Implementing: Alternatives,costs, and benefits

This essay provides a conceptual framework for thinking about the problem of implementing (i.e. getting things done) as part of the larger process of managing. We shall isolate some alternative approaches to that implementing problem and briefly examine the underlying beliefs, the accompanying technologies, and the attendant costs/benefits of those alternatives. We shall then make a few suggestions about appropriate alternatives for the decade ahead.     

The Role of Principal-Agent Conflicts in the 1980s Thrift Crisis

Agency theory suggests that many of the costs incurred by the taxpayer during the 1980s thrift crisis were the result of conflicts between principals and their agents. This study models the costs associated with three distinct types of agency conflicts involved in closing an insolvent thrift—conflicts between creditors and owners, between owners and managers, and between taxpayers and government officials. Using a model that controls for sample-selection bias, the study presents strong evidence that thrift owners effected wealth transfers from creditors by undertaking high-risk investments, and that government officials pursued policies that increased losses to the thrift deposit insurance fund which ultimately were funded by the taxpayer. The results do not show that managers effected wealth transfers from owners through expense-preference behavior, but rather that inefficient management increased the losses of the deposit insurance fund.     

Déjà Vu All Over Again: The Causes of U.S. Commercial Bank Failures This Time Around

In this study, we analyze why commercial banks failed during the recent financial crisis. We find that traditional proxies for the CAMELS components, as well as measures of commercial real estate investments, do an excellent job in explaining the failures of banks that were closed during 2009, just as they did in the previous banking crisis of 1985–1992. Surprisingly, we do not find that residential mortgage-backed securities played a significant role in determining which banks failed and which banks survived. Our results offer support for the CAMELS approach to judging the safety and soundness of commercial banks, but call, into serious question the current system of regulatory risk weights and concentration limits on commercial real estate loans.     

How Has Takeover Competition Changed Over Time?

Since the boom in takeovers in the 1980s, research in both law and financial economics has debated the role of takeover impediments such as poison pills, staggered boards, and state antitakeover laws. Have these impediments entrenched target management to the detriment of shareholders? Or have they increased the bargaining power of target boards of directors and left shareholders, if not better off, then at least unharmed? In their study published recently in the Journal of Corporate Finance, the authors provide new answers to these questions with a detailed analysis of takeover competition during the period 1981 through 2014. Using a random sample of 388 completed and withdrawn deals from this 34‐year period, the authors begin by confirming the already well‐documented increase in the use of takeover impediments over time. They then report evidence that takeover competition has not declined during this period. First of all, takeover premiums—the average percentage over market paid by acquirers to consummate transactions—have remained steady over time. Second, and the most striking of the authors' findings, is that the corporate auction process has “gone underground” since the 1980s. Although we now see fewer hostile attempts and publicly reported takeover bidding contests, the amount of competition for targets has remained largely unchanged when one takes account of “private” as well as public auctions—that is, contests that, as the authors discovered, included unidentified bidders. The authors view such a fundamental change in the takeover auction process as a response to the widespread growth of takeover impediments. In this sense, as Bill Schwert commented years ago, “hostile takeovers are less about shirking target management than about the bargaining tactics of targets and bidders.” Or as the authors put it, “the greater bargaining power provided by state laws and other takeover impediments has changed the manner in which takeover auctions are conducted,” but without greatly affecting the goal of economic efficiency that such transactions are designed to help bring about.     

Destabilizing role of futures markets on North American hard red spring wheat spot prices

The objective of the paper is to determine if the futures prices of hard red spring wheat (HRSW) have stabilizing or destabilizing impact on spot HRSW price in North America. Several important results emerge from thorough empirical analysis. First, both Granger causality tests and directed acyclic graph algorithms (DAGs) point to two-way causality between futures and spot HRSW prices and thus endogeneity in both prices formation. To the contrary, both procedures suggest that ending stocks are exogenous to spot and futures HRSW prices. Both vector error correction model and impulse response functions point to a large and long-lasting impact of a shock to futures price on spot price level. Finally, variance decomposition analysis indicates that futures prices are responsible for the bulk of spot price volatility in both short and long run. Our result is consistent with those of theoretical models suggesting that when production (supply side) is the dominant disturbance, spot price is destabilized in both the short and the long run by futures prices. An important implication of this research is the need for alternative market mechanisms or alternative farm policy measures that would mitigate price risk and ensure sustainable farming of American HRSW farmers.     

Merging Markets

We study the causes and effects of the competition for order flow by U.S. regional stock exchanges. We trace the origins of competition for order flow to a change in the role of regional exchanges from being venues for listing local securities to being more direct competitors for the order flow of NYSE listings. We study the way regionals competed for order flow, concentrating on a series of stock-exchange mergers that occurred in the midst of this transition of the regional exchanges. The merging exchanges attracted market share and experienced narrower bid-ask spreads.     

Random Walks and Market Efficiency Tests: Evidence from Emerging Equity Markets

We use the multiple variance-ratio test of Chow and Denning (1993) to examine the stochastic properties of local currency- and US dollar-based equity returns in 15 emerging capital markets. The technique is based on the Studentized Maximum Modulus distribution and provides a multiple statistical comparison of variance-ratios, with control of the joint-test's size. We find that the random walk model is consistent with the dynamics of returns in most of the emerging markets analyzed, which contrasts many random walk test results documented with the use of single variance-ratio techniques. Further, a runs test suggests that most of the emerging markets are weak-form efficient. Overall, our results suggest that investors are unlikely to make systematic nonzero profit by using past information in many of the examined markets, thus, investors should predicate their investment strategies on the assumption of random walks. Additionally, our results suggest exchange rate matters in returns' dynamics determination for some of the emerging equity markets we analyzed.     

Expropriation through loan guarantees to related parties: Evidence from China

We identify and analyze a sample of publicly traded Chinese firms that issued loan guarantees to their related parties (usually the controlling block holders), thereby expropriating wealth from minority shareholders. Our results show that the issuance of related guarantees is less likely at smaller firms, at more profitable firms and at firms with higher growth prospects. We also find that the identity and ownership of block holders affect the likelihood of expropriation. In addition, we use this sample to provide new evidence on the relation between tunneling and proxies for firm value and financial performance. We find that Tobin’s Q, ROA and dividend yield are significantly lower, and that leverage is significantly higher, at firms that issued related guarantees.