• Selected
• Entire List

Abstract:
This paper is the first study of long-run evolution of investor protection, equity financing and corporate ownership in the U.K. over the 20th century. Formal investor protection only emerged in the second half of the century. We assess its influence on ownership by comparing cross-sections of firms at different times in the century and the evolution of firms incorporating at different stages of the century. Investor protection had little impact on dispersion of ownership: even in the absence of investor protection, there was a high rate of dispersion of ownership, primarily associated with mergers. Ownership dispersion in the UK relied more on informal relations of trust than on formal systems of regulation. Preliminary evidence for this comes from the geographical proximity of shareholders to their boards of directors, the absence of price discrimination in takeovers and retention of directors of target boards in merged firms.

Evolution, ownership, investor protection, equity issues, trust

Abstract:
This article reports a unique analysis of private engagements by an activist fund. It is based on data made available to us by Hermes, the fund manager owned by the British Telecom Pension Scheme, on engagements with management in companies targeted by its U.K. Focus Fund (HUKFF). In contrast with most previous studies of activism, we report that the fund executes shareholder activism predominantly through private interventions that would be unobservable in studies purely relying on public information. The fund substantially outperforms benchmarks and we estimate that abnormal returns are largely associated with engagements rather than stock picking. We categorize the engagements and measure their impact on the returns of target companies and the fund. We find that Hermes frequently seeks and achieves significant changes in the company's strategy including refocusing on the core business and returning cash to shareholders, and changes in the executive management including the replacement of the CEO or chairman.

Shareholder activism, institutional investors, real authority

Abstract:
Using a large sample of small-to-medium size firms that defaulted on their bank debt in France, Germany, and the UK, we find that large differences in creditors' rights across countries lead banks to adjust their lending and reorganization practices to mitigate the expected creditor-unfriendly aspects of the bankruptcy law. In particular, French banks respond to a creditor-unfriendly code by requiring more collateral than lenders elsewhere, and by relying on particular collateral forms that minimize the statutory dilution of their claims in bankruptcy. Despite such adjustments, bank recovery rates in default remain sharply different across the three countries, reflecting different levels of creditor protection. Notwithstanding the high level of creditor protection and low expected losses from default, pre-distress loan spreads in the UK are not lower than elsewhere. We conclude that, despite significant adjustments in lending practices, bankruptcy codes still sharply affect default outcomes.

Recovery rate, Default, Reorganization, Bankruptcy code

Abstract:
Family ownership was rapidly diluted in the twentieth century in Britain. The main cause was equity issued in the process of making acquisitions. In the first half of the century, it occurred in the absence of minority investor protection and relied on directors of target firms protecting the interests of shareholders. Families were able to retain control by occupying a disproportionate number of seats on the boards of firms. However, in the absence of large stakes, the rise of hostile takeovers and institutional shareholders made it increasingly difficult for families to maintain control without challenge. Potential targets attempted to protect themselves through dual class shares and strategic share blocks but these were dismantled in response to opposition by institutional shareholders and the London Stock Exchange. The result was a regulated market in corporate control and a capital market that looked very different from its European counterparts. Thus, while acquisitions facilitated the growth of family controlled firms in the first half of the century, they also diluted their ownership and ultimately their control in the second half.

Abstract:
Family ownership was rapidly diluted in the twentieth century in Britain. Issuance of equity in the process of acquisitions was the main cause. In the first half of the century, it occurred in the absence of minority investor protection and relied on directors of target firms protecting the interests of shareholders. Families were able to retain control by occupying a disproportionate number of seats on the boards of firms. However, in the absence of large stakes, the rise of hostile takeovers and institutional shareholders made it increasingly difficult for families to maintain control without challenge. Potential targets attempted to protect themselves through dual class shares and strategic share blocks but these were dismantled in response to opposition by institutional shareholders and the London Stock Exchange. The result was a regulated market in corporate control and a capital market that looked very different from its European counterparts. Thus, while acquisitions facilitated the growth of family controlled firms in the first half of the century, they also diluted their ownership and ultimately their control in the second half.

Family ownership, control, takeovers

Abstract:
In a study of the ownership of German corporations, we find a strong relation between board turnover and corporate performance, little association of concentrations of ownership with managerial disciplining, and only limited evidence that pyramid structures can be used for control purposes. The static relationship of ownership to control in Germany is therefore similar to the United Kingdom and the United States. However, there are marked differences in dynamic relations involving transfers of ownership. There is an active market in share blocks giving rise to changes in control, but the gains are limited and accrue solely to the holders of large blocks, not to minority investors. We provide evidence of low overall benefits to control changes and the exploitation of private benefits of control.

Abstract:
In a study of the ownership of German corporations, we find a strong relation between board turnover and corporate performance, little association between concentrations of ownership with managerial disciplining and only limited evidence that pyramid structures can be used for control purposes. The static relation of ownership to control in Germany is therefore similar to the UK and US. There are, however, marked differences in dynamic relations involving transfers of ownership. There is an active market in share blocks giving rise to changes in control, but the gains are limited and accrue solely to the holders of large blocks, not to minority investors. We provide evidence of low overall benefits from control changes and the exploitation of private benefits of control.

Ownership, control, board turnover, pyramiding, bank control, takeovers

Abstract:
In a study of the ownership of German corporations, we find a strong relation between board turnover and corporate performance, little association of concentrations of ownership with managerial disciplining and only limited evidence that pyramid structures can be used for control purposes. The static relation of ownership to control in Germany is therefore similar to the UK and US. However, there are marked differences in dynamic relations involving transfers of ownership. There is an active market in share blocks giving rise to changes in control but the gains are limited and accrue solely to the holders of large blocks, not to minority investors. We provide evidence of low overall benefits to control changes and the exploitation of private benefits of control.

Abstract:
In a study of the ownership of German corporations, we find a strong relation between board turnover and corporate performance, little association of concentrations of ownership with managerial disciplining and only limited evidence that pyramid structures can be used for control purposes. The static relation of ownership to control in Germany is therefore similar to the UK and US. However, there are marked differences in dynamic relations involving transfers of ownership. There is an active market in share blocks giving rise to changes in control but the gains are limited and accrue solely to the holders of large blocks, not to minority investors. We provide evidence of low overall benefits to control changes and the exploitation of private benefits of control.

Ownership, control, board turnover, pyramiding, bank control, takeovers

Abstract:
The ownership of German corporations is quite different today from that of Anglo-American firms. How did this come about? To what extent is it attributable to regulation? A specially constructed data set on financing and ownership of German corporations from the end of the 19th century reveals that, as in the UK, there was a high degree of activity on German stock markets with firms issuing equity in preference to borrowing from banks, and insider and family ownership declining rapidly. However, unlike in the UK, other companies and banks emerged as the main holders of equity, with banks holding shares primarily as custodians of other investors rather than on their own account. The changing pattern of ownership concentration was therefore very different from that of the UK with regulation reinforcing the control that banks exercised on behalf of other investors.

Evolution of ownership, German stock markets, financial regulation

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:
This paper provides an empirical study of the resolution of financial distress in England. The study is based upon a unique data set of 532 financially distressed UK companies, most of which are small and privately held. The data were assembled from the private records of three major commercial banks. The main focus of our investigation is a description and analysis of the process of rescue and the extent to which it leads to turnaround or insolvency.

We find that the typical firm in our sample has a capital structure that is dominated by one senior lender (a bank) and dispersed trade creditors. The bank's loan is highly collateralised, it holds all the liquidation rights and controls the rescue process. Notwithstanding, we find an elaborate rescue process that contradicts claims that such a capital structure would lead to virtual automatic liquidation. Also, we find little evidence of co-ordination failures, especially among dispersed trade creditors. The paper provides strong evidence of how a contract driven bankruptcy procedure, with highly collateralised loans, will perform.

Bankruptcy

Abstract:
This paper analyzes the evolution of ownership of the 4,000 biggest companies, private or listed, in France, Germany, Italy and the U.K. over the 1996-2006 period. We find that family ownership in the U.K. follows a life cycle: U.K. family firms evolve into widely held companies as they age, while Continental European ones do not. The stability of family firms is related to their profitability relative to non-family firms: in Continental Europe family firms are more profitable than non-family firms (but not in the U.K.). We also find that in the U.K. family ownership is diluted more quickly in sectors that are more dependent on external capital but not so in Continental Europe. The different evolution pattern in the U.K. relative to Continental Europe applies to both listed and private firms, although in all four countries the dispersion of ownership in listed firms is faster than in private firms.

family control, ownership, widely held, evolution, cross country study, private and listed firms

Abstract:
We analyze the significance of the debt overhang problem for a large sample of UK firms. We find little evidence that debt overhang affects the firm's ability to raise equity and the likelihood of firm failure. We also examine a large sample of financially distressed firms that succeeded in raising equity. Lending banks frequently provided significant concessions, including debt forgiveness, which mitigated the wealth transfers to creditors arising from the equity issue. Taken together the evidence suggests that the debt overhang does not lead to significant under investment even for firms that are highly leveraged and distressed.

Debt overhang, distress, wealth transfers

Abstract:
This paper provides the first large-scale study measuring the bias in favor of going concerns induced by court-administered bankruptcy procedures. Although we find that the large majority of bankrupt firms in our sample of Hungarian firms are kept as going concerns, the evidence suggests that the going concern bias sharply reduces aggregate proceeds to pre-bankruptcy creditors. The high costs are accompanied by the eventual closure and piecemeal sale of three quarters of going concerns. These results arise because of poor court oversight and the compensation scheme awarded to the court appointed trustee managing the bankrupt company. Comparisons with other bankruptcy codes suggest that the application of the code and court procedures have an important impact on outcomes, including the degree of inefficiency.

Allocation of control rights, bankruptcy code, compensation, recovery rates

Abstract:
This paper provides the first large-scale study measuring the bias in favour of going concerns induced by court-administered bankruptcy procedures. Although we find that the large majority of bankrupt firms in our sample are kept as going concerns, the evidence suggests that they sharply reduce aggregate proceeds to pre-bankruptcy creditors, and almost three quarters are eventually closed and sold piecemeal. These results arise because of the combination of poor court oversight and the compensation scheme awarded to the trustee, managing the bankrupt company. This suggests the particular architecture of court-administered codes can give rise to very different levels of inefficiency.

G21, G30, G33

Abstract:
Corporate ownership and financing in Japan in the 20th century are striking. In the first half of the 20th century equity markets were active in raising more than 50% of the external financing of Japanese companies. Ownership was dispersed both by the standards of other developed economies at the time and even by those of the UK and US today. In the second half of the 20th century, bank finance dominated external finance and interlocking shareholdings by banks and companies became widespread. The change from equity to bank finance and from an outsider system of public equity markets to an insider system of private equity in the middle of the 20th century coincided precisely with a marked increase in investor protection. Informal institutional arrangements rather than formal investor protection explain the existence of equity in the first half of the century - business co-ordinators in the early 20th century and zaibatsu later. Insider ownership in the form of bank ownership and cross-shareholdings emerged in the second half of the century as a response to the equity financing needs of fast growing firms and the financial restructuring of failing firms.

Japan, corporate ownership, equity, investor protection, institutions

Abstract:
Who disciplines management of poorly performing firms? Four parties are considered: existing holders of large blocks of shares, investors acquiring new shareholdings, creditors and non-executive directors. This paper reports a comparative evaluation of the role of all four parties using a large sample of UK companies. Like the US, we find that there is a high level of executive board turnover in poorly performing companies but, contrary to US evidence, outside directors perform a weak disciplinary function and most outside owners of large share blocks exert little influence. Financial factors are important in the disciplining of management: high board turnover is closely linked to high levels of debt and to new equity finance in the form of distressed rights issues.

Abstract:
Economic theory points to five parties active in disciplining management of poorly performing firms: holders of large share blocks, acquirers of new blocks, bidders in take-overs, non-executive directors, and investors during periods of financial distress. This Paper reports the first comparative evaluation of the role of these different parties in the discipline of management. We find that, in the UK, most parties, including holders of substantial share blocks, exert little discipline and that some (for example, inside holders of share blocks and boards dominated by non-executive directors), actually impede it. Bidders replace a high proportion of management of companies acquired in take-overs but do not target poorly performing management. In contrast, during periods of financial constraints, which prompt distressed rights issues and capital restructuring, investors focus control on poorly performing companies. These results stand in contrast to the US, where there is little evidence of a role for new equity issues but non-executive directors and acquirers of share blocks perform a disciplinary function. The different governance outcomes are attributed to differences in minority investor protection in two countries with supposedly similar common law systems.

Board turnover, control, corporate governance, regulation, restructuring

Abstract:
Who disciplines management of poorly performing firms? Four parties are considered: existing holders of large blocks of shares, investors acquiring new shareholdings, creditors and non-executive directors. This paper reports a comparative evaluation of the role of all four parties using a large sample of UK companies. Like the US, we find that there is a high level of executive board turnover in poorly performing companies but, contrary to US evidence, outside directors perform a weak disciplinary function and most outside owners of large share blocks exert little influence. Financial factors are important in the disciplining of management: high board turnover is closely linked to high levels of debt and to new equity finance in the form of distressed rights issues.

Abstract:
We use a unique data set to analyse how UK banks deal with small to medium size distressed firms both inside and outside bankruptcy. The approach to bankruptcy is contract-based, with lenders and borrowers relying on procedures written into the debt contract, and where the courts are largely uninvolved. We find that firms in our sample have highly concentrated debt structures and liquidation rights. As a result, the rescue process is largely free of coordination failures and creditors' runs. We find that the principal lender, 'the bank', makes few concessions to the borrower and that there is a virtual absence of debt forgiveness. Finally, the bank relies heavily on the highly collateralized value of its loan in making the decision to place the distressed firm in bankruptcy.

Bankruptcy, bank lending, collateral, liquidation rights

Abstract:
Using Hungarian data, this paper provides the first large-scale study measuring the bias in favour of inefficient going concerns induced by court-administered bankruptcy procedures. We find that the large majority of bankrupt firms in our sample are kept as going concerns, although the evidence suggests that they sharply reduce aggregate proceeds to pre-bankruptcy creditors. These results stem from bankruptcy law and practices that dilute rights of secured creditors, and provide the trustee managing the bankruptcy process with strong incentives to maintain a going concern. The bias in favour of going concerns encourages trade creditors to trigger bankruptcy, either to be bought out by secured creditors or to benefit from supplying the firm in bankruptcy.

Bankruptcy code, control rights, recovery rates

Abstract:
In the first half of the twentieth century, the UK capital markets were marked by an absence of investor protection; by the end of the century, there was more extensive protection there than virtually anywhere else in the world. The UK therefore provides an exceptional laboratory for evaluating how regulation affects the development of securities markets and corporations. We investigate this question by tracing the ownership and board composition of firms incorporated in around 1900 over the subsequent 100 years, and comparing the pattern of ownership and control with a sample incorporated around 1960. We find that at the beginning of the century there were active securities markets, firms were able to raise substantial outside equity finance, and there was rapid dispersion of ownership even in the absence of investor protection. The introduction of investor protection in the second half of the century was not associated with greater dispersion of ownership but with more trading in share blocks. We offer an explanation as to how UK capital markets could flourish in the absence of investor protection.

Ownership, control, stock markets, investor protection

Abstract:
This paper examines means of payment in over 2,500 acquisitions in the UK and US over the period 1955 to 1985. Data on financing proportions, bid premia and postmerger performance are used to test the validity of tax and information hypotheses. It is difficult to explain many of the results in terms of tax effects. Capital gains tax does not appear to be a primary determinant of financing patterns in the UK in a period in which there were substantial variations in the tax rate. As well the tax motivated "trapped equity" model is inconsistent with several observations on financing patterns. In both countries much larger acquiree bid premia are associated with cash than equity bids, consistent with information models suggesting that high valuing bidders make cash offers and low valuing bidders make securities offers. Even after controlling for the form of takeover (tender versus merger) and whether the bid is contested, cash offers provide substantially higher wealth gains to target shareholders. In the US bidders using all equity suffer significant abnormal losses at the time of the bid announcement consistent with the findings on the wealth effects of seasoned new equity offerings in the US. In the UK, however, no such losses are evident, perhaps reflecting the fact that in the UK equity bids are typically underwritten. Finally, we find that acquirors making cash offers have better postmerger shareprice performance than do those using equity. These results are consistent with the hypothesis that bidders are motivated to use overvalued equity to acquire other firms.

Abstract:
Julian Franks, in unique research looked at over 100 years of data on corporate ownership and found that relationships of trust have been a crucial historical ingredient in the ownership of firms. He argues that relationships of trust are as important now as ever.

Abstract:
This article is the first study of long-run evolution of investor protection and corporate ownership in the United Kingdom over the twentieth century. Formal investor protection emerged only in the second half of the century. We assess the influence of investor protection on ownership by comparing cross-sections of firms at different times in the century and the evolution of firms incorporating at different stages of the century. Investor protection had little impact on dispersion of ownership: even in the absence of investor protection, rates of dispersion of ownership were high, associated primarily with mergers. Preliminary evidence suggests that ownership dispersion in the United Kingdom relied more on informal relations of trust than on formal investor protection.

G32, G34

Abstract:
This article reports a unique analysis of private engagements by an activist fund. It is based on data made available to us by Hermes, the fund manager owned by the British Telecom Pension Scheme, on engagements with management in companies targeted by its UK Focus Fund. In contrast with most previous studies of activism, we report that the fund executes shareholder activism predominantly through private interventions that would be unobservable in studies purely relying on public information. The fund substantially outperforms benchmarks and we estimate that abnormal returns are largely associated with engagements rather than stock picking.

G32

Abstract:
Finance scholars have produced little evidence of the effectiveness of direct attempts by institutional shareholders to improve corporate performance. What studies we have - focused mainly on the activities of U.S. pension funds - show no clear effect on shareholder returns. But a new study of shareholder activism in the U.K. looks promising.

The subject of the study is a Focus Fund, launched in 1998 by the U.K. investment firm Hermes, whose aim is to identify underperforming companies, propose changes to their managements and boards, and—in contrast to the practices of the best-known U.S. shareholder activists—work mainly behind the scenes with the companies to bring about those changes. In keeping with the more private nature of U.K. activism, which reflects in part the fewer restrictions on communication between companies and their investors than in the U S., the study's method of investigation is also notably different from the methods used in studies of U.S. investors. Four academics were allowed to examine Hermes' records of its engagements with companies, including letters, recordings and transcripts of telephone conversations, and the staff's personal notes and recollections.

Abstract:
The paper examines the disciplining function of hostile takeovers. It reports evidence of high board turnover and significant levels of restructuring post takeover. Large gains are anticipated in hostile bids as reflected in high bid premia. However, there is little evidence of poor performance prior to bids suggesting that the high board turnover does not derive from past managerial failure. Hostile takeovers do not therefore perform a disciplining function. Instead, rejection of bids appears to derive from opposition to redeployment of assets post takeover and renegotiation over the terms of bids.

Abstract:
In this paper we examine how separation of ownership and control evolves as a result of an IPO and how the underpricing of the issue can be used by insiders to retain control. Using data from a sample of 69 IPOs in the UK, we argue that IPO underpricing is used to ensure oversubscription and rationing in the share allocation process so as to allow owners to discriminate between applicants for shares and reduce the block size of new shareholdings. We find that of the pre-IPO shareholders in a firm, directors sell only a small fraction of their shares at the time of the offering and in the seven subsequent years: in contrast, holdings of nondirectors are virtually eliminated during the same period. As a result, in less than seven years almost two-thirds of the offering company's shares have been sold to outside shareholders, thereby substantially advancing the process of separation of ownership and control. Additional evidence in the paper suggests that rationing in the IPO discriminates against applicants who apply for large blocks, and that the greater the underpricing, the smaller the size of new blocks assembled after the IPO.

Abstract:
This paper describes three insolvency codes that differ importantly in their allocation of control rights as between debtors and creditors and in the discretion granted to the party in control. The paper proposes six criteria for judging the efficiency of a bankruptcy code, and discusses the implications for the efficiency of each code. Potentially significant defects are found in each code. The paper also draws out some implications for the design of bankruptcy procedures.

Abstract:
We show how the efficiency of reorganization is affected by the distribution of control rights under the UK insolvency code. Control rights raise particular problems when creditors have different incentives to keep the firm as a going concern. Such differences may arise from the possession of private benefits by particular creditors which are lost if the debtor firm is liquidated. The incidence of inefficient liquidations is influenced by the size and seniority of creditors' claims. The current UK code is widely thought to give rise to inefficient liquidations. We show, however, that inefficiency depends upon the debt structure and whether the controlling creditor in formal bankruptcy has private benefits.