Vol. 35, No. 4 - November 2000
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"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. 1-8
Abstract: 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. 9-30
Abstract: 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. 31-50
Abstract: 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. 51-68
Abstract: 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. 69-94
Abstract: 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. 95-108
Abstract: 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. 109-122
Abstract: 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. 123-138
Abstract: 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. 139-152
Abstract: 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.