Do cross border and domestic acquisitions differ? Evidence from the acquisition of UK targets

We investigate the determinants of short term wealth effects for both public acquiring and target shareholders following the announcement of UK acquisitions over the period 1990–2005. Regardless of their nationality, overall acquirers incur losses, with domestic acquirers’ under-performing cross-border acquirers in general. For the latter no differences in returns between regions are found once the differences in corporate governance regimes are controlled for. Instead it is firm characteristics and in particular firm leverage that largely explain acquirers' returns. All targets gain significantly but the higher returns associated with international deals disappear once bid characteristics are controlled for.     

Do relative leverage and relative distress really explain size and book-to-market anomalies?

In a capital asset pricing model (CAPM) framework, Ferguson and Shockley [2003. Equilibrium “anomalies”. Journal of Finance 58, 2549–2580] propose two factors constructed on relative leverage and relative distress, and show that the two factors subsume Fama and French's [1993. Common risk factors in the returns on stocks and bonds. Journal of Financial Economics 33, 3–56] factors constructed on size and book-to-market (BM) in explaining the cross-sectional average returns of the 25 size-BM portfolios. Based on tests on individual securities, we find that all factors fail to fully explain the common asset-pricing anomalies. In the spirit of Merton's [1973. An intertemporal capital asset pricing model. Econometrica 41, 867–887] intertemporal CAPM, we propose an augmented five-factor model, which incorporates Ferguson and Shockley's [2003. Equilibrium “anomalies”. Journal of Finance 58, 2549–2580] factors into the Fama–French three-factor model. The empirical results show that a simple conditional version of the augmented model is able to explain most well-known asset-pricing anomalies.     

Does the difference in valuation between domestic and foreign investors help explain their distinct holdings of domestic stocks?

This paper proposes an investor heterogeneity approach to the different domestic stock holdings between domestic and foreign investors. Specifically, we hypothesize that domestic and foreign investors evaluate domestic stocks via different models and thus arrive at different valuations for them; consequently, the two investor groups are attracted to different sets of domestic stocks. Using panel data from Korea, we find strong support for our hypothesis. More precisely, we find that the foreign ownership of a stock increases with foreigners’ valuation for the stock in excess of that of domestic investors. As we control for various firm characteristics known to be correlated with foreign ownership, our results indicate that the valuation difference between domestic and foreign investors can help explain the allocation of domestic stocks between the two groups over and above the existing explanations.     

Information asymmetry,leverage and firm value: Do crisis and growth matter?

Drawing on pecking order and agency cost theories, we assess the extent to which information asymmetry is an important determinant of firm value and the extent to which this relationship is conditional on the leverage level of firms. We also assess the impact of information asymmetry on firm value during the pre and post 2007/09 financial crisis period and for high and low growth opportunity firms. Using a large sample of UK firms, our empirical findings suggest that information asymmetry adversely impacts firm value, and that this effect decreases with firm's leverage. We also find that leverage has a negative effect on firm value, and that the marginal effect of leverage is lower for information asymmetric firms. Further, we find that the relation between information asymmetry and firm value is more pronounced in the post-crisis period than the pre-crisis period. Finally, we show that the impact of information asymmetry on firm value is higher (lower) for firms with high (low) growth opportunities.     

Do corporations learn from mispricing? Evidence from takeovers and corporate performance

In this article we form the simple prediction that mispricing encourages traders to collect costly information that guides managerial decisions at corporate level. Our findings support this prediction based on evidence derived from both the US market for corporate control and the overall variation in aggregate corporate profits. The trading activity in response to the temporary mispricing of the merging companies provides useful information that leads to the design of high-synergy deals. Such synergies are reflected in an increase in the announcement period acquirer abnormal returns and are not reversed in the long-run. At the market-wide level, our results suggest that the growth in the overall stock trading volume in response to market mispricing is associated with high future corporate profit growth. Overall, after controlling for several economic and financial conditions, the temporary mispricing in a developed and generally efficient stock market stimulates informative trading, ultimately leading to value- and performance-enhancing corporate decisions.     

Do CEOs gain more in foreign acquisitions than domestic acquisitions?

This paper examines the impact of domestic and foreign acquisitions on chief executive officer (CEO) compensation packages using a sample of 147 completed bids by UK companies from 1999 to 2005. We find that foreign acquisitions lead to higher CEO compensation than domestic acquisitions. Overall, our findings suggest that CEOs have strong incentives to do foreign acquisitions rather than domestic acquisitions since they receive larger compensation following a foreign acquisition regardless of how poor firm performance is. Furthermore, we observe a positive and significant relation between CEO compensation and firm size during the pre-acquisition period for firms involved in foreign acquisitions, thus their CEOs would expect to increase their compensation package through foreign acquisitions. However, our results show that there is no significant link between firm size and CEO compensation during the pre-acquisition period for firms involved in domestic acquisitions.     

Do firms have leverage targets? Evidence from acquisitions

In the context of large acquisitions, we provide evidence on whether firms have target capital structures. We examine how deviations from these targets affect how bidders choose to finance acquisitions and how they adjust their capital structure following the acquisitions. We show that when a bidder's leverage is over its target level, it is less likely to finance the acquisition with debt and more likely to finance the acquisition with equity. Also, we find a positive association between the merger-induced changes in target and actual leverage, and we show that bidders incorporate more than two-thirds of the change to the merged firm's new target leverage. Following debt-financed acquisitions, managers actively move the firm back to its target leverage, reversing more than 75% of the acquisition's leverage effect within five years. Overall, our results are consistent with a model of capital structure that includes a target level and adjustment costs.     

Zero leverage puzzle: Do labour laws matter?

Exploiting the staggered passage of labour protection laws in the United States, we find that higher labour adjustment costs increased the likelihood of observing zero leverage firms by 22%. This effect is significantly larger in states with stronger unionization, in industries with higher volatility and concentration, and in firms with higher labour intensity. Both within-firm changes in debt policies and higher propensity of newer firms to be debt-free are important in explaining these patterns. Overall, our work contributes to the literature on the relation between financial and labour markets by highlighting the role of labour laws in explaining the zero-leverage puzzle.     

Drivers of systemic risk: Do national and European perspectives differ?

With the establishment of the Banking Union, the European Central Bank has been granted the power to impose stricter regulations than the national regulator if systemic risks are not adequately addressed at the national level. We ask whether there is a cross-border externality in the sense that a bank’s systemic risk differs when applying a national versus a European perspective. On average, banks’ contribution to systemic risk is similar at the two regional levels, and so is the ranking of banks. Generally, larger banks and banks with a lower share of loans are more systemically important. The effects of these variables are qualitatively but not quantitatively similar at the national versus the European level.     

Do capital flows change domestic credit allocation?

Since the 1990s, domestic bank credit has been reallocated away from lending to non-financial business and toward households. An expanding literature discusses negative effects on growth and stability of this change in credit allocation. We research its drivers. We hypothesize that if foreign capital flows into economies with few investment opportunities, it may substitute for domestic bank lending to non-financial business, so that bank balance sheets become more dominated by household lending. In GMM estimations on data for 36 economies over 1990–2011, we find evidence consistent with this mechanism. Foreign capital inflows into the non-bank sector (but not into the bank sector) are associated with lower shares of business lending in domestic bank portfolios. The association is weaker in economies with more investment opportunities, whether proxied by investment shares, current account surpluses, or EMU membership. Our results highlight the importance of sectoral destination in determining the effects of capital flows.     

Do policies and institutions matter for pre-tax income inequality? Cross-country evidence

International Tax and Public Finance - Do policies and institutions matter for pre-tax income inequality? I build an annual panel of 43 countries for the period 1980–2016 to document...     

Do labor unions affect firm payout policy?: Operating leverage and rent extraction effects

While previous literature documents weak effects of unionization on payout policy on average, we find that this average relationship hides significant heterogeneous effects of unionization on payouts across firms that depend on firm profitability. The effect of unionization on payouts is negative for low-profitability firms but positive for high-profitability firms. We posit that labor unions (i) increase operating risk, which negatively affects payouts, but (ii) increase potential for rent extraction from unions, which could induce shareholders to demand positive payouts. Higher profitability mitigates the negative effect while strengthening the positive effect, making the relation between unionization and payouts less negative or more positive. We provide evidence consistent with both the negative and positive effects of unionization on payouts. Our empirical design mitigates endogeneity concerns. Further, an instrumental variable analysis and a cross-sectional test using right-to-work laws confirm that endogeneity is unlikely to drive our results.     

Do regulatory policies matter to corporate innovation?

This paper examines the relationship between regulation and innovation from both theoretical and empirical perspectives. The theoretical model focuses on the role of competition policy (measured by increases in the number of firms) and the strength of intellectual property rights in fostering cost-reducing R&D, under both R&D competition and R&D cooperation. It is shown that, theoretically, competition policy and intellectual property rights are complements under R&D competition, while they are substitutes under R&D cooperation. Moreover, under R&D competition, innovation is maximized through strict competition policy and strong intellectual property rights; whereas under R&D cooperation, innovation is maximized through strict competition policy and weak intellectual property rights. The empirical model tests the effect of several regulatory policies on innovation in several MENA countries. The results of dynamic panel data regressions point that competition policy and intellectual property rights are complements. In addition to competition policy and intellectual property rights protection, the following country/regulation characteristics are considered: human capital, government efficiency, foreign direct investment, natural resources dependence, labor market regulations, and GDP level. The paper finds that the extent of regulations in all categories has statistically significant effects on R&D, except FDI. One explanation is that most FDI to the MENA region flows to natural resources and non-tradable sectors, which are less relevant to R&D than other sectors (e.g., manufacturing and information and communications technology sectors).     

Do co-opted boards strategically choose LGBT-supportive policies?

This study contributes to the underexplored literature: corporate governance responsibilities towards internal stakeholders (the employees). We investigate (a) whether the co-opted board, that is, the proportion of directors appointed after the current CEO takes office, influences firms' adoption of Lesbian, Gay, Bisexual and Transgender (LGBT)-supportive policies, (b) if so, what motivates the co-opted boards to do so, and (c) how these relationships change at times of limited economic resources and heightened governance. Based on 4850 firm-year observations of 1081 firms over the sample period of 1996–2010, we find (a) firms with co-opted boards are more inclined towards LGBT-supportive policies, that address stakeholders internal to the firms, (b) management of co-opted boards that adopt LGBT-supportive policies experience a higher increase in compensation than management of co-opted boards that do not adopt LGBT-supportive policies, and (c) during the global financial crisis (GFC), when firms aimed to survive economically under tighter governance, co-opted boards have lower tendency to adopt LGBT-supportive policies. This study offers insights to regulators interested in promoting board structures that address stakeholders. Despite the positive benefits documented in the literature on inclusive policies such as LGBT-supportive policies, the adoption of such policies may have a dark side to it.     

Do banks overstate their Value-at-Risk?

This paper is the first empirical study of banks’ risk management systems based on non-anonymous daily Value-at-Risk (VaR) and profit-and-loss data. Using actual data from the six largest Canadian commercial banks, we uncover evidence that banks exhibit a systematic excess of conservatism in their VaR estimates. The data used in this paper have been extracted from the banks’ annual reports using an innovative Matlab-based data extraction method. Out of the 7354 trading days analyzed in this study, there are only two exceptions, i.e. days when the actual loss exceeds the disclosed VaR, whereas the expected number of exceptions with a 99% VaR is 74. For each sample bank, we extract from historical VaRs a risk-overstatement coefficient, ranging between 19 and 79%. We attribute VaR overstatement to several factors, including extreme cautiousness and underestimation of diversification effects when aggregating VaRs across business lines and/or risk categories. We also discuss the economic and social cost of reporting inflated VaRs.     

Earnings management in domestic versus multinational firms: discussion of “Where do firms manage earnings?”

Dyreng, Hanlon, and Maydew examine the geographical location of earnings management within US multinational firms. The paper addresses an interesting topic and partially fills a gap in the literature. This discussion presents additional empirical evidence on issues related to the research question raised by Dyreng et al. In particular, the discussion provides answers to the following preliminary questions: do US multinational firms manage earnings differently from domestic firms? If so, to what extent are they different? Surprisingly, these issues have been overlooked by prior studies. Indeed, the results below show that US multinational firms manage earnings less than domestic companies. The discussion also raises a number of additional questions on earnings management in multinational firms and calls for further research on the topic.     

Do banks price their informational monopoly?

Theory suggests that banks’ private information lets them hold up borrowers for higher interest rates. Since new information about a firm is revealed at the time of its bond IPO, it follows that banks will be forced to adjust their loan interest rates downwards after firms undertake their bond IPO. We test this hypothesis and find that firms are able to borrow at lower interest rates after their bond IPO. Importantly, firms that get their first credit rating at the time of their bond IPO benefit from larger interest rate savings than those that already had a credit rating. These findings provide support for the hypothesis that banks price their informational monopoly. We also find that it is costly for firms to enter the public bond market.     

Why does sovereign risk differ for domestic and external debt? Evidence from Scandinavia, 1938–1948

This study shows empirically that the political costs of sovereign default can differ considerably for domestic and external debt. The analysis uses new evidence from Danish and Swedish bond markets around World War II, a time when markets went from being fully integrated to fully segmented overnight. By linking the exogenous wartime shocks to changes in default costs on domestic and external debt, it is found that these costs explain a significant part of the variation in the sovereign yield spread across markets. The results suggest that governments can choose strategically on which debt, the domestic or the external, to default on, and that this decision hinges on the relative size of the political default costs.     

Do GCC market-oriented labor policies encourage inward FDI flows?

In this paper, we empirically examine the impact of market-oriented labor policies on inward FDI flows to the GCC countries. The paper adopts different estimation methodologies to address endogeneity and cross-sectional dependence. Reliance on professional management reduces inward FDI flows to the UAE while linking pay to productivity reduces inward FDI flows to both Bahrain and the UAE. Trade openness and infrastructure development have a positive influence, while human capital development has a surprisingly negative influence. Evidence, therefore, does not support the view that flexible labor market policies encourage inward FDI flows to GCC countries.     

Do women managers keep firms out of trouble? Evidence from corporate litigation and policies

We find that firms where women have more power in the top management team, measured by female executives’ plurality and pay slice, face fewer operations-related lawsuits. This effect is robust to several treatments of endogeneity and does not appear to be driven by female executives' greater willingness to settle the cases. Evidence from a simultaneous equations approach suggests that firms where women executives have more power avoid lawsuits partly by avoiding some risky but value-increasing firm policies, such as more aggressive R&D, intensive advertising, and policies inimical to other parties.