Arturo Bris

The Value of Investor Protection: Firm Evidence from Cross-Border Mergers

International law prescribes that in a cross-border merger where the acquiror buys 100 percent of the target, the target firm becomes a national of the country of the acquiror. Among other effects, the change in nationality implies a change in investor protection, because the law that is applicable to the newly merged firm changes as well. Therefore, cross-border mergers provide a natural experiment to analyze the effects of changes - both improvements and deteriorations - in corporate governance on firm value. We construct measures of the change in investor protection induced by cross-border mergers in a sample of 506 acquisitions from 39 countries, spanning the period 1989 to 2002. We find that the announcement effect of a cross-border merger for the target firm is higher - relative to a matching, domestic acquisition - the better the shareholder protection and the accounting standards in the country of origin of the acquiror. This result is only significant in acquisitions where the acquiror buys 100 percent of the target, and therefore where the nationality of the target firm changes. In addition, this result is only significant when the acquiror comes from a more-protective country, which suggests that target firms avoid addopting weaker protection via private contracting. Interestingly, we do not find a symmetric effect on the acquirors return. All in all, we present evidence that the transfer of better corporate governance practices through cross-border mergers is positively valued by markets with weaker corporate governance.

A Breakdown of the Valuation Effects of International Cross-Listing

It is well known that cross-listing domestic stocks in foreign exchanges has significant valuation effects on the listed companys shares. Using a sample of firms with dual shares, we explore the differential effects of cross-listing on prices and we are able to separate the different sources of the benefits of cross-listing. Our results show that even though the market segmentation and bonding effects are both statistically significant, the economic significance of segmentation is more than double that of bonding. Furthermore, we document an economically and statistically significant increasse in the liquidity of both share classes after the listing. Overall, our results explain why less and less firms are willing to list in the U.S.: Sarbanes Oxley has increased the cost of adopting better governance while its benefits are not substantial; and market segmentation has decreased significantly in the last years.

Corporate Financial Policies and Performance around Currency Crises

Using data from 20 countries that have suffered a currency crisis, this paper studies firm-level leverage and performance before and after a crisis has occurred. First we provide some evidence of increasing leverage both before and after a crisis. We show that, in the years preceding a currency crisis, companies that benefit from currency depreciations increase their leverage more than companies that are harmed by currency depreciations. These findings do not hold for countries with either floating exchange rates or currency boards. We argue that increasing leverage is a sign that some firms behave strategically towards governments that lack commintment mechanisms not to devalue their currencies. We also provide evidence that the Asian crisis is different from the previous European and Latin American ones: in Asia firms become more fragile after the crisis and their profitability declines further, whereas in Europe and Latin America there are clear signs of recovery after a crisis has occurred.

Toeholds, takeover premium, and the probability of being acquired

Abstract Most of the theoretical literature on tender offers has been devoted to illustrating the positive effects of the toehold on the bidders profits. Empirical research, however, shows that a high proportion of bidders do not trade on the targets shares prior to the tender offer announcement. This paper presents a model in which the bidder trades in the open market before announcing a tender offer and the incumbent shareholders form beliefs about the rivals quality given the order size. Market liquidity allows the potential bidder to partially hide her trade, and thus insiders are not able to ascertain whether an increase in volume indicates toehold acquisition. Stock price prior to the announcement date and market perception about the probability of a takeover are therefore contingent on players actions. We show that in some situations no trade will be optimal, and a negative relationship between takeover premium and toehold size arises. Interestingly, stock liquidity and initial stake are positively related. Our results also provide a theoretical basis for the observed pre-bid stock price dynamics. In particular, we show that the ratio between price runup and bid premium is increasing in the toehold size.

The Euro and Corporate Financing

In this paper we study how the introduction of the euro has affected corporate financing in Europe. We use firm level data from eleven euro-countries as well as from a control group of five other European countries spanning the years 1991-2006. We show that firms from euro-countries that previously had weak currencies have increased both their equity and debt financing compared to the control group. We also show that results are stronger for firms that hail from less financially developed euro-countries, and that large firms from industries that are dependent on external financing have increased their debt financing more. These results support the hypothesis that improved access to capital markets in the euro-area has enabled increased external financing, especially debt financing.

Who Should Pay for Bankruptcy Costs

The fees of professionals (financial advisors, lawyers, accountants) are a substantial fraction of bankruptcy costs. Scholars have considered how best to reduce these costs but have not considered how they should be allocated among creditors. Creditors can spend redistributionally (to violate or uphold absolute priority) or productively (to increase the value of the bankrupt firm). An efficient bankruptcy cost allocation scheme should discourage redistributional and encourage productive creditor spending. We consider the desirability of various allocation schemes in a model in which senior and junior creditors can engage in both types of spending. We show that (1) the current U.S. cost allocation system is unsatisfactory because the scheme partially reimburses junior expenses for professionals but does not reimburse senior expenses and (2) a cost allocation scheme that approaches the first‐best solution and is implementable would delegate the issue of professionals’ cost reimbursement to the debtor in possession.

The effect of merger laws on merger activity: International evidence

Publisher Summary This chapter is an attempt to isolate the direct effect of competition laws on a countrys merger activity and indirectly on corporate value. Although the direct relationship between merger laws and Tobins Q is positive and significant, the relationship vanishes once it is controlled for the net cross-border merger flows in a particular country. To the extent that the trend toward globalization in the world has dramatically increased merger flows from some countries to others, it is argued that there is a need for competition laws that make up for the pervasive effects of the global market on some countries. The chapter concludes that the positive effect of merger laws on corporate value is driven by their deterring effect on horizontal, cross-border, and anticompetitive mergers.

Conflicts in Bankruptcy and the Sequence of Debt Issues

We present a model that shows how interactions between creditor groups in bankruptcy can affect the debt issuance decisions of firms. In particular, we suggest that deviations from APR should be priced and can affect the issuing decisions of junior and senior debt. Our model suggests that once firms issue debt with one level of seniority, they have an incentive to alternate, and subsequent issues will have a different seniority level. When we introduce explicit costs of conflict in our model, we find that as these costs increase, firms will tend to stay with one class of debt. The empirical implications of our model are consistent with the somewhat surprising fact that most firms issue debt at one seniority level only, and quite a few of them never issue any senior debt. We also find that companies that issue only senior subordinated debt are much smaller than those that issue senior debt, while those that issue at both levels are intermediate on most financial measures. This is broadly consistent with our theoretical analysis. Our model is also supported by the fact that companies that issue only senior debt pay lower spreads than companies that issue at both levels. Finally, we study a sample of firms in bankruptcy and again find significant relationships between corporate characteristics and the types of debts that they issue, as predicted by the model.

Separated by a common currency? Evidence from the Euro changeover

We study the price convergence of goods and services in the euro area in 2001-2002. To measure the degree of convergence, we compare the prices of around 220 items in 32 European cities. The width of the border is the price di¤erence attributed to the fact that the two cities are in different countries. We find that the 2001 European borders are negative, which suggests that the markets were very integrated before the euro changeover. Moreover, we do not identify an integration effect attributable to the introduction of the euro. We then explore the determinants of the European borders. We find that different languages, wealth and population differences tend to split the markets. Historical inflation, though, tends to lead to price convergence.