UK Panel Data Research Articles

An Empirical Model of Merger and Acquisitions Timing

An empirical model of merger timing is constructed combining different micro-perspectives into a single framework that endogenises the merger process and illuminates the dynamics of merger activity. The model is estimated using survival analysis upon a uniquely constructed UK panel data set covering merger activity in twelve major industrial sectors over the period from 1990 to 2004. The findings provide strong empirical evidence for the endogenous character of mergers, especially as regards herd and preemption effects. The results also indicate that, mergers are strategic complements in the sense that by reducing competition in the market, merger activity today can dampen future competitive response and as a consequence mergers can become more profitable as merger activity proceeds. It is further shown that firm specific characteristic play an important role in merger timing. Specifically firms that are low growth but resource-rich, high growth but resource-poor, pay low dividends, have low investment opportunities or are small, are all considered 'attractive' targets and are more likely to be acquired. The relative importance of these micro-forces may differ at different stages of a merger wave, causing in this way the bandwagon rolling at full speed. These results provide answers to the long-standing question regarding the dynamics of merger activity and its wave like behavior.

Firm Performance: Do Non‐Executive Directors Have Minds of their Own? Evidence from UK Panel Data

I investigate the relation between firm performance and both ownership structure and board composition. Use of the GMM methodology permits simultaneous control of both endogeneity of the independent variables and fixed effects. The data comprise an original, large, hand‐collected panel dataset of UK firms for the period 1991–2001. Results indicate that the direction of causality runs from ownership and board composition to performance. I find a cubic relation between performance and ownership by executive directors. The proportion of non‐executives on the board, but not their proportional ownership, is significantly and positively related to firm performance. Finally, the relation between performance and blockholdings by institutional and non‐institutional owners is negative. Thus, results indicate that only non‐executive directors are effective monitors.

Firm Performance: Do Non-Executive Directors Have a Mind of Their Own? Evidence from Uk Panel Data

I investigate the relation between firm performance, ownership structure and board composition. I use the GMM methodology to control simultaneously for endogeneity of the independent variables and for endogeneity due to fixed effects. I use an original, large, hand-collected panel dataset of UK firms for the period 1991-2001. Results indicate that the direction of causality runs from ownership and board composition to performance. I find a cubic relation between performance and ownership by executive directors. The proportion of non-executives on the board, but not their proportional ownership, is significantly and positively related to firm performance. Finally, I detect a negative relation between performance and blockholding by institutional and non-institutional owners, which suggests that they are not effective monitors.

CEO Compensation and Firm Performance: An Empirical Investigation of UK Panel Data

This paper examines the link between CEO pay and performance employing a unique, hand-collected panel data set of 390 UK non-financial firms from the FTSE All Share Index for the period 1999-2005. We include both cash (salary and bonus) and equity-based (stock options and long-term incentive plans) components of CEO compensation for a panel of large UK companies. Different from previous studies, we use GMM-system estimation method, which controls for the presence of unobserved firm-specific effects and for the endogeneity of explanatory variables. In addition, we control for a comprehensive set of corporate governance variables. The empirical results indicate that there is a positive and significant relationship between firm performance and the level of CEO cash compensation while the relationship is positive but not significant for total compensation. This finding suggests that corporate governance reports in the UK, such as Greenbury Report (1995) that proposed CEO compensation be more closely linked to performance, have not been totally effective. We also find that proportion of non-executive directors on board does not have a significant impact on CEO cash compensation, while non-executive directors' share ownership has a significant impact suggesting that ownership can provide incentives for non-executive directors to be more active in monitoring for CEO compensation packages. Our results also indicate that institutional ownership has a positive and significant influence on CEO pay-for-performance sensitivity of option grants. Finally, we find that longer CEO tenure is associated with lower pay-for-performance sensitivity of option grants suggesting the entrenchment effect of CEO tenure.

Company Dividends and Ownership Structure: Evidence from UK Panel Data

This study investigates the relationship between dividends and ownership structure for a panel of 330 large quoted UK firms. Controlling for unobserved firm‐specific effects, results indicate a negative relationship between dividends and ownership concentration. Ownership composition also matters, with a positive relationship observed for shareholding by insurance companies, and a negative one for individuals. These results are consistent with agency models in which dividends substitute for poor monitoring by a firm's shareholders but can also be explained by the presence of powerful principals who are able to impose their preferred payout policy upon firms.

Wage inequality and the role of multinationals: evidence from UK panel data

Despite the increased attention on the impacts of globalisation, there has been little empirical investigation into the impact of multinational firms on the domestic labour market and in particular wage inequality, this is in spite of a rapid increase in foreign direct investment (FDI) at around the same time of rising inequality. Using UK panel data, this paper tests whether inward flows of FDI have contributed to increasing wage inequality. Even after controlling for the two most common explanations of wage inequality, technology and trade, we find that FDI has a significant effect upon wage inequality, with the overall impact of FDI explaining on average 11% of wage inequality.

The Roles of Expected Profitability, Tobin's Q and Cash Flow in Econometric Models of Company Investment

Evidence that cash flow has a significant effect on company investment spending, after controlling for Tobin's average Q, has often been interpreted as suggesting the importance of financing constraints. Recent work on measurement error in the Q model casts doubt on this interpretation. It is possible that the Q model may not be identified if there are 'bubbles' in stock market valuations that are both persistent over time and that are correlated with fundamental values. Cash flow may then provide additional information about expected profitability that is not captured by a poorly measured Tobin's average Q variable. This hypothesis is explored empirically using UK panel data on companies for which analysts' earnings forecasts are available from the IBES database. The results point to a severe measurement error in average Q. The paper finds that, controlling for expected profitability using analysts' earnings forecasts, cash flow becomes insignificant. Both sales growth and cash-stock variables do provide additional information, which could either be capturing expectations of profitability at longer horizons, or reflect misspecification of the basic Q model. Results for subsamples do not suggest financing constraints as a likely explanation for these findings.

Debt, Incentives and Performance: Evidence from UK Panel Data

A large body of theoretical literature suggests that capital structure plays an important role as a managerial incentive mechanism. What of the evidence for the agency approach? Crosssectional empirical studies have identified a positive effect of leverage on expected performance (measured by Q) for firms with low growth opportunities. However, this evidence does not take into account the endogeneity of capital structure decisions. Our paper investigates the determinants of capital structure and performance, allowing for endogeneity and dynamics. Our results suggest that conclusions reached by previous studies which did not take into account the endogeneity issue should be treated with caution. What determines firms' capital structure decisions? What are the implications for firm performance? These questions have attracted a great deal of attention in the theoretical literature on firms' financial structure; see Harris and Raviv (1991) for an excellent survey, as well as Hart (1995) and Shleifer and Vishny (1997) for more recent discussions. Our paper examines the same questions empirically, in the light of existing theories and notably the agency literature which highlights the potential role of debt as a mechanism to mitigate conflicts between management and shareholders (Jensen and Meckling, 1976; Grossman and Hart, 1982; Jensen, 1986; Harris and Raviv, 1991; Stulz, 1990; Hart and Moore, 1995; Zwiebel, 1996).1 We identify some key econometric problems which arise when translating such theories into an empirical model that can be estimated with available data. Our main contribution lies in the analysis of panel data, which enables us to deal with these econometric problems. In so doing, we are able to shed some light on the value of the underlying theoretical approach. At the same time, we show that results obtained in the existing empirical literature, which has largely overlooked the econometric issues we address, are not robust; the implications of these findings are then discussed. The argument is essentially as follows. In most contributions to the agency

The link between dividend policy and institutional ownership

This paper examines the relatively neglected link between dividend policy and institutional ownership. It is also the first example of using well-established dividend payout models to examine the potential association between ownership structures and dividend policy. Moreover, the paper presents the first results for the UK, where the institutional framework and ownership structures are different from those of the US. Using a UK panel data set, the role of institutional ownership in association to dividend payout ratios is analysed within the context of the dividend models of Lintner [American Economic Review, 46 (1956) 97], Waud [Journal of the American Statistical Association, 1996] and Fama and Babiak [Journal of the American Statistical Association, 63 (1968) 1132]. The results consistently produce strong support for the hypothesis that a positive association exists between dividend payout policy and institutional ownership. Furthermore, the results for an earnings trend model suggest a positive earnings trend component to the association between institutional ownership and the dividend payout ratio. In addition, there is some evidence in support of the hypothesis that a negative association exists between dividend payout policy and managerial ownership.

Capacity and Competition: Empirical Evidence on UK Panel Data

Following D. Kreps and J. Scheinkman (1983), it is common to view the difference between Cournot and Bertrand competition as depending on production capacity. Bertrand undercutting is only feasible if firms have capacity to serve the market gained. If firms are capacity constrained, the Cournot model is more appropriate. This paper tests the capacity and competition idea by looking at the relationship between profits and capacity constraints; if capacity constrained firms become more Cournot-like, it should be positive. Using survey data on capacity constraints merged into a panel industry data set for the United Kingdom, the authors find a robust positive relationship. Copyright 1994 by Blackwell Publishing Ltd.