NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

NBER Reporter: Summer 2002


Corporate Finance


    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. 8776)

    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 corporate governance.

    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 decisionmaking.


 
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