Audra L. Boone

Comparing Acquisitions and Divestitures

We study the acquisition and divestiture activity of a sample of 1,305 firms from 59 industries during the 1990-99 period. Consistent with the importance of restructuring activity during the 1990s, we find that half of the sample firms are acquired or engage in a major divestiture. Consistent with the notion that economic change is a source of the observed restructuring activity, we find significant industry clustering in both acquisitions and divestitures. We also study the announcement effects of the two forms of restructuring and find that both acquisitions and divestitures in the 1990s increase shareholder wealth. Moreover, the wealth effects for both acquisitions and divestitures are directly related to the relative size of the event. The symmetric, positive wealth effects for acquisitions and divestitures are consistent with a synergistic explanation for both forms of restructuring and are inconsistent with non-synergistic models based on entrenchment, empire building and hubris. JEL classification: G14, G34

How Are Firms Sold

As measured by the number of bidders that publicly attempt to acquire a target, the takeover arena in the 1990s appears noncompetitive. However, we provide novel data on the pre-public, private takeover process that indicates that public takeover activity is only the tip of the iceberg of actual takeover competition during the 1990s. We show a highly competitive market where half of the targets are auctioned among multiple bidders, while the remainder negotiate with a single bidder. In event study analysis, we find that the wealth effects for target shareholders are comparable in auctions and negotiations. Copyright 2007 by The American Finance Association.

Do auctions induce a winner's curse? New evidence from the corporate takeover market☆

We test for the winners curse in the corporate takeover market by comparing bidder returns in auctions versus negotiations. Our sample entails 308 takeovers that were announced in the 1989 to 1999 period. Our classification of auctions and negotiations comes from a unique data set on the private sales process that occurs prior to the public announcement of a takeover. We find that the returns to bidders in auctions are similar to the returns to bidders in negotiations. The results hold after controlling for size and deal characteristics that have been shown to affect bidder returns. The results are also robust to a variety of proxies for takeover competition. Our results do not support the existence of a winners curse in the corporate takeover market. Roll (1986) provides a provocative model of the takeover process in which overconfident managers at bidding firms fall prey to the winners curse when acquiring other publicly traded corporations. He contends that his model is as consistent with the evidence on the returns to bidders in takeovers as other models based on synergy or disciplinary motives. Thaler (1988) builds on Rolls (1986) model to argue that the non-positive return to bidders is consistent with a winners curse in the takeover market. Moeller, Schlingemann, and Stulz (2004) conclude that the apparent overpayment by large bidders in corporate takeovers could stem from the factors described in Rolls (1986) model. While possibly consistent with the overall data on bidder returns, a more direct test of the winners curse in the corporate takeover market would analyze the effect of takeover competition on bidder returns. For example, laboratory experiments such as Kagel and Levin (1986) contrast the effects on bidding of a large number of bidders versus a small number of bidders. In the corporate takeover setting, the basic question is: Do bidders fare worse when they participate in an auction for a target than when they negotiate with a target on a one-on-one basis? We address this question with a novel data set on auctions and negotiations in corporate takeovers. For a sample of 308 takeovers announced in the 1989 to 1999 period, we use information from SEC filings to determine the competitiveness of the private sales process that occurs prior to any public announcement of the takeover. This private sales process, which is described by Herzel and Shepro (1990) and Wasserstein (2000) and formally modeled by Hansen (2001), …

The Effect of Institutional Ownership on Firm Transparency and Information Production

This paper provides evidence on the causal relationship of institutional ownership on a firm’s information environment. Our analyses use the annual reconstitution of the Russell 1000 and 2000 indexes. The characteristics of firms near the Russell 1000/2000 threshold are similar, except that firms just included in the top of the Russell 2000 index have discontinuously higher institutional ownership, predominantly stemming from quasi-indexing institutions. We find that greater quasi-indexer ownership results in more public information dissemination, both from managers and analysts, and an improved information environment as evidenced by lower information asymmetry and higher liquidity. Overall, our paper demonstrates that demands for information by quasi-indexers positively affects firm transparency and information production, which can enhance monitoring and decrease trading costs for all investors.

Is There Shareholder Expropriation in the United States? An Analysis of Publicly Traded Subsidiaries

This paper examines the relation between the performance and valuations of publicly traded subsidiaries in the United States and the ownership stake of their parent companies. Cross-sectional and time-series tests demonstrate that subsidiaries of parents that own a substantial minority stake exhibit negative peer-adjusted operating performance and are valued at a 23% median discount relative to peers. In contrast, majority-owned and fully divested subsidiaries show no abnormal performance or valuations. The results of our study indicate that the association between parent ownership and subsidiary performance is nonlinear and that some parents behave opportunistically toward their publicly traded subsidiaries.

Time trends and determinants of the method of payment in M&As☆

Corporate acquirers have increasingly resorted to a mix of cash and stock to finance takeovers. We show that mixed-payment deals are rich in diversity and fundamentally different from all-cash and all-stock deals. Some mixed-payment deals allow target shareholders to choose their preferred payment method. Based on election results, we document that shareholders generally prefer stock over cash, especially when the value of the stock payment is high relative to the cash payment on the election date. We also find that a non-trivial fraction of target shareholders fail to make a valid election even in the presence of a substantial value difference between the stock and cash payments.

Who Monitors the Monitor? The Use of Special Committees by Target Firms in Corporate Takeovers

This paper extends the corporate governance literature such as Alchian and Demsetz (1972) by analyzing the use of special committees of disinterested directors by target firms during corporate takeovers. Our sample spans post Sarbanes–Oxley from 2003 through 2007, under which boards of directors are subject to increased scrutiny and additional regulatory mandates. This period is also characterized by a high level of management buyout activity that can exacerbate conflicts. Our results show that special committee use is positively related to conflicts and negatively related to factors and situations where insider knowledge is particularly valuable. Moreover, the propensity to form a committee is negatively related to the boards overall independence; hence special committees substitute for the monitoring not found in the overall board composition. Special committees, on average, are formed well in advance of the merger agreement, employ additional financial advisors, and are more likely to run an auction process. Target returns in deals with special committees are no different than deals without special committees. The evidence indicates that special committees enable target boards to adapt to situational conflicts, which helps explain when independent directors matter for corporate governance.

Is There Shareholder Expropriation in the U.S.? An Analysis of Publicly-Traded Subsidiaries

This paper examines the relation between the performance and valuations of publicly-traded subsidiaries in the United States and the ownership stake of their parent companies. Cross-sectional and time-series tests demonstrate that subsidiaries in which the parent owns a substantial minority stake exhibit negative peer-adjusted operating performance and are valued at a 23% median discount relative to peers. In contrast, majority-owned and fully divested subsidiaries show no abnormal performance or valuations. The results of our study indicate that the association between parent ownership and subsidiary performance is nonlinear and that some parents do, in fact, behave opportunistically toward their publicly traded subsidiaries.

Political Uncertainty and Firm Disclosure

We explore how managers adjust voluntary disclosure in response to local policy uncertainty generated by gubernatorial elections. We show that the securities of firms headquartered in election states experience transitory deterioration in firm-level measures of uncertainty and information asymmetry in the months prior to the election. Managers respond to local policy uncertainty by providing more frequent and informative voluntary disclosures, but only when they do not reduce real activities. Cross-sectional tests indicate that voluntary disclosure increases more for firms with higher external demand for information from analysts and institutional investors, more investment, and lower disclosure costs.

Shareholder Decision Rights in Acquisitions: Evidence from Tender Offers.

Using a 2013 Delaware law that reduces the approval threshold from 90% to 50% to conduct a short-form merger after a tender offer, we investigate whether variation in the required level of shareholder support affects acquisition outcomes. We find that lower authorization requirements increase the use of tender offers relative to mergers for Delaware targets. Further, Delaware targets collectively receive greater acquisition premiums and returns after the passage of the new law relative to target firms incorporated other states. We do not find evidence that managers use the lower threshold to extract private benefits. Our results suggest that supermajority shareholder approval is unnecessary for tender offers and can increase the risk of holdup by activist investors.Using a 2013 Delaware law that reduces the authorization threshold for two-step tender-offers from 90% to 50%, we investigate whether variation in the required level of shareholder support affects acquisition outcomes. We find that lower authorization requirements increase the use of tender offers relative to mergers for Delaware targets. Though the new law removes target shareholders’ right to vote on certain deals, they do not appear to be harmed by the change. Indeed, Delaware targets received greater acquisition premiums and target cumulative abnormal returns after the passage of the new law relative to target firms incorporated in another state. Our results suggest that the supply of equity is not perfectly elastic and caution that supermajority approval requirements can increase the risk of shareholder holdup and lead to inefficient choice of deal structure.