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on Corporate Finance |
| By: | Edmans, Alex |
| Abstract: | This paper reviews the theoretical and empirical literature on the different channels through which blockholders (large shareholders) engage in corporate governance. In classical models, blockholders exert governance through direct intervention in a firm’s operations, otherwise known as “voice.” These theories have motivated empirical research on the determinants and consequences of activism. More recent models show that blockholders can govern through the alternative mechanism of “exit” – selling their shares if the manager underperforms. These theories give rise to new empirical studies on the two-way relationship between blockholders and financial markets, linking corporate finance with asset pricing. Blockholders may also worsen governance by extracting private benefits of control or pursuing objectives other than firm value maximization. I highlight the empirical challenges in identifying causal effects of and on blockholders, and the typical strategies attempted to achieve identification. I close with directions for future research. |
| Keywords: | activism; exit; governance; large shareholders; microstructure; voice |
| JEL: | G34 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9708&r=cfn |
| By: | Edmans, Alex; Mann, William |
| Abstract: | Most research on firm financing studies the choice between debt and equity. We model an alternative source -- non-core asset sales -- and identify three new factors that drive a firm's choice between selling assets and equity. First, equity investors own a claim to the cash raised. Since cash is certain, this mitigates the information asymmetry of equity (the "certainty effect"). In contrast to Myers and Majluf (1984), even if non-core assets exhibit less information asymmetry, the firm issues equity if the financing need is high. This result is robust to using the cash for an uncertain investment. Second, firms can disguise the sale of a low-quality asset as instead motivated by operational reasons – dissynergies – and thus receive a higher price (the "camouflage effect"). Third, selling equity implies a "lemons" discount for not only the equity issued but also the rest of the firm, since its value is perfectly correlated. In contrast, a "lemons" discount on assets need not lead to a low stock price, as the asset is not a carbon copy of the firm (the "correlation effect"). |
| Keywords: | Asset sales; Financing; Pecking order; Synergies |
| JEL: | G32 G34 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9720&r=cfn |
| By: | Back, Kerry E.; Li, Tao; Ljungqvist, Alexander P. |
| Abstract: | Is greater trading liquidity good or bad for corporate governance? We address this question both theoretically and empirically. We solve a model consisting of an optimal IPO followed by a dynamic Kyle market in which the large investor's private information concerns her own plans for taking an active role in governance. We show that an increase in the liquidity of the firm's stock increases the likelihood of the large investor ‘taking the Wall Street walk.’ Thus, higher liquidity is harmful for governance. Empirical tests using three distinct sources of exogenous variation in liquidity confirm the negative relation between liquidity and blockholder activism. |
| Keywords: | corporate governance; hedge funds; Kyle models; Liquidity; shareholder activism; shareholder proposals; Wall Street walk |
| JEL: | G23 G34 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9739&r=cfn |
| By: | Kandel, Eugene; Kosenko, Konstantin; Morck, Randall; Yafeh, Yishay |
| Abstract: | The extent to which business groups ever existed in the United States and, if they did exist, the reasons for their disappearance are poorly understood. In this paper we use hitherto unexplored historical sources to construct a comprehensive data set to address this issue. We find that (1) business groups, often organized as pyramids, existed at least as early as the turn of the twentieth century and became a common corporate form in the 1930s and 1940s, mostly in public utilities (e.g., electricity, gas and transportation) but also in manufacturing; (2) In contrast with modern business groups in emerging markets that are typically diversified and tightly controlled, many US groups were focused in a single sector and controlled by apex firms with dispersed ownership; (3) The disappearance of US business groups was largely complete only in 1950, about 15 years after the major anti-group policy measures of the mid-1930s; (4) Chronologically, the demise of business groups preceded the emergence of conglomerates in the United States by about two decades and the sharp increase in stock market valuation by about a decade, so that a causal link between these events is hard to establish, although there may well be a connection between them. We conclude that the prevalence of business groups is not inconsistent with high levels of investor protection; that US corporate ownership as we know it today evolved gradually over several decades; and that policy makers should not expect policies that restrict business groups to have an immediate effect on corporate ownership. |
| Keywords: | Business Groups; Corporate Ownership; Financial Market Regulation; Pyramids |
| JEL: | G30 G34 G38 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9759&r=cfn |
| By: | Edmans, Alex; Goldstein, Itay; Jiang, Wei |
| Abstract: | This paper identifies a limit to arbitrage that arises because firm value is endogenous to the exploitation of arbitrage. Trading on private information reveals this information to managers and improves their real decisions, enhancing fundamental value. While this feedback effect increases the profitability of buying on good news, it reduces the profitability of selling on bad news. Thus, investors may refrain from trading on negative information, and so bad news is incorporated more slowly into prices than good news. This has potentially important real consequences -- if negative information is not incorporated into prices, inefficient projects are not canceled, leading to overinvestment. |
| Keywords: | feedback effect; Limits to arbitrage; overinvestment |
| JEL: | G14 G34 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9917&r=cfn |
| By: | Grinstein, Yaniv; Rossi, Stefano |
| Abstract: | Are courts effective monitors of corporate decisions? In a controversial landmark case, the Delaware Supreme Court held directors personally liable for breaching their fiduciary duties, signaling a sharp increase in Delaware’s scrutiny over corporate decisions. In our event study, low-growth Delaware firms outperformed matched non-Delaware firms by 1% in the three day event window. In contrast, high-growth Delaware firms under-performed by 1%. Contrary to previous literature, we conclude that court decisions can have large, significant and heterogeneous effects on firm value, and that rules insulating directors from court scrutiny benefit the fastest growing sectors of the economy. |
| Keywords: | case law; corporate governance; monitoring; regulation |
| JEL: | G32 G34 G38 |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9960&r=cfn |
| By: | Dill, Verena (University of Trier); Jirjahn, Uwe (University of Trier); Smith, Stephen C. (George Washington University) |
| Abstract: | Comparing domestic- and foreign-owned firms in Germany, this paper finds that foreign-owned firms are more likely to focus on short-term profit. This influence is particularly strong if the local managers of the German subsidiary are not sent from the foreign parent company. Moreover, the physical distance between the foreign parent company and its German subsidiary increases the probability of focusing on short-term profit. These findings conform to the hypothesis that foreign owners facing an information disadvantage concerning the local conditions of their subsidiaries are more likely to favor short-term profit. However, we do not identify differences in "short-termism" between investors from "Anglo-Saxon" and other foreign countries; rather, results point in the direction of more general features of corporate globalization. |
| Keywords: | foreign ownership, short-termism, asymmetric information, globalization, multinational enterprises, stakeholders |
| JEL: | F23 G34 M16 P10 |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp8165&r=cfn |
| By: | Elasrag, Hussein |
| Abstract: | This paper is one of few papers that highlight the importance of studying corporate governance for institutions offering Islamic financial services. The book is of value in describing governance in Islamic institutions and how there are many issues under the investigation process, especially issues related to the shari‘a Supervisory board and its functionality. One of the objectives of this paper is to discuss, and create greater awareness of, some of the crucial issues related to corporate governance in Islamic financial institutions. A second, but in fact more important, objective is to provide, in the light of this discussion, certain essential guidelines to improve corporate governance in these institutions and thereby enable them to not only maintain their momentum of growth and international acceptance but also safeguard the interests of all stakeholders. The paper gives particular attention to the mechanisms for corporate governance, including the Board of Directors, Senior Management, shareholders, depositors, and regulatory and supervisory authorities. It also focuses on the effective management of risks and, in particular, on creating a supporting environment through moral uplift, social, legal and institutional checks, greater transparency, internal controls, and Shari'a as well as external audit. The paper also indicates briefly the shared institutions that are needed for effective corporate governance. |
| Keywords: | Corporate governance,Islamic Finance,ISLAMIC FINANCIAL INSTITUTIONS,SHARI‘A GOVERNANCE |
| JEL: | G0 G15 G2 G21 G34 |
| Date: | 2014–05–26 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:56221&r=cfn |