Anh L. Tran

On the Importance of Golden Parachutes

In acquisitions, target CEOs face a moral hazard: any personal gain from the deal could be offset by the loss of the future compensation stream associated with their jobs. Larger, more important, parachutes provide greater relief for these losses. To explicitly measure the moral hazard target CEOs face, we standardize the parachute payment by the expected value of their acquisition-induced lost compensation. We examine 851 acquisitions from 1999-2007, finding that more important parachutes benefit target shareholders through higher completion probabilities. Conversely, as parachute importance increases, target shareholders receive lower takeover premia while acquirer shareholders capture additional rents from target shareholders. JEL classification: D82; G34; J33

Blank Check Acquisitions

Special Purpose Acquisition Companies (SPACs), a particular type of blank check firms, have risen dramatically since 2003 and account for one third of the U.S. IPO market in 2008. Compared to other public acquirers, SPACs tend to make focused acquisitions, target mostly private companies, are less likely to do cash only deals or tender offers, and less likely to complete acquisitions. SPACs exhibit a mean cumulative abnormal return of 1.7% upon deal announcement and a monthly excess return of 1.5% from deal announcement until closing. I show that SPACs make better acquisitions: they negotiate an additional 7.6% discount compared to other public acquirers that bid for private targets. The results highlight the role of specialization, ownership structure, and independent long-term institutional blockholders’ monitoring as important corporate governance mechanisms in SPACs.

The dynamic impact of macroeconomic factors on initial public offerings: evidence from time-series analysis

This article examines the explanatory power and the dynamic impact of macroeconomic conditions on Initial Public Offering (IPO) activities in US during the period from 1970 to 2005. Applying time-series econometric techniques, we find the existence of long-run equilibrium relationships between IPO activities and selected macroeconomic variables. Stock market performance and volatility are shown to play the most important role in the timing of IPOs. The Fed funds rate and the 10 year US Treasury Bond (TB) yield play a comparable role in determining the amount of proceeds raised in the IPOs. There also exist different short-run dynamic adjustment mechanisms between IPOs and macroeconomic factors towards the long run equilibrium path and they are mostly completed within the period of 6 months to 1 year. The results have some useful implications for forecasting IPO activities.

Frenemies: How Do Financial Firms Vote on Their Own Kind?

The financial sector is unique in being largely self-governed: the majority of financial firms’ shares are held by other financial institutions. This raises the possibility that monitoring of financial firms is especially undermined by conflicts of interest due to personal and professional links between these firms and their shareholders. To investigate this possibility, we scrutinize the aspect of the financial sector’s self-governance that is directly observable: mutual fund companies’ voting of their peers’ stock. We find that considerations specific to investee firms’ membership in the same industry as their investors do indeed impact voting. This impact is in the direction of supporting the investee’s management. We show that the own-industry effect reduces director efficacy and lowers firm value as a result. We extend our analysis to other financial companies and show that they also tend to vote more favorably when it comes to their peers. Our results suggest that peer support is a corrupting factor in the financial sector’s governance.

Advertising, Attention, and Acquisition Returns

We examine the hypothesis that advertising allows a takeover target’s management to increase the firm’s profile and their own negotiating power, leading to higher subsequent takeover premiums. Our evidence from 7,095 merger bids supports this hypothesis. Moreover, we find an economically significant decrease in the acquirer’s market capitalization during the announcement period. To consider the possibility of codetermination of target advertising and takeover premiums, we employ instrumental variable tests as well as propensity matching methods and our results hold. Further, we find targets that advertise are more likely to be pursued by multiple bidders and receive revised increased bids.We examine the hypothesis that advertising allows a takeover target’s management to increase the firm’s profile and their own negotiating power, leading to higher subsequent takeover premiums. Our evidence from 7,095 merger bids supports this hypothesis. Moreover, we find an economically significant decrease in the acquirer’s market capitalization during the announcement period. To consider the possibility of codetermination of target advertising and takeover premiums, we employ instrumental variable tests as well as propensity matching methods and our results hold. Further, we find targets that advertise are more likely to be pursued by multiple bidders and receive revised increased bids.

Corporate Tax Cuts, Merger Activity, and Shareholder Wealth

We study the impact of the Domestic Production Activities Deduction (DPAD) on mergers and acquisitions. DPAD reduces corporate tax rates on income from work or goods made in the US. Results indicate that the quantity and quality of acquisition bids by DPAD-advantaged firms conform to the predictions of the neoclassical theory of the firm and the theory of financial constraints. Specifically, bids, particularly those cash-financed, increase substantially in industries with large DPAD-related tax cuts and for firms with financial constraints. Moreover, DPAD improves acquisition quality where acquirers and targets are likely to generate incremental DPAD tax benefits through their merger.

Do Acquirers Benefit from Retaining Target CEOs

Acquirers do not benefit from hiring the CEOs of firms they buy, either in terms of merger announcement returns or long-run operating performance. This is especially true when the retained CEOs exhibit inferior quality (as proxied by target firm industrial efficiency or the target CEO’s educational aptitude, pay slice, or outside directorships). We find no evidence that our results are due to hard bargaining by target managers: premiums paid in M&A deals appear unrelated to the decision to hire the target CEO. These findings withstand several econometric methods we use to account for potential endogeneity, selection, and unobserved heterogeneity.

Timing Stock Trades for Personal Gain: Private Information and Sales of Shares by CEOs

We investigate the determinants of gains to CEOs from large stock sales. Consistent with the literature, we find that some CEOs benefit from inside information by strategically timing sales. We also find that internal accounting information can be used to predict such timing. Furthermore, sales executed under plans that conform to SEC Rule 10b5-1 tend to follow positive abnormal stock returns, but do not, on average, precede abnormal declines. In contrast, sales that do not conform to the requirements of Rule 10b5-1 tend to follow smaller positive abnormal stock returns, but, on average, precede large abnormal declines. Board and CEO characteristics are related to the magnitude of the post-transaction abnormal returns. Overall, the evidence suggests that Rule 10b5-1 plans do not prevent CEOs from timing large sales or the release of discretionary information around them.