I just attended the Financial Management Association International meetings in Orlando, Florida. The FMA also holds European, Asian and other meetings, but the one in North America is the annual one and draws a large crowd. The FMA itself consists of over 7000 academics and practitioners interested in best practices in finance. The way we find 'best practices' is typically through analyzing empirical data - often samples of thousands of observations to find out what is increasing value and what is not increasing value. Topics analyzed range from all the aspects of mergers one can imagine to capital structure, dividend policy, agency theory, option pricing, investments, banking, regulation, working capital and much more.
The working papers presented at this conference are just that - works in progress that will improve from the careful criticism of peers. Ultimately, academics hope their working papers are published in leading academic journal and influence theory and practice. Indeed, what we teach in the business schools is designed to be cutting edge practice and is (or should be) heavily influenced by current research and conditions. Textbooks are three to five years out of date by the time they are published.
Rather than comment on individual papers, I am adding the link to the complete program which itself has links to individual papers. This way readers can note the breadth of topics covered and choose those of interest. Of course, you can find papers on any specific topic (i.e, mergers) with the search function (control + f on my computer). Not all of these papers are at the stage where they are informative of 'best practices'. Some of them are. I sift through research carefully before presenting in executive education sessions but our next session in Amsterdam is in early December and my Drexel EMBAs in early January. Many of my practitioner colleagues find scanning even the topics to be a way to stay current and get new ideas and in the best scenarios, get ahead of the competition.
All the best,
Ralph
Showing posts with label Research. Show all posts
Showing posts with label Research. Show all posts
Thursday, October 22, 2015
Thursday, April 16, 2015
Drexel's Corporate Governance Conference
Each year, Drexel's Center for Corporate Governance holds a conference soliciting papers from around the world. This year over sixty papers we submitted from which five were chosen for presentation. The audience consists of some of the leading researchers in Corporate Governance from around the world. This year's program honors Jon Karpoff for his outstanding research in Corporate Governance and features an outstanding set of papers. Patrick McGurn of ISS is the featured dinner speaker. A copy of the program is shown below.
All the best,
Ralph
All the best,
Ralph
Thursday, March 19, 2015
Arbs - Smart, Influential, or Both?
Consider several interesting, stylized facts about the role of arbitrageurs in acquisitions:
So lets take the last point. It has been known that arbitrageurs can earn abnormal returns around mergers. What hasn't been clear is why. There are two theories - one that arbs play a passive role and the other that they play an active role in facilitating deal completion.
The passive theory is that arbs are better at predicting deal success - studying the dynamics of a deal, the positions of the players and the likely regulatory positions. They then take a position when the odds are in their favor.
The active theory is that arbs actually influence the outcome of a deal - that their shareholdings help tip the balance of power and facilitate deal completion.
In that article below, published in the Journal of Financial Economics co-author Jim Hsieh and I find evidence supporting both theories. The abstract is below. A copy of the published article is available through the link above. A copy of the working paper is available here.
Abstract:
- Once a firm is in play, the new shareholder base is likely to be the arbitrageurs as existing shareholders sell out to lock in the jump in price surrounding the announcement of the deal and avoid the risk of deal failure.
- Arbs make a living taking this risk of deal failure.
- Most arbs don't try to predict who will be a target but take a position after a deal has been announced
- The risk profile of arbs is very low - arbs hedge their positions to minimize as much risk as possible. In a stock deal, for example, they might go short the acquiring firm and go long the target, locking in the spread between the post announcement price and the offered price - usually a few percent.
- Arbs favor the rapid completion of a deal and when deals close quickly the few percent gained in the spread becomes a very high return when annualized.
- Arbs can lose their shirt if a deal collapses or they are not properly hedged.
- Arbs tend to earn superior returns around acquisitions.
So lets take the last point. It has been known that arbitrageurs can earn abnormal returns around mergers. What hasn't been clear is why. There are two theories - one that arbs play a passive role and the other that they play an active role in facilitating deal completion.
The passive theory is that arbs are better at predicting deal success - studying the dynamics of a deal, the positions of the players and the likely regulatory positions. They then take a position when the odds are in their favor.
The active theory is that arbs actually influence the outcome of a deal - that their shareholdings help tip the balance of power and facilitate deal completion.
In that article below, published in the Journal of Financial Economics co-author Jim Hsieh and I find evidence supporting both theories. The abstract is below. A copy of the published article is available through the link above. A copy of the working paper is available here.
Determinants and Implications of Arbitrage Holdings in Acquisitions
This study investigates arbitrage activities and their impact on acquisitions. The literature contains arguments for both passive and active roles of arbitrageurs during the takeover process. Larcker and Lys (1987) suggest that arbitrageurs are passive, having superior ability to predict offer success. Cornelli and Li (2002) and Gomes (2001) model arbitrageurs as active, influencing the terms and outcome of offers. We find evidence supporting both arguments. Using a simultaneous-equations framework to recognize endogeneity, we analyze 608 acquisition bids over the 1992-1999 period. Consistent with the passive arbitrage argument, the change in arbitrage holdings is greater in successful offers. However, changes in arbitrage holdings are also shown to be an important determinant of the probability of success, bid premia, and arbitrage returns. In addition, the change in arbitrage holdings is positively associated with both revision returns and the occurrence of subsequent bids within one year after initial bids are terminated. Overall, we find that merger arbitrageurs play an important role in the market for corporate control.
All the best,
Ralph
Thursday, March 14, 2013
Say on Pay in the US: The Early Evidence
Joe and I have been debating the merits of the new Swiss Say on Pay regulation. (See Mad as Hell and I'm Not Going to Take This and Swiss Say on Pay - The Dangers.
The US now has it's own, non-binding Say on Pay legislation, but it is a relatively new development. A few years ago, my colleague Jay Cai and I performed the first empirical analysis of Say on Pay in the United States in the academic literature.
The starting point for our analysis was April 20, 2007, when underdog Presidential Candidate Barack Obama introduced the legislation into the Senate. It had just passed the house on the same day. Thinking about the impact of this legislation on shareholder wealth you can immediately envision three possible impacts.
First, it could be beneficial, prodding boards to rein in excessive pay and to be more careful in the compensation packages they offer. In this case, the share price of firms would increase with the bill.
Second, such a law could be detrimental to shareholders. Boards are responsible for executive compensation and can always hire additional expertise to advise them as needed. Outside pressures from shareholders, some of whom may have narrow agendas, could produce unnecessary complications within the boardroom which could reduce shareholder wealth.
Finally, we might find that the mere introduction of the bill in the Senate (and it's passage in the house) have no impact on shareholder wealth. After all, we are talking about the introduction of a bill, not its passage. Moreover, even if it passed the Senate, then-President Bush said he would veto it. Besides, it is an advisory vote - boards don't have to do anything even if a majority of shareholders disagree with the level of executive compensation. (In this regard, I note that previous evidence on advisory votes finds them to have little impact on shareholder wealth.) So in my mind, the probabilities were stacked towards no impact.
What did we find? Some interesting results.
First, we find that one size doesn't fit all with this legislation. Our results indicate that situations where the law appears beneficial and situations where shareholder votes are likely to be seriously considered are associated with increases in shareholder wealth. In other situations, the bill would appear to reduce shareholder wealth.
So where was it beneficial? In firms with high, abnormal CEO compensation, those with low pay for performance sensitivity and for those firms that had been responsive to shareholder votes in the past. The latter result is in line with the fact that firms don't have to implement changes, even if a majority of shareholders disagree with pay packages.
But Say on Pay could have been voluntarily implemented by boards if they deemed it beneficial. They didn't need legislation to do this. Moreover, shareholders themselves could have proposed Say on Pay to their boards. In fact, this did happen. We found numerous cases where activists (primarily unions) had sponsored Say on Pay proposals. Unfortunately, they appeared to target the wrong firms. The firms they targeted were large firms that, on average, appeared to have reasonable performance, governance and pay characteristics. As a result, the share price dropped for firms targeted in this way. Our research suggests that say-on-pay creates value for companies with inefficient compensation, but can destroy value for others.
The complete paper can be downloaded here: Shareholders’ Say on Pay: Does It Create Value?
The US now has it's own, non-binding Say on Pay legislation, but it is a relatively new development. A few years ago, my colleague Jay Cai and I performed the first empirical analysis of Say on Pay in the United States in the academic literature.
The starting point for our analysis was April 20, 2007, when underdog Presidential Candidate Barack Obama introduced the legislation into the Senate. It had just passed the house on the same day. Thinking about the impact of this legislation on shareholder wealth you can immediately envision three possible impacts.
First, it could be beneficial, prodding boards to rein in excessive pay and to be more careful in the compensation packages they offer. In this case, the share price of firms would increase with the bill.
Second, such a law could be detrimental to shareholders. Boards are responsible for executive compensation and can always hire additional expertise to advise them as needed. Outside pressures from shareholders, some of whom may have narrow agendas, could produce unnecessary complications within the boardroom which could reduce shareholder wealth.
Finally, we might find that the mere introduction of the bill in the Senate (and it's passage in the house) have no impact on shareholder wealth. After all, we are talking about the introduction of a bill, not its passage. Moreover, even if it passed the Senate, then-President Bush said he would veto it. Besides, it is an advisory vote - boards don't have to do anything even if a majority of shareholders disagree with the level of executive compensation. (In this regard, I note that previous evidence on advisory votes finds them to have little impact on shareholder wealth.) So in my mind, the probabilities were stacked towards no impact.
What did we find? Some interesting results.
First, we find that one size doesn't fit all with this legislation. Our results indicate that situations where the law appears beneficial and situations where shareholder votes are likely to be seriously considered are associated with increases in shareholder wealth. In other situations, the bill would appear to reduce shareholder wealth.
So where was it beneficial? In firms with high, abnormal CEO compensation, those with low pay for performance sensitivity and for those firms that had been responsive to shareholder votes in the past. The latter result is in line with the fact that firms don't have to implement changes, even if a majority of shareholders disagree with pay packages.
But Say on Pay could have been voluntarily implemented by boards if they deemed it beneficial. They didn't need legislation to do this. Moreover, shareholders themselves could have proposed Say on Pay to their boards. In fact, this did happen. We found numerous cases where activists (primarily unions) had sponsored Say on Pay proposals. Unfortunately, they appeared to target the wrong firms. The firms they targeted were large firms that, on average, appeared to have reasonable performance, governance and pay characteristics. As a result, the share price dropped for firms targeted in this way. Our research suggests that say-on-pay creates value for companies with inefficient compensation, but can destroy value for others.
The complete paper can be downloaded here: Shareholders’ Say on Pay: Does It Create Value?
Friday, November 16, 2012
Netflix and Some Personal History with the Poison Pill
It will be interesting to follow the battle for Netflix. The company recently adopted a 'poison pill' in response to Carl Icahn's acquisition of a 10% interest in the company. Some recent details are contained in this link from MSN Money.
Poison pills are so named because they are designed to make a company indigestible to a hostile bidder. Typically, a poison pill is a 'springing right' giving shareholders the option of either buying shares in their own firm at a bargain price or buying shares in the bidding firm at a bargain price. (More on this latter option in a moment.) Conceptually, this seems like a stock split or a stock dividend where under idealized conditions, the wealth of a shareholder isn't affected. In the case of the poison pill, however, the 'acquiring or bidding party' is excluded from using the pill. Hence other shareholders gain at the loss of the potential bidder.
The first poison pill was issued by Enstar in 1982. By early 1985, there were 12 in existence. I know, because I was a young assistant professor at the time, visiting at the University of Washington in Seattle. My colleague, Paul Malatesta and I were intrigued by a Wall Street Journal article describing the pill and we conducted the first empirical examination of their characteristics. (The original article that came out of this is now dated but for those interested it was published in the Journal of Financial Economics. It can be viewed here and downloaded at the top left of the page).
Of particular interest to us was the concept that you could 'buy stock in the acquiring party's firm at a reduced rate'. The last time I checked, I couldn't give you the right to buy someone else's car at a bargain rate. We wondered how this could work with stock and decided to investigate. We called Marty Lipton, regarded as the father of the poison pill and he informed us that, yes, the article was correct and that there were now 14 such pills - he had done them all. So we began our analysis with that small sample. Soon the sample grew to 30. By that time, the legality of the pill was being decided in the Delaware Courts. The courts upheld the legality of the Household International pill in November 1985 and our sample quickly grew to over 120. By the end of 1986 there were over 300 in existence.
Our main findings at the time:
The announcement of a pill can send two messages. First - wow, the firm's in play! This would boost stock prices. Second, is the deterrent effect of the pill itself. For the very earliest pills, we found the wealth losses to be negative. In fact the wealth losses were 1% for firms not in play, but if we restricted our analysis to those already in play at the time the pill was announced, (so the positive 'in play' hit was already in the price) the wealth losses were 4%.
The impact and efficacy of the pill has continued to be debated over the past 30 years. Throughout the rest of the 1980s and 1990s thousands of companies adopted them. As they became more anticipated, the price reaction was muted. Advocates argued that they effectively prevented so called 'raiders' from stealing the company. The pills, it is argued, increase bargaining power. Detractors counter that the pills can be used to entrench mangement at the expense of shareholders. It is still felt that the combination of a poison pill with a staggered board (i.e., electing say a third of the directors each year) is a powerful deterrent to acquisition. The combination is important because pills can be rescinded by the board, so a proxy fight resulting in a takeover of the board would remove the pill. However, few acquiring firms would be so patient as to wait two or more years to get control of the entire board. Over the past decade there has been a movement by activists to remove poison pills and staggered boards. Many boards have agreed.
The specific details of Netflix's pill can be found here. Note: Netflix has a staggered board. It will be interesting to see how the directors react and whether the pill is used to negotiate or thwart Icahn's bid.
Poison pills are so named because they are designed to make a company indigestible to a hostile bidder. Typically, a poison pill is a 'springing right' giving shareholders the option of either buying shares in their own firm at a bargain price or buying shares in the bidding firm at a bargain price. (More on this latter option in a moment.) Conceptually, this seems like a stock split or a stock dividend where under idealized conditions, the wealth of a shareholder isn't affected. In the case of the poison pill, however, the 'acquiring or bidding party' is excluded from using the pill. Hence other shareholders gain at the loss of the potential bidder.
The first poison pill was issued by Enstar in 1982. By early 1985, there were 12 in existence. I know, because I was a young assistant professor at the time, visiting at the University of Washington in Seattle. My colleague, Paul Malatesta and I were intrigued by a Wall Street Journal article describing the pill and we conducted the first empirical examination of their characteristics. (The original article that came out of this is now dated but for those interested it was published in the Journal of Financial Economics. It can be viewed here and downloaded at the top left of the page).
Of particular interest to us was the concept that you could 'buy stock in the acquiring party's firm at a reduced rate'. The last time I checked, I couldn't give you the right to buy someone else's car at a bargain rate. We wondered how this could work with stock and decided to investigate. We called Marty Lipton, regarded as the father of the poison pill and he informed us that, yes, the article was correct and that there were now 14 such pills - he had done them all. So we began our analysis with that small sample. Soon the sample grew to 30. By that time, the legality of the pill was being decided in the Delaware Courts. The courts upheld the legality of the Household International pill in November 1985 and our sample quickly grew to over 120. By the end of 1986 there were over 300 in existence.
Our main findings at the time:
- Firms that issued pills had been less profitable than their peers
- Shareholders of Firms that issued pills suffered wealth losses
- Executives of these firms owned smaller amounts of shares and hence, were more insulated from the losses
The announcement of a pill can send two messages. First - wow, the firm's in play! This would boost stock prices. Second, is the deterrent effect of the pill itself. For the very earliest pills, we found the wealth losses to be negative. In fact the wealth losses were 1% for firms not in play, but if we restricted our analysis to those already in play at the time the pill was announced, (so the positive 'in play' hit was already in the price) the wealth losses were 4%.
The impact and efficacy of the pill has continued to be debated over the past 30 years. Throughout the rest of the 1980s and 1990s thousands of companies adopted them. As they became more anticipated, the price reaction was muted. Advocates argued that they effectively prevented so called 'raiders' from stealing the company. The pills, it is argued, increase bargaining power. Detractors counter that the pills can be used to entrench mangement at the expense of shareholders. It is still felt that the combination of a poison pill with a staggered board (i.e., electing say a third of the directors each year) is a powerful deterrent to acquisition. The combination is important because pills can be rescinded by the board, so a proxy fight resulting in a takeover of the board would remove the pill. However, few acquiring firms would be so patient as to wait two or more years to get control of the entire board. Over the past decade there has been a movement by activists to remove poison pills and staggered boards. Many boards have agreed.
The specific details of Netflix's pill can be found here. Note: Netflix has a staggered board. It will be interesting to see how the directors react and whether the pill is used to negotiate or thwart Icahn's bid.
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