Annette B. Poulsen

Event study methodology under conditions of event-induced variance

Abstract Many authors have identified the hazards of ignoring event-induced variance in event studies. To determine the practical extent of the problem, we simulate an event with stochastic effects. We find that when an event causes even minor increases in variance, the most commonly-used methods reject the null hypothesis of zero average abnormal return too frequently when it is true, although they are reasonably powerful when it is false. We demonstrate that a simple adjustment to the cross-sectional techniques produces appropriate rejection rates when the null is true and equally powerful tests when it is false.

Asset Sales, Firm Performance, and the Agency Costs of Managerial Discretion

We argue that management sells assets when doing so provides the cheapest funds to pursue its objectives rather than for operating efficiency reasons alone. This hypothesis suggests that (1) firms selling assets have high leverage and/or poor performance, (2) a successful asset sale is good news and (3) the stock market discounts asset sale proceeds retained by the selling firm. In support of this hypothesis, we find that the typical firm in our sample performs poorly before the sale and that the average stock-price reaction to asset sales is positive only when the proceeds are paid out.

Dual-class recapitalizations as antitakeover mechanisms: The recent evidence

Abstract We report evidence on shareholder wealth effects of 94 firms recapitalizing with dual classes of common stock with disparate voting rights. We find significant, negative abnormal stock price returns at the announcement of the dual-class recapitalization. When we consider recapitalizations separately announced since the NYSE imposed a moratorium is June 1984 on the delisting of companies with dual classes of equity, we find significant, negative abnormal returns as compared with insignificant returns in the earlier period. Those firms recapitalizing from June 1986 through May 1987 experienced the most significant negative returns observed.

Determinants of contractual relations between shareholders and bondholders: investment opportunities and restrictive covenants

Abstract We evaluate the costs and benefits of restrictive covenants in bonds issued in 1989 and 1996. Our results indicate that firms with growth opportunities are more likely to seek to preserve flexibility in future financing activities by not including dividend or debt issuance restrictions in their bond contracts. We do not find, however, that the use of other restrictive covenants is significantly lower for firms with high investment opportunities. Instead, the use of these other covenants is primarily driven by the issuing firms likelihood of financial distress. Our results emphasize that contractual relations between firms and bondholders reflect the specific needs of the contracting parties.

Linking pay to performance--compensation proposals in the S&P 500

We study the proposal of manager-sponsored compensation plans linking pay to performance by SP G34; J33

Consolidating corporate control*1: Dual-class recapitalizations versus leveraged buyouts

Abstract Dual-class recapitalizations and leveraged buyouts have similar effects on ownership of corporate voting rights but very different effects on ownership of residual claims. We predict that firms with greater growth opportunities, lower agency costs, and lower tax liability are more likely to consolidate control through dual-class recapitalizations. We find strong support for the growth hypothesis and weaker support for the other hypotheses. These results increase our understanding of the causes of change in organizational form by illustrating that the method and effects of consolidating corporate control are systematically related to firm attributes.

Proxy contests and corporate change: implications for shareholder wealth

Abstract We study the shareholder wealth effects of 270 proxy contests for board seats in the 1979–1994 period. We find that proxy contests create value, with the bulk of the wealth gains stemming from firms that are acquired. Restricting analysis to firms listed on Compustat imparts a downward bias on estimated wealth effects because such a restriction excludes a sizable fraction of the firms acquired during the proxy contest. For firms that are not acquired, the occurrence of management turnover has a significant, positive effect on shareholder wealth because firms replacing management are more likely to restructure following the contest.

Moving from Private to Public Ownership: Selling out to Public Firms versus Initial Public Offerings

We study the movement of assets from private to public ownership through two alternative means: the acquisition of private companies by firms that are public (sellouts) or by initial public share offerings (IPOs). We consider firm-specific characteristics for 1,074 IPOs and 735 sellouts from 1995 through 2004 to identify differences in growth, capital constraints, and asymmetric information between the two types of transactions. Our results suggest that firms move to public ownership through an IPO when they have greater growth opportunities, and face more capital constraints. Previous analyses of U.S. companies have focused on broad aggregate and industrylevel trends while our work allows a better understanding of the firm-specific characteristics leading to firms choosing to go public through an IPO and the costs of accessing the public capital markets. Takeovers of private firms by publicly traded firms (sellouts) and initial public offerings (IPOs) are two methods through which privately owned assets move to public ownership. These transactions are comparable since they represent significant shifts in ownership structure, a channel for raising capital, and a means of liquidation for owners. However, there are important differences between the transactions. Most fundamentally, in an IPO the firm continues to exist as a separate entity (although now owned by public shareholders) and in a sellout the control of the assets moves to another public firm. In addition, the structures of the transactions that move the assets to public ownership are different – sellouts need not access the costly IPO process. In this research, we consider the factors that determine the mechanism through which a firm moves to public status after the firm has decided to access the public equity market. Most closely related to our study, Brau, Francis and Kohers (2003) report that IPOs are more likely under macroeconomic conditions such as a relatively high cost of debt and a “hotter” IPO market and industry characteristics such as in industries that are more highly concentrated and more high-tech, while sellouts are more likely in higher market-to-book industries and highly leveraged industries. In our analysis, we extend Brau, Francis, and Kohers by analyzing firm-specific factors that might be important in the decision of how to access public equity markets. More recently, Bayar and Chemmanur (2006) theoretically model the choice of exit strategy by entrepreneurs and venture capitalists and find the probability of success in the product market as a stand-alone firm and the amount of information asymmetry between the insiders and IPO market investors or potential acquirers to be key drivers in the exit decision. They also suggest that synergies with the acquirer, the relative bargaining power of the private firm and the potential acquirer, and the presence of venture capitalists will affect the decision. Our work extends this research empirically by considering firm-specific factors (i.e., growth opportunities, financial constraints, and asymmetric information in firm valuation) that are associated with the method chosen to move assets from private to public status. Overall, our results illustrate the importance of firm-specific growth opportunities and market valuation in

Operational Risk in Financial Service Providers and the Proposed Basel Capital Accord: An Overview

The 1988 Basel Accord and the proposed revisions to the Accord represent some of the most significant international regulations impacting the financial decisions of firms, in this case, financial services firms, in recent years. The revisions to the Accord incorporate operational risk into the capital, supervisory and market requirements. In our review of the issues in this area, we provide insight into the workings of an important international regulation. We also present suggestions for further research in this area that will become feasible when data on the impact of the new regulations become available after the proposed implementation in 2006.

Syndicated Loan Announcements and the Market Value of the Banking Firm

This paper examines valuation effects on the stocks of fifteen participating money-center banks of 774 announcements of syndicated loans, representing announcements of investment decisions for the lenders. The authors find that announcements of LDC loans in the 1970s, especially those to Latin American borrowers, are associated with negative abnormal returns to the lending banks while announcements of loans to U.S. corporate borrowers in the 1980s, especially those for takover finance, are associated with positive abnormal returns. While a number of testable predictions are consistent with the negative abnormal returns for Latin American loans, they explain response to takeover loans with a return-to-liquidity hypothesis. Copyright 1995 by Ohio State University Press.