Charoenwong B.; Kowaleski Z.T.; Kwan A.; Sutherland A.G.
Journal of Financial Economics, 2024

Compliance-driven investments in technology--or "RegTech"--are growing rapidly. To understand the effects on the financial sector, we study firms' responses to new internal control requirements. Affected firms make significant investments in ERP and hardware. These expenditures then enable complementary investments that are leveraged for noncompliance purposes, leading to modest savings from avoided customer complaints and misconduct. IT budgets rise and profits fall, especially at small firms, and acquisition activity and market concentration increase. Our results illustrate how regulation can directly and indirectly affect technology adoption, which in turn affects noncompliance functions and market structure.

Liebersohn J.
Journal of Financial Economics, 2024

This paper studies bank antitrust rules which discontinuously shift bank mergers' competitive impact. The likelihood of mandatory divestiture rises sharply for mergers in markets above a threshold level of concentration, leading to an increase in the number of banks in these markets. Consistent with greater competition, intervention leads to higher deposit rates. Mortgage originations rise by 11%, from both refinancing and purchases. However, small business loan quantities do not change. The effects of intervention do not dissipate over time, and nonbank lenders respond similarly to banks. Overall, antitrust rules can increase bank competition, but relationships protect banks from competitors.

Ewens M.; Xiao K.; Xu T.
Journal of Financial Economics, 2024

We quantify the costs of major disclosure and governance regulations by exploiting a regulatory quirk: many rules trigger when a firm's public float exceeds a threshold. Consistent with firms avoiding costly regulation, we document significant bunching around three major regulatory thresholds. Estimations reveal that the three examined rules' compliance costs range from 1.2% to 1.8% of market capitalization for firms near thresholds. For a median U.S. public company, total costs amount to 4.3% of market capitalization, and at least 2.3% absent regulatory avoidance frictions. These cost estimates are robust across various extrapolation assumptions, ranging from 2.1% to 6.3% of market capitalization. Regulatory costs have a greater impact on private firms' IPO decisions than on public firms' going private decisions, but such costs only explain a small part of the decline in the number of public firms.

Buffa A.M.; Hodor I.
Journal of Financial Economics, 2023

We study the equilibrium implications of a multi-asset economy in which asset managers performance is tied to different benchmarks, reflecting heterogeneity in their investment mandates. Fluctuations in the capital asset managers invest for benchmarking purposes, scaled by the size of the economy, induce price pressure that results in negative spillovers across assets. We characterize a rich structure of asset price comovement within and across benchmarks by analyzing shock elasticities and cross-elasticities of price-dividend ratios. Evidence on the heterogeneity of mutual fund mandates and the benchmarking-induced return comovement across cap-style and industry-sector portfolios corroborates the model assumptions and predictions.

Derrien F.; Frésard L.; Slabik V.; Valta P.
Journal of Financial Economics, 2023

Revaluations of industry peers around horizontal acquisitions are negative when targets are private, but positive when they are public. We posit this "revaluation spread" arises because acquiring managers favor private targets when public firms are overvalued. Targets' ownership status thus conveys information about industry assets' misvaluation and triggers predictable revaluations. Supporting this idea, private acquisitions occur when private targets appear "cheaper" than public firms based on valuation multiples or the trading activity of industry insiders. The revaluation spread varies with overall market misvaluation, predicts future industry returns, and is unrelated to peers' and industries' fundamentals.

Buffa A.M.; Hodor I.
Journal of Financial Economics, 2023

We study the equilibrium implications of a multi-asset economy in which asset managers performance is tied to different benchmarks, reflecting heterogeneity in their investment mandates. Fluctuations in the capital asset managers invest for benchmarking purposes, scaled by the size of the economy, induce price pressure that results in negative spillovers across assets. We characterize a rich structure of asset price comovement within and across benchmarks by analyzing shock elasticities and cross-elasticities of price-dividend ratios. Evidence on the heterogeneity of mutual fund mandates and the benchmarking-induced return comovement across cap-style and industry-sector portfolios corroborates the model assumptions and predictions.

Gokkaya S.; Liu X.; Stulz R.M.
Journal of Financial Economics, 2023

We open the black box of the M&A decision process by examining whether specialized M&A staff, who perform a wide range of acquisition-related functions, improve acquisition performance. We find that the presence and the quality of specialized M&A staff is one of the most economically important determinants of acquisition performance. We explore mechanisms through which specialized M&A staff improve acquisition performance and investigate why only less than half of US firms employ such staff. Agency costs are a first-order determinant for specialized M&A staff's value-creation role. Such staff do not improve acquisition performance in firms with heightened agency conflicts.

Antón M.; Azar J.; Gine M.; Lin L.X.
Journal of Financial Economics, 2022

Diversified acquirer shareholders can profit from value-destroying acquisitions not only through their target stakes, but also through stakes in non-merging rival firms. Announcement losses are largely mitigated for the average acquirer shareholder when accounting for wealth effects on their rival stakes. Ownership by acquirer shareholders in non-merging rivals is negatively associated with deal quality and positively associated with deal completion. Funds with more rival ownership are more likely to vote in favor of the acquisition. Overall, these results show that many so-called "bad deals" are often in the interest of acquirer-firm shareholders.

Graham J.R.; Grennan J.; Harvey C.R.; Rajgopal S.
Journal of Financial Economics, 2022

Ninety-two percent of the 1348 North American executives we survey believe that improving corporate culture would increase firm value. A striking 84% believe their company needs to improve its culture. But how can that be achieved? Our paper provides some guidance by documenting the following: executives' views on what corporate culture is and how it operates, distinguishing between stated values and everyday norms; the extent to which culture is perceived to influence value creation (productivity, mergers), ethical choices (compliance, short-termism), and innovation (creativity, risk-taking); and a list of obstacles that can prevent culture from being where it should be (inattentive leaders, misaligned incentive compensation). Finally, we provide evidence that the executives' survey responses are consistent with external data.

Field L.C.; Lowry M.
Journal of Financial Economics, 2022

While the percentage of mature firms with classified boards or dual class shares has declined by more than 40% since 1990, the percentage of IPO firms with these structures has doubled over this period. We test whether IPO firms implement these structures optimally or whether they are utilized to allow managers to protect their private benefits of control. Both shareholder voting patterns and changes in firm types going public suggest that the Agency Hypothesis best explains IPO firm's use of dual class, particularly when there is a large voting-cash flow wedge. In contrast, among firms with high information asymmetry, classified board structures are better explained by the Optimal Governance hypothesis.

Eaton G.W.; Guo F.; Liu T.; Officer M.S.
Journal of Financial Economics, 2022

Using unique data, this paper examines investment banks' choice of peers in comparable companies analysis in mergers and acquisitions. We find strong evidence that product market space is amongst the most important factors in peer selection, but Standard Industrial Classification (SIC) codes, particularly three and four digit codes, do a poor job of categorizing related firms in this setting. Banks strategically select large, high growth peers with high valuation multiples, factors that are also positively related to premiums. Our evidence is consistent with target-firm advisors selecting peers with high valuation multiples to negotiate higher takeover prices.

Grieser W.; Hadlock C.; LeSage J.; Zekhnini M.
Journal of Financial Economics, 2022

We present a spatial econometrics framework for estimating peer effects in capital structure. This approach exploits the heterogeneous and intransitive nature of peer networks to identify economically informative structural coefficients. In models of leverage levels, we detect significant peer-effect leverage coefficients that are on the order of 0.20, indicating a moderate but substantive level of strategic complementarity in capital structure decisions. We argue that prior estimates in the literature substantially overstate the magnitude of the underlying relation. Our evidence is robust to a wide variety of model modifications and supports the hypothesis that leverage is an important strategic choice variable.

Aghamolla C.; Thakor R.T.
Journal of Financial Economics, 2022

This study investigates whether a private firm's decision to go public affects the IPO decisions of its competitors. Using detailed data from the drug development industry, we identify a private firm's direct competitors at a precise level through a novel approach using similarity in drug development projects based on disease targets. The analysis shows that a private firm is significantly more likely to go public after observing the recent IPO of a direct competitor, and this effect is distinct from "hot" market effects or other common shocks. Furthermore, our effects are centered on firms that operate in more competitive areas. We additionally explore peer effects in private firm funding propensities more broadly, such as through venture capital or being acquired, and find results consistent with a competitive channel.

Chaderina M.; Weiss P.; Zechner J.
Journal of Financial Economics, 2022

We show that firms with longer debt maturities earn risk premia not explained by unconditional factors. Embedding dynamic capital structure choices in an asset-pricing framework where the market price of risk evolves with the business cycle, we find that firms with long-term debt exhibit more countercyclical leverage. The induced covariance between betas and the market price of risk generates a maturity premium similar in size to our empirical estimate of 0.21% per month. We also provide direct evidence for the model mechanism and confirm that the maturity premium is consistent with observed leverage dynamics of long- and short-maturity firms.

Biswas S.; Koufopoulos K.
Journal of Financial Economics, 2022

We study bank regulation under optimal contracting, absent exogenous distortions. In equilibrium, banks offer a senior claim (deposits) to external investors and retain equity; the return on equity is higher than the return on deposits due to a scarcity of skilled bankers. Inefficient equilibria emerge under asymmetric information. Optimally designed regulation restores efficiency. Our main result is that disclosure requirements by themselves can be endogenously costly because they may push the economy from a separating equilibrium to a less efficient equilibrium that pools good and bad banks, but always improve welfare when combined with capital regulation.

Busaba W.Y.; Restrepo F.
Journal of Financial Economics, 2022

We investigate the effect of the "7% solution"--the fact that underwriters in the U.S. charge a 7% spread to most IPOs between $20 million and $100 million in size--on the ensuing pricing of the offerings. Our identification exploits the variation in spreads that is due to distinct kinks in the relation between spread and offer size at these two thresholds. We find the spread positively influences underpricing but also the offer-price adjustment from the filing range's midpoint. Our evidence indicates the spread influences the aftermarket price, suggesting underwriters can shape, not merely discover, investor valuations.

Aggarwal D.; Eldar O.; Hochberg Y.V.; Litov L.P.
Journal of Financial Economics, 2022

We create a novel dataset to examine the recent rise in dual-class IPOs. We document that dual-class firms have different types of controlling shareholders and wedges between voting and economic rights, and that the increasing popularity of dual-class structures is driven by founder-controlled firms. We find that founders' wedge is greater when founders have stronger bargaining power. The increase in founder control over time is due to greater availability of private capital and technological shocks that reduced firms' needs for external financing. Stronger bargaining power is also associated with a lower likelihood of sunset provisions that terminate dual-class structures.

Michaely R.; Moin A.
Journal of Financial Economics, 2022

We decompose the decrease (1970s-2000) and subsequent recovery (2000-2018) in the fraction of dividend-paying firms. Changes in firm characteristics and proclivity to pay (probability of paying dividends conditional on characteristics) each drive half of the dividend disappearance. A higher proclivity drives 82% of the dividend reappearance. The remaining 18% is driven by a single characteristic: reduced earnings volatility. Changing characteristics are associated with low-profitability, high-earnings-volatility firms. Changing proclivity is associated with stable, profitable firms. Rather than dividend initiations or omissions, newly listed and delisted firms drive trends. Finally, the magnitude and duration of disappearing total payout is substantially smaller than that of dividends, indicating some substitution between dividends and repurchases.

Duong H.N.; Goyal A.; Kallinterakis V.; Veeraraghavan M.
Journal of Financial Economics, 2022

We find a negative relation between democracy and initial public offering (IPO) underpricing for a sample of 23,050 IPOs across 45 countries. The effect of democracy on underpricing is weaker for IPOs audited by Big 4 auditing firms, backed by venture capital firms, and with better disclosure specificity of use of proceeds. Democracy exerts a larger influence on underpricing for firms with higher agency problems, in countries with weaker institutional quality or shareholder protection, and during periods of high investor sentiment or economic policy uncertainty. Overall, our results highlight the importance of democracy in reducing IPO underpricing around the world.

Dutordoir M.; Strong N.C.; Sun P.
Journal of Financial Economics, 2022

Announcements of stock-financed mergers and acquisitions (M&As) may attract short selling of bidder shares by merger arbitrageurs. We hypothesize that bidders with higher short-selling potential include a higher proportion of cash in their M&A payments to mitigate stock price declines resulting from arbitrage short sales. Consistent with this hypothesis, we find that the ex ante net lending supply of bidder shares has a positive impact on the percentage of cash in public target payments. Further tests, including a placebo analysis of public-to-private deals and an analysis of expected price pressure proxies, corroborate the impact of anticipated arbitrage-related price pressure on payment choice.

Fathollahi M.; Harford J.; Klasa S.
Journal of Financial Economics, 2022

Theory predicts that horizontal acquisitions can effectively increase incumbent firms' market power in concentrated industries with high product similarity. Using a novel measure for industry product similarity, we show that in such industries firms' propensity to make horizontal acquisitions is greater and that the acquisitions result in more positive announcement returns for the acquirer and rival firms and in a larger premium paid for the target. Also, the deals harm dependent customer and supplier firms and they are more likely to be challenged by antitrust authorities. Overall, by emphasizing the importance of product similarity, our results help explain mixed empirical findings on whether horizontal acquisitions are used to reduce competition intensity.

Chen H.; Xu Y.; Yang J.
Journal of Financial Economics, 2021

We document several facts about corporate debt maturity: (1) debt maturity is pro-cyclical, (2) higher-beta firms tend to have longer maturity, and (3) shorter maturity amplifies the sensitivity of credit spreads to aggregate shocks. We present a dynamic capital structure model that explains these facts. In the model, leverage and maturity choices are interdependent, which reflect the tradeoffs of liquidity discounts of long-term debt, repayment risks of short-term debt, and the benefit of short-term debt as a commitment device for timely leverage adjustments. Additionally, the model helps quantify the effects of maturity dynamics on the term structure of credit spreads.

Wang Z.; Yin Q.E.; Yu L.
Journal of Financial Economics, 2021

We use staggered share repurchases legalization from 1985 to 2010 across the world to examine its impact on corporate behaviors. We find that share-repurchasing firms do not cut dividends as a substitution. The cash for repurchasing shares comes more from internal cash than external debt issuance, leading to reductions in capital expenditures and R&D expenses. While this strategy boosts stock prices, it results in lower long-run Tobin's Q, profitability, growth, and innovation, accompanied by lower insider ownership. Tax benefits and paying out temporary earnings are two primary reasons that firms repurchase.

Ham C.G.; Kaplan Z.R.; Leary M.T.
Journal of Financial Economics, 2020

Yes. We show that dividend changes contain information about highly persistent changes in future economic income. Three methodological differences lead us to different conclusions from the extant literature: (i) we use an "event window approach" to cleanly delineate earnings after dividend changes from those before, (ii) we use alternative earnings measures to control for endogenous investment and asset write-downs surrounding dividend changes, and (iii) we control for the nonlinear relation between dividend changes and market reactions. Our results suggest dividend announcement returns reflect information about the level of permanent earnings, though the timing of the information content is difficult to reconcile with traditional signaling models.

Gornall W.; Strebulaev I.A.
Journal of Financial Economics, 2020

We develop a valuation model for venture capital-backed companies and apply it to 135 US unicorns, that is, private companies with reported valuations above $1 billion. We value unicorns using financial terms from legal filings and find that reported unicorn post-money valuations average 48% above fair value, with 14 being more than 100% above. Reported valuations assume that all shares are as valuable as the most recently issued preferred shares. We calculate values for each share class, which yields lower valuations because most unicorns gave recent investors major protections such as initial public offering (IPO) return guarantees (15%), vetoes over down-IPOs (24%), or seniority to all other investors (30%). Common shares lack all such protections and are 56% overvalued. After adjusting for these valuation-inflating terms, almost one-half (65 out of 135) of unicorns lose their unicorn status.

Gilje E.P.; Gormley T.A.; Levit D.
Journal of Financial Economics, 2020

We derive a measure that captures the extent to which common ownership shifts managers' incentives to internalize externalities. A key feature of the measure is that it allows for the possibility that not all investors are attentive to whether a manager's actions benefit the investor's overall portfolio. Empirically, we show that potential drivers of common ownership, including mergers in the asset management industry and, under certain circumstances, even indexing, could diminish managerial motives to internalize externalities. Our findings illustrate the importance of accounting for investor inattention when analyzing whether the growth of common ownership affects managerial incentives.

Masulis R.W.; Zhang E.J.
Journal of Financial Economics, 2019

We provide new evidence on the value of independent directors by exploiting exogenous events that seriously distract independent directors. Approximately 20% of independent directors are significantly distracted in a typical year. They attend fewer meetings, trade less frequently in the firm's stock, and resign from the board more frequently, indicating declining firm-specific knowledge and a reduced board commitment. Firms with more preoccupied independent directors have declining firm valuation and operating performance and exhibit weaker merger and acquisition (M&A) profitability and accounting quality. These effects are stronger when distracted independent directors play key board monitoring roles and when firms require greater director attention.

Liu J.; Stambaugh R.F.; Yuan Y.
Journal of Financial Economics, 2019

We construct size and value factors in China. The size factor excludes the smallest 30% of firms, which are companies valued significantly as potential shells in reverse mergers that circumvent tight IPO constraints. The value factor is based on the earnings-price ratio, which subsumes the book-to-market ratio in capturing all Chinese value effects. Our three-factor model strongly dominates a model formed by just replicating the Fama and French (1993) procedure in China. Unlike that model, which leaves a 17% annual alpha on the earnings-price factor, our model explains most reported Chinese anomalies, including profitability and volatility anomalies.

Grosse-Rueschkamp B.; Steffen S.; Streitz D.
Journal of Financial Economics, 2019

We study the transmission channels from central banks' quantitative easing programs via the banking sector when central banks start purchasing corporate bonds. We find evidence consistent with a "capital structure channel" of monetary policy. The announcement of central bank purchases reduces the bond yields of firms whose bonds are eligible for central bank purchases. These firms substitute bank term loans with bond debt, thereby relaxing banks' lending constraints: banks with low tier-1 ratios and high nonperforming loans increase lending to private (and profitable) firms, which experience a growth in investment. The credit reallocation increases banks' risk-taking in corporate credit.

Grennan J.
Journal of Financial Economics, 2019

I show dividend policies have peer effects. My estimates indicate that firms speed up the time taken to make a dividend change by about 1.5 quarters and increase payments by 16% in response to peer changes. The peer effects matter in increases but not decreases. In contrast to dividends, repurchases show no peer effects. In addition, announcement returns indicate that investors partially anticipate the consequences of peer effects. Overall, peer interdependencies account for 12% of total dividend payments.

Hauser R.
Journal of Financial Economics, 2018

This paper studies whether director appointments to multiple boards impact firm outcomes. To overcome endogeneity of board appointments, I exploit variation generated by mergers that terminate entire boards and thus shock the appointments of those terminated directors. Reductions of board appointments are associated with higher profitability, market-to-book, and likelihood of directors joining board committees. The performance gains are particularly stark when directors are geographically far from firm headquarters. I conclude that the effect of the shocks to board appointments is: (i) evidence that boards matter; and (ii) plausibly explained by a workload channel: when directors work less elsewhere, their companies benefit.

Klasa S.; Ortiz-Molina H.; Serfling M.; Srinivasan S.
Journal of Financial Economics, 2018

Firms strategically choose more conservative capital structures when they face greater competitive threats stemming from the potential loss of their trade secrets to rivals. Following the recognition of the Inevitable Disclosure Doctrine by US state courts, which exogenously increases the protection of a firm's trade secrets by reducing the mobility of its workers who know its secrets to rivals, the firm increases its leverage relative to unaffected rivals. The effect is stronger for firms with a greater risk of losing key employees to rivals, for those facing financially stronger rivals, and for those in industries where competition is more intense.

Bonaime A.; Gulen H.; Ion M.
Journal of Financial Economics, 2018

Political and regulatory uncertainty is strongly negatively associated with merger and acquisition activity at the macro and firm levels. The strongest effects are for uncertainty regarding taxes, government spending, monetary and fiscal policies, and regulation. Consistent with a real options channel, the effect is exacerbated for less reversible deals and for firms whose product demand or stock returns exhibit greater sensitivity to policy uncertainty, but attenuated for deals that cannot be delayed due to competition and for deals that hedge firm-level risk. Contractual mechanisms (deal premiums, termination fees, MAC clauses) unanimously point to policy uncertainty increasing the target's negotiating power.

Schmidt C.; Fahlenbrach R.
Journal of Financial Economics, 2017

We investigate whether corporations and their executives react to an exogenous change in passive institutional ownership and alter their corporate governance structure. We find that exogenous increases in passive ownership lead to increases in CEO power and fewer new independent director appointments. Consistent with these changes not being beneficial for shareholders, we observe negative announcement returns to the appointments of new independent directors. We also show that firms carry out worse mergers and acquisitions after exogenous increases in passive ownership. These results suggest that the changed ownership structure causes higher agency costs.

Gormley T.A.; Matsa D.A.
Journal of Financial Economics, 2016

This article examines managers' incentive to play it safe. We find that, after managers are insulated by the adoption of an antitakeover law, they take value-destroying actions that reduce their firms' stock volatility and risk of distress. To illustrate one such action, we show that managers undertake diversifying acquisitions that target firms likely to reduce risk, have negative announcement returns, and are concentrated among firms with managers who gain the most from reducing risk. Our findings suggest that instruments typically used to motivate managers, such as greater financial leverage and larger ownership stakes, exacerbate risk-related agency challenges.

Chen T.; Harford J.; Lin C.
Journal of Financial Economics, 2015

Building on two sources of exogenous shocks to analyst coverage (broker closures and mergers), we explore the causal effects of analyst coverage on mitigating managerial expropriation of outside shareholders. We find that as a firm experiences an exogenous decrease in analyst coverage, shareholders value internal cash holdings less, its CEO receives higher excess compensation, its management is more likely to make value-destroying acquisitions, and its managers are more likely to engage in earnings management activities. Importantly, we find that most of these effects are mainly driven by the firms with smaller initial analyst coverage and less product market competition. We further find that after exogenous brokerage exits, a CEO's total and excess compensation become less sensitive to firm performance in firms with low initial analyst coverage. These findings are consistent with the monitoring hypothesis, specifically that financial analysts play an important governance role in scrutinizing management behavior, and the market is pricing an increase in expected agency problems after the loss in analyst coverage.

Ahern K.R.; Daminelli D.; Fracassi C.
Journal of Financial Economics, 2015

We find strong evidence that three key dimensions of national culture (trust, hierarchy, and individualism) affect merger volume and synergy gains. The volume of cross-border mergers is lower when countries are more culturally distant. In addition, greater cultural distance in trust and individualism leads to lower combined announcement returns. These findings are robust to year and country-level fixed effects, time-varying country-pair and deal-level variables, as well as instrumental variables for cultural differences based on genetic and somatic differences. The results are the first large-scale evidence that cultural differences have substantial impacts on multiple aspects of cross-border mergers.

Deng X.; Kang J.-K.; Low B.S.
Journal of Financial Economics, 2013

Using a large sample of mergers in the US, we examine whether corporate social responsibility (CSR) creates value for acquiring firms' shareholders. We find that compared with low CSR acquirers, high CSR acquirers realize higher merger announcement returns, higher announcement returns on the value-weighted portfolio of the acquirer and the target, and larger increases in post-merger long-term operating performance. They also realize positive long-term stock returns, suggesting that the market does not fully value the benefits of CSR immediately. In addition, we find that mergers by high CSR acquirers take less time to complete and are less likely to fail than mergers by low CSR acquirers. These results suggest that acquirers' social performance is an important determinant of merger performance and the probability of its completion, and they support the stakeholder value maximization view of stakeholder theory.

Malmendier U.; Tate G.
Journal of Financial Economics, 2008

Does CEO overconfidence help to explain merger decisions? Overconfident CEOs over-estimate their ability to generate returns. As a result, they overpay for target companies and undertake value-destroying mergers. The effects are strongest if they have access to internal financing. We test these predictions using two proxies for overconfidence: CEOs' personal over-investment in their company and their press portrayal. We find that the odds of making an acquisition are 65% higher if the CEO is classified as overconfident. The effect is largest if the merger is diversifying and does not require external financing. The market reaction at merger announcement (-90 basis points) is significantly more negative than for non-overconfident CEOs (-12 basis points). We consider alternative interpretations including inside information, signaling, and risk tolerance.

Chen X.; Harford J.; Li K.
Journal of Financial Economics, 2007

Within a cost-benefit framework, we hypothesize that independent institutions with long-term investments will specialize in monitoring and influencing efforts rather than trading. Other institutions will not monitor. Using acquisition decisions to reveal monitoring, we show that only concentrated holdings by independent long-term institutions are related to post-merger performance. Further, the presence of these institutions makes withdrawal of bad bids more likely. These institutions make long-term portfolio adjustments rather than trading for short-term gain and only sell in advance of very bad outcomes. Examining total institutional holdings or even concentrated holdings by other types of institutions masks important variation in the subset of monitoring institutions.

Flannery M.J.; Rangan K.P.
Journal of Financial Economics, 2006

The empirical literature provides conflicting assessments about how firms choose their capital structures. Distinguishing among the three main hypotheses ("tradeoff," pecking order, and market timing) requires that we know whether firms have long-run leverage targets and (if so) how quickly they adjust toward them. Yet many previous researchers have applied empirical specifications that fail to recognize the potential for incomplete adjustment. A more general, partial-adjustment model of firm leverage indicates that firms do have target capital structures. The typical firm closes about one-third of the gap between its actual and its target debt ratios each year.

Brav A.; Graham J.R.; Harvey C.R.; Michaely R.
Journal of Financial Economics, 2005

We survey 384 financial executives and conduct in-depth interviews with an additional 23 to determine the factors that drive dividend and share repurchase decisions. Our findings indicate that maintaining the dividend level is on par with investment decisions, while repurchases are made out of the residual cash flow after investment spending. Perceived stability of future earnings still affects dividend policy as in Lintner (1956. American Economic Review 46, 97-113). However, 50 years later, we find that the link between dividends and earnings has weakened. Many managers now favor repurchases because they are viewed as being more flexible than dividends and can be used in an attempt to time the equity market or to increase earnings per share. Executives believe that institutions are indifferent between dividends and repurchases and that payout policies have little impact on their investor clientele. In general, management views provide little support for agency, signaling, and clientele hypotheses of payout policy. Tax considerations play a secondary role.

Moeller S.B.; Schlingemann F.P.; Stulz R.M.
Journal of Financial Economics, 2004

We examine a sample of 12,023 acquisitions by public firms from 1980 to 2001. The equally weighted abnormal announcement return is 1.1%, but acquiring-firm shareholders lose $25.2 million on average upon announcement. This disparity suggests the existence of a size effect in acquisition announcement returns. The announcement return for acquiring-firm shareholders is roughly two percentage points higher for small acquirers irrespective of the form of financing and whether the acquired firm is public or private. The size effect is robust to firm and deal characteristics, and it is not reversed over time.

Graham J.R.; Harvey C.R.
Journal of Financial Economics, 2001

We survey 392 CFOs about the cost of capital, capital budgeting, and capital structure. Large firms rely heavily on present value techniques and the capital asset pricing model, while small firms are relatively likely to use the payback criterion. A surprising number of firms use firm risk rather than project risk in evaluating new investments. Firms are concerned about financial flexibility and credit ratings when issuing debt, and earnings per share dilution and recent stock price appreciation when issuing equity. We find some support for the pecking-order and trade-off capital structure hypotheses but little evidence that executives are concerned about asset substitution, asymmetric information, transactions costs, free cash flows, or personal taxes.

Smith Jr. C.W.; Watts R.L.
Journal of Financial Economics, 1992

The authors examine explanations for corporate financing-, dividend-, and compensation-policy choices. They documen t robust empirical relations among corporate policy decisions and vari ous firm characteristics. Their evidence suggests contracting theories a re more important in explaining cross-sectional variation in observed financial, dividend, and compensation policies than either tax-based or signaling theories.