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Abstract:
We survey two generations of research on corporate governance systems around the world, concentrating on countries other than the United States. The first generation of international corporate governance research is patterned after the US reasearch that precedes it. These studies examine individual governance mechanisms - particularly board composition and equity ownership - in individual countries. The second generation of international corporate governance research recognizes the fundamental impact of differing legal sysems on the structure and effectiveness of corporate governance and compares systems across countries.

corporate governance, ownership, control, takeovers, block holders, boards, investor protection

Abstract:
"Streetlore" has touted the market return in January as a predictor of market returns for the remainder of the year since at least 1973. We systematically examine the predictive power of January returns over the period 1940-2003 and find that January returns have predictive power for market returns over the next 11 months of the year. The effect persists after controlling for macroeconomic/business cycle variables that have been shown to predict stock returns, the Presidential Cycle in returns, and investor sentiment and persists among both large and small capitalization stocks and among both value and glamour stocks. Additionally, we find that January has predictive power for two of the three premiums in the Fama-French (1993) three-factor model of asset pricing.

Abstract:
A turn-of-the-month effect in U.S. equity returns was initially identified by Lakonishok and Smidt (1988) using the DJIA for the period 1897-1986. According to the turn-of-the-month effect, equity returns over the interval beginning the last trading day of the month and ending three days later are significantly higher than over other days. Using CRSP daily returns, we find that the turn-of-the-month effect persists over the recent interval of 1987-2005: in essence, over this 19-year period (and over the 109-year period of 1897-2005) all of the excess market return occurred during the four-day turn-of-the-month interval. Thus, during the other 16 trading days of the month, on average, investors received no reward for bearing market risk. We further find that the turn-of-the-month effect is not confined to small or low-priced stocks; it is not confined to the December-January turn-of-the-month; it is not confined to calendar-quarter-ends; it is not confined to the U.S.; and it is not due to market risk as traditionally measured: the standard deviation of returns at the turn-of-the-month is no higher than during other days. This persistent peculiarity in equity returns poses a challenge to both "rational" and "behavioral" models of asset pricing.

Equity Returns, seasonaliy, turn-of-the-month

Abstract:
We analyze the likelihood of government bailouts of a sample of 450 politically-connected (but publicly-traded) firms from 35 countries over the period 1997 through 2002. We find that politically-connected firms are significantly more likely to be bailed out than similar non-connected firms. Additionally, politically-connected firms are disproportionately more likely to be bailed out when the IMF or World Bank provide financial assistance to the firm's home country. Further, among firms that are bailed out, those that are politically-connected exhibit significantly worse financial performance than their non-connected peers at the time of the bailout and over the following two years. This evidence suggests that, at least in some countries, political connections influence the allocation of capital through the mechanism of financial assistance when connected companies confront economic distress. It may also explain prior findings that politically-connected firms borrow more than their non-connected peers.

Political connections, cronism, bailouts

Abstract:
This study analyzes corporate expenditures for property, plant and equipment (PP&E) and research and development (R&D) for over 2,500 firms from 1987 to 1994. We document a positive relation between expenditures for PP&E and R&D and institutional share ownership. This relation is robust to a variety of specifications. We examine the link between firm-level expenditures and institutional ownership by using lead-lag structures and changes in institutional ownership. The data do not support the contention that institutional investors cause corporate managers to behave myopically. Indeed, the data indicate that the presence of institutional shareholders allows managers to invest more in PP&E and R&D than would individual shareholders.

Abstract:
During the 1990s, the global economy appears to have suffered an outbreak of "outside director mania" - at least 18 countries have witnessed publication of guidelines that stipulate floors for the representation of outside directors on corporate boards. The apparent (largely untested) premise underlying this movement is that boards with significant outside directors will make different (and perhaps better) decisions than boards dominated by inside directors. As the first-mover in this movement, the U.K. provides a laboratory for a "natural experiment" to examine this presumption empirically. We investigate one key board task - the appointment of the CEO - to determine whether boards are more likely to appoint an outside CEO after they have increased the representation of outside directors to comply with the exogenously imposed standards. We find that the (coerced) increase in outside directors does alter the CEO selection decision. Additionally, announcement period stock returns indicate that the decisions are not only different, they also appear to be better.

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:
During the 1990s and beyond, countries around the world have witnessed calls and/or mandates for more outside directors on publicly-traded companies' boards even though extant studies find no significant correlation between outside directors and corporate performance. We examine the connection between changes in board composition and corporate performance in the UK over the interval 1989-1996, a period that surrounds publication of the Cadbury Report calling for at least three outside directors for publicly-traded corporations. We find that companies that added directors to conform with this standard exhibited a significant improvement in operating performance both in absolute terms and relative to various peer-group benchmarks. We also find a statistically significant increase in stock prices around announcements that outside directors were added in conformance with this recommendation. We do not endorse mandated board structures, but the evidence appears to be that such a mandate was associated with an improvement in performance in UK companies.

Directors, Governance, Cadbury, Performance

Abstract:
We investigate the relation between corporate value and the proportion of the board made up of independent directors in 799 firms with a dominant shareholder across 22 countries. We find a positive relation, especially in countries with weak legal protection for shareholders. The findings suggest that a dominant shareholder, were he so inclined, could offset, at least in part, the documented value discount associated with weak country-level shareholder protection by appointing an 'independent' board. The cost to the dominant shareholder of doing so is the loss in perquisites associated with being a dominant shareholder. Thus, not all dominant shareholders will choose independent boards.

Abstract:
We examine announcement period abnormal returns to acquirers of listed and unlisted targets in 17 Western European countries over the interval 1996-2001. Acquirers of listed targets earn an insignificant average abnormal return of -0.38%, while acquirers of unlisted targets earn a significant average abnormal return of 1.48%. This "listing effect" in acquirers' returns persists through time and across countries and remains after controlling for the method of payment for the target, the acquirer's size and Tobin's Q, pre-announcement leakage of information about the transaction, whether the acquisition created a blockholder in the acquirer's ownership structure, whether the acquisition was a cross-border deal, and other variables. The fundamental factors that give rise to this listing effect, which has also been documented in US acquisitions, remain elusive.

Mergers and acquisitions

Abstract:
We examine announcement period abnormal returns to acquirers of listed and unlisted targets in 17 Western European countries over the interval 1996-2001. Acquirers of listed targets earn an insignificant average abnormal return of -0.38%, while acquirers of unlisted targets earn a significant average abnormal return of 1.48%. This listing-related factor in acquirers' returns persists through time and across countries and remains after controlling for the method of payment for the target, the acquirer's size and Tobin's Q, pre-announcement leakage of information about the transaction, whether the acquisition created a blockholder in the acquirer's ownership structure, whether the acquisition was a cross-border deal, and other variables. The fundamental factors that give rise to this listing-related effect, which has also been documented in US acquisitions, remain elusive.

Mergers and acquisitions

Abstract:
We propose to extend and complete the attached study of the "turn-of-the-month" effect in equity returns in two ways. First, we propose to study whether the effect is more pronounced among certain industries where industries are determined by SIC codes and/or the Fama-French industry classifications and/or whether the effect is more pronounced in certain time periods especially periods of 'high' investor sentiment. Second, we propose to investigate whether the effect can be used to generate a profitable trading strategy after trading costs. This latter investigation will examine three low cost strategies:

1. a strategy of switching between an equity fund and a bond fund of the same mutual fund family;
2. a strategy of buying and selling exchange traded funds (ETFs), either specific styles of ETFs or market-based ETFs; and
3. a strategy of buying and selling equity index futures.

We propose to consider the implications of these for fund managers especially funds that might be exposed to being "picked off" by a turn-of-the-month trading strategy.

The turn-of-the-month effect in U.S. equity returns was initially identified by Ariel (1987), who studies CRSP market returns over the period 1963-1982, and Lakonishok and Smidt (L&S) (1988) who study DJIA returns over the period 1897-1986. According to the turn-of-the-month effect, equity returns over the interval beginning with the last trading day of the month and ending three days later are unusually high. For example, L&S report that over the 90-year period covered by their study, the average cumulative return over the four-day turn-of-the-month is 0.473% whereas the average cumulative return over the full month is 0.349%, indicating that returns were, on average, negative over the remaining days of the month.

In the attached study, we extend and broaden the Ariel and the L&S analyses using CRSP daily market returns for the period 1926-2006. To begin, we find that the effect occurs over the two decades that begin after the periods studied by them. For example, with VW returns, over the period 1987-2005, the mean daily market return over the four-day turn-of-the-month is 0.15%; whereas over the other 16 trading days, it is -0.001%. When our results are combined with those of L&S, on average, investors receive no reward for bearing market risk except at the turn-of-the-month over the 109-years of 1897-2005.

We find that the effect is not confined to small-cap or low-price stocks; it is not concentrated at calendar year-ends or quarter-ends; and it is not confined to the US: of the 34 countries we study, the effect occurs in 30 of them. Further the effect is not due to risk as measured by standard deviation of returns. Finally, we find that the effect is not due to increased buying pressure measured by trading volume and net flows to mutual funds. We propose to extend and complete this study as described above.

turn of the month effect, equity return, trading strategy, industry effect

Abstract:
Prior studies argue that investment by undervalued firms that require external equity is particularly sensitive to stock prices in irrational capital markets. We present a model in which investment can appear to be more sensitive to stock prices when capital markets are rational, but subject to imperfections such as debt overhang, information asymmetries, and financial distress costs. Our empirical tests support the rational (but imperfect) capital markets view. Specifically, investment-stock price sensitivity is related to firm leverage, financial slack, and probability of financial distress, but is not related to proxies for firm undervaluation. Because, in our model, stock prices reflect the NPVs of investment opportunities, our results are consistent with rational capital markets improving the allocation of capital by channeling more funds to firms with positive NPV projects.

Investment policy, financing policy, capital market imperfections

Abstract:
Prior studies of stocks added to the S&P 500 Index report that Index inclusion is associated with a permanent increase in stock price. This result has been interpreted to mean that demand curves for stocks slope downward. A key premise underlying this interpretation is that Index inclusion provides no new information about the future prospects of the newly-included companies. We examine this premise empirically by analyzing changes in analysts' eps forecasts for newly-included companies from before to after Index inclusion and by comparing post-inclusion realized earnings to pre-inclusion earnings forecasts. We find that, relative to various benchmark companies, newly-included companies experience significant increases in eps forecasts and significant improvements in realized earnings. These results indicate that S&P Index inclusion is not an information-free event and, thus, undermine tests of the downward-sloping demand curve hypothesis that are based on S&P 500 Index additions.

Abstract:
Prior studies of stocks added to the S&P 500 Index report that Index inclusion is associated with a permanent increase in stock price. This result has been interpreted to mean that demand curves for stocks slope downward. A key premise underlying this interpretation is that Index inclusion provides no new information about the future prospects of the newly-included companies. We examine this premise empirically by analyzing changes in analysts' eps forecasts for newly-included companies from before to after Index inclusion and by comparing post-inclusion realized earnings to pre-inclusion earnings forecasts. We find that, relative to various benchmark companies, newly-included companies experience significant increases in eps forecasts and significant improvements in realized earnings. These results indicate that S&P Index inclusion is not an information-free event and, thus, undermine tests of the downward-sloping demand curve hypothesis that are based on S&P 500 Index additions.

Abstract:
We examine announcement period excess returns to acquirers of listed and unlisted targets in 17 Western European countries over the interval 1996 through 2001. Acquirers of listed targets earn an insignificant average excess return of -0.38%, while acquirers of unlisted targets earn a significant average excess return of +1.48%. This "listing effect" in acquirers' returns persists through time and across countries and remains after controlling for the method of payment for the target, the acquirer's size and Tobin's Q, pre-announcement leakage of information about the transaction, whether the acquisition created a blockholder in the acquirer's ownership structure, whether the acquisition was a cross-border deal, and other variables. The fundamental factors that give rise to the listing effect, which has also been documented in U.S. acquisitions, remain elusive.

Abstract:
The market for Auction Rate Securities (ARS) made headlines during the second week of February 2008 when auctions, at which the bonds interest rates are reset, experienced a wave of “failures.” Contrary to headlines that attribute the failures to a “frozen” market and/or to “irrationality” on the part of market participants, we find that (1) even at their height, less than 50% of ARS bonds experienced auction failures, (2) the likelihood of auction failure was directly related to the level of the bonds ”maximum auction rates” that cap the bond yields, and (3) using an empirical model of market clearing yields, the implied market clearing yields of bonds with failed auctions were significantly above their maximum auction rates. We interpret this evidence to mean that auctions failed because investors rationally declined to bid for bonds for which required market yields exceeded their maximum auction rates. We further find that ARS yields were generally higher than yields of various cash equivalent investment alternatives including treasury bills (T-bill), certificates of deposits (CD), money market funds (MMF), and Variable Rate Demand Obligations (VRDO). We interpret this latter evidence to mean that investors priced the possibility of auction failure into ARS yields.

Auction Failures, Auction Rate Securities, ARS

Abstract:
We hypothesize that firms structure their asset holdings so as to shelter assets from extraction by politicians and bureaucrats. Specifically, in countries where the threat of political extraction is higher, we hypothesize that firms will hold a lower fraction of their assets in liquid form. Consistent with this conjecture, using firm-level data from 109 countries, we find that, across countries, corporate holdings of cash and marketable securities are negatively correlated with measures of political corruption. Further, we find that annual investment in property, plant, equipment, and inventory plus dividends is positively correlated with the measures of corruption suggesting that owners channel their cash into harder to extract assets. To the extent that this deployment of assets is less efficient than would occur in the absence of the threat of political extraction, corporate sheltering of assets may represent a channel through which corruption reduces economic growth.

Abstract:
According to Streetlore, as embedded in the adage 'As goes January so goes the rest of the year,' the market return in January provides useful information to would-be investors in that the January market return predicts the market return over the remainder of the year. This adage has become known as the January Barometer. In an earlier paper (Cooper, McConnell and Ovtchinnikov, 2006) we investigated the power of the January market return to predict returns for the next 11 months using 147 years of U.S. stock market returns. We found that, on average, the 11-month holding period return following positive Januarys was significantly higher, by a wide margin, than the 11-month holding period return following negative Januarys. In this paper we update that analysis through 2008 and address the question of how an investor can best use that information as part of an investment strategy. We find that the best way to use the January Barometer is not the obvious one of being long following positive Januarys and short following negative Januarys, but to be long following positive Januarys and invest in t-bills following negative Januarys. This strategy beats various alternatives, including a passive long-the-market-all-the-time strategy, by significant margins over the 152 years for which we have data.

January Barometer, return predictability

Abstract:
What is likely to cause controlling shareholders to appoint more independent directors - a change that, after all, effectively limits the controlling shareholders' power and “degrees of freedom”? The answer provided by the authors is that board independence is most likely to be pursued by companies with controlling shareholders that also have major growth opportunities that must be funded mainly with outside equity.This article investigates the possibility that such discounts can be reduced by appointing boards of directors made up of individuals who are independent of the controlling shareholders. Based on the systematic analysis of some 800 companies representing 22 countries, the authors' recent study reports that corporate values are consistently higher when boards are more independent of controlling shareholders - and that this relationship is especially strong in those countries that afford fewer rights to minority shareholders.A number of studies have reported value discounts for listed companies in countries that provide weak legal protection to minority shareholders. Such studies typically attribute these discounts to the ability, and the well-documented tendency, of controlling shareholders to extract a disproportionate share of corporate resources for “private benefits.” This tendency and the resulting discounts create a dilemma for those controlling shareholders intent on maximizing value for not just themselves, but all shareholders: How can such controlling shareholders assure their minority shareholders that they will not exploit their power to expropriate resources and so eliminate the discount from their companies' shares?

This article investigates the possibility that such discounts can be reduced by appointing boards of directors made up of individuals who are independent of the controlling shareholders. Based on the systematic analysis of some 800 companies representing 22 countries, the authors' recent study reports that corporate values are consistently higher when boards are more independent of controlling shareholders - and that this relationship is especially strong in those countries that afford fewer rights to minority shareholders.

What is likely to cause controlling shareholders to appoint more independent directors - a change that, after all, effectively limits the controlling shareholders' power and “degrees of freedom”? The answer provided by the authors is that board independence is most likely to be pursued by companies with controlling shareholders that also have major growth opportunities that must be funded mainly with outside equity.

Abstract:
The turn-of-the-month effect in U.S. equities is found to be so powerful in the 1926-2005 period that, on average, investors received no reward for bearing market risk except at turns of the month. The effect is not confined to small-capitalization or low-price stocks, to calendar year-ends or quarter-ends, or to the United States: This study finds that it occurs in 31 of the 35 countries examined. Furthermore, it is not caused by month-end buying pressure as measured by trading volume or net flows to equity funds. This persistent peculiarity in returns remains a puzzle in search of an answer.

Portfolio Management, Equity Strategies, Equity Investments, Fundamental Analysis and Valuation Models

Abstract:
Investment strategies of buying and holding recently spun off companies and their parents have received significant attention from the investment community in the recent past. Despite their popularity, the existing evidence on the attractiveness of spin-offs appears piecemeal. In this paper, we examine in detail stock price performance of spin-offs and their parents on a comprehensive sample that covers the last 36 years. We show that excess returns are indeed positive for both subsidiary and parent companies over almost all holding periods considered. For subsidiaries, the results appear both economically and statistically significant after various adjustments for risk. This evidence is consistent with investors earning an above normal rate of return by investing in recently spun off subsidiaries. For parents, however, after correcting for one very large positive outlier, returns are not statically or economically different from zero.

Spin-off, long-run event studies, excess stock returns

Abstract:
In 1992, the Cadbury Committee issued the code of Best Practice which recommends that boards of U.K. corporations include at least three outside directors and that the positions of chairman and CEO be held by different individuals. The underlying presumption was that these recommendations would lead to improved board oversight. We empirically analyze the relationship between CEO turnover and corporate performance. CEO turnover increased following issuance of the code; the negative relationship between CEO turnover and performance became stronger following the code's issuance; and the increase in sensitivity of turnover to performance was concentrated among firms that adopted the code.

Abstract:
Prior studies have reported a positive correlation between insider trading and stock price changes. The implication of these studies is that insider (i.e., informed) trades have a differential impact on price discovery than non-insider (i.e., uninformed) trades. Based on these results, various scholars have argued for the legalization of insider trading to facilitate rapid price discovery. We analyze the trading activity of a confessed inside trader, Ivan Boesky, in Carnation's stock just prior to the acquisition of Carnation by Nestle, and find that our tests are unable to distinguish the price effect of Boesky's (i.e., informed) purchases of Carnation's stock from the effect of non-insider (i.e., uninformed) purchases. Our conclusion survives extensive robustness tests and has methodological and public policy implications.

Abstract:
This paper presents the results of an in-depth investigation of 61 publicly-traded firms that chose to liquidate voluntarily over the period 1970 through 1991. In comparison with a size-matched sample of industry peers, firms that elect to liquidate voluntarily are characterized by lower Tobin's Q (as measured by the market-to-book value of the firm), a higher percentage of equity ownership by management and members of the board of directors, and a higher incidence of a member of the corporation's founding family on the board. These firms are also characterized by a higher incidence of asset sales and prior attempts to transfer control of the firm by other means, including merger and proxy fights, than their industry counterparts. The average stock return around announcements regarding the liquidation decisions is roughly +20% and statistically significantly different from zero. These results suggest that firms that make the value enhancing decision voluntarily liquidate confront low future growth opportunities (i.e., low Tobin's Q), but, the absence of future growth opportunities is not sufficient to bring about this decision. Rather, it is also necessary that decision makers have a vested interest in the outcome, either because of their ownership stake or because of their family affiliation with the business. We interpret the results to be consistent with managerial theories of the firm which posit that managers are more likely to act in shareholders' interests when managers have a significant personal stake in the firm.

Abstract:
This paper evaluates the conjecture that excess stock returns that have been documented around the announcement of corporate spin-offs represent, at least in part, the re-creation of value destroyed at the time of an earlier acquisition. We evaluate this question with a sample of spin-offs that originated as earlier acquisitions. At the time of the original acquisition, on average, announcement period returns to the bidder and the combined bidder and target firm are negative and significant. Additionally, announcement period returns at the time of the spin-off are negatively and significantly correlated with acquisition announcement period returns.

Abstract:
This study analyzes bid/ask spreads surrounding announcements of open- market share repurchase programs for a sample of 248 announcements of repurchase programs by NYSE firms over the period January 1984 through June 1988. The sample includes 158 announcements of new programs and 90 announcements regarding continuations of already existing programs. Contrary to the theory that spreads increase surrounding the announcement of open-market share repurchase programs, with both univariate and multi-variate tests that control for changes in volume, changes in stock price volatility, and changes in the level of stock price, we find no evidence of an increase in spread surrounding announcement of open-market share repurchase programs.

Abstract:
SUBJECT AREAS: Corporate restructuring; LBOs; valuation.

CASE SETTING: 1985, LBO in Convenience Store Industry.

Management of White Hen Pantry, a subsidiary of Jewel Stores, undertook a leveraged buyout of the subsidiary in 1985 with the assistance of PruCapital. The case focuses on the valuation of the subsidiary and the structure of the financing of the transaction.The case demonstrates how to construct cash flow forecasts, how investment bankers function, and how management of a subsidiary decided to undertake the LBO.The solution employs the Adjusted Present Value (APV) approach to analyzing WHP. We have used the case at the end of our first year core course, but the case can also be used in a course on corporate restructuring.