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Abstract:
The marketability of an asset refers to the degree to which an asset can be converted to cash quickly, without incurring large transactions costs or price concessions. All else equal, the more marketable an asset, the higher the price an investor will be willing to pay for the asset. The lack of marketability of an asset is costly to investors because it potentially causes the investor to miss opportunities to allocate capital to alternative uses, such as liquidity or portfolio rebalancing.

In this article we review and critique the various methods that appear in the literature and are used in practice to estimate valuation discounts when an asset lacks marketability. We also present findings from our own original empirical research which offer further insights into the estimation of such discounts.

Marketability discount, valuation, liquidity discount

Abstract:
We examine the number of external appointments held by corporate directors. Directors who serve larger firms and sit on larger boards are more likely to attract additional directorships. Consistent with Fama and Jensen (1983), we find that firm performance has a positive effect on the number of appointments held by a director. We find no evidence that multiple directors shirk their responsibilities to serve on board committees. We also do not find that multiple directors are associated with a greater likelihood of securities fraud litigation. We conclude that the evidence does not support calls for limits on directorships held by an individual.

Abstract:
We examine the number of external appointments held by corporate directors. Directors who serve larger firms and sit on larger boards are more likely to attract additional directorships. Consistent with Fama and Jensen (1983), we find that firm performance has a positive effect on the number of appointments held by a director. We find no evidence that multiple directors shirk their responsibilities to serve on board committees. We also do not find that multiple directors are associated with a greater likelihood of securities fraud litigation. We conclude that the evidence does not support calls for limits on directorships held by an individual.

Abstract:
Using a sample of telecommunications mergers during the 1990-1994 period, we find that acquiring firms underperform relative to their size and industry matched control firms. The annual cumulative abnormal returns (CARs) to these firms are significantly negative for five years following the merger. Shareholders of the acquiring firm suffer a wealth loss of nearly 20% over the five-year post-merger period. We obtain similar results from three- and five-year holding period returns (HPRs). Our findings are consistent with those reported by earlier studies and indicates that regulated industries also experience post-merger underperformance. We do find however upon disaggregation of the sample that larger mergers exhibit positive long-run performance while the mid-size and smaller mergers underperform relative to their control firms. We further observe that conglomerate mergers demonstrate superior long-run performance while that for non-conglomerate mergers is consistent with the aggregate sample findings and suggests significant underperformance.

Abstract:
We study the stock market's reaction to three events in the litigation process: (1) the revelation of potential fraud; (2) the filing a lawsuit; and (3) the judicial resolution of the lawsuit. We find a large and statistically significant negative reaction to the first event, and a smaller but still statistically significant reaction to the second. We find no significant reaction to the resolution of the motion to dismiss. We find little overlap between the variables that previous research has found to be correlate with the incidence of the litigation and the variables that correlate with the resolution of the motion to dismiss. We also find little overlap between the variable that correlate with the outcome of the motion to dismiss and the variables that explain the variance in stock market returns for these dates. We conclude that the outcome of litigation is not generally anticipated by stock market participants and that market returns are not influenced by the outcome of litigation.

Securities fraud, litigation, corporate fraud

Abstract:
This paper makes the first attempt at a comprehensive and general assessment of chapter 11 costs. The findings are based on a random sample of 118 case files from six federal judicial districts. The data was collected by hand through reading of individual files. We find that chapter 11 costs appear to be of a relatively low magnitude. In the median chapter 11 case, costs consumed 4.7% of distributions to all creditors or, stated alternatively, 3.5% of total assets listed at filing. The paper also informs a theoretical debate about the efficiency of secured credit. Our results suggest that secured credit can create efficiencies by lowering chapter 11 costs. Unsecured creditors also appeared to be receiving significant recoveries. At the same time, we also find evidence that secured credit may result in wealth transfer that decrease firm value. From a bankruptcy-costs perspective, secured credit appears to be a net gain for the firm. We stop short, however, of an unqualified endorsement of secured credit. Although secured credit may lower chapter 11 costs, it also may have pernicious, unmeasured effects on firm value.

Abstract:
Legal rights of investors have been recognized as an essential component of corporate governance. We assess the efficacy of these rights by an examination of the corporate governance effects of 215 shareholder derivative lawsuits filed in U.S. courts over the period, 1982-1994. We find significant negative stock price reactions at the filings of derivative lawsuits, with important cross-sectional variability in the cumulative abnormal returns (CARs). We observe that larger firms with higher R&D expenses, larger boards, and greater insider board representation tend to experience more negative CARs. We also find that the incidence of derivative suits is higher for firms with a greater likelihood of managerial agency problems. Most importantly, we find that derivative suits are associated with significant improvements in the boards of directors, which have been recognized as a critical aspect of corporate governance. We find that firms, whose managers lose derivative lawsuits, have smaller boards, a higher percentage of outside directors on their boards, and a greater departure rate among board directors in the periods following the filings of lawsuits. These findings suggest that shareholder derivative lawsuits have the intended benefits, affirming the useful role of U.S. courts in producing better corporate governance.

shareholder derivative lawsuits, corporate governance effects

Abstract:
We test whether a bias exists in analyst recommendations for firms that file for bankruptcy during 1995-2001. We fail to find over-optimism in analyst recommendations, including those of affiliated analysts. Our multivariate analysis of the market reaction to changes in analyst recommendations indicates that prior affiliation exerts no impact on either returns or trading volume. Nor do we find that the market views recommendation upgrades by affiliated analysts as biased since there is no price reversal following these recommendation changes. Overall, our results suggest that recently passed legislation to reduce analysts' conflicts of interest might be an overreaction.

Analyst optimism, recommendations, analyst bias, bankruptcy

Abstract:
This study examines whether the state legal environment influences where IPOs elect to incorporate and their subsequent market value. To examine these questions, we develop a new measure of the state legal environment that incorporates both the presence of critical statutes and the willingness of a state to innovate. We conclude that this new measure offers legal academics, practitioners and others interested in corporate finance, a highly convenient and quantitative evaluation of a state's corporate legal climate. Our empirical use of this measure yields important cross-sectional variations in state legal environments, with the result that the most promanagement state is Pennsylvania. We also find that firms exhibit a willingness to separate their operational headquarters from the state of incorporation in a manner consistent with the promanagement orientation of the state legal code. Finally, we find that the state legal environment does effect firm value, but in a way that is consistent with a "race to the bottom" view of corporate law.

incorporation, state law, firm value

Abstract:
This Article examines the quality of forecasts in bankruptcy disclosure statements. Required by the Bankruptcy Code, disclosure statements seek to provide creditors with adequate information to cast an informed vote on a chapter 11 plan of reorganization. In addition, disclosure statements are theoretically important devices to narrow some of the information asymmetries that a bankruptcy proceeding exacerbates. We find that chapter 11 debtors forecast postbankruptcy business earnings capability with significant error and that bankruptcy disclosure statements are systematically over-optimistic in their forecasts of postbankruptcy performance. Furthermore, we find negative relations between the forecast error and the size of the firm as well as the firm's capital intensity. We do not find significant relationships between forecast error and changes in corporate governance, at either the CEO or board level.

Abstract:
In this study we test for the presence of over-optimism in analyst recommendations for a sample of bankrupt firms over the 1995-2001 period. Our findings indicate a pervasive over-optimism in analysts' recommendations. This recommendation bias exists even for firms that are unable to reorganize and must liquidate. Our results indicate that the probability of revision in recommendations does not depend on the analyst reputation, the investment bank's reputation, or existing business ties between the investment bank and the bankrupt firm. Further, the extent of the bias is not attenuated by prior financial signals, such as the existence of a qualified opinion or changes in the firm's auditor. Nevertheless, the market appears to recognize the existence of this bias and ignores analyst upgrades. It only reacts when analysts act against their bias and issue a recommendation downgrade. These findings suggest that recently passed regulations and laws to reduce analyst conflict of interest might be unnecessary to the operation of an informationally efficient equities market.

Analysts, recommendations, bankruptcy

Abstract:
This paper investigates the influence of managerial entrenchment on private placements by examining the firm's decision to appoint representatives of the private investors to the board without shareholder approval. By analyzing a sample of U.S. firms that appoint directors in combination with private offerings between 1995 and 2000, we find that firms with greater managerial entrenchment are more likely to bypass shareholder approval. Firms that bypass shareholders are less likely to appoint independent directors or to elect one of these directors as chairman. We also show that the market reacts more positively to the private offering announcement when the firm submits its board candidates for shareholder approval. Further, firms that bypass approval underperform compared to firms that obtain it. Overall our findings suggest that managers avoid shareholder approval to perpetuate entrenchment.

Shareholder voting, boards of directors, private placement

Abstract:
Using a comprehensive sample of mutual funds and fund families for the period 1992-2004, this paper examines the impact of fund management companies' organizational forms on the level of agency costs observed within mutual funds. We find that, all else being equal, (1) funds managed by public fund families charge higher fees than those managed by private fund families; (2) public fund families are more likely to be implicated in the recent fund scandals; (3) public fund families acquire more funds than private fund families; and (4) funds of public fund families significantly underperform funds of private fund families. Collectively, these findings suggest that agency costs are higher in mutual funds managed by public fund families. Our results are consistent with the idea that the agency conflict between the fund management company and fund shareholders is more acute for public management companies because of their shorter-term focus.

Organizational form, Mutual funds, Agency costs, Governance

Abstract:
This study tests for the international presence of dividend catering across a sample of twenty-three countries. We find evidence of catering among firms incorporated in common law countries but not for those in civil law nations. Catering persists even after controlling for the effect of the firm's lifecycle. We conclude that when the legal regime and its accompanying set of investor protections permit, investors force dividends from managers, but they also attempt to extract such payouts indirectly by placing a high value on dividend paying firms. The relative failure of civil law firms to cater might be explained by idiosyncratic behaviors in the consumption of the private benefits of control or a lack of interest in responding to temporary market misevaluations of their equity.

Abstract:
This study investigates patterns in dividend payment across nine common law and sixteen civil law countries over 1994-2007. We begin by examining whether the recent decline in the number of dividend payers is solely a US phenomenon or part of a more global trend. We find that at the beginning of our sample period, 72% of our sample firms pay dividends, but by 2007, this percentage decreases to 55%, with the decline more acute in common law countries. Our analysis further shows that the growing incidence of non-dividend paying firms can be explained by an increase in the percentage of firms that have never paid dividends. We find that common law firms are less likely to initiate new dividend programs than those in civil law nations, although they tend to have more abundant growth opportunities. We further establish that this global decline in the propensity to pay dividends is more pronounced in firms incorporated in common law jurisdictions. Finally, we find that both the percentage increase in aggregate dividends and the dividend payout ratio is higher in civil law countries.

Abstract:
The changing nature of initial public offering (IPO) underpricing is examined using a sample of 513 IPOs launched in the UK from 1993 to 2001. It is found that the mean UK underpricing is initially less than that in the USA, reverses itself in the mid-1990s, returns to a lower level during the bubble period, but exceeds US underpricing for the last years of the sample. A growing amount of money left-on-the-table by UK underwriters is also observed. The analysis of IPO characteristics shows the simultaneous presence of changing composition and incentive realignment effects in the UK IPO market. These effects are most evident during the technology/internet equity bubble, which spans the last two subperiods of this study. It is concluded that although the market frenzy of the technology/internet bubble was present in the UK IPO market, its influence appears more limited than that documented for the US.(Publication abstract)

Stocks, Internet industry, Initial public offerings (IPO), Valuation, High technology industries

Abstract:
This review of the empirical evidence will contribute to the identification of a set of best practices that can lead to improved governance for firms worldwide. Furthermore, the discussion of what remains unexamined by governance researchers will help to shape the contours of future policy and legislative debate. This study synthesizes the extensive empirical work done on crosslisting and consequent changes in corporate governance structures. It also highlights a number of areas that require further research including more direct testing of governance changes following crosslisting, the effect of crosslisting on corporate equity ownership structures, and the investment/new securities issuance behavior of firms subsequent to crosslisting. This research will help to chart the path of future academic study by scholars of international corporate governance. After a review of the existing literature, we conclude that there is substantial support for legal bonding in the decision to crosslist, with lesser evidence consistent with reputational bonding. We also conclude that firm growth opportunities and the need for external capital are critical factors in a decision to crosslist. This review essay examines the mechanisms by which crosslisting of a firm's shares on a foreign stock exchange and its subsequent exposure to an international capital market can induce changes in corporate governance. We also review reasons why a firm might elect to use crosslisting to improve investor perception of the quality of its governance.

This review essay examines the mechanisms by which crosslisting of a firm's shares on a foreign stock exchange and its subsequent exposure to an international capital market can induce changes in corporate governance. We also review reasons why a firm might elect to use crosslisting to improve investor perception of the quality of its governance.

After a review of the existing literature, we conclude that there is substantial support for legal bonding in the decision to crosslist, with lesser evidence consistent with reputational bonding. We also conclude that firm growth opportunities and the need for external capital are critical factors in a decision to crosslist.

This study synthesizes the extensive empirical work done on crosslisting and consequent changes in corporate governance structures. It also highlights a number of areas that require further research including more direct testing of governance changes following crosslisting, the effect of crosslisting on corporate equity ownership structures, and the investment/new securities issuance behavior of firms subsequent to crosslisting. This research will help to chart the path of future academic study by scholars of international corporate governance.

This review of the empirical evidence will contribute to the identification of a set of best practices that can lead to improved governance for firms worldwide. Furthermore, the discussion of what remains unexamined by governance researchers will help to shape the contours of future policy and legislative debate.

Abstract:
Myers and Majluf (1984) argue that informational asymmetry between managers and investors can explain the negative stock returns around the announcement of new equity. Using analyst following and consensus as proxies for information asymmetry, we observe that announcement period returns are significantly more negative for firms followed by fewer analysts and whose forecasts exhibit less consensus. Our findings hold after controlling for firm size and growth opportunities. Finally, we find evidence suggesting that analyst activity also influences firms' long-term performance. We conclude that the information role of security analysts partially explains the negative stock returns surrounding the announcement of new equity.

Abstract:
Existing literature documents a positive stock market reaction to the announcement of long-term performance plans as well as subsequently higher growth rates in earnings per share and return on equity (ROE). These findings are consistent with the notion that such performance plans provide an incentive to managers to reduce the magnitude of agency conflict present within the modern corporation. Using a paired sample design, this paper addresses the specific sources of superior post-adoption ROE performance. We fail to observe any evidence of improvement in total sales, total asset turnover of the management of long-term debt. We find that the post-adoption increase in ROE growth is primarily attributable to improved profit margins, which in turn is a result of a lower Cost of Goods Sold (COGS) and reduced inventory related costs. Specifically, we observe lower inventory size and a greater inventory turnover in the post-adoption period. We further report a reduction in short-term debt usage, which is consistent with a lower inventory related costs. We also find that the number of employees declines in the post adoption period, which is consistent with a lower COGS. We find no evidence, however, that managers significantly reduce depreciation, advertising or R&D expenses. Moreover, it does not appear that managers attempt to manipulate reported earnings by increasing accruals. The obvious implication of this study is that through the adoption of long term performance plans, shareholders can mitigate the agency problem by inducing management to reduce wasteful expenditures on excessively large workforces and inventories. These results suggest that a prominent manifestation of agency conflict within the firm is lack of managerial oversight over the size of the corporate workforce and inventories.

Abstract:
This paper re-examines the reaction of stockholders and bondholders to announcements of filing of Chapter 11 with a sample of 274 NYSE/AMEX and NASDAQ firms that announce bankruptcy during the period 1979-1989. Although the market reaction of these securityholders is the subject of considerable recent research, the literature contains only limited empirical evidence on bankruptcies in the period following the enactment of the 1978 Bankruptcy Reform Act (BRA). We find that both sets of securityholders experience significant losses in the days immediately surrounding the announcements, as would be expected if investors recognize that attempts to avoid bankruptcy costs through cheaper workouts have apparently failed. However, these losses are smaller than those associated with bankruptcies occurring prior to the BRA. One interpretation of these findings is that bankruptcy costs are lower under the 1978 law. Furthermore, our larger sample permits us to compare stock price reactions to bankruptcy announcements by NYSE/AMEX firms with those by NASDAQ firms; NASDAQ firms experience significantly larger losses (the difference is -10.29% with a z-statistic of 17.46), consistent with the notion that smaller firms have relatively larger bankruptcy costs. Also, our analysis of recent bankruptcies reveals the same puzzle that earlier researchers report; despite the sharp rise in leverage and significant increases in variance of returns (and residual risk), betas decline significantly as the announcement of the filing approaches. Finally, we report that lower rated bonds suffer larger losses, since their claims are more likely to be affected before those of senior bondholders.