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Abstract:
We examine how intra-industry variation in financial structure relates to industry factors and whether real and financial decisions are jointly determined within competitive industries. We find that industry and group factors beyond standard industry fixed effects are also important to firm financial structure. Firm financial leverage, capital intensity, and cash-flow risk are interdependent decisions that depend on the firm's proximity to the median industry capital-labor ratio, the actions of firms within its industry quintile, and its status as entrant, incumbent, or exiting firm. Our results support competitive industry equilibrium models of financial structure in which debt, technology, and risk are simultaneous decisions.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
We examine how intra-industry variation in financial structure relates to industry factors and whether real and financial decisions are jointly determined within competitive industries. We find that industry and group factors beyond standard industry fixed effects are also important to firm financial structure. Firm financial leverage, capital intensity, and cash-flow risk are interdependent decisions that depend on the firm's proximity to the median industry capital-labor ratio, the actions of firms within its industry quintile, and its status as entrant, incumbent, or exiting firm. Our results support competitive industry equilibrium models of financial structure in which debt, technology, and risk are simultaneous decisions.

Capital Structure, Debt, Equity, Financial Structure, Intra-industry Equilibrium

Abstract:
We analyze the market for firms, divisions and plants of manufacturing firms using a large sample of plant-level data for the period 1974-92. There is an active market for corporate assets, with close to 7 percent of plants changing ownership annually through mergers,acquisitions and asset sales in peak expansion years in the economy. Partial firm sales account for more than half of these transactions. The probability of asset sales and whole-firm transactions is related to firm organization and ex ante efficiency of buyers and sellers. We find that efficiency gains of assets sold are significantly higher the more efficient the buying firm relative to the selling firm.

The timing of sales and the pattern of efficiency gains suggests that the transactions that occur, especially through asset sales of plants and divisions, tend to improve the allocation of resources and are consistent with a simple neoclassical model of profit maximizing by firms.

Mergers, Asset Sales, Conglomerate Firms, Productivity

Abstract:
We analyze the market for firms, divisions and plants of manufacturing firms using a large sample of plant-level data for the period 1974-92. There is an active market for corporate assets, with close to 7 percent of plants changing ownership annually through mergers,acquisitions and asset sales in peak expansion years in the economy. Partial firm sales account for more than half of these transactions. The probability of asset sales and whole-firm transactions is related to firm organization and ex ante efficiency of buyers and sellers. We find that efficiency gains of assets sold are significantly higher the more efficient the buying firm relative to the selling firm.

This timing of sales and the pattern of efficiency gains suggests that the transactions that occur, especially through asset sales of plants and divisions, tend to improve the allocation of resources and are consistent with a simple neoclassical model of profit maximizing by firms.

Abstract:
We examine public firms' issues of private and public debt, convertibles, and common equity securities. The market for public firms issuing private securities is large. Of the over 13,000 issues we examine, more than half are in the private market. We find that asymmetric information plays a major role in the choice of security type within public and private markets. Conditional on issuing in the public market, firms' predicted probability of issuing equity declines and issuing debt increases with measures of asymmetric information. We find a weak reversal of this sensitivity in the private market. We also find large differences in the sensitivity of security issue decisions to market timing, risk and investment opportunity variables in public and private markets. Our results point to a potentially important unexplored dimension of capital structure - the public-private funding ratio in addition to the debt-equity ratio.

Abstract:
We examine a comprehensive set of private and public security issuance decisions by publicly traded companies. We study private and public issues of debt, convertibles and common equity securities - a total of 6 different security-market choices. The market for public firms issuing private securities is large. Of the over 13,000 issues we examine, more than half are in the private market. We find that asymmetric information and moral hazard problems play a large role in the public versus private market choice and the security type choice. Our findings show that asymmetric information impacts security choice in a particular pattern: Conditional on issuing in the public market we find a pecking order of security issuance holds, firms with higher measures of asymmetric information are less likely to issue equity. We find a reversal of this pecking order in the private market, firms with higher measures of asymmetric information are more likely to issue equity and convertibles. Second, we find risk and investment opportunities are important in determining which security type a firm issues. Firms with high risk, low profitability and good investment opportunities are more likely to choose equity and convertibles and to issue privately. The results support models of security issuance where private securities give investors more incentives to produce information and monitor the firm.

Abstract:
We examine a comprehensive set of public firms' issues of private and public debt, convertibles and common equity securities. The market for public firms issuing private securities is large. Of the over 13,000 issues we examine, more than half are in the private market, with 81\% of small public firms issuing equity and convertibles choosing to issue privately. We find that asymmetric information, in particular, plays a large role in the public versus private market choice and the security type choice. Conditional on issuing in the public market, firms' predicted probability of issuing equity declines and issuing debt increases with measures of asymmetric information. We find a reversal of this sensitivity in the private market, firms' probability of issuing debt slightly declines with measures of asymmetric information. We also find large differences in the sensitivity of security issue decisions to market timing and trade-off variables in public and private markets.

Capital structure, financial structure, debt, equity, public, private

Abstract:
This paper examines long-term block ownership by corporations and performance changes in firms with corporate block owners. We also examine potential reasons for corporate ownership including benefits in product market relationships, alleviation of financing constraints, and board monitoring by corporate owners. We find the largest significant increases in targets' stock prices, investment, and operating profitability when ownership is combined with product market relationships between purchasing and target firms, especially in industries with high research and development. Our findings are consistent with the conclusion that block ownership by corporations has significant benefits in product market relationships.

Equity Ownership, Strategic Alliances, Joint Ventures, Product Market Relationships

Abstract:
This paper examines long-term block ownership by corporations and performance changes in firms with corporate block owners. We also examine potential reasons for corporate ownership including benefits in product market relationships, alleviation of financing constraints, and board monitoring by corporate owners. We find the largest significant increases in targets' stock prices, investment, and operating profitability when ownership is combined with product market relationships between purchasing and target firms, especially in industries with high research and development. Our findings are consistent with the conclusion that block ownership by corporations has significant benefits in product market relationships.

Abstract:
We develop a profit-maximizing neoclassical model of optimal firm size and growth across different industries based on differences in industry fundamentals and firm productivity. The model predicts how conglomerate firms will allocate resources across divisions over the business cycle and how their responses to industry shocks will differ from those of single-segment firms. We test our model and find that growth and investment of conglomerate and single-segment firms is related to fundamental industry factors and individual firm-segment productivity suggested by our simple neoclassical theory. The majority of conglomerate firms exhibit growth across industry segments that is consistent with optimal behavior.

Abstract:
We develop a profit-maximizing neoclassical model of optimal firm size and growth across different industries. The model predicts how conglomerate firms will allocate resources across divisions over the business cycle and how their responses to industry shocks will differ from those of single-segment firms.

We test our model and find that growth of conglomerate and single-segment firms is related to fundamental industry factors and individual firm-segment productivity consistent with our simple neoclassical theory. Conglomerates grow less in a particular segment if their other segments are more productive and if their other segments experience a larger positive demand shock. We find that the growth rates of peripheral segments are very sensitive to relative productivity and that conglomerates sharply cut the growth of unproductive peripheral segments. We do find some evidence consistent with agency problems for conglomerate firms that are broken up. However, the majority of conglomerate firms exhibit growth across business segments that is consistent with optimal behavior.

Abstract:
This paper investigates an unexplored dimension of block-equity ownership: benefits in product-market relationships between corporations. We find significant increases in investment and operating performance for firms that have product-market relationships with their corporate owners. We also find that the size of equity stakes is positively related to measures of asset specificity and growth options, especially when firms can fund subsequent investment with internal funds. Investment of target firms with business relationships with their corporate owners also significantly increases with Tobin's q following the block equity purchases. We find a strong association of investment with Tobin's q for firms in which there is repeated interaction through supply and distribution agreements between the firm and its equity owner.

Our evidence indicates that benefits in product-market relationships are an important motivation for corporate equity ownership. The evidence is consistent with the view that an equity position by an outside corporation is important in aligning incentives between contracting firms to expand joint investment opportunities and reduce the costs of generating and maintaining business agreements and alliances.

Abstract:
The large literature on conglomerate firms began with the documentation of the conglomerate discount. Given conglomerate firm production represents more than 50 percent of production in the United States, this discount has represented a large economically important puzzle for the U.S. economy. For corporate finance, the primary question about diversification is "When does corporate diversification affect firm value?" And, "When it does, how does it do so?" Early literature came to the conclusion that the conglomerate discount was the result of problems with resource allocation and internal capital markets. Recent empirical literature has found that self-selection by firms with different investment opportunities can explain the conglomerate discount. Additional theoretical and empirical research has shown how a model of profit-maximizing firms with different abilities and investment opportunities can explain resource allocation by conglomerate firms.

Conglomerate firms, multidivisional firms, firm organization, investment, internal capital markets, conglomerates

Abstract:
We examine the effect of financial dependence on acquisition and investment within existing industries by single-segment and conglomerate firms for industries undergoing different long run changes in industry conditions. Conglomerates and single-segment firms differ more in rates of within-industry acquisitions than in capital expenditure rates, which are similar across organizational type. In particular, 36 percent of within-industry growth by conglomerate firms in growth industries is from intra-industry acquisitions, compared to nine percent for single segment firms. Financial dependence, a deficit in a segment's internal financing, decreases the likelihood of within-industry acquisitions and opening new plants, especially for single-segment firms. These effects are mitigated for conglomerates in growth industries. The findings persist after controlling for firm size and segment productivity. Acquisitions lead to increased efficiency as plants acquired by conglomerate firms in growth industries increase in productivity post acquisition. The results are consistent with the comparative advantages of different firm organizations differing across long-run industry conditions.

Abstract:
We examine the effect of financial dependence on acquisition and investment within existing industries by single-segment and conglomerate firms for industries undergoing different long-run changes in industry conditions. Conglomerates and single-segment firms differ more for within-industry acquisitions, while capital expenditure rates are similar across organizational type. In particular, 36 percent of within-industry growth by conglomerate firms in growth industries is from intra-industry acquisitions versus nine percent for single-segment firms. Financial dependence, a deficit in a segment's internal financing, decreases the likelihood of within-industry acquisitions and opening new plants, especially for single-segment firms. These effects are mitigated for conglomerates in growth industries and also for firms that are publicly traded. We also find that plants acquired by conglomerate firms in growth industries increase in productivity post-acquisition. In declining industries, plants of segments that are financially dependent are less likely to be closed by conglomerate firms. These findings persist after controlling for firm size and segment productivity. The results are consistent with the comparative advantages of different firm organizations differing across long-run industry conditions.

conglomerates, acquisitions, mergers, investment, conglomerate, mulit-industry, productivity

Abstract:
This paper investigates whether Chapter 11 bankruptcy provides a mechanism by which insolvent firms are efficiently reorganized and the assets of unproductive firms are effectively redeployed. We argue that incentives to reorganize depend on the level of demand and industry conditions. Using plant-level data, we find that Chapter 11 status is much less important than industry conditions in explaining the productivity, asset sales and closure conditions of Chapter 11 bankrupt firms. This suggests that firms that elect to enter into Chapter 11 incur few real economic costs.

Abstract:
This paper investigates whether Chapter 11 bankruptcy provides a mechanism by which insolvent firms are efficiently reorganized and the assets of unproductive firms are effectively redeployed. We argue that incentives to reorganize depend on the level of demand and industry conditions. Using plant-level data, we find that Chapter 11 status is much less important than industry conditions in explaining the productivity, asset sales and closure conditions of Chapter 11 bankrupt firms. This suggests that firms that elect to enter into Chapter 11 incur few real economic costs.

Abstract:
We study the resource allocation decisions of U.S. multinational corporations (MNCs). We examine how established MNCs grow across countries and how firm-specific resources and host country financial-market development influence MNC growth. We find evidence of intra-firm trade-offs to growth in MNCs that have limited organizational capital and high R&D, and MNCs with low external and internal financing. In countries with less developed capital markets, we find significant within-MNC trade-offs to growth between affiliates and their U.S. parents. These trade-offs diminish over time as local capital markets develop. Our evidence indicates that access to financing and organizational capital are important resources for MNC affiliate growth.

Abstract:
We study the resource allocation decisions of U.S. multinational corporations (MNCs). We examine how established MNCs grow across countries over time and how firm-specific resources and host country financial-market development influence MNCs' growth across their networks of affiliates. We find that affiliates of high-R&D MNCs with small affiliate networks face trade-offs to growth within the firm. These trade-offs are particularly important when MNC affiliates have lower combined host-country and parent financing.

We also find evidence that country-level contracting effectiveness is associated with increased affiliate growth for MNCs with small affiliate networks in countries with less developed capital markets. MNCs that have large affiliate networks can internalize contracting costs and are less affected by host country institutions. Our findings also show that intra-MNC trade-offs to growth are affected by the development of host-country institutions and financial markets. Overall, our findings are consistent with MNCs possessing organizational and financial capital that is in scarce
supply for MNCs with smaller networks of affiliates.

Multinational Corporations, Financial Market Development, Capital Markets, Investment, Growth, Exchange Rates, International Trade

Abstract:
We study the effect of real asset liquidity on a firm’s implied cost of capital. We find an aggregate asset-liquidity discount in firms’ cost of capital that is strongly counter-cyclical. At the firm-level we find that asset liquidity affects firms’ cost of capital both in the cross section and in the time series: Firms in industries with high asset liquidity and during industry liquidity booms have lower cost of capital. This effect is stronger when the asset liquidity is provided by firms operating within the industry. We also find that higher asset liquidity reduces the cost of capital by more for firms that face more competitive risk in product markets, have less access to external capital or are closer to default, and for those facing negative demand shocks. Our results suggest that asset liquidity is valuable to firms and, more generally, that operating inflexibility is an economically important source of risk.

asset liquidity, cost of capital, operating flexibility, financial flexibility

Abstract:
Mergers and acquisitions are a fast way for a firm to grow. Using plant-level data, we examine how firms redraw their boundaries after acquisitions. We find that there is a large amount of restructuring in a short period following mergers. Acquirers sell 27% and close 19% of acquired plants within three years of the acquisition. Plants in the target's peripheral divisions, especially in industries in which asset values are increasing, and in industries in which the acquirer does not have a comparative advantage, are more likely to be sold by the acquirer. Acquirers with skill in running their peripheral divisions tend to retain more acquired plants. Plants retained by acquirers increase in productivity whereas sold plants do not. The extent of post-merger restructuring activities and their cross-sectional variation do not support an empire building explanation for mergers. Acquirers readjust their firm boundaries in ways that are consistent with the exploitation of their comparative advantage across industries.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
Mergers and acquisitions are a fast way for a firm to grow. Using plant-level data, we examine how firms redraw their boundaries after acquisitions. We find that there is a large amount of restructuring in a short period following mergers. Acquirers sell 27% and close 19% of acquired plants within three years of the acquisition. Plants in the target's peripheral divisions, especially in industries in which asset values are increasing, and in industries in which the acquirer does not have a comparative advantage, are more likely to be sold by the acquirer. Acquirers with skill in running their peripheral divisions tend to retain more acquired plants. Plants retained by acquirers increase in productivity whereas sold plants do not. The extent of post-merger restructuring activities and their cross-sectional variation do not support an empire building explanation for mergers. Acquirers readjust their firm boundaries in ways that are consistent with the exploitation of their comparative advantage across industries.

acquisitions, mergers, investment, dispositions, conglomerate, restructuring, productivity

Abstract:
We examine how product market competition affects firm cash flows and stock returns in industry booms and busts. Our results show how real and financial factors interact in industry business cycles. In competitive industries, we find that high industry-level stock-market valuation, investment and new financing are followed by sharply lower operating cash flows and abnormal stock returns. Analyst estimates are positively biased and returns comove more in competitive industries. In concentrated industries these relations are weak and generally insignificant. Our results are consistent with firms and investors in competitive industries not fully internalizing the negative externality of industry competition on cash flows and stock returns.

Product Markets, competition, stock, returns, booms, busts, analysts

Abstract:
We examine how product similarity and competition influences mergers and acquisitions and the ability of firms to exploit product market synergies through asset complementarities. Using novel text-based analysis of firm 10K product descriptions, we find three key results. (1) Firms are more likely to enter mergers with firms whose language describing their assets is similar. (2) Transactions in competitive product markets with similar acquirer and target firms experience increased stock returns and real longer-term gains including higher growth in their product descriptions. (3) These gains are higher when the target is less similar to the acquirer's closest rivals, and when firms have the potential for unique products. Our findings are consistent with firms merging and buying assets to exploit asset complementarities and creating new products to increase product differentiation.

Mergers, Product Markets, Text Analysis, Merger Strategies

Abstract:
We examine how product differentiation influences mergers and acquisitions and the ability of firms to exploit product market synergies. Using novel text-based analysis of firm 10K product descriptions, we find three key results. (1) Firms are more likely to enter restructuring transactions when the language describing their assets is similar to all other firms, consistent with their assets being more redeployable. (2) Targets earn lower announcement returns when similar alternative target firms exist. (3) Acquiring firms in competitive product markets experience increased profitability, higher sales growth, and increased changes in their product descriptions when they buy target firms that are similar to them and different from rival firms. Our findings are consistent with similar merging firms exploiting synergies to create new products and increase their product differentiation relative to ex-ante rivals.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
We examine how product market competition affects firm cash flows and stock returns in industry booms and busts. In competitive industries, we find that high industry-level stock-market valuation, investment and new financing are followed by sharply lower operating cash flows and abnormal stock returns. We also find that analyst estimates are positively biased and returns comove more when industry valuations are high in competitive industries. In concentrated industries these relations are weak and generally insignificant. Our results suggest that when industry stock-market valuations are high, firms and investors in competitive industries do not fully internalize the negative externality of industry competition on cash flows and stock returns.

Abstract:
We develop a profit-maximizing neoclassical model of optimal firm size and growth across different industries based on differences in industry fundamentals and firm productivity. In the model, a conglomerate discount is consistent with profit maximization. The model predicts how conglomerate firms will allocate resources across divisions over the business cycle and how their responses to industry shocks will differ from those of single-segment firms. Using plant level data, we find that growth and investment of conglomerate and single-segment firms is related to fundamental industry factors and individual segment level productivity. The majority of conglomerate firms exhibit growth across industry segments that is consistent with optimal behavior.

Abstract:
This paper presents empirical evidence on the interaction of capital structure decisions and product market behavior. We examinine when firms recapitalize and increase the proportion of debt in their capital structure. The evidence in this paper shows that firms with low productivity plants in highly concentrated industries are more likely to recapitalize and increase debt financing. This finding suggests that debt plays a role in highly concentrated industries where agency costs are not significantly reduced by product market competition. Following the empirical evidence we introduce the "strategic investment" effect of debt and argue that this effect, in conjunction with agency costs, appears to fit the data.

Abstract:
This paper examines whether sharp debt increases through leveraged buyouts and recapitalizations interact with firm productivity and industry characteristics to influence plant closing and investment decisions. Given the endogeneity of recapitalization decisions, we also predict recapitalization decisions using exogenous productivity and market structure variables and use the predicted values as a measure of capital structure change. The results show that industry concentration, capacity utilization and relative plant productivity are significant determinants of the recapitalizations and subsequent plant (dis)investment decisions. We find that the effects of high leverage on investment and plant closing are significant when the industry is highly concentrated. Following their recapitalizations, firms in industries with high concentration are more likely to close plants and less likely to invest. In addition, we find that rival firms are less likely to close plants and more likely to invest when the market share of leveraged firms is higher.

Abstract:
We show that the incentives to reorganize inefficient firms and redeploy their assets depend on the change in industry output and industry characteristics. We find that in industries with low or negative output growth, bankrupt firms do not have significantly lower manufacturing productivity than their industry counterparts - throughout bankruptcy and subsequent to emerging from Chapter 11. In industries with high growth, fewer firms file for Chapter 11 but those that do file have productivity that is significantly lower average productivity than that of their industry. A large part of this decrease in average productivity is explained by the fact that bankrupt firms sell and close plants over time. Bankrupt firms sell and close plants at a higher rate than non-bankrupt firms. However, for the most part this increased rate of sales and closures is accounted for by sample selection and industry conditions and not by bankruptcy status. Our findings suggest that Chapter 11 has a larger role in promoting the exit of capacity from declining industries than in increasing the tendency of firms to close inefficient plants.