Sources of gains to shareholders from bankruptcy resolution

Using a logistic regression model, we identify the characteristics of firms whose shareholders are likely to benefit from bankruptcy resolution. That is, winners (losers) are firms whose shareholders experience positive (negative) excess returns after bankruptcy filing. We find that winners are relatively smaller firms with higher proportions of convertible debt, tend to file for bankruptcy for strategic reasons, have low share-ownership concentration, and suffer comparatively larger pre-filing stock price declines. Among winners, shareholder returns are greater for firms that have higher levels of private debt and research and development (R&D) expenditures, and operate in more concentrated industries. In addition, our analysis indicates that an ex ante trading strategy of purchasing bankrupt stocks with a greater than 50% probability of being a winner on the day after bankruptcy filing and holding the stocks for a year, on an average, can generate average compounded and excess compounded holding-period returns of +71% and +42%, respectively.     

The Vote Is Cast: The Effect of Corporate Governance on Shareholder Value

This paper investigates whether improvements in the firm's internal corporate governance create value for shareholders. We analyze the market reaction to governance proposals that pass or fail by a small margin of votes in annual meetings. This provides a clean causal estimate that deals with the endogeneity of internal governance rules. We find that passing a proposal leads to significant positive abnormal returns. Adopting one governance proposal increases shareholder value by 2.8%. The market reaction is larger in firms with more antitakeover provisions, higher institutional ownership, and stronger investor activism for proposals sponsored by institutions. In addition, we find that acquisitions and capital expenditures decline and long‐term performance improves.     

The spillover effect of shareholder activism: Evidence on firm reporting

This study examines the spillover effect of shareholder activism against target firms on financial reporting by non-target firms in portfolios held by the same activist shareholders. We find that firms that are not the target of institutional shareholders’ activism campaigns report more positive abnormal accruals. Cross-sectional tests indicate that the effect is more pronounced i) for firms that have more opportunities to engage in upward earnings management, or for firms with less effective alternative monitoring forces, and ii) when investors are more sensitive to good news. We also find that the effect is stronger when activist shareholders are more experienced, are waging more confrontational campaigns against target firms, and have larger holdings in non-target firms. We further find that non-target firms tend to report lower magnitude of asset write-downs, are more likely to restate financial statements and meet or beat earnings benchmarks, and exhibit a more optimistic tone in their 10-K/10-Q filings. Overall, our findings suggest that firms tend to window-dress their mandatory reporting to preempt possible shareholder activism against them.     

CEO and board chair roles: To split or not to split?

We examine the performance and compensation implications of firms' decisions to combine the roles of CEO and board chairman (duality). We document that firms that split the CEO and chairman positions due to investor pressure have significantly lower announcement returns and subsequent performance, and lower contributions of investments to shareholder wealth. Further, these performance outcomes are more negative for firms with higher predicted probabilities of duality based on a model of economic determinants of board leadership structure. We also find that pay-performance sensitivity in CEO compensation contracts are significantly lower following a split in the CEO and chairman positions, and significantly higher following a combination in these positions. Our evidence suggests that on average, board leadership choices by firms and market responses are consistent with efficiency arguments, and recent proposals for all firms to separate the CEO and chairman roles warrant more careful consideration.     

Cash holdings and bond returns around takeovers

Using a large sample of 2712 unique U.S. domestic takeovers over the period 1993 to 2014, we show a negative relation between the level of cash holdings and post-announcement corporate bond returns. Our findings support the agency cost of cash holdings view and show that bondholders and shareholders share the same interests with respect to cash policy around takeovers. We further find that cash holdings are viewed less negatively by bondholders in firms with strong shareholders. This paper is the first to document the role of cash holdings on bondholder wealth around takeover announcements.     

It's Showtime: Do Managers Report Better News Before Annual Shareholder Meetings?

Annual shareholder meetings provide an opportunity for shareholders to express their concerns with corporate performance, pressuring managers to demonstrate good performance. We show that managers respond to the shareholder pressure by reporting positive corporate news before the annual shareholder meetings. Specifically, we find significantly positive average cumulative abnormal returns (CARs) during the 40 days before the annual meeting date. The premeeting returns are significantly higher when shareholder discontent with managerial performance is likely to be stronger. The decile of companies with the worst past stock price performance exhibits average CARs of 3.4% and buy‐and‐hold returns of 7.0% during the 40‐day premeeting period. Companies with poor past performance exhibit even higher premeeting returns when shareholder pressure on management is greater, such as when institutional ownership is high, when CEO compensation is high, and when shareholders submit proxy proposals on corporate governance. We complement the evidence based on CARs by showing how managers of poorly performing firms manage the timing and content of earnings announcements and management forecast announcements before the annual shareholder meetings. Overall, the results suggest that managers attempt to influence shareholders before annual shareholder meetings through positive news.     

Undoing the powerful anti-takeover force of staggered boards

We examine cases where managers announce an intention to de-stagger their boards via proxy proposals or board action. The literature has established the staggered board as the most consequential of all takeover defenses and one that destroys wealth. Thus, dismantling staggered boards benefits shareholders. We study the wealth effects and motives behind this change in governance within a conditional event study. We find that de-staggering the board creates wealth and that shareholder activism is an important catalyst for pushing through this change. Moreover, in the period preceding Sarbanes–Oxley, investor reaction indicates a perception that de-staggering firms are more likely to be takeover targets.     

Labor Unions as Shareholder Activists: Champions or Detractors?

We examine the impact of labor union shareholder activism through the submission of shareholder proposals during the period 1988–2002. We examine the effect of labor union‐sponsored shareholder proposals on announcement period returns; on the corporate governance environment of the firm including shareholder rights, board composition, and CEO compensation; on changes in unionization rates and labor expense; and on long‐run shareholder wealth. We do not find any observable patterns for the overall sample of proposals. However, subsets of proposals associated with union presence at the target firm and shareholder voting support for the proposal are associated with significant effects surrounding and subsequent to targeting.     

Corporate cash holdings and CEO compensation incentives

We examine the effect of chief executive officer (CEO) compensation incentives on corporate cash holdings and the value of cash to better understand how compensation incentives designed to enhance the alignment of manager and shareholder interests could influence stockholder-bondholder conflicts. We find a positive relation between CEO risk-taking (vega) incentives and cash holdings, and we find a negative relation between vega and the value of cash to shareholders. The negative effect of vega on the value of cash is robust after controlling for corporate governance, is stronger in firms with high leverage, is reversed for unlevered firms, and is not present in financially constrained firms. We also find that the likelihood of liquidity covenants in new bank loans is increasing in CEO vega incentives. Our evidence primarily supports the costly contracting hypothesis, which asserts that bondholders anticipate greater risk-taking in high vega firms and, therefore, require greater liquidity.     

A Re-Examination of the Wealth Expropriation Hypothesis: The Case of Captive Finance Subsidiaries

This paper re-examines Kim, McConnell, and Greenwood's (1977) study of captive finance subsidiaries. We suggest that, as long as firms are concerned with reputation, shareholders will find it costly to engage in deliberate wealth expropriation and thus have no incentives to do so. Using a sample of fourteen firms with publicly traded debt, we compute and test the statistical significance of abnormal returns to shareholders, bondholders, and the firm when captives are incorporated. We find that shareholders gain 14.9 percent, bondholders lose 2.3 percent, and firm value increases a significant 10.4 percent. Our results are inconsistent with wealth expropriation and lend support to the importance of reputation to firms.     

SHAREHOLDER-MANAGEMENT CONFLICT AND EVENT RISK COVENANTS

Event risk covenants (ERCs), such as poison puts, can protect bondholders from losses related to highly leveraged transactions. Previous observers argue that managers could use ERCs primarily to benefit shareholders or to entrench, and the evidence on the shareholder wealth effects of ERCs is conflicting. Using data not previously exploited and an innovative method of isolating the wealth effects of ERCs, we find that ERCs decrease shareholder wealth. Additional evidence suggests that firms with greater shareholder-management conflict are more likely to use ERCs. Overall, the evidence from this study supports the entrenchment view of ERCs.     

Can online annual general meetings increase shareholders’ participation in corporate governance?

We find that annual shareholder meetings conducted online can significantly increase the participation of shareholders, especially minority shareholders. This finding is more evident when the cost of physically attending the annual meeting is higher and when the firm's ownership is more dispersed. We further document significant positive stock returns when firms initiate annual online meetings. We also find that such online meetings help improve corporate governance. Overall, we provide evidence that online shareholder meetings provide shareholders a cost-effective way to participate in governance issues.     

The dark side of strengthened minority voting power: An innovation perspective

Based on the 2014 regulatory reforms aimed at strengthening the protection of legitimate rights and interests of minority investors in China, we investigate minority shareholders’ short-termism and how minority voting impacts firm innovation. We find that the 2014 reforms effectively motivate minority shareholders to attend shareholder meetings and greatly enhance their voting influence. We also find that enhanced minority voting power after the reforms lowers the number of firms’ patent applications, and this effect is more pronounced for the firms that see the greatest increase in shareholder attendance at shareholder meetings. Moreover, enhanced minority voting power boosts executive turnover-performance sensitivity, thereby undermining firm innovation. Finally, we show that different types of minority shareholders have distinct impacts on firm innovation, depending on their investment horizons. The negative effect of minority voting power is more pronounced for state-owned enterprises (SOEs) than for non-SOEs.     

Shareholder Wealth Responses to Bankruptcy Filing Announcements under the Chandler and Reform Acts

This paper examines shareholder wealth responses to bankruptcy filing announcements between 1974 and 1989 to draw inferences about the impact of the adoption of the Bankruptcy Reform Act of 1978. The authors find that post-Reform Act announcements are associated with more negative pre-filing and announcement period returns to shareholders. Unlike prior research, this study finds that large firms and NYSE-listed firms experience more negative returns. It also finds that the market can discriminate between firms that are ultimately worthless and those that may retain some value for shareholders.     

Shareholder voting in mergers and acquisitions: evidence from the UK

This paper examines the determinants and consequences of shareholder voting on mergers and acquisitions using a sample of resolutions approved by shareholders of UK publicly listed firms from 1997 to 2015. We find that dissent on M&A resolutions is negatively related to bidder announcement returns and positively related to shareholders’ general dissatisfaction towards the management. Shareholder dissent is an important predictor of the announcement returns of subsequent M&A deals. We also report an increase in shareholder dissent after the 2007–2008 financial crisis.     

Who benefits from bond tender offers in Europe?

This paper investigates the wealth effects of European cash tender offers for bonds during the period from 1996 to 2005. European bond offers are made to refinance (35% of cases), to reduce debt (40%) or triggered by an ownership change (25%). We investigate the wealth effects to both bondholders and shareholders. Cash tender offers for bonds turn out to be value creating for firms; with bondholders taking most of the gains on a relative basis. We find no evidence of wealth transfers from shareholders to bondholders: bondholders are paid an average tender premium of 3.9% but shareholders do not experience a significant wealth loss. Shareholders even benefit from making refinancing bond tender offers after a drop in interest rates. The wealth effects to both bondholders and shareholders increase in the remaining time to maturity. This suggests that tendering the bonds, rather than waiting for them to mature, is a win-win situation for both types of security holders.     

The wealth effects of shareholder-sponsored proposals

Shareholder-sponsored proposals represent direct attempts to improve the operating and governance performance of publicly held corporations. This study examines the different types of shareholder proposals to determine their impact on value. While some recent studies show positive wealth effects for small or specific samples associated with shareholder proposal announcements or no wealth effects at all, this study documents significant negative abnormal returns for a large sample of firms. The results of previous studies suggest that shareholder proposals are beneficial to shareholders, and this study shows that to be true for only a fraction of them. Although management opposes the overwhelming majority of shareholder proposals, there are rare instances in which they either support the proposal and negotiate a settlement or in which the proposal receives enough support at the annual meeting to pass. This study documents positive abnormal returns for these cases.     

Do corporate governance characteristics influence tax management?

This paper investigates how corporate governance plays a role in long-run tax management and contributes to the existing literature in several ways. First, we add insight into the horizon problems related to executive and director compensation and show that incentive compensation provides long-term incentives to improve performance by establishing a link between higher pay-performance sensitivity and lower taxes. Second, this is one of the first papers, to our knowledge, to empirically examine the role of governance in corporate tax management from a long-term perspective in order to better understand the lasting effects of governance. We find that incentive compensation drives managers to make investments into longer-horizon pay outs such as tax management. Furthermore, we find that this investment into tax management benefits shareholders; better tax management is positively related to higher returns to shareholders. We also address the endogeneity issues of corporate governance and performance measures. Finally, our paper is unique in examining which type of tax management strategy (domestic or foreign) different firms focus on. Our results shed light into how governance can improve firm performance and increase shareholder value in the long run.     

Shareholder investment horizons and the market for corporate control

This paper investigates how the investment horizon of a firm's institutional shareholders impacts the market for corporate control. We find that target firms with short-term shareholders are more likely to receive an acquisition bid but get lower premiums. This effect is robust and economically significant: Targets whose shareholders hold their stocks for less four months, one standard deviation away from the average holding period of 15 months, exhibit a lower premium by 3%. In addition, we find that bidder firms with short-term shareholders experience significantly worse abnormal returns around the merger announcement, as well as higher long-run underperformance. These findings suggest that firms held by short-term investors have a weaker bargaining position in acquisitions. Weaker monitoring from short-term shareholders could allow managers to proceed with value-reducing acquisitions or to bargain for personal benefits (e.g., job security, empire building) at the expense of shareholder returns.     

Hedge fund activism,CEO turnover and compensation

This paper examines the governance role of hedge fund activists by analyzing the impact of these activists on CEO turnover, CEO pay, and CEO pay-performance link in targeted companies. Using the difference-in-difference approach, we first find significantly higher CEO turnover following hedge fund activism. After we split target companies into the CEO-turnover and non-CEO-turnover sub-samples, we find that only new CEOs in targeted companies get more compensation following hedge fund activism while incumbent CEO pay does not significantly change. The relationship between CEO bonuses and return on assets following hedge fund activism also differs across the subsamples split by CEO turnover. Pay-performance relationship is enhanced by hedge fund activism for new CEOs, but not for incumbent CEOs. In additional analyses, we document that CEO turnover is positively associated with Tobin’s Q and shareholder votes on Say on Pay in target companies after hedge fund activism.