Corporate Control and the Politics of Finance
22 Pages Posted: 17 Dec 2002
Date Written: Summer 1991
In this paper I explore the effects of politics on corporate finance, including the determinants of capital structure and the regulatory and legal factors governing the market for corporate control. I examine the effects and consequences of the active corporate control market of the 1980s, then I outline the enormous political controversy and inaccurate media portrayals that ensued, and contrast them to the results obtained from intensive study of the phenomena by academic economists.
First, I review new macroeconomic evidence on changes in productivity in American manufacturing that is dramatically inconsistent with popular claims that corporate control transactions were crippling the industrial economy in the 80s. Second, I show how the restructuring movement of the 1980s reflected the re-emergence of active investors in the U.S. and how restructuring addressed the conflict between management and shareholders over control of corporate free cash flow. Third, I summarize my conception of LBO associations as new organizational forms that overcome the deficiencies of large public conglomerates. I also discuss the similarity between LBO associations and Japanese business financing networks known as keiretsu. Fourth, I argue that the highly-leveraged financial structures of the 1980s should lead to a Japanese-style privatization of bankruptcy (i.e., out-of-court reorganization). Fifth, I present a theory of boom-bust cycles in venture markets that explains why many companies involved with late-1980s leveraged transactions encountered financial distress. Sixth, I argue that misguided changes in the tax and regulatory codes and in bankruptcy court decisions have distorted the normal economic incentives for out-of-court reorganizations, resulting in increased costs of financial distress and a sharp rise in the number of Chapter 11 filings. Seventh and last, I propose a set of changes in the Chapter 11 process designed to reduce the costs of financial distress and thus maximize the total value of the firm to all investors.
Keywords: corporate control, corporate finance, highly leveraged transactions (HLTs), mergers, tender offers, divestitures, LBOs, KKR, contracting problems, agency costs, active investor, LBO Association, takeovers, privatization of bankruptcy, keiretsu, deregulation, re-regulation, Congress, government
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