The NBER's Program on Corporate Finance, directed by Raghuram G. Rajan,
Northwestern University, met in Chicago on April 19. They discussed the following papers:
Mike Burkart, Stockholm School of Economics; Fausto Panunzi, Università di Bologna; and
Andrei Shleifer, NBER and Harvard University, "Family Firms" (NBER Working Paper No.
Discussant: Robert Gertner, NBER and University of Chicago
Allen N. Berger and Nathan H. Miller, Federal Reserve Board of Governors; Mitchell A.
Petersen, Northwestern University; Raghuram G. Rajan; and Jeremy C. Stein, NBER and
Harvard University; "Does Function Follow Organizational Form? Evidence from the Lending
Practices of Large and Small Banks"
Discussant: David S. Scharfstein, NBER and MIT
Lucian Bebchuk, NBER and Harvard University, and Alma Cohen, Harvard University,
"Firms' Decisions Where to Incorporate"
Discussant: Roberta Romano, NBER and Yale University
B. Espen Eckbo and Karin S. Thorburn, Dartmouth College, "Overbidding versus Fire Sales
in Bankruptcy Auctions"
Discussant: Kose John, New York University
Alexander Dyck, Harvard University, and Luigi Zingales, NBER and University of Chicago,
"Private Benefits of Control: An International Comparison" (NBER Working Paper No. 8711)
Discussant: Rene M. Stulz, NBER and Ohio State University
Marianne Bertrand, NBER and University of Chicago, and Antoinette Schoar, NBER and
MIT, "Managing with Style: The Effect of Managers on Firm Policies"
Discussant: Kent D. Daniel, NBER and Northwestern University
Ivo Welch, NBER and Yale University, "Columbus's Egg: Stock Returns Are The Real
Determinant of Capital Structure"
Discussant: Steven N. Kaplan, NBER and University of Chicago
Burkart, Panunzi, and Shleifer present a model of succession in a firm controlled and
managed by its founder. The founder decides between hiring a professional manager or leaving
management to his heir, as well as on how much, if any, of the shares to float on the stock
exchange. The authors assume that a professional is a better manager than the heir, and they
describe how the founder's decision is shaped by the legal environment. Specifically, they show
that, in legal regimes that successfully limit the expropriation of minority shareholders, the
widely held professionally managed corporation emerges as the equilibrium outcome. In legal
regimes with intermediate protection, management is delegated to a professional, but the family
stays on as large shareholders to monitor the manager. In legal regimes with the weakest
protection, the founder designates his heir to manage and the ownership remains inside the
family. This theory of separation of ownership from management includes the Anglo-Saxon and
the Continental European patterns of corporate governance as special cases, and generates
additional empirical predictions consistent with cross-country evidence.
Theories based on incomplete contracting suggest that small organizations may do better
than large organizations in activities that require the processing of soft information. Berger,
Miller, Petersen, Rajan, and Stein explore this idea in the context of bank lending to small
firms, an activity that is typically thought of as relying heavily on soft information. They find
that large banks are less willing than small banks to lend to informationally "difficult" credits,
such as firms that do not keep formal financial records. Moreover, controlling for the
endogeneity of bank-firm matching, large banks lend at a greater distance, interact less
personally with their borrowers, have shorter and less exclusive relationships, and do not
alleviate credit constraints as effectively. All of this is consistent with small banks being better
able to collect and act on soft information than large banks.
Bebchuk and Cohen investigate the decisions of publicly traded firms about where to
incorporate. They study what makes states more or less attractive to incorporating firms and how
firms determine whether they will incorporate outside their state of location. The authors find
that states that offer stronger antitakeover protections are significantly more successful in
retaining in-state companies and in attracting out-of-state incorporations. Indeed, the market for
incorporations has not even penalized the three states that passed severe antitakeover statutes
which have been viewed as detrimental to shareholders. The authors also find that there is a big
difference between a state's ability to attract incorporations from firms located in it versus from
out-of-state firms; they investigate several possible explanations for this home-state advantage.
Finally, the authors find that Delaware's dominance is greater than has been recognized and that
in the future Delaware's market share can be expected to increase further. These findings have
significant implications for the ongoing debates on regulatory competition, takeover law, and
Eckbo and Thorburn analyze the bidding incentives of the main creditor (bank) in
Swedish bankruptcy auctions. Without a direct mechanism for enforcing its seller-reservation
price, the bank offers financing to a potential bidder in return for a strategy that maximizes the
expected profits of the bank-bidder coalition. The coalition overbids (in excess of the coalition's
private valuation) by an amount that decreases with the bank's "liquidation recovery": the
recovery if the bank were to receive the piecemeal liquidation value announced by the auctioneer
at the start of the auction. Since both the liquidation recovery and the final going-concern
auction premium can be observed, the overbidding theory can be tested. The authors perform a
large-sample, cross-sectional analysis in which overbidding is pitted against asset-fire sale
arguments. The latter hold that auctions tend to produce lower going-concern premiums when
taking place during industry-wide financial distress, or when the firm is sold back to old owners
or to industry outsiders. The evidence is strongly consistent with overbidding but provides little
support for asset fire-sale arguments.
Dyck and Zingales construct a measure of the private benefits of control in 39 countries
based on 412 transactions between 1990 and 2000. They find that the value of control ranges
between negative 4 percent and positive 65 percent, with an average of 14 percent. In countries
where private benefits of control are larger, capital markets are less developed, ownership is
more concentrated, and privatizations are less likely to take place as public offerings. The
authors also analyze what institutions are most important in curbing these private benefits. A
high degree of statutory protection of minority shareholders and a high degree of law
enforcement are associated with lower levels of private benefits of control, but so are a high
level of diffusion of the press, a high rate of tax compliance, and a high degree of product market
competition. A crude test suggests that the "non-traditional" mechanisms have at least as much
explanatory power as the legal ones commonly mentioned in the literature. In fact, in a
multivariate analysis, newspapers' circulation and tax compliance seem to be the dominating
factors. The authors advance an explanation of why this might be the case.
Bertrand and Schoar investigate the extent to which heterogeneity in firm policies can
be explained by differences in managerial style. They use a firm-manager matched panel data set
with which they can track the same managers across different firms over time. They find that
manager fixed effects matter for a wide range of corporate decisions. For example, differences in
capital expenditures, financial structure, dividend policies, acquisition and diversification
policies, and cost-cutting policies are explained to a significant extent by executive fixed effects.
Moreover, specific patterns in managerial decisionmaking seem to indicate general differences
in "style." Also, style affects performance, and this is reflected in part in managerial
compensation levels. In a final step, the authors tie these findings to some observable managerial
characteristics, including MBA graduation and birth cohort. They ask whether and how
corporate decisions are affected by these managerial characteristics. Executives from earlier
birth cohorts overall appear more financially conservative. On the other hand, managers who
hold an MBA degree on average seem to follow more financially aggressive strategies.
Welch shows that the typical firm's capital structure is not caused by attempts to time the
market, by attempts to minimize taxes or bankruptcy costs, or by any other attempts at firm-value maximization. Instead, firms appear to be passive. Thus, current capital structure is best
predicted by (past capital structure adjusted for) intervening stock return appreciation.
Consequently, one should conclude that observed U.S. capital structure is determined defacto
primarily by external stock market influences and not by deliberate internal corporate