Liquidity of the CBOE Equity Options

We examine the CBOE option market depth and bid-ask spreads. Absence of price effects surrounding large option trades suggests excellent market depth. However, bid-ask spreads for the CBOE options and the NYSE stocks are nearly equal, even though an average option is equivalent to less than half a stock plus borrowing. We explain this tradeoff between market depth and bid-ask spreads on the CBOE and the NYSE by differences in market mechanisms. We also show that the adverse-selection component of the option spread, which measures the extent of information-related trading on the CBOE, is very small.     

Do Long-Term Shareholders Benefit From Corporate Acquisitions?

Using 947 acquisitions during 1970–1989, this article finds a relationship between the postacquisition returns and the mode of acquisition and form of payment. During a five-year period following the acquisition, on average, firms that complete stock mergers earn significantly negative excess returns of ?25.0 percent whereas firms that complete cash tender offers earn significantly positive excess returns of 61.7 percent. Over the combined preacquisition and postacquisition period, target shareholders who hold on to the acquirer stock received as payment in stock mergers do not earn significantly positive excess returns. In the top quartile of target to acquirer size ratio, they earn negative excess returns.     

Overconfidence,CEO Selection,and Corporate Governance

We develop a model that shows that an overconfident manager, who sometimes makes value‐destroying investments, has a higher likelihood than a rational manager of being deliberately promoted to CEO under value‐maximizing corporate governance. Moreover, a risk‐averse CEO's overconfidence enhances firm value up to a point, but the effect is nonmonotonic and differs from that of lower risk aversion. Overconfident CEOs also underinvest in information production. The board fires both excessively diffident and excessively overconfident CEOs. Finally, Sarbanes‐Oxley is predicted to improve the precision of information provided to investors, but to reduce project investment.     

Incentive Effects of Stock and Option Holdings of Target and Acquirer CEOs

Acquisitions enable target chief executive officers (CEOs) to remove liquidity restrictions on stock and option holdings and diminish the illiquidity discount. Acquisitions also enable acquirer CEOs to improve the long‐term value of overvalued holdings. Examining all firms during 1993 to 2001, we show that CEOs with higher holdings (illiquidity discount) are more likely to make acquisitions (get acquired). Further, in 250 completed acquisitions, target CEOs with a higher illiquidity discount accept a lower premium, offer less resistance, and more often leave after acquisition. Similarly, acquirer CEOs with higher holdings pay a higher premium, expedite the process, and make diversifying acquisitions using stock payment.     

RELATIONSHIPS,COMPETITION AND THE STRUCTURE OF INVESTMENT BANKING MARKETS*

It is well known that competition can destroy incentives to invest in firm‐specific relationships. This paper examines how the tension between relationships and competition is resolved in the investment banking market, which for decades has been characterized by both relationships and competition. The model studies the impact on relationships of four different dimensions of competition: non‐exclusive relationships, competition from arm's‐length intermediaries, non‐price competition, and endogenous entry. The analysis shows how market equilibrium adjusts so that relationships are sustained in the face of such competition. Banks are shown to establish relationships without either local or aggregate monopoly power. The model rationalizes two distinct empirical regularities of market structure: the invariance of market concentration to market size; and a pyramidal market structure with an oligopoly comprising similar‐sized players at the top and a large number of small banks at the bottom. The analysis may also shed light on the industrial organization of other professional service industries.     

The Spinoff and Merger Ex-Date Effects

This article shows that some of the wealth gains from financial decisions involving changes in security form occur on predictable ex dates. For a sample of 113 spinoffs during 1964 to 90, we document an average excess return of 3.0 percent on ex dates, roughly the same magnitude as the average announcement-date return. We conjecture that the spinoff ex-date return arises because the parent and subsidiary stocks attract different investors who prefer to buy the separated shares after the ex date. We also document that, on average, the target shareholders in stock-for-stock mergers earn an excess return of 1.5 percent on merger ex dates.     

Rank-Order Tournaments and Incentive Alignment: The Effect on Firm Performance

We investigate simultaneously the impact of promotion-based tournament incentives for VPs and equity-based (alignment) incentives for VPs and the chief executive officer (CEO) on firm performance. We find that tournament incentives, as measured by the pay differential between the CEO and VPs, relate positively to firm performance. The relation is more positive when the CEO nears retirement and less positive when the firm has a new CEO, and weakens further when the new CEO is an outsider. Our analysis is robust to corrections for endogeneity of all our incentive measures and to several alternative measures of tournament incentives and firm performance.     

On the Structure of Analyst Research Portfolios and Forecast Accuracy

This study provides insights into the forces and constraints that shape analyst research coverage along country and sector dimensions and the impact of the structure of an analyst's portfolio on forecast accuracy. We find that analyst specialization by country and sector is sensitive to the extent to which firms  within  a country or sector and firms  across  country-sectors are exposed to common economic forces, the potential for revenue generation, and broker culture. Our tests indicate that existing research on the relation between analyst portfolio structure and forecast accuracy may suffer from an endogeneity bias. We use our analysis of analyst specialization to develop controls for this bias. Once we employ these controls, we find that country diversification is associated with superior forecast accuracy. However, the relation between sector diversification and forecast accuracy is context-specific. Specifically, sector diversification enhances forecast accuracy in an international context, while it detracts from forecast accuracy in a domestic U.S. context.     

ASSET REDEPLOYMENT,ACQUISITIONS AND CORPORATE STRATEGY IN DECLINING INDUSTRIES

The resource-based perspective suggests that firms are bundles of assets, some of which are fungible in nature. To the extent that some resources are fungible, firms should be able to redeploy them to enter new markets when their existing businesses decline. On the other hand, perspectives that emphasize the business-specific nature of routines or managerial skills point to inherent risks in organizational transformation. In a declining market, resources can be redeployed within the firm through diversification-oriented acquisitions, or they can be redeployed through market mechanisms through consolidation-oriented acquisitions. In this paper, we examine the differences in performance outcomes between diversification-oriented acquisitions and consolidation-oriented acquisitions in industries within the defense sector, which have experienced significant decline. Our results indicate that consolidation-oriented acquisitions outperform diversification-oriented acquisitions in the decline phase of their industries in terms of both ex ante (stock market based) and ex post (operating) performance measures. At the corporate level, we find a positive relationship between focus and Tobin’s q, even when the industry is in decline. The implication of our results is that assets from declining industries are redeployed more effectively through market mechanisms than within the firm through the acquisition of complementary assets. ©1997 by John Wiley & Sons, Ltd.