Corporate Control Transactions Research Articles

Growth options, risk dynamics, and cost of capital: Evidence from U.S. corporate control transactions

We provide empirical evidence on recent models on the evolution of systematic risk around growth option exercise related to takeover announcements. Consistent with theory, the risk differential between the merging firms influences the evolution of bidder systematic risk. We find that the cost of capital decreases (increases) when the growth option’s underlying assets (i.e., the target firm) are less (more) risky than the bidder’s assets in place. Furthermore, the impact on the cost of capital is larger, the bigger the difference between the pre-transaction risk of the bidder and the target. Firm characteristics such as the relative size of the firms and information asymmetry affecting the bidder also impact risk dynamics. Our findings help clarify conflicting predictions in the finance literature, thus allowing for more informed capital structure decisions by financial managers when considering growth option exercise.

Determinants of Cross-Border Mergers and Acquisitions: A Comprehensive Review and Future Direction

The purpose of this paper is to review and summarize earlier studies analyzing the determinants of cross-border mergers and acquisitions (M&As). We primarily describe the motives of cross-border acquisitions and present the market performance for corporate control transactions over the period 1994-2013. Then, we illustrate the factors affecting cross-border investments and acquisitions in various taxonomies, namely deal-specific factors, firm- and industry-specific attributes, organizational learning and prior-acquisition experience, and country-specific factors. We draw special attention to the country-specific taxonomy for various reasons include economic and financial markets environment, institutional and regulatory framework, political situation (including corruption), tax system, accounting and valuation matters, geographical factors and cultural issues. We also provide a synopsis of earlier studies addressing the diversification motive in M&A decision. We thus propose that a host-country’s institutional laws and regulatory system, accounting and tax provisions, economic performance, financial markets development, investor protection, geographical, political and cultural factors distinctly affect cross-border acquisition’s completion. Lastly, we outline contemporary issues in M&A research, and suggest promising areas for future exploration.

Acquisition of corporate control and clear criteria in the adjustment of the mandatory bid price

This article discusses the adoption of clear criteria for the adjustment of the bid price in mandatory bids. The analysis takes place in the context of Article 5 of the EU Takeovers Directive which harmonises mandatory bids, the notion of “equitable price” of shares and the adjustment of the mandatory bid price, at the EU level. This article focuses on the ruling of the EFTA Court in the case of Periscopus AS v Oslo Børs ASA and Erik Must AS which analysed corporate control transactions and clear criteria for the adjustment of the mandatory bid price, within the framework of the Takeovers Directive. The EFTA Court sought to interpret and to clarify this adjustment mechanism. The protection of minority shareholders is also scrutinised. Moreover, the importance of EU fundamental freedoms with regard to the adjustment of the mandatory bid price is analysed. A few concluding remarks are deduced.

Does Corporate Control Transactions’ Type and Focus really Create Value? Evidence from an Emerging Market

The failure of corporate-control transactions as strategic-oriented transactions to create significant values for their stockholders has triggered the management to deal with these phenomena by setting the right and best strategies and at the same time, to ensure company's growth in the future. This study tests empirically the implication of corporate-control transaction announcement on companies’ abnormal returns. Particularly, this study investigates the effect of the announcement of corporate-control transactions’ type (merger and acquisition, sell-off, joint venture, alliance) and focus (transformative or expansionist). It used the event study of 94 corporate-control transactions, which contains of transactions’ type and focus of during 1991-2001 periods. By using multivariate regression analysis, the results show that the announcement of corporate-control transactions significant and positively influence the cumulative abnormal return. Meanwhile, the announcement of the corporate-control transactions’ type and focus does not significantly influence stockholders' benefit. Generally, the characteristic of the independent and control variables in this study due to their implications to cumulative abnormal return are in-line with previous studies. In addition, this study has proven that the characteristic of investors in Indonesia's stock markets are very different with the ones in many other places like Europe or United States. In other words, this reflects the unstable and inefficiency of Indonesia's stock market as an emerging market.

Understanding Investor Sentiment: The Case of Soccer

We examine the extent to which the stock market's inefficient responses to resolutions of uncertainty depend on investors’ biased ex ante beliefs regarding the probability distribution of future event outcomes or their ex post irrational reactions to these outcomes. We use a sample of publicly traded European soccer clubs and analyze their returns around important matches. Using a novel proxy for investors’ expectations based on contracts traded on betting exchanges (prediction markets), we find that within our sample, investor sentiment is attributable, in part, to a systematic bias in investors’ ex ante expectations. Investors are overly optimistic about their teams’ prospects ex ante and, on average, end up disappointed ex post, leading to negative postgame abnormal returns. Our evidence may have important implications for firms’ investment decisions and corporate control transactions.

Private benefits in corporate control transactions

This paper presents an analytical framework from which it can be inferred whether sellers or buyers in block transactions value private benefits highest. I am thus able to suggest an answer to the question: Are blocks of shares traded because the buyer has high security benefits, or because the buyer has high private benefits from the control rights that come with the shares? Using voting rights as the vehicle for private benefits, I find that the selling shareholders in block transactions attaches more value to private benefits than the buyers and that toeholds are insignificant for the premium paid.

Understanding Investor Sentiment: The Case of Soccer

We examine whether investors' biased ex-ante beliefs regarding the probability distribution of future events' outcomes can partially explain the stock market's inefficient response to resolution of uncertainty. In our experiment, we analyze stock returns of publicly traded European soccer clubs around important matches. Using a novel proxy for investors' expectations derived from contracts traded on betting exchanges (prediction markets), we find that in our sample investor sentiment is attributable in part to a systematic bias in investors' ex-ante expectations. Investors are overly optimistic about their teams' prospects ex-ante and, on average, end up disappointed ex-post, leading to negative post-event abnormal returns. Our evidence may have important implications for firms' investment decisions and corporate control transactions.

A Oferta Pública de Aquisição de Ações e a Tutela dos Acionistas Minoritários

This article outlines general considerations on corporate control transactions and the tender offers. It faces the following issue: To whom is the over price paid for the control power is due? Also, it shows how this subject is treated differently in the North American, European and Brazilian laws. Finally, it analyses whether the tender offer is an efficient tool for minority shareholders protection.

Trading Suspensions on an Emerging Market Around Corporate Control Transactions

Trading Suspensions on an Emerging Market Around Corporate Control Transactions

Trading‐off Corporate Control and Personal Diversification through Capital Structure and Merger Activity

Abstract: In this study we use direct estimates of the portfolio diversification of the largest shareholder in a firm to study the impact of shareholder diversification on the firm. For firms where the controlling shareholder is an individual, our tests indicate that the owner‐managers use debt, dual class shares and corporate control transactions (merger activity) to strategically trade off corporate control and the drawback of poor portfolio diversification. However, for firms where the controlling shareholder is an institution, our results indicate that control but not diversification is important.

Private Benefits in Corporate Control Transactions

This paper presents an analytical framework from which it can be inferred whether sellers or buyers in corporate control transactions value private benefits highest. I am thus able to suggest an answer to the question: Are blocks of shares traded because the buyer is a more efficient monitor with high security benefits, or because the buyer has high private benefits from the control rights that come with the shares? Using voting rights as the vehicle for private benefits, I find that the selling shareholders in block transactions attach more value to private benefits than the buyers. In tender offer transactions, the answer is that private benefits are insignificant to both sides of the transaction. As an alternative measure of the transaction premium, I calculate the abnormal return premium. This represents the stock market’s valuation of the transaction. I find that the stock market puts a positive premium on the sample transactions. Although this is not confirmed by the regression results, the market therefore expects higher future security benefits. The negative coefficients of relative voting power lend support to this conclusion, but they are not significant. I also find that inside shareholders have a very small effect on these results, but that they do attach more value to private benefits.

The Impact of All-star Analyst Job Changes on Their Coverage Choices and Subsequent Investment Banking Deal Flow

Using a sample of all-star analysts who switch investment banks between 1988 and 1999, we examine (1) whether analyst behavior is influenced by investment banking relationships and (2) whether analyst behavior affects investment banking deal flow (debt and equity underwriting and corporate control transactions). Although the stock coverage decision is dependent on the investment banking relationship with the client firms, we find no evidence that analysts change their optimism or recommendation levels when joining a new firm. Investment banking deal flow is related to analyst reputation only for equity underwriting transactions. For debt underwriting and M&A transactions, after controlling for bank reputation, analyst reputation does not matter. There is no evidence that issuing optimistic earnings forecasts or recommendations affects investment banking deal flow.

Musings on the Dynamics of Corporate Governance Issues, Director Liability Concerns, Corporate Control Transactions, Ethics, and Federalism

Musings on the Dynamics of Corporate Governance Issues, Director Liability Concerns, Corporate Control Transactions, Ethics, and Federalism

The Shareholder as Ulysses: Some Empirical Evidence on Why Investors in Public Corporations Tolerate Board Governance

Why do investors in public corporations cede control over corporate assets and outputs to a board of directors, rather than retaining control for themselves? This Article reviews two possible explanations for why shareholders tolerate board control: the monitoring hypothesis, which posits that shareholders rely on boards primarily to control the agency costs associated with turning day-to-day control over the firm to self-interested corporate executives; and the mediating hypothesis, which posits that shareholders also seek to tie their own hands by ceding control to directors as a means of attracting the extracontractual, firm-specific investments of stakeholder groups such as creditors, executives, and employees. Part I of the Article reviews each hypothesis and concludes that each is theoretically plausible and internally consistent. As a result, the validity of each only can be established, or rejected, on the basis of empirical evidence. Part II of the Article reviews the available empirical evidence. Many aspects of contemporary corporate law and governance seem, on first inspection, consistent with either the monitoring or the mediating model. In the context of corporate control transactions, however, it is possible to distinguish between legal rules and governance structures consistent with a purely monitoring board, and rules and structures consistent with a mediating board. Part II concludes that, as a positive matter, corporate takeover law is consistent with the view that directors are not just monitors, but also perform a mediating function. Recognizing this, commentators who subscribe only to the monitoring model often argue that the legal rules that govern changes of control are flawed and should be reformed. Part II demonstrates, however, that this normative claim is undermined by other empirical evidence, especially new evidence on the charter provisions of firms involved in initial public offerings. Part III of the Article discusses some future directions for empirical research and identifies some pitfalls to be avoided. It concludes that, while the issue has not been resolved with certainty, at this point the empirical evidence favors the claim that directors do more than simply restrain executive opportunism; they also restrain shareholder opportunism, and so mediate between the firm's shareholders and other important constituencies that make extracontractual specific investments in the firm. What's more, shareholders favor this arrangement. Accordingly, the burden of proof should shift to those who would defend a purely monitoring model of the board.

The Shareholder as Ulysses: Some Empirical Evidence on Why Investors in Public Corporations Tolerate Board Governance

Why do investors in public corporations cede control over corporate assets and outputs to a board of directors, rather than retaining control for themselves? This Article reviews two possible explanations for why shareholders tolerate board control: the monitoring hypothesis, which posits that shareholders rely on boards primarily to control the agency costs associated with turning day-to-day control over the firm to self-interested corporate executives; and the mediating hypothesis, which posits that shareholders also seek to tie their own hands by ceding control to directors as a means of attracting the extracontractual, firm-specific investments of stakeholder groups such as creditors, executives, and employees. Part I of the Article reviews each hypothesis and concludes that each is theoretically plausible and internally consistent. As a result, the validity of each only can be established, or rejected, on the basis of empirical evidence. Part II of the Article reviews the available empirical evidence. Many aspects of contemporary corporate law and governance seem, on first inspection, consistent with either the monitoring or the mediating model. In the context of corporate control transactions, however, it is possible to distinguish between legal rules and governance structures consistent with a purely monitoring board, and rules and structures consistent with a mediating board. Part II concludes that, as a positive matter, corporate takeover law is consistent with the view that directors are not just monitors, but also perform a mediating function. Recognizing this, commentators who subscribe only to the monitoring model often argue that the legal rules that govern changes of control are flawed and should be reformed. Part II demonstrates, however, that this normative claim is undermined by other empirical evidence, especially new evidence on the charter provisions of firms involved in initial public offerings. Part III of the Article discusses some future directions for empirical research and identifies some pitfalls to be avoided. It concludes that, while the issue has not been resolved with certainty, at this point the empirical evidence favors the claim that directors do more than simply restrain executive opportunism; they also restrain shareholder opportunism, and so mediate between the firm's shareholders and other important constituencies that make extracontractual specific investments in the firm. What's more, shareholders favor this arrangement. Accordingly, the burden of proof should shift to those who would defend a purely monitoring model of the board.

Takeovers: Their Causes and Consequences

Economic analysis and evidence indicate that the market for corporate control is benefiting shareholders, society, and the corporate form of organization. The value of transactions in this market ran at a record rate of about $180 billion per year in 1985 and 1986, 47 percent above the 1984 record of $122 billion. The gains to shareholders from these transactions have been huge. The gains to selling firm shareholders from mergers and acquisition activity in the ten-year period 1977-86 total $346 billion (in 1986 dollars). The gains to buying firm shareholders are harder to estimate, and no one to my knowledge has done so as yet, but my guess is that they will add at least another $50 billion to the total. These gains, to put them in perspective, equal 51 percent of the total cash dividends (valued in 1986 dollars) paid to investors by the entire corporate sector in the past decade. These corporate control transactions and the restructurings that often accompany them are frequently wrenching events in the lives of those linked to the involved organizations: the managers, employees, suppliers, customers and residents of surrounding communities. Restructurings usually involve major organizational change (such as shifts in corporate strategy) to meet new competition or market conditions, increased use of debt, and a flurry of recontracting with managers, employees, suppliers and customers. This activity sometimes results in expansion of resources devoted to certain areas and at other times in contractions involving plant closings, layoffs of top-level and middle managers, staff and production workers, and reduced compensation. Those threatened by the changes that restructuring brings about argue that corporate restructuring is damaging the American economy, damaging the morale and productivity of organizations, and pressuring executives to manage for the short-term. Further, they hold that the value restructuring creates does not come from increased efficiency and productivity; instead, the gains come from lower tax payments, broken contracts with managers, employees and others, and mistakes in valuation by inefficient capital markets. Since the benefits are illusory and the costs are real, they argue, takeover activity should be restricted. The controversy has been accompanied by strong pressure on regulators and legislatures to enact restrictions that would curb activity in the market for corporate control. Dozens of congressional bills in the last several years have proposed new restrictions on takeovers, but none have passed as of this writing. The Business Roundtable, composed of the chief executive officers of the 200 largest corporations in the country, has pushed hard for restrictive legislation. Within the past several years the legislatures of New York, New Jersey, Maryland, Pennsylvania, Connecticut, Illinois, Kentucky, Michigan, Ohio, Indiana and Minnesota have passed antitakeover laws. The Federal Reserve Board implemented new restrictions in early 1987 on the use of debt in certain takeovers. In all the controversy over takeover activity, it is often forgotten that only 40 (an all-time record) out of the 3,300 takeover transactions in 1986 were hostile tender offers. There were 110 voluntary or negotiated tender offers (unopposed by management) and the remaining 3,100-plus deals were also voluntary transactions agreed to by management, although this simple classification is misleading since many of the voluntary transactions would not occur absent the threat of hostile takeover. A major reason for the current outcry is that in recent years mere size alone has disappeared as an effective takeover deterrent, and the managers of many of our largest and least efficient corporations now find their jobs threatened by disciplinary forces in the capital markets. The market for corporate control is creating large benefits for shareholders and for the economy as a whole by loosening control over vast amounts of resources and enabling them to move more quickly to their highest-valued use. This is a healthy market in operation, on both the takeover side and the divestiture side, and it is playing an important role in helping the American economy adjust to major changes in competition and regulation of the past decade.

The Effectiveness of Insider Trading Regulation in Italy. Evidence from Stock-Price Run-Ups Around Announcements of Corporate Control Transactions

All developed countries and most emerging countries restrict insider trading in the belief that it may undermine investors' confidence and the integrity of financial markets. Such regulation, however, has proved to be relatively ineffective almost everywhere, as shown by the records on convictions in the last few decades and by the pervasiveness of insider trading signalled by stock-price run-ups around announcements of private information. Identifying illegal insider transactions may be difficult: the private information must be material, i.e. price-sensitive, and in some countries prosecutors have to prove the use of such information by corporate insiders. Moreover, the investigative powers of the enforcing Authority may be weak and the deterrence of criminal sanctions may be diminished by lengthy proceedings, especially when alternatives, such as administrative fines and civil actions, do not exist. To date, the Italian legal system has experienced great difficulty in detecting and punishing illegal insider trading. Since they were first enacted in 1991, the insider trading rules have led to two convictions and to a very low ratio of prosecutions to allegations of illegal trading. Moreover, leakage of private information appears to be widespread, given that news about firm-specific events seems to be incorporated in stock prices long before it is disclosed in public announcements. This paper examines the effectiveness of Italian insider trading legislation by focusing, among other things, on the stock-price run-up around announcements of corporate events. In particular, after a brief survey of earlier research on legal and illegal insider trading and on the most important weaknesses in the Italian legal framework, standard event-study methodology is used to analyse stock-price run-ups around 29 announcements of corporate control transactions in the period 1998–2000. Indicators of the “leakage” of non-public material information are then constructed, showing that securities prices follow similar patterns regardless of whether insider trading is likely to have occurred. This evidence raises questions as to the efficacy of Italian insider trading regulation and the paper concludes with some suggestions as to how it could be improved.

Corporate Control and the Politics of Finance

In this paper I explore the effects of politics on corporate finance, including the determinants of capital structure and the regulatory and legal factors governing the market for corporate control. I examine the effects and consequences of the active corporate control market of the 1980s, then I outline the enormous political controversy and inaccurate media portrayals that ensued, and contrast them to the results obtained from intensive study of the phenomena by academic economists. First, I review new macroeconomic evidence on changes in productivity in American manufacturing that is dramatically inconsistent with popular claims that corporate control transactions were crippling the industrial economy in the 80s. Second, I show how the restructuring movement of the 1980s reflected the re-emergence of active investors in the U.S. and how restructuring addressed the conflict between management and shareholders over control of corporate free cash flow. Third, I summarize my conception of LBO associations as new organizational forms that overcome the deficiencies of large public conglomerates. I also discuss the similarity between LBO associations and Japanese business financing networks known as keiretsu. Fourth, I argue that the highly-leveraged financial structures of the 1980s should lead to a Japanese-style privatization of bankruptcy (i.e., out-of-court reorganization). Fifth, I present a theory of boom-bust cycles in venture markets that explains why many companies involved with late-1980s leveraged transactions encountered financial distress. Sixth, I argue that misguided changes in the tax and regulatory codes and in bankruptcy court decisions have distorted the normal economic incentives for out-of-court reorganizations, resulting in increased costs of financial distress and a sharp rise in the number of Chapter 11 filings. Seventh and last, I propose a set of changes in the Chapter 11 process designed to reduce the costs of financial distress and thus maximize the total value of the firm to all investors.

Takeover Premiums, Appraisal Rights, and the Price Elasticity of a Firm's Publicly Traded Stock

Financial economists generally believe that the demand for a specific publicly traded stock is virtually perfectly price-elastic. This proposition has significant implications for many rules of corporate law that concern the correct value of the corporation. In a Yale Law Journal article, Professor Lynn Stout argues that the demand curve for the common stock of a publicly traded corporation is downward-sloping. She claims that a critical assumption underlying the capital asset pricing model (CAPM) is that investors have homogeneous expectations about a stock's value, and that this assumption implies that the CAPM will predict each stock to have infinitely (perfectly) price-elastic demand. In Part I of this Article, we show that Stout's claim of less-than-infinite price elasticity does not advance her thesis that the market price of a security is an unreliable and unfair measure of value. Infinite price elasticity of a firm's stock is not implied by either the CAPM or the efficient capital market hypothesis (ECMH). The new-information hypothesis of stock price changes offers a more plausible explanation for events that Stout claims are more readily explained by price pressure resulting from less than infinitely elastic demand. In Part II, we explain why the appraisal remedy, and the stock market exception to it, are wealth-maximizing features of corporate law that enhance the liquidity of ownership and control of the publicly traded corporation. We further explain that Stout's appraisal rule, which would ignore market value even for publicly traded corporations, is flawed in theory and unworkable in practice. If adopted, Stout's rule would diminish the liquidity (and hence the value) of corporate ownership and control, make management's performance of its fiduciary duty in unsolicited corporate control transactions nonfalsifiable and, thus, diminish shareholder wealth.

Market Evidence in Corporate Law

Market prices are frequently given little or no weight in resolving valuation disputes in corporate law. Under Delaware corporate law, for example, market prices can never be the sole determinant of value in appraisal proceedings and, at most, are one factor to be considered.1 Similarly, corporate managers who negotiate corporate control transactions at significant premiums under Delaware law face significant potential liability for damages because courts dismiss the premium received as irrelevant. Other jurisdictions, with rare exceptions, have followed the same approach.3 I argue here that courts should rely more heavily on market prices when resolving valuation disputes than has occurred to date. Part I of this Article discusses why market prices are superior to other methods of valuation when market prices are available and addresses the various justifications that have been advanced for limiting reliance on market prices. Part I also briefly discusses other types of market evidence. Part II surveys some of the leading cases in corporate law to illustrate how adjudication of these cases would have been improved and simplified had courts interpreted the relevant market evidence properly. Part II also extends the analysis outside corporate law to the Winstar litigation-the damage claims filed by over one hundred sav-