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Abstract:
In a simple model of capital budgeting in a diversified firm where headquarters has limited power, we show that funds are allocated towards the most inefficient divisions. The distortion is greater the more diverse are the investment opportunities of the firm`s divisions. We test these implications on a panel of diversified firms in the U.S. during the period 1979-1993. We find that i) diversified firms mis-allocate investment funds; ii) the extent of mis-allocation is positively related to the diversity of the investment opportunities across divisions; iii) the discount at which these diversified firms trade is positively related to the extent of the investment mis-allocation and to the diversity of the investment opportunities across divisions.

Abstract:
In a simple model of capital budgeting in a diversified firm where headquarters has limited power, we show that funds are allocated towards the most inefficient divisions The distortion is greater the more diverse are the investment opportunities of the firm's divisions. We test these implications on a panel of diversified firms in the U.S. during the period 1979-1993. We find that i) diversified firms mis-allocate investment funds; ii) the extent of mis-allocation is positively related to the diversity of the investment opportunities across divisions; iii) the discount at which these diversified firms trade is positively related to the extent of the investment mis-allocation and to the diversity of the investment opportunities across divisions.

Abstract:
In a simple model of capital budgeting in a diversified firm where headquarters has limited power, we show that funds are allocated towards the most inefficient divisions The distortion is greater the more diverse are the investment opportunities of the firm's divisions. We test these implications on a panel of diversified firms in the U.S. during the period 1979-1993. We find that i) diversified firms mis-allocate investment funds; ii) the extent of mis-allocation is positively related to the diversity of the investment opportunities across divisions; iii) the discount at which these diversified firms trade is positively related to the extent of the investment mis-allocation and to the diversity of the investment opportunities across divisions.

Abstract:
Using a new database, we study fees charged by 46,580 mutual fund classes offered for sale in 18 countries, which account for about 86% of the world fund industry in 2002. We examine management fees, total expense ratios, and total shareholder costs (which include load charges). Fees vary substantially across funds and from country to country. To explain these differences, we consider fund, sponsor, and national characteristics. Fees differ by investment objectives; larger funds and fund complexes charge lower fees; fees are higher for funds distributed in more countries and funds domiciled in certain offshore locations (especially when selling into countries levying higher taxes). Substantial cross-country differences persist even after controlling for these variables. These remaining differences can be explained by a variety of factors, the most robust of which is that fund fees are lower in countries with stronger investor protection.

Abstract:
Mutual fund investors generally desire high risk-adjusted performance at low cost, which is not necessarily the objective of fund families. Fund families generally want to maximize assets under management (i.e., their market share) and the resulting management fees. This paper examines how these conflicting objectives affect competition and investor behavior in the mutual fund industry for the universe of U.S. mutual fund families over the period 1979-1998. Over this period, industry assets increased by a factor of twenty, the number of active fund families tripled, and the average market share of a family declined by two thirds. We find that price competition is important in the industry. Families that charge lower fees than the competition gain market share, but only if these fees are above average to begin with. Low-cost families do not lose market share by charging higher fees. In addition, fees charged explicitly for marketing and distribution (12b-1 fees) have a positive impact on market share. We find no evidence that investors derive any benefit from 12b-1 fees. Product differentiation strategies are also effective in obtaining market share. Families that perform better, and start more funds relative to the competition (a measure of innovation) have a higher market share. Innovation is rewarded more if the new fund is more differentiated from existing offerings and is in a less crowded objective. Finally, market share within an investment objective is driven primarily by a family's policies within that objective, but there are important performance spillover effects from other funds in the family. Our findings are robust to various tests for endogeneity of the explanatory variables. Overall, this paper highlights a number of conflicts between fund families and investors.

Abstract:
This paper studies the mutual fund industry in 56 countries and tests various hypotheses to explain the extent to which this innovative form of financial intermediation has flourished. Consistent with related findings from the law and economics literature, the mutual fund industry is larger in countries with stronger rules, laws, and regulations, specifically where mutual fund investors' rights are better protected. The industry is smaller in countries where barriers to entry are higher, measured by the effort required to set up a new fund. The fund industry is larger in countries with wealthier and more educated populations, and where the industry itself is older. The fund industry is also larger in countries in which defined contribution pension plans are more prevalent and where trading costs are lower. These results indicate that laws and regulations, supply-side, and demand-side factors simultaneously affect the size of the mutual fund industry. These factors are also related to the recent growth rates of the fund industry across nations.

Abstract:
This paper studies the mutual fund industry in 56 countries and tests various hypotheses to explain the extent to which this innovative form of financial intermediation has flourished. Consistent with related findings from the law and economics literature, the mutual fund industry is larger in countries with stronger rules, laws, and regulations, specifically where mutual fund investors' rights are better protected. The industry is smaller in countries where barriers to entry are higher, measured by the effort required to set up a new fund. The fund industry is larger in countries with wealthier and more educated populations, and where the industry itself is older. The fund industry is also larger in countries in which defined contribution pension plans are more prevalent and where trading costs are lower. These results indicate that laws and regulations, supply-side, and demand-side factors simultaneously affect the size of the mutual fund industry. These factors are also related to the recent growth rates of the fund industry across nations.

Abstract:
This article reviews the recent trends (2001-2006) in private equity and leveraged buyouts (LBOs), focusing on changes in valuations, amount of leverage, and the institutional nature of leveraged financing. It compares these recent trends to the private equity boom and bust cycle of the 1980s, suggesting that there might have been a boom in recent times as well, and examines the likely consequences of a bust. It presents a case that the dispersed and opaque nature of recent LBO debt could transform few, large LBO defaults into a systemic event, akin to the sub-prime crisis. It concludes with policy recommendations concerning the disclosure of institutional ownership of LBO debt and the ability of bankruptcy codes to deal with large LBO defaults.

leveraged buyouts, hedge funds, securitization, credit risk transfer, financial crisis, bankruptcy

Abstract:
The authors offer a number of suggestions for increasing the transparency of this market. First, bankers' incentives to engage in effective ex-ante screening and ex-post monitoring of deals have been weakened, which may have led to excessive lending while encouraging buyers to overpay. Consistent with this possibility, the authors provide new evidence that some recent transactions have occurred at very low EBITDA-to-capital ratios, financed with high levels of debt that recall those of the late 1980s and early 1990s. The private equity or leveraged buyout (LBO) market in Europe and the U.S. has grown enormously over the last two decades, from $7.5 billion in 1991 to $500 billion in 2006. Much of the financing of recent transactions has come in the form of syndicated debt, which is dispersed after origination to many non-bank financial institutions. This financing practice has two important possible consequences: First, bankers' incentives to engage in effective ex-ante screening and ex-post monitoring of deals have been weakened, which may have led to excessive lending while encouraging buyers to overpay. Consistent with this possibility, the authors provide new evidence that some recent transactions have occurred at very low EBITDA-to-capital ratios, financed with high levels of debt that recall those of the late 1980s and early 1990s. Second, there is a scarcity of information about the identity of the ultimate holders of the LBO debt, and as a consequence of the resulting uncertainty, a few defaults of major LBO deals could cause a drying up of new funding for financial institutions. The end result could be that the veil covering the repackaging of LBO debt converts a small shock to the LBO sector into a liquidity crisis for its financiers. Such liquidity problems could in turn affect not the financing and re-financing of just LBO deals, but other as set classes as well, including lending by banks to public firms. The authors offer a number of suggestions for increasing the transparency of this market.

Abstract:
Agency problems are an important determinant of corporate liquidity. For a sample of more than 11,000 firms from 45 countries, we find that corporations in countries where shareholders rights are not well protected hold up to twice as much cash as corporations in countries with good shareholder protection. In addition, when shareholder protection is poor, factors that generally drive the need for liquidity, such as investment opportunities and asymmetric information, actually become less important. These results strengthen after controlling for capital market development. In fact, consistent with the importance of agency costs, we find that managers actually hold larger cash balances when capital markets are better developed. Our evidence indicates that investors in countries with poor shareholder protection cannot force managers to disgorge excessive cash balances.

Corporate liquidity, cash holdings, shareholder rights

Abstract:
Agency problems are an important determinant of corporate liquidity. For a sample of more than 11,000 firms from 45 countries, we find that corporations in countries where shareholders rights are not well protected hold up to twice as much cash as corporations in countries with good shareholder protection. In addition, when shareholder protection is poor, factors that generally drive the need for liquidity, such as investment opportunities and asymmetric information, actually become less important. These results strengthen after controlling for capital market development. In fact, consistent with the importance of agency costs, we find that managers actually hold larger cash balances when capital markets are better developed. Our evidence indicates that investors in countries with poor shareholder protection cannot force managers to disgorge excessive cash balances.

Agency costs, Cash, liquidity, shareholder rights, shareholder protection, international, corporate governance

Abstract:
Using a sample of over 1000 firms from seven emerging markets in 1995, we find that diversified firms trade at a discount of approximately 7% compared to single-segment firms. Diversified firms are also less profitable than single-segment firms, but lower profitability only explains part of the discount. We find a discount only for those firms that are part of industrial groups, and for diversified firms with management ownership concentration between 10% and 30%. The discount is most severe when management control rights substantially exceed their cash flow rights. Our results do not support internal capital market efficiency in economies with severe capital market imperfections.

Abstract:
Using a sample of over one thousand firms from seven emerging markets (Hong Kong, India, Indonesia, Malaysia, Singapore, South Korea, and Thailand) at the end of 1995, we find that diversified firms trade at a discount of approximately seven percent compared to single-segment firms. Diversified firms are also less profitable than single-segment firms, but lower profitability only explains part of the discount. We find a discount only for firms that are part of industrial groups, and for diversified firms with management ownership concentration between 10 percent and 30 percent; there is no evidence of a discount for firms with lower or higher ownership concentration. The discount is most severe when management control rights substantially exceed their cash flow rights. Our results provide little evidence of internal capital market efficiency in economies with severe capital market imperfections.

Corporate diversification, agency costs, governance, emerging markets

Abstract:
This paper documents the range of portfolio manager ownership in the funds they manage and examines whether higher ownership is associated with improved future performance. Almost half of all managers have ownership stakes in their funds, though the absolute investment is modest. Future risk-adjusted performance is positively related to managerial ownership, with performance improving by about three basis points for each basis point of managerial ownership. These findings persist after controlling for various measures of fund board effectiveness. Fund manager ownership is higher in funds with better past performance, lower front-end loads, smaller size, longer managerial tenure, and funds affiliated with smaller families. It is also higher in funds with higher board member compensation and in equity funds relative to bond funds. Future performance is positively related to the component of ownership that can be predicted by other variables, as well as the unpredictable component. Our findings support the notion that managerial ownership has desirable incentive alignment attributes for mutual fund investors, and indicate that the disclosure of this information is useful in making portfolio allocation decisions.

Fund performance, portfolio manager ownership

Abstract:
This paper documents the level of portfolio manager ownership in the funds they manage and examines whether higher ownership is associated with improved future performance. Almost half of all managers have ownership stakes in their funds, though the absolute investment is modest. Future risk-adjusted performance is positively related to managerial ownership, with performance improving by about three basis points for each basis point of managerial ownership. These findings persist after controlling for various measures of fund board effectiveness. Fund manager ownership is higher in funds with better past performance, lower front-end loads, smaller size, funds affiliated with smaller families, and where the manager has been in charge for a longer period of time. It is also higher in funds with higher board member compensation and in equity funds relative to bond funds. Future performance is positively related to the component of ownership that can be predicted by other variables, as well as the unpredictable component. Our findings support the notion that managerial ownership has desirable incentive alignment attributes for mutual fund investors, and indicate that the disclosure of this information is useful in making portfolio allocation decisions.

manager ownership, fund performance, mutual fund board

Abstract:
We study the stock price response to announcements of share purchases by corporate insiders over the period 1994 through 1999. The cross-sectional variability in the response is consistent with a curvilinear relation between firm value and insider ownership, where the value of the firm first increases, then decreases as insider ownership increases. These results are consistent with a causal interpretation of the relationship between insider ownership and firm value. The results of further tests are inconsistent with an interpretation that the firms in our sample are moving toward a new equilibrium ownership level or that insiders are purchasing shares to signal that the firm is undervalued.

Executive stock purchases, firm value, insider ownership

Abstract:
The empirically-observed cross-sectional relationship between the level of insider share ownership and the level of firm value has often been interpreted to mean that a change in share ownership can lead to a change in firm value. Such an interpretation has been criticized for ignoring potential endogeneity. In this paper, we perform two sets of tests to circumvent this alleged endogeneity. First, we regress changes in firm value against changes in insider ownership. We find that the cross-sectional variability in stock price responses to announcements of share purchases by corporate insiders is described by a curvilinear relation between firm value and insider ownership where the value of the firm first increases, then decreases, as insider ownership increases. Second, we test whether the firms in our sample are moving toward a new optimal equilibrium ownership level or that insiders are purchasing shares to signal that the firm is undervalued. We find no evidence to support this interpretation. Overall, our results are consistent with a causal interpretation of the relationship between insider ownership and firm value.

equity ownership, corporate governance

Abstract:
This study examines the motivations for and empirical performance of roll-up transactions, a special class of initial public equity offering where multiple small business entities are consolidated into a single publicly traded company. Using a sample of 47 deals initiated between 1994 and 1998, we find that the long-term stock price performance of roll-ups substantially lags that of several benchmarks. Further, measures of accounting profitability for these new firms are, on average, significantly lower than those for companies from comparable industries. An analysis of the cross-sectional variation in long-run stock performance reveals that it is important that managers and owners of companies acquired in the roll-up remain involved in the business as shareholders and directors. Further, while the market's response to announcements of subsequent acquisitions by the roll-up firms is positive, market-adjusted post-announcement returns are significantly negative. We conclude that, as an organizational form, roll-ups have not met investor expectations and have, on average, decreased shareholder value.

Roll-up; Consolidation; IPO; Going-public; Merger; Long-run performance; Ownership; Governance; Board of directors; Acquisitions

Abstract:
For a sample of 1163 mutual funds started over the period 1979-1992, we find that fund initiations are positively related to the level of assets invested in and the capital gains embedded in other funds with the same objective, the fund family's prior performance, the fraction of funds in the family in the low range of fees, and the decision by large families to open similar funds in the prior year. In addition, consistent with the presence of scale and scope economies, we find that large families and families that have more experience in opening funds in the past are more likely to open new funds.

Abstract:
For a sample of 1163 mutual funds started over the period 1979-1992, we find that fund initiations are positively related to the level of assets invested in and the capital gains embedded in other funds with the same objective, the fund family's prior performance, the fraction of funds in the family in the low range of fees, and the decision by large families to open similar funds in the prior year. In addition, consistent with the presence of scale and scope economies, we find that large families and families that have more experience in opening funds in the past are more likely to open new funds.

Abstract:
We survey CFOs of public and private firms in 29 countries about aspects of corporate liquidity that cannot be obtained from publicly available data. We find that lines of credit are very important liquidity instruments relative to cash holdings. The median line of credit is equal to 15 percent of book assets whereas cash holdings comprise only 9 percent of book assets. Of these cash holdings, the fraction held as non-operational cash (rather than held for day-to-day operations) is only about 40% of the total. Cash and lines of credit are held for different purposes. Lines of credit, which represent options on liquidity, are strongly related to a firm's need for external financing to fund future investment opportunities. Non-operational cash, which constitutes realized liquidity, is not related to future external financing needs and is primarily held as a general buffer against future cash shortfalls. Across countries, firms make greater use of lines of credit, but not excess cash, when external credit markets are poorly developed.

corporate liquidity, line of credit, cash holdings, investor protection

Abstract:
Several changes, such as the advances in information technology and the advent of outsourcing, led to increases in optimal firm size in many fragmented industries over the last decade. This paper studies the determinants of the success of these industry consolidations using a unique sample of firms that were created at the time of their initial public offering: rollup-up IPOs. In these transactions, many small firms merge into a shell company, which goes public at the same time. This sample allows us to follow firms from the day they were established. We find that these firms deliver poor absolute and relative stock returns, on average. Their operating performance mimics that of other firms of the industry, but does not justify to their high initial valuations. However, the average performance hides substantial cross-sectional differences. If the managers and owners of the firms included in the transaction remain involved in the business as shareholders and directors, operating and stock price performance improve dramatically, which suggests that incentive effects outweigh power struggles. Higher promoter ownership leads to a reduction in long-run performance, consistent with the view that the sponsor compensation is excessive. Restructuring activities after the IPO are unable to halt poor performance, which indicates that the proper governance structure needs to be in place from the start.

industry consolidation, roll-up, governance, incentives

Abstract:
This paper studies whether risk management policies are affected by the financial reporting treatment of derivatives. To address this question, we focus on new standards that require firms to report derivatives at fair value and use worldwide survey data on risk management practices. More than 40% of the companies in the survey indicate that their risk management policies have been affected by the new standards. Their ability to hedge from an economic perspective has been compromised, but so have their speculative activities. Firms are more affected by the new standards if they operate in an environment where they are more likely to use financial statement numbers in contracting, attach greater importance to the reduction in earnings volatility as a benefit of risk management, and are more inclined to take active positions. We also document a substantial decrease in foreign exchange hedging and in the use of non-linear hedging instruments. This evidence indicates that fair value reporting of derivatives has a substantial effect on risk management policies.

risk management, speculation, derivatives, fair values, financial reporting standards

Abstract:
This paper studies how industry peers respond when another firm in the industry is the subject of a hostile takeover attempt. We document two major responses. First, the industry peers cut their capital spending, free cash flows, and cash holdings, and increase their leverage and payouts to shareholders. Second, they increase the quality of financial reporting: after the control threat, there is evidence of less earnings management, more timely loss recognition, and more value relevance of accounting earnings. We also find that the stock price reaction upon announcement of the takeover is larger for peer firms with higher capital spending, less debt, fewer takeover defenses in place, and lower insider ownership. These findings are consistent with Jensen's (1986, 1993) and Shleifer and Vishny's (1988) observation that agency costs often manifest themselves at the industry level, and with Bushman and Smith's (2001) conjecture that changes in takeover pressure can alter managerial incentives to distort firms' accounting numbers. Our results also highlight the relation between financial reporting quality and financing and investment policies.

Hostile takeover, agency costs, investment decisions, capital structure financial reporting quality

Abstract:
Using a new database, we study fees charged by 46,580 mutual fund classes offered for sale in 18 countries, which account for about 86% of the world fund industry in 2002. We examine management fees, total expense ratios, and total shareholder costs (including load charges). Fees vary substantially across funds and from country to country. To explain these differences, we consider fund, sponsor, and national characteristics. Fees differ by investment objectives: larger funds and fund complexes charge lower fees; fees are higher for funds distributed in more countries and funds domiciled in certain offshore locations (especially when selling into countries levying higher taxes). Substantial cross-country differences persist even after controlling for these variables. These remaining differences can be explained by a variety of factors, the most robust of which is that fund fees are lower in countries with stronger investor protection.

G2, L11

Abstract:
This paper studies the determinants of the success of industry consolidations using a unique sample of firms established at the time of their initial public offering: roll-up IPOs. In these transactions, small, private firms merge into a shell company, which goes public at the same time. These firms deliver poor stock returns; their operating performance mimics that of comparable firms, but does not justify their high initial valuations. However, if the managers and owners of the firms included in the transaction remain involved in the business as shareholders and directors, operating and stock price performance improve, and future acquisitions are better received by the market. Higher ownership by the sponsor of the transaction leads to a reduction in performance, consistent with the view that the sponsor's compensation is excessive. These findings highlight the impact of corporate governance on performance.

industry consolidation, roll-up, ipo, incentives, governance

Abstract:
For a sample of 1163 mutual funds started over the period 1979-1992, we find that fund initiations are positively related to the level of assets invested in and the capital gains embedded in other funds with the same objective, the fund family's prior performance, the fraction of funds in the family in the low range of fees, and the decision by large families to open similar funds in the prior year. In addition, consistent with the presence of scale and scope economies in funds openings, we find that large families and families that have more experience in opening funds in the past are more likely to open new funds.

Abstract:
This paper examines the characteristics of firms that complete acquisitions over the period 1972-1993. Successful acquirors tend to be larger, they have poor investment opportunities, high cash balances and high levels of free cash flow when compared to a sample of control firms. They also have higher leverage and asset growth rates than control firms. Insider ownership has a negative impact on the probability of becoming a bidder for low levels of insider ownership, but a positive impact for high levels of insider ownership. The results are stronger for acquisitions completed during the 1980s and 1990s and for acquisitions where cash is used as the form of payment. These findings are broadly consistent with arguments advanced by Jensen (1986), Roll (1986), Myers and Majluf (1984), and Stulz (1988).

Abstract:
We examine data on analyst following for a sample of initial public offerings (IPOs) completed over the 1975-1987 period to see how they relate to three well-documented IPO anomalies. We find that higher underpricing leads to increased analyst following. Analysts are overoptimistic about the earnings potential of recent IPOs and about their long term growth prospects. More firms complete IPOs when analysts are particularly optimistic about the growth prospects of recent IPOs. In the long run, IPOs have better stock price performance when analysts ascribe low growth potential to these firms than when they ascribe high growth potential. These results suggest that the anomalies documented in the IPO market may, at least partially, be driven by overoptimism.

Abstract:
The current trend toward corporate focus reverses the diversification trend of the late 1960s and early 1970s. This paper examines the value of diversification when many corporations started to diversify. I find no evidence that diversified companies were valued at a premium over single segment firms during the 1960s and 1970s. On the contrary, there was a large diversification discount during the 1960s, but this discount declined to zero during the 1970s. Insider ownership was negatively related to diversification during the 1960s, but when the diversification discount declined, firms with high insider ownership were the first to diversify.

Abstract:
We compare acquisitions completed with and without investment bank advice over the 1981-1992 period. We find that the choice to use an investment bank depends on the complexity of the transactions, the type of transaction (takeovers versus acquisitions of assets), the acquiror's prior acquisition experience, and the degree of diversification of the target firm. Although acquisition announcement returns are lower for firms using investment banks, this difference can be explained by differences in transaction characteristics. These results suggest that transaction costs are the main determinant of investment banking choice, followed by contracting costs and asymmetric information costs.

Abstract:
We compare acquisitions completed with and without investment bank advice. We find that the choice to use an investment bank depends on the complexity of the transaction, the type of transaction (takeovers versus acquisitions of assets) and the acquiror's prior acquisition experience. For takeovers, the ownership structure of the acquiring firm also affects the decision to use an investment bank. These results suggest that transactions costs and contracting costs are important determinants of investment banking choices.