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Abstracts of Articles in
The Financial Review
Vol. 35, No. 4 - November 2000
"Corporate Finance, Incentives, and Strategy"
Thomas H. Noe"The Impact of Capital Structure on Efficient Sourcing and Strategic Behavior"
Sudha Krishnaswami and Venkat Subramaniam"Corporate Bankruptcy in Korea: Only the Strong Survive?"
Paola Bongini, Giovanni Ferri, and Hongjoo Hahm"Asset Maturity, Debt Covenants, and Debt Maturity Choice"
Gautam Goswami"Incentive Compensation and the Stock Price Response to Dividend Increase Announcements"
Robert L. Lippert, Terry D. Nixon, and Eugene A. Pilotte"Open-Market Stock Repurchase and Stock Price Behavior When Management Values Real Investment"
Nobuyuki Isagawa"Multiple Bids, Management Opposition, and the Market for Corporate Control"
Craig E. Lefanowicz and John R. Robinson"The Pricing of Equity Carve-Outs"
Alexandros Prezas, Murat Tarimcilar, and Gopala Vasudevan"Managerial Motives and Merger Financing"
Saeyoung Chang and Eric Mais
"Corporate Finance, Incentives, and Strategy"
Thomas H. Noe
Volume 35, No. 4, pp. 1-8Abstract: This study reviews papers from the Eastern Finance Association's Symposium on Corporate Finance, Incentives, and Strategy. I identify the common themes underlying these papers and place the studies in the broader context of contemporary academic finance research. Further, I discuss new directions for future research in corporate finance that are suggested in these studies.
"The Impact of Capital Structure on Efficient Sourcing and Strategic Behavior"
Sudha Krishnaswami and Venkat Subramaniam
Volume 35, No. 4, pp. 9-30Abstract: We model the capital structure choice of a firm that operates under imperfect competition. Extant literature demonstrates that debt commits a firm to an aggressive output stance, which is an advantage to the firm under Cournot competition. However, empirical evidence, indicates that debt is, in fact, a disadvantage under imperfect competition. We reconcile the theory with the evidence by incorporating firms’ relations with their suppliers, in a model of strategic firm-rival interactions. Under imperfect competition and incomplete contracting, we show that although debt financing improves a firm’s input sourcing efficiency it could also benefit the firm’s rivals by lowering their input costs. This effect offsets the benefits due to aggressive product market strategies that result from increased debt. Under certain conditions this subsidy effect is sufficiently strong that debt is suboptimal in equilibrium and leads to an increase in rival’s shareholder value.
"Corporate Bankruptcy in Korea: Only the Strong Survive?"
Paola Bongini, Giovanni Ferri, and Hongjoo Hahm
Volume 35, No. 4, pp. 31-50Abstract: We analyze whether the build-up of financial vulnerabilities led listed Korean companies to bankruptcy. We find that pre-crisis leverage is systematically high for both poor performing/slow growing firms and for profitable/fast-growing firms. Pre-crisis leverage raises the probability of bankruptcy, which is lower for firms: (1) relying more on (renegotiable) bank credit; (2) with less inter-firm debt; and (3) having higher interest coverage ratios. Finally, none of these liquidity variables helps predict bankruptcies for chaebol-firms, suggesting that liquidity constraints are more stringent for non-chaebol. Thus, in a systemic crisis it is not only the strong/healthy that survive.
"Asset Maturity, Debt Covenants, and Debt Maturity Choice"
Gautam Goswami
Volume 35, No. 4, pp. 51-68Abstract: The existing research on debt-maturity under asymmetric information has focused on the impact of differential information regarding asset quality on the debt maturity decision. This research has generally indicated the optimality of short-term debt financing as a vehicle of mitigating the adverse selection problem. In this paper, we consider the impact of information asymmetry regarding the maturity structure of cash flows on the debt maturity decision. We demonstrate that, in this context, long-term debt is generally the form of debt financing most effective in alleviating the adverse selection problem. We also show that costs of adverse selection may induce some mismatching of debt maturity and asset maturity in the presence of significant transaction costs.
"Incentive Compensation and the Stock Price Response to Dividend Increase Announcements"
Robert L. Lippert, Terry D. Nixon, and Eugene A. Pilotte
Volume 35, No. 4, pp. 69-94Abstract: Linking executive compensation to stock price performance is predicted to decrease the usual positive price response to dividend increases for two reasons. One, increasing pay-performance sensitivity (PPS) exacerbates managers’ optimistic bias regarding future firm performance, reducing the credibility of dividend signals. Two, increasing pay-performance sensitivity reduces the need for dividends as a means of reducing agency costs. Consistent with behavioral and agency theories of corporate finance, we find that price response does decrease as pay-performance sensitivity increases and that this effect is concentrated in firms with low market-to-book ratios. Additional findings are most consistent with the agency cost explanation.
"Open-Market Stock Repurchase and Stock Price Behavior When Management Values Real Investment"
Nobuyuki Isagawa
Volume 35, No. 4, pp. 95-108Abstract: This paper provides a simple explanation of open-market stock repurchases and the stock price behavior surrounding them. There is ex ante asymmetry of information with regard to the private benefits that corporate managers can attain from real investments. In our model, open-market repurchase announcements reveal information about the managers’ private benefits when real investment opportunities are unprofitable in terms of firm values. This study differs from previous studies in that we show that announcements of open-market repurchase programs can be believable without the restriction that the announcements are commitments. Empirically, the model simultaneously predicts that a stock price will drop prior to an open-market repurchase announcement and will rise in response to the announcement. These predictions are consistent with stylized facts.
"Multiple Bids, Management Opposition, and the Market for Corporate Control"
Craig E. Lefanowicz and John R. Robinson
Volume 35, No. 4, pp. 109-122Abstract: We use regression analysis to disentangle the wealth effect for acquired firm shareholders of management opposition and multiple bids (e.g., multiple bidders and bid revisions). Although multiple bidders and bid revisions occur more frequently for opposed acquisitions, opposition is not associated with incremental acquisition returns for acquisitions with multiple bidders. We also find that management opposition has no significant incremental effect on single bidder acquisitions unless the acquiring firm revises its initial bid. These findings indicate that rather than amplifying acquisition returns directly, management opposition instead serves as a negotiating tool to solicit additional bids.
"The Pricing of Equity Carve-Outs"
Alexandros Prezas, Murat Tarimcilar, and Gopala Vasudevan
Volume 35, No. 4, pp. 123-138Abstract: This article examines the pricing of stock for 251 equity carve-outs during the 1986–1995 period. We document a mean initial-day return of 5.83% and a mean one-week return of 5.43%. Among carve-outs, the initial underpricing is lower for issues represented by high prestige investment bankers and those that have a lower offer price. In comparison with 251 initial public offering (IPO) firms matched by size and book-to-market ratio of equity, carve-outs exhibit significantly lower initial-day returns, but their buy-and-hold returns for six-month and one-year periods are not significantly different from IPOs. The IPO firms have a three-year return of 28.82% which is significantly higher than the 21.07% return for the carve-out firms.
"Managerial Motives and Merger Financing"
Saeyoung Chang and Eric Mais
Volume 35, No. 4, pp. 139-152Abstract: We examine how managerial motives influence the choice of financing for a sample of 209 completed mergers from 1981–1988. Our evidence indicates that bidding firm management is more likely to finance mergers with cash when target firm ownership concentration is high, preventing the creation of an outside blockholder. This suggests bidding firm managers prefer to keep ownership structure widely diffused to reduce external monitoring. We also find that bidding firm management is more likely to finance mergers with stock when the variance of bidding firm’s stock return is high. This suggests managers of risky firms prefer leverage-reducing transactions to reduce their personal risk.