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Abstract:
This paper reviews empirical research on the use of private and court-supervised mechanisms for resolving default and reorganizing companies in financial distress. Starting with a simple framework for financial distress and a quick overview of the theoretical research in this area, we proceed to summarize and synthesize the empirical research in the areas of financial distress, asset and debt restructuring, and features of the formal bankruptcy procedures in the US and around the world. Studies of out-of-court restructurings (workouts and exchange offers), corporate governance issues relating to distressed restructurings, and the magnitude of the costs and the efficiency of bankruptcy reorganizations are among the topics covered.

Bankruptcy, financial distress, bankruptcy costs, fire-sales, bankruptcy auctions, reorganizations, Chapter 11

Abstract:
We present unique empirical tests for overbidding using data from Sweden's auction bankruptcy system. The main creditor (a bank) can neither bid in the auction nor refuse to sell in order to support a minimum price. We argue that the bank may increase its expected revenue by financing a bidder in return for a joint bid strategy. The optimal coalition bid exceeds the bidder's private valuation (overbidding) by an amount that is increasing in the bank's ex ante debt impairment. We find that bank-bidder financing arrangements are common, and our cross-sectional regressions show that winning bids are increasing in the bank-debt impairment as predicted. While, in theory, overbidding may result in the coalition winning against a more efficient rival bidder, our evidence on post-bankruptcy operating performance fails to support such allocative inefficiency effects. We also find that restructurings by bank-financed bidders are relatively risky as they have greater bankruptcy refiling rates, irrespective of the coalition's overbidding incentive.

Bankruptcy, auctions, overbidding, fire sale, saleback, governance, premiums, recovery rates, bank bidding

Abstract:
This essay surveys the recent empirical literature and adds to the evidence on takeover bids for U.S. targets, 1980-2005. The availability of machine readable transaction databases have allowed empirical tests based on unprecedented sample sizes and detail. We review both aggregate takeover activity and the takeover process itself as it evolves from the initial bid through the final contest outcome. The evidence includes determinants of strategic choices such as the takeover method (merger v. tender offer), the size of opening bids and bid jumps, the payment method, toehold acquisition, the response to target defensive tactics and regulatory intervention (antitrust), and it offers links to executive compensation. The data provides fertile grounds for tests of everything ranging from signaling theories under asymmetric information to strategic competition in product markets and to issues of agency and control. The evidence is supportive of neoclassical merger theories. For example, regulatory and technological changes, and shocks to aggregate liquidity, appear to drive out market-to-book ratios as fundamental drivers of merger waves. Despite the market boom in the second half of the 1990s, the proportion of all-stock offers in more than 13,000 merger bids did not change from the first half of the decade. While some bidders experience large losses (particularly in the years 1999 and 2000), combined value-weighted announcement-period returns to bidders and targets are significantly positive on average. Long-run post-takeover abnormal stock returns are not significantly different from zero when using a performance measure that replicates a feasible portfolio trading strategy. There are unresolved econometric issues of endogeneity and self-selection.

Takeover, merger, tender offer, auction, offer premium, bidder gains, toeholds, markups

Abstract:
Although takeover premiums are large, only 2% of twelve thousand bidders initiating control contests for publicly traded targets acquire target shares (toehold) shortly prior to the bid. We argue that, because toeholds deter competition, toehold bidding may trigger target resistance. If resistance simply means withholding a termination agreement, it takes a toehold of 8% to compensate for the opportunity loss of a typical agreement. As predicted, we find that toehold bidding is significantly more likely when this implied toehold threshold is low. Toehold costs may also arise when target resistance eliminates all bids. We show, however, that the expected marginal toehold effect is positive because toeholds increase the probability of success. Finally, toehold purchases may cause a pre-bid target stock price run-up and increase total takeover costs (markup pricing). However, we find that bidder gains are increasing in both the target run-up and in the toehold. We conclude that friendly bidders appear to abstain from toeholds primarily to avoid toehold-induced target resistance.

Abstract:
Surprisingly, bidders rarely acquire a target stake (toehold) prior to launching control bids, despite paying large takeover premiums. At the same time, toeholds are large when they occur, and toehold bidding is the norm in hostile takeovers. To explain these observations, we develop and test an auction-based takeover model in which toeholds antagonize some (rational) targets, causing these to reject merger negotiations. Optimal toeholds are either zero (to avoid rejection costs) or greater than a threshold so that toehold benefits offset rejection costs. We estimate the toehold threshold, which averages as much as 9\% across 10,000 initial control bids for U.S. public targets, and show that the probability of toehold bidding decreases in the threshold estimate as predicted. The threshold model is also consistent with higher toehold frequencies in hostile bids, and with the steady decline in toehold bidding since the 1980s.

Bidding strategy, tender offer, merger, toehold, termination fee, bid failure

Abstract:
This essay surveys the empirical literature on corporate breakup transactions (divestitures, spinoffs, equity carveouts, tracking stocks), leveraged recapitalizations, and leveraged buyouts (LBOs). Many breakup transactions are a response to excessive conglomeration and reverse costly diversification discounts. The empirical evidence shows that the typical restructuring creates substantial value for shareholders. The value-drivers include elimination of costly cross-subsidizations characterizing internal capital markets, reduction in financing costs for subsidiaries through asset securitization and increased divisional transparency, improved (and more focused) investment programs, reduction in agency costs of free cash flow, implementation of executive compensation schemes with greater pay-performance sensitivity, and increased monitoring by lenders and LBO sponsors. Buyouts after the turn of the century create value similar to LBOs of the 1980s. Recent developments include club deals (consortiums of LBO sponsors bidding together), fund-to-fund exits (LBO funds selling the portfolio firm to another LBO fund), a highly liquid (until mid-2007) leveraged loan market, and evidence of persistence in fund returns (perhaps because brand-sponsors borrow at better rates). The perhaps greatest challenge to the restructuring literature is to achieve a modicum of integration of the analysis across transaction types. Another challenge is to produce precise estimates of the expected return from buyout investments in the presence of limited data on those portfolio companies which do not return to public status.

Restructuring, breakup, divestiture, spinoff, equity carveout, tracking stock, leveraged

Abstract:
This paper provides some first, large-sample evidence on CEO turnover, compensation changes and corporate performance following bankruptcy auctions, using data from Sweden. Two-thirds of CEOs lose their jobs through the auction, and the median compensation loss is 40% over the two years following filing. While CEO turnover and compensation effects are dramatic, post-bankruptcy operating performance of firms auctioned as going concerns is typically at par with industry competitors. Thus, there is little evidence of delayed filing at the detriment of the firm's going concern value. Overall, the results are consistent with the hypothesis that bankruptcy auctions force turnover of inefficient CEOs. These results contrast with extant evidence on Chapter 11 renegotiations.

Abstract:
We examine whether pre-bid target stock price runups lower bidder takeover gains and deter short-term toehold purchases in the runup period. A dollar increase in the runup raises the initial offer price by $0.80 (markup pricing). Bidder gains, while decreasing in offer price markups, are increasing in runups, suggesting that runups are interpreted by the negotiating parties as reflecting increases in target stand-alone values. We also show that short-term toehold purchases increase runups. However, when purchased by the initial bidder (as opposed to by other investors), short-term toeholds lower markups, possibly because they provide evidence to the target that the runup anticipates the pending offer premium (supporting substitution between the runup and the markup). We conclude that markup pricing per se is unlikely to deter short-term toehold aquisitions.

Bidder returns, target runup, takeover, markup pricing, toehold bidding

Abstract:
This paper provides some first evidence on CEO turnover, compensation and corporate performance following bankruptcy auctions, using small-firm data from Sweden. Auction bankruptcy imposes significant costs on CEOs: the median compensation loss is 40% over two years following filing, and two-thirds of CEOs lose their jobs through the auction. There is, however, little evidence that managers delay bankruptcy filing at the detriment of firms' going concern value. The post-bankruptcy operating performance of auctioned firms is typically at par with industry competitors. Overall, the results are consistent with the hypothesis that bankruptcy auctions tend to force turnover of inefficient CEOs. This contrasts with extant evidence on Chapter 11 reorganizations.
compensation, post-bankruptcy performance

Bankruptcy auctions, CEO turnover, executive

Abstract:
Researchers debate whether environmental investments reduce firm value or can actually improve financial performance. We provide some first evidence on shareholder wealth effects of voluntary corporate environmental initiatives. Companies announcing membership in Climate Leaders and Ceres - two voluntary environmental programs related to climate change - experience significantly negative abnormal stock returns. The price decline is smaller in carbon-intensive industries, where regulatory actions are more likely, and for high book-to-market firms, suggesting that "green" expenditures crowd out growth-related investments. We also document insignificant announcement returns for portfolios of industry rivals. Overall, the environmental investments appear to conflict with shareholder value-maximization. This has far reaching implications since the U.S. government relies on voluntary initiatives to reduce the emissions of greenhouse gases.

capital expenditures, climate change, corporate social responsibility, environmentally responsible investing, shareholder wealth

Abstract:
We argue that the existence of CEO private control benefits complements managerial reputation in counteracting costly shareholder risk-shifting incentives during severe financial distress, when job-loss may be imminent. We examine this argument empirically using bankruptcy filings in Sweden, where a filing automatically terminates CEO employment and requires the firm to be sold in an open auction. The median CEO income loss is a dramatic 40%, suggesting that bankruptcy filing damages CEO reputation. Empirical proxies for both CEO reputation and control benefits are significant determinants of the probability of the CEO being rehired by the buyer in the auction, as predicted. Moreover, we find that the rehired CEOs generate a post-bankruptcy accounting performance at par with industry rivals. The surprisingly strong survival characteristics of the reorganized firms are consistent with managerial conservatism ex ante, and help alleviate creditor concern with costly asset substitution designed to delay filing in an automatic bankruptcy auction system.

Post-bankruptcy performance, CEO turnover, bankruptcy, executive compensation, private benefits of control, risk-shifting incentives

Abstract:
Swedish bankruptcy filing automatically terminates CEO employment and triggers an auction of the firm. Critics of this system warn of excessive shareholder risk-shifting incentives prior to filing. We argue that private benefits of control induce managerial conservatism that may override risk-shifting incentives. By investing conservatively, the CEO increases the joint probability that the auction results in a going-concern sale and that she is rehired. This uniquely implies that the rehiring probability is increasing in private control benefits, which our empirical results support. We also find that buyers in the auction screen on CEO quality. Overall, labor market discipline is dramatic, as filing CEOs suffer large income losses relative to CEOs of matched, non-bankrupt firms. Firms emerging from bankruptcy typically perform at par with industry rivals.

CEO Turnover, Executive Compensation, Private Benefits of Control, Risk-shifting Incentives, Bankruptcy, Post-bankruptcy Performance

Abstract:
We present large-sample evidence on the performance of domestic and U.S.(foreign) bidder firms acquiring Canadian targets. Domestic bidders earn significantly positive average announcement-period abnormal returns, while U.S. bidder returns are indistinguishable from zero. Measures of pre- and post-acquisition abnormal accounting performance are also consistent with a superior domestic bidder performance. Domestic bidder announcement returns are on average greatest for offers involving stock-payment and for the bidders with the smallest equity size relative to the target. Neither direct foreign investment controls, horizontal product-market relationships, nor acquisition propensities explain why domestic bidders outperform their U.S. competitors.

Abstract:
We present large-sample evidence on the performance of domestic and U.S.(foreign) bidder firms acquiring Canadian targets. Domestic bidders earn significantly positive average announcement-period abnormal returns, while U.S. bidder returns are indistinguishable from zero. Measures of pre- and post-acquisition abnormal accounting performance are also consistent with a superior domestic bidder performance. Domestic bidder announcement returns are on average greatest for offers involving stock-payment and for the bidders with the smallest equity size relative to the target. Neither direct foreign investment controls, horizontal product-market relationships, nor acquisition propensities explain why domestic bidders outperform their U.S. competitors.

Abstract:
We survey empirical research on the Swedish auction bankruptcy system, which requires that filing firms are put up for sale in an auction. The bids determine whether the firm will be liquidated piecemeal or continued as a going concern. The auctions are competitive and there is little evidence of fire-sales. Three-quarters of the firms survive the auction with their core assets intact. In contrast to evidence on reorganizations under Chapter 11 in the U.S., buyers in Sweden restructure the auctioned firms well enough for these firms to perform at par with industry rivals. The CEOs of auctioned firms suffer dramatic personal bankruptcy costs. Nevertheless, there is no indication that this results in value-destroying risk shifting behaviour prior to filing. Overall, the Swedish experience suggests that greater reliance on the auction mechanism, seen recently also in the U.S., enhances economic efficiency.

Bankruptcy, auction, reorganization, liquidation, risk-shifting, asset substitution, fire-sale, bankruptcy costs

Abstract:
We test for fire-sale tendencies in automatic bankruptcy auctions. We find evidence consistent with fire-sale discounts when the auction leads to piecemeal liquidation, but not when the bankrupt firm is acquired as a going concern. Neither industry-wide distress nor the industry affiliation of the buyer affect prices in going-concern sales. Bids are often structured as leveraged buyouts, which relaxes liquidity constraints and reduces bidder underinvestment incentives in the presence of debt overhang. Prices in "prepack" auctions (sales agreements negotiated prior to bankruptcy filing) are on average lower than for in-auction going-concern sales, suggesting that prepacks may help preempt excessive liquidation when the auction is expected to be illiquid. Prepack targets have a greater industry-adjusted probability of refiling for bankruptcy, indicating that liquidation preemption is a risky strategy.

Bankruptcy, auction, going-concern sale, piecemeal liquidation, fire-sale

Abstract:
This paper provides large-sample evidence on the Swedish auction bankruptcy system. Compared to U.S. Chapter 11, bankruptcy auctions are substantially quicker and have lower costs. Three-quarters of the firms survive the auction as going concern, which is similar to Chapter 11 survival rates. Also, based on market values, auctions produce total debt recovery rates that are comparable to recovery rates in Chapter 11 reorganizations. The cash settlement enforces adherence to absolute priority rules. Overall, the evidence provides little support for the view that auction bankruptcy causes managers to delay filing relative to what happens under the U.S. reorganization code.