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Abstract:
Industry concentration measures calculated with Compustat data, which cover only the public firms in an industry, are poor proxies of actual industry concentration. These measures have correlations of only 13 percent with the corresponding U.S. Census measures, which are based on all public and private firms in an industry. Also, only when U.S. Census measures are used is there evidence consistent with theoretical predictions that more concentrated industries, which should be more oligopolistic, are populated by larger and fewer firms with higher price-cost margins. Further, the significant relations of Compustat based industry concentration measures with the dependent variables of several important prior studies are not obtained when U.S. Census measures are used. One of the reasons for this occurrence is that Compustat based measures proxy for industry decline. Overall, our results indicate that product markets research that uses Compustat based industry concentration measures may lead to incorrect conclusions.

Abstract:
Industry concentration measures calculated with Compustat data, which cover only the public firms in an industry, are poor proxies of actual industry concentration. These measures have correlations of only 13 percent with the corresponding U.S. Census measures, which are based on all public and private firms in an industry. Also, only when U.S. Census measures are used is there evidence consistent with theoretical predictions that more concentrated industries, which should be more oligopolistic, are populated by larger and fewer firms with higher price-cost margins. Further, the significant relations of Compustat based industry concentration measures with the dependent variables of several important prior studies are not obtained when U.S. Census measures are used. One of the reasons for this occurrence is that Compustat based measures proxy for industry decline. Overall, our results indicate that product markets research that uses Compustat based industry concentration measures may lead to incorrect conclusions.

Industry concentration, product market competition, finance research

Abstract:
Prior work suggests that if a firm shares a larger proportion of its growth opportunities with rivals, an inability to fully invest in these opportunities leads to predatory behavior on the part of rivals and losses in market share. We examine whether firms manage this predation risk. We find inter- and intra-industry evidence that the extent of the interdependence of a firm's investment opportunities with rivals is positively associated with its use of derivatives and the size of its cash holdings. Moreover, an analysis of investment behavior provides evidence that if this interdependence is high, the management of predation risk provides strategic benefits. Our results indicate that predation risk is an important determinant of corporate financial policy choices and investment behavior.

Cash holdings, hedging, financing constraints, risk management, intra-industry equilibrium

Abstract:
We document that firms included in the ExecuComp database tend to be larger, more complex, followed by more analysts, have greater stock liquidity levels, and have higher total, but less concentrated, institutional ownership than other firms. Based on these differences, we test and find support for three predictions. First, ExecuComp firms rely more heavily on earnings and stock returns in determining CEO cash compensation. Second, the weight on earnings is more sensitive to differences in the extent of growth opportunities for ExecuComp firms. Third, the positive relation between institutional ownership concentration and the value of stock option grants is stronger for ExecuComp firms. Overall, our results suggest that ExecuComp and non-ExecuComp firms operate in different contracting environments that lead to differences in the design of their executive compensation contracts. As a result, care should be taken in extending results based on ExecuComp samples to non-ExecuComp firms.

Executive compensation, Stock options, Ownership structure, Institutional investors

Abstract:
In the context of large acquisitions, we provide evidence on whether firms have target capital structures. We examine how deviations from these targets affect how bidders choose to finance acquisitions and how they adjust their capital structure following the acquisitions. We show that when a bidder's leverage is over its target level, it is less likely to finance the acquisition with debt and more likely to finance the acquisition with equity. Also, we find a positive association between the merger-induced changes in target and actual leverage and document that bidders incorporate more than two-thirds of the change to the merged firm's new target leverage. Following debt-financed acquisitions, managers actively move the firm back to its target leverage, reversing more than 75% of the acquisition's leverage effect within 5 years. Overall, our results are consistent with a model of capital structure that includes a target level and adjustment costs.

Capital structure, target leverage, mergers, acquisitions

Abstract:
We study takeover sequences that contain at least five acquisitions made by an individual acquirer over a period greater than 12 months with no two acquisitions separated by more than 24 months. Acquisitions made in the context of such sequences represent more than 25% of takeover activity by U.S. public firms from 1982 to 1999. Our findings suggest takeover sequences are made in the context of time-varying changes in an acquiring firm's growth opportunity set. Specifically, our results indicate that takeover sequences begin subsequent to an expansion of this opportunity set and end when this opportunity set closes off. Our evidence does not support a proposition that a low quality acquisition is what causes a takeover sequence to end.

Abstract:
We provide evidence on the prediction that because in more concentrated industries firms have more interdependent investment strategies with rivals, incumbents in such industries prefer less informative disclosure policies to avoid providing competitors with strategically useful information. Supporting this prediction, we find that firms in more concentrated industries provide less frequent management earnings forecasts, are less likely to make long-term forecasts, receive lower disclosure ratings from analysts, and have more opaque information environments. Also, when such firms raise funds they prefer private placements, which have minimal SEC-mandated disclosure requirements, over seasoned equity offerings. Likewise, when these firms engage in takeovers they get around having to disclose significant details about their acquisitions by acquiring private targets. Finally, we document that our results are more pronounced in younger industries in which proprietary costs from disclosure are likely to be greater and less pronounced in industries with higher leverage in which product market competition is expected to be ‘softer’. Overall, our findings suggest that firms’ attempts to avoid providing rivals with strategically valuable information impacts corporate disclosure policy and other major corporate financial policy decisions.

Abstract:
We provide evidence that firms in more unionized industries strategically hold less cash to gain bargaining advantages over labor unions and shelter corporate income from their demands. Specifically, we show that corporate cash holdings are negatively related with industry unionization rates. We also find that this relation is stronger for firms that are likely to place a higher value on gaining a bargaining advantage over unions and weaker for those firms in which lower cash holdings provides less credible evidence that a firm is unable to concede to union demands. Additionally, we document that unionized firms manage their cash holdings downward prior to labor negotiations and that increases in cash holdings raise the probability of a strike. Finally, we show that unionization decreases the market value of a dollar of cash holdings. Overall, our findings indicate that firms trade-off the benefits of corporate cash holdings with the costs resulting from a weaker bargaining position with labor.

Cash holdings, liquidity policy, hedging, labor unions

Abstract:
I investigate what leads controlling families of publicly traded firms to sell their remaining ownership stake. The sale of a controlling stake is best explained in the context of theories of the firm related to optimal risk-bearing, the separation of ownership and management expertise, the CEO succession process, and the monitoring provided by outside blockholders. A timing explanation is only marginally supported. The sale of a controlling stake is not explained by insufficient financial resources to fully invest in growth opportunities. My study offers insights into the final stage of the process in which entrepreneurs sequentially sell their firm to outside parties and also identifies the nature of costs of concentrated ownership.

Ownership structure, capital structure, corporate governance, mergers and acquisitions

Abstract:
Utama and Cready (1997) use total institutional ownership to proxy for the proportion of better-informed traders, an important determinant of trading around earnings announcements. We argue that institutions holding small stakes cannot justify the fixed cost of developing private predisclosure information. Also, institutions with large stakes generally do not trade around earnings announcements since they are dedicated investors or face regulations that make informed trading difficult. However, institutions holding medium stakes have incentives to develop private predisclosure information and trade on it; we show that their ownership is a finer proxy for the proportion of better-informed traders at earnings announcements.

institutional investors, informed traders, trading volume

Abstract:
Prior work shows that firms have incentives to manage earnings upward so that suppliers and corporate customers perceive a firm to be financially stronger and more capable of honoring implicit claims. We predict that this leads to an underlying demand from firms’ suppliers and customers for accounting conservatism to reduce the likelihood of basing terms of trade on inflated financial information and that firms meet this demand when these stakeholders have relative bargaining advantages that allow them to dictate terms of trade. Consistent with expectations, we document results suggesting that when a firm’s suppliers or customers have bargaining power over it the firm follows more conservative accounting practices. This effect is more pronounced when the underlying demand for conservatism from a firm’s suppliers and customers is likely to be greater. We also show that when a firm’s suppliers or customers have relative bargaining advantages over it they provide the firm with better terms of trade if it has greater conservatism in its financial reporting practices. Overall, our findings provide insights into how a firm’s suppliers and customers impact its accounting practices and also support the contracting explanation for accounting conservatism.

Abstract:
Kim and Verrecchia (1991a) propose that volume reaction to a public announcement is proportional to the product of absolute price change at the announcement and a measure of differential precision of predisclosure information across traders. We use ownership by institutions with medium stakes (between 1 to 5 percent of outstanding shares) as a measure of differential information precision, given that these institutional investors, as compared to other institutional and individual investors, are likely to have more precise predisclosure information and are more likely to trade at earnings announcements based on their belief revision about stock value. We examine this proposition in the context of earnings announcements and obtain results consistent with the theory. Tests of the theory by prior studies have yielded somewhat inconclusive results.

Abstract:
Industry concentration measures calculated with Compustat data, which cover only the public firms in an industry, are poor proxies for actual industry concentration. These measures have correlations of only 13% with the corresponding U.S. Census measures, which are based on all public and private firms in an industry. Also, only when U.S. Census measures are used is there evidence consistent with theoretical predictions that more-concentrated industries, which should be more oligopolistic, are populated by larger and fewer firms with higher price-cost margins. Further, the significant relations of Compustat-based industry concentration measures with the dependent variables of several important prior studies are not obtained when U.S. Census measures are used. One of the reasons for this occurrence is that Compustat-based measures proxy for industry decline. Overall, our results indicate that product markets research that uses Compustat-based industry concentration measures may lead to incorrect conclusions.

G10, G30, L10