Christopher W. Anderson

Empirical evidence on capital investment, growth options, and security returns

Growth in capital expenditures conditions subsequent classification of firms to portfolios based on size and book-to-market ratios, as in the widely used Fama and French (1992, 1993) methods. Growth in capital expenditures also explains returns to portfolios and the cross section of future stock returns. These findings are consistent with recent theoretical models (e.g., Berk, Green, and Naik (1999)) in which the exercise of investment-growth options results in changes in both valuation and expected stock returns. Copyright 2006 by The American Finance Association.

Deregulation, disintermediation, and agency costs of debt: evidence from Japan

Abstract Many Japanese firms reduced dependence on banks following financial deregulation in the 1980s. The financial architecture of Japanese firms after liberalization provides an opportunity to investigate the choice of financing with public bonds versus monitored bank loans. Examination of accounting and stock price data for a sample of Japanese firms in the late 1980s suggests that debt structure is related to variables that serve as proxies for agency costs of debt. In particular, we find that the proportion of bond debt is inversely related to growth opportunities, while the proportion of bank debt is positively related to growth opportunities.

Financial contracting under extreme uncertainty:: an analysis of Brazilian corporate debentures

Financial contracting in a developing economy can be extremely costly due to a volatile economic environment, high transactions costs, and fragile institutions. These conditions broadly characterize the economy of Brazil, yet a nascent corporate bond market thrives. To investigate the design of financial contracts under extreme uncertainty, I analyze the terms of 50 indenture agreements governing Brazilian corporate debentures issued between 1989 and 1993. The sample contracts are characterized by i) mechanisms that reduce inflation risk for investors, ii) contingent maturity features that provide periodic opportunities for exit or renegotiation, iii) a paucity of covenants that restrict an issuers investment, financing, and dividend decisions, and iv) self-enforcement mechanisms that by-pass arguably inefficient public remedies. Inferences drawn from the analysis have implications for our understanding of financial contracting, institutional frameworks for contracting, and policymaking in emerging economies.

Bank Mergers, the Market for Bank CEOs, and Managerial Incentives

After a large bank merger the compensation of the surviving banks CEO often increases materially. Theories of executive compensation based on managerial productivity and optimal incentives suggest that changes in CEO compensation are related to the potential gains from merger. Alternatively, compensation gains might result from an increase in bank size regardless of whether the merger creates value. We examine mergers among billion-dollar banks in the 1990s and find results consistent with managerial productivity. Specifically, we show empirically that changes in CEO compensation after mergers are positively related to anticipated gains from merger measured at the announcement date. Other changes in the structure of compensation are also consistent with hypotheses based on managerial productivity and incentive restructuring.

Restructuring the Japanese banking system Has Japan gone far enough

Abstract The resolution of the Japanese banking crisis has been identified as a critical factor affecting the health of the global economy. Massive restructuring must be undertaken to improve the health of Japanese financial system. We provide evidence that the Japanese banking system has begun to restructure in light of recent financial deregulation. In particular, failures, mergers and other forms of restructuring are now underway. However, Japanese banks still must overcome serious obstacles to regain their place among the worlds best financial institutions.

BANK MONITORING, FIRM PERFORMANCE, AND TOP MANAGEMENT TURNOVER IN JAPAN

An inverse relation between performance and managerial turnover at Japanese firms suggests that bank monitoring substitutes for other governance mechanisms (Kaplan, 1994; Kang & Shivdasani, 1995). Morck and Nakamura (1999), however, report that Japanese banks protect their self-interests as creditors rather than the interests of shareholders when appointing corporate directors. We re-examine data on top management changes at Japanese firms and find results consistent with this latter notion. Specifically, management turnover is conditionally related to a firm’s ability to meet its short-term obligations rather than profitability or stock returns. Bank monitoring is therefore not a substitute for mechanisms that directly serve shareholders’ interests.

Can Investors Anticipate Post-IPO Mergers and Acquisitions?

Given the frequency and its important value implication of post-IPO M&A activity, we investigate empirically whether investors can utilize information based on IPO deal structure to predict merger and acquisition activity among newly public firms. Consistent with the hypothesis that some firms conduct IPOs to facilitate future M&A activity, we find that whether a newly public firm subsequently becomes a bidder or target is predicted by aspects of IPO deal structure. These characteristics include underwriter quality, promotional activity, pricing, proceeds, ownership structure, and issuance activity suggestive of market timing. Investors appear to rely on these observable aspects of a firm’s going public process to anticipate the implications of M&A activity for security valuation. Specifically, when newly public firms with IPO deal structures predictive of acquisition activity announce an acquisition their stock returns are indistinguishable from zero. In contrast, abnormal returns to acquisition announcements by unlikely or surprise bidders are positive on average. These results suggest that the going public process has important implications for future M&A activity and valuation.

Investor Objective and Financial Contracting: Evidence from the PIPE Market

We investigate empirically how investor objectives condition the design of financial contracts as manifest in private investment in public equity (PIPE) deals. We hypothesize that varying objectives among different types of institutional investors affect the observed allocation of cash flow rights, control rights, and other contractual protections. For instance, strategic investors are more likely to request control rights in comparison to financial investors and may be willing to trade off cash flow rights for control rights. Financial investors, in contrast, are more likely to demand investor protections and be adverse to contractual restrictions on their post-issue trading activity. Empirical analysis of more than 3000 PIPE deals occurring between 1999 and 2007 supports these hypotheses. We also find PIPEs associated with strategic investors outperform those with financial investors. The differences in performance can be explained by the contractual differences in PIPEs conditional on investor objective.