Charles J. Hadlock

Do Banks Provide Financial Slack

We study the decision to choose bank debt rather than public securities in a firms marginal financing choice. Using a sample of 500 firms over the 1980 to 1993 time period, we find that firms are relatively more likely to choose bank loans when variables that measure asymmetric information problems are elevated. The sensitivity of the likelihood of choosing bank debt to information problems is greater for firms with no public debt outstanding. These results are consistent with the hypothesis that banks help alleviate asymmetric information problems and that firms weigh these information benefits against a wide range of contracting costs when choosing bank financing. Copyright The American Finance Association 2002.

The role of managerial incentives in bank acquisitions

Abstract This paper examines the effect of variables related to management incentives, corporate governance, and performance on the likelihood a bank is acquired. We find that banks with higher levels of management ownership are less likely to be acquired, particularly in acquisitions where target managers depart from their jobs following the acquisition. We document high rates of management turnover following bank acquisitions. This evidence is consistent with an entrenchment hypothesis, where management teams block attempts to be acquired. We find little evidence that any other incentive, governance, or performance variables are systematically related to the probability a bank is acquired.

Ownership, Liquidity, and Investment

This article documents a nonlinear relationship between insider shareholdings and the sensitivity of a firms investment to its cash flow. As insider holdings increase from zero, investment-cash flow sensitivities rise sharply. This relationship weakens at higher levels of insider ownership, and I find some evidence that investment-cash flow sensitivities decrease slowly with insider holdings after a certain point. I argue that these results are inconsistent with the hypothesis that free-cash-flow problems cause the widely noted sensitivity of investment to cash flow. The results are consistent with the presence of asymmetric-information problems in the capital markets that are heightened when managers have a strong incentive to maximize shareholder returns.

Management Turnover and Product Market Competition: Empirical Evidence from the U.S. Newspaper Industry

We examine the relationship between management turnover and market structure for newspapers in 50 large cities from 1950 to 1993. We find that competitive markets display greater turnover rates than monopolistic markets and that turnover rates are increasing in the degree to which a newspaper trails its competition in market share. We find no evidence that the turnover-performance relationship varies with market structure. We discuss the implications of these findings for theories concerning competition and managerial employment contracting. The results appear most consistent with the hypothesis that the greater likelihood of liquidation in competitive markets leads to elevated turnover rates. Copyright 2000 by University of Chicago Press.

Promotions in the Internal and External Labor Market: Evidence from Professional Football Coaching Careers*

We study job movements of professional football coaches. The likelihood of an external promotion is strongly related to measures of individual performance and only weakly related to team performance. In contrast, the likelihood of an internal promotion is not related to individual performance. This difference arises from the process governing internal job openings, since openings are negatively related to performance. Conditional on the presence of an opening, promotion likelihood is increasing in individual performance. Relationships matter, as coaches are often hired and fired as a group. These findings have implications for several issues related to incentives and organizational design.

Chief Executive Officer Careers in Regulated Environments: Evidence from Electric and Gas Utilities*

We compare chief executive officers (CEOs) of electric and gas utility firms with CEOs of unregulated firms. Utility CEOs tend to be older when appointed to office, have less‐prestigious educational backgrounds, and are more likely to have a legal background. Despite these differences, the evidence indicates that the likelihood of utility CEO turnover is at least as sensitive to stock performance as the likelihood of turnover among CEOs of unregulated firms. We find no convincing evidence that utility CEOs stay in office longer than their unregulated counterparts, although they are less likely to be overtly forced from office or replaced by an executive from outside the firm. Finally, the evidence suggests that regulatory expertise is valued in the selection of new utility CEOs.

Financial Strength and Product Market Competition: Evidence from Asbestos Litigation

We study the role of financial strength on product market competition by examining exogenous shocks to a firm’s liability structure arising from asbestos litigation. We find that exogenous increases (decreases) in asbestos liabilities are interpreted by the market as negative (positive) news for a firm’s close competitors. These reactions are magnified in events in which one asbestos-tainted firm goes bankrupt and other asbestos-tainted stocks fall on the news of the bankruptcy. For smaller competitors, market reactions are more pronounced in more concentrated industries. Our findings support the general hypothesis that increases in fixed liabilities lead to more aggressive product market interactions.

Raids, Rewards, and Reputations in the Market for CEO Talent

We examine the basic hypothesis that the market for managerial talent rewards managers from firms with superior stock price performance. We identify a set of outside CEO hires in a set of large publicly traded firms and investigate the stock price performance of the prior employers of these executives. Using 5-year buy-and-hold returns as our basic performance measure, we find that the prior employers of our sample executives did, on average, exhibit superior performance compared to a variety of benchmarks. A conditional logit analysis confirms that superior firm performance increases the likelihood that an executive will get an outside CEO job. Our results are most pronounced for executives who jump immediately from their prior employer to the new employer (raids) and for executives who were more highly ranked at their prior employer. We also examine compensation contracts and find that executives are typically awarded large initial hiring grants composed of stock options, restricted stock, and cash signing bonuses. These grants are highly correlated with the value of the unvested option and restricted stock position the executive leaves behind at his old employer. The evidence also suggests that these grants are positively related to prior firm performance, even after controlling for the forfeited position at the prior employer. We interpret our findings as providing substantial support for the basic hypothesis that superior stock price performance enhances an executives external labor market opportunities. In our view this is an interesting and important finding, as it supports the basic assumption underlying a large class of models concerning executive decision making and contracting in the presence of career concerns.

What Happens in Acquisitions? Evidence from Brand Ownership Changes and Advertising Investment

We study advertising at the brand level in a sample of corporate acquisitions. New owners display an elevated propensity to sharply cut advertising in acquired brands. This behavior is most pronounced in private equity transactions. When a buyers existing brands overlap with the acquired brands, aggregate advertising spending on the merged portfolio of brands tends to shift downward. Sharp advertising cuts are more likely to be observed when the old owner of the assets was investing at an elevated level and when the new owner has displayed past restraint in their investment spending activities. Combined buyer and seller abnormal returns are more positive in deals characterized by post-acquisition cuts in advertising, suggesting that these cuts often represent efficiency-enhancing cost savings.

Robust Models of CEO Turnover: New Evidence on Relative Performance Evaluation

We examine the robustness of empirical models of CEO turnover and revisit prominent findings in the literature regarding the CEO turnover-performance relation. We find that the procedure used to categorize turnover events and the method used to construct performance metrics can have large effects on model inferences. We show that common modeling choices have potentially serious shortcomings including (a) ignoring important information, (b) relying on information that may be systematically biased towards the hypothesis of interest, and (c) weighing extreme observations more heavily than the underlying theory would suggest. We identify a small set of robustness checks and model permutations that are likely to span the reasonable set in many turnover modeling contexts. Using these checks, we show that the widely documented significant sensitivity of CEO turnover to a firm’s abnormal stock performance is an extremely robust result. In contrast, the surprising recent evidence that CEO turnover depends on industry returns is fragile and non-robust, and in general there is no convincing evidence of an independent role of industry stock returns in predicting CEO turnover. We conclude that efforts to explain the general presence of an industry factor in turnover are misguided and that a simple efficient learning view of turnover with full relative performance evaluation is a reasonable description of the CEO turnover process.