find that firms in countries with stronger shareholder rights issue convertible debt with a higher expected probability of converting to equity. The positive association between the expected probability of conversion and shareholder rights is less pronounced in firms for which ownership structures create potentially high managerial agency costs. Specifically, in countries with stronger shareholder rights, firms with higher separation of control rights and cash flow rights tend to issue convertibles with lower probability of conversion. Furthermore, we find that large non-management block ownership strengthens the likelihood of issuing convertible debt with higher probability of conversion in countries with stronger shareholder rights. In contrast, firms in countries with stronger creditor rights issue convertibles with lower probability of conversion. We also document that the negative association between creditor rights and probability of conversion is more pronounced in firms with higher separation of control rights and cash flow rights.     

International Evidence on Cash Holdings and Expected Managerial Agency Problems

This article uses managerial control rights data for over 5000firms from 31 countries to examine the net costs and benefitsof cash holdings. We find that when external country-level shareholderprotection is weak, firm values are lower when controlling managershold more cash. Further, when external shareholder protectionis weak we find that firm values are higher when controllingmanagers pay dividends. Only when external shareholder protectionis strong do we find that cash held by controlling managersis unrelated to firm value, consistent with generally prevailingU.S. and international evidence.     

The role of managerial incentives in corporate acquisitions: the 1990s evidence

This paper examines the relationship between the likelihood a firm is acquired and the governance and financial characteristics of the firm. Given many of the developments in the corporate control market in the late 1980s, I suspect that the process governing takeover likelihood may have changed in the 1990s. I examine a sample of 342 NYSE/AMEX firms that were acquired during the 1990–1997 period and compare them to a matched sample of nonacquired firms. I find that firms that were acquired over this period can be characterized as having lower managerial ownership and higher ownership by outsiders, particularly higher ownership by nonmanagement blockholders with board representation. The fact that managerial ownership is negatively related to takeover likelihood is consistent with studies using data from 1970s and 1980s. This suggests that managerial ownership helps managers maintain control, or alternatively that ownership proxies for how much managers care about control.     

Shareholder Rights,Insider Ownership and Earnings Management

This paper examines whether shareholder rights, which enable shareholders to replace managers, can constrain earnings management, and whether this effect is conditional on the level of insider ownership. Using the comprehensive shareholder rights measure constructed by Gompers et al. ( 2003 ), we find that firms with stronger shareholder rights are associated with fewer income‐increasing discretionary accruals, suggesting that stronger shareholder rights deter managers from reporting aggressive earnings. Moreover, if insider ownership introduces managerial entrenchment, managers with higher ownership would be insulated from shareholder discipline. Consistent with this entrenchment theory, we find that the association between shareholder rights and earnings management becomes insignificant in the presence of higher levels of insider ownership. Shareholder rights are negatively associated with earnings management only when insider ownership is low. Our results indicate that the disciplinary effect of shareholder rights can be attenuated by high levels of insider ownership.     

Thirty Years of Shareholder Rights and Firm Value

This paper introduces a new hand‐collected data set that tracks restrictions on shareholder rights at approximately 1,000 firms from 1978 to 1989. In conjunction with the 1990 to 2006 IRRC data, we track shareholder rights over 30 years. Most governance changes occurred during the 1980s. We find a robustly negative association between restrictions on shareholder rights (using G‐Index as a proxy) and Tobin's Q. The negative association only appears after judicial approval of antitakeover defenses in the 1985 landmark Delaware Supreme Court decision of Moran v. Household. This decision was an unanticipated exogenous shock that increased the importance of shareholder rights.     

Capital Versus Performance Covenants in Debt Contracts

Building on contract theory, we argue that financial covenants control the conflicts of interest between lenders and borrowers via two different mechanisms. Capital covenants control agency problems by aligning debt holder–shareholder interests. Performance covenants serve as trip wires that limit agency problems via the transfer of control to lenders in states where the value of their claim is at risk. Companies trade off these mechanisms. Capital covenants impose costly restrictions on the capital structure, while performance covenants require contractible accounting information to be available. Consistent with these arguments, we find that the use of performance covenants relative to capital covenants is positively associated with (1) the financial constraints of the borrower, (2) the extent to which accounting information portrays credit risk, (3) the likelihood of contract renegotiation, and (4) the presence of contractual restrictions on managerial actions. Our findings suggest that accounting‐based covenants can improve contracting efficiency in two different ways.     

Shareholder coordination and corporate innovation

We show that greater shareholder coordination, as proxied by the geographic proximity between institutional investors, is positively related to corporate innovation outcomes. This relationship is driven by coordination among dedicated and independent institutions who have strong monitoring incentives and is more pronounced among firms with lower blockholder ownership and greater information asymmetry where there is greater benefit to monitoring. We propose that shareholder coordination promotes corporate innovation through a reduction in managerial agency problems. Overall, our results are consistent with the notion that greater shareholder coordination enables diffuse shareholders to monitor managers more effectively and enhances corporate innovation.     

Institutional Shareholder Investment Horizons and Seasoned Equity Offerings

Firms with more short‐term institutional shareholders experience significantly more negative abnormal returns at the announcement of seasoned equity offerings. This effect is strong for primary offerings (only firms receive proceeds), but is not present for secondary offerings (firms do not receive any proceeds). Furthermore, a shorter institutional shareholder investment horizon predicts poorer postissue abnormal operating performance and the negative effect of a shorter shareholder horizon is mitigated by higher managerial ownership. My results are consistent with the argument that long‐term shareholders more carefully monitor managerial activities and prevent misuse of the cash flow provided by equity issues.     

Costs of voting and firm performance: Evidence from RegTech adoption in Chinese listed firms

Employing the 2014 mandatory adoption of online shareholder voting in China, we show that the reduction of voting costs through online voting is positively related to participation in shareholder meetings and future firm performance. Our mechanism analysis suggests that the improved firm performance is mainly driven by the enhanced governance role played by informed investors and institutional investors. Further analysis shows that online shareholder voting makes the firms more attractive to mutual fund managers who are far away from the firms. Moreover, we find that the improved firm performance is concentrated in firms with low controlling shareholder ownership, and that online shareholder voting is associated with an increased likelihood of vetoing proposals and lower tunneling.     

Business Groups,Bank Control,and Large Shareholders: An Analysis of German Takeovers

To analyze the consequences of concentrated ownership and bank control for the performance of acquiring firms, I employ a unique data set of 715 German takeovers. First, I find that takeovers increase bidder value, but majority owners provide no clear benefit. Second, bank control is beneficial only if it is counterbalanced by another large shareholder. Third, the worst takeovers are completed by firms that are majority-controlled by financial institutions. I conclude that majority control, whether exercised by a bank or another shareholder, increases the likelihood of decisions that do not maximize shareholder value. Journal of Economic Literature Classification Numbers: G34, G32, G21.     

Corporate Governance When Managers Set Their Own Pay

This paper presents a model of the firm in which the manager has discretion over his own compensation, constrained only by the threat of shareholder intervention. The model addresses two main questions. How does shareholder power affect managers' compensation and their incentives to maximise firm value? And what is the optimal level of shareholder power? Expectedly, the model shows that increasing shareholder power leads to lower managerial pay. Greater shareholder power, however, also weakens the manager's incentives to maximise value and may even lead to lower profits for shareholders. There might, thus, be too much, as well as too little, shareholder power. The model characterises the optimal level of shareholder power and yields predictions about the relation between shareholder power, managerial pay, performance and firm characteristics.     

When managers bypass shareholder approval of board appointments: Evidence from the private security market

This paper investigates the influence of managerial entrenchment on private placements by examining the firm's decision to appoint representatives of the private investors to the board without shareholder approval. By analyzing a sample of U.S. firms that appoint directors in combination with private offerings between 1995 and 2000, we find that firms with greater managerial entrenchment are more likely to bypass shareholder approval. Firms that bypass shareholders are less likely to appoint independent directors or to elect one of these directors as chairman. We also show that the market reacts more positively to the private offering announcement when the firm submits its board candidates for shareholder approval. Further, firms that bypass approval underperform compared to firms that obtain it. Overall our findings suggest that managers avoid shareholder approval to perpetuate entrenchment.     

Securities class actions and conditional conservatism: Evidence from two legal events

We use two US court rulings as exogenous shocks to firms' litigation environment and examine the changes in conservative financial reporting following these court decisions. The Silicon Graphics ruling in 1999 imposed a heightened pleading standard and discouraged the filing of shareholder lawsuits against firms with headquarters in the Ninth Circuit. The Tellabs ruling in 2007, however, effectively reversed the Silicon Graphics ruling and made it easier to file securities litigation against Ninth Circuit firms. We predict and find that the reduced litigation risk following the Silicon Graphics ruling discourages conservative reporting for Ninth Circuit firms. By contrast, the elevated threat of shareholder lawsuits following the Tellabs ruling encourages conservative reporting for Ninth Circuit firms relative to non-Ninth Circuit firms. The disciplining effect of the threat of shareholder lawsuits on conservatism is stronger for firms facing higher ex ante litigation risk. The litigation-risk-induced increase (decrease) in reporting conservatism leads to higher (lower) firm valuations.     

Managerial risk-taking behavior and equity-based compensation

Equity-based compensation affects managers’ risk-taking behavior, which in turn has an impact on shareholder wealth. In response to an exogenous increase in takeover protection in Delaware during the mid-1990s, managers lower firm risk by 6%. This risk reduction is concentrated among firms with low managerial equity-based incentives, in particular firms with low chief executive officer portfolio sensitivity to stock return volatility. Furthermore, the risk reduction is value-destroying. Finally, firms respond to the increased protection accorded by the regime shift by providing managers with greater incentives for risk-taking.