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Entrenched Management and the Adaptation Option

39 Pages Posted: 20 Sep 2008 Last revised: 24 Oct 2011

Mitchell Oler

University of Wyoming - Department of Accounting

Date Written: October 1, 2011

Abstract

This paper examines whether firms with market values less than book values continue to exist because management does not want to utilize the adaptation option. If managers have the option to adapt assets (either internally or externally via selling the firm) to other uses when the expected net present value from current earnings is less than liquidation values, then a book-to market (BTM) ratio greater than one should not be observed. However, a sample from 1992 to 2009 indicates 35,575 continuous firm-month observations where the BTM ratio is above one. I specifically investigate whether the relation between entrenchment techniques, market discipline, changes in management, and undervaluation signaling is correlated with firms continuing with an BTM greater than one. Results are consistent with the entrenchment techniques, market discipline, and changing management hyp theses, but not with signaling. This paper extends the research on the adaptation option and provides an explicit link between firm value and corporate governance.

Keywords: E-Index, Corporate Governance, Adaptation Option, Market to Book Ratio

JEL Classification: M41, G34, G12

Suggested Citation

Oler, Mitchell, Entrenched Management and the Adaptation Option (October 1, 2011). Available at SSRN: https://ssrn.com/abstract=1270800 or http://dx.doi.org/10.2139/ssrn.1270800

Mitchell Oler (Contact Author)

University of Wyoming - Department of Accounting ( email )

United States

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