Clifford W. Smith

The investment opportunity set and corporate financing, dividend, and compensation policies☆

We examine explanations for corporate financing-, dividend-, and compensation-policy issues. We document robust empirical relations among corporate policy decisions and various firm characteristics. Our evidence suggests contracting theories are more important in explaining cross-sectional variation in observed financial, dividend, and compensation policies than either tax-based or signaling theories.

On financial contracting: An analysis of bond covenants

Abstract With risky debt outstanding, stockholder actions aimed at maximizing the value of their equity claim can result in a reduction in the value of both the firm and its outstanding bonds. We examine ways in which debt contracts are written to control the conflict between bondholders and stockholders. We find that extensive direct restrictions on production/investment policy would be expensive to employ and are not observed. However, dividend and financing policy restrictions are written to give stockholders incentives to follow a firm-value-maximizing production/investment policy. Taking into account how contracts control the bondholder- stockholder conflict leads to a number of testable propositions about the specific form of the debt contract that a firm will choose.

Ownership structure and voting on antitakeover amendments

Abstract Theory suggests that shareholders who own blocks of stock have a stronger incentive to invest in voting on corporate issues than nonblockholders. Our evidence indicates that institutional investors and other blockholders vote more actively on antitakeover amendments than nonblockholders, and opposition by institutions is greater when the proposal appears to harm shareholders. Our evidence suggests that institutions that are less subject to management influence, such as mutual funds, foundations, and public-employee pension funds, are more likely to oppose management than banks, insurance companies, and trusts, which frequently derive benefits from lines of business under management control.

Option pricing: A review☆

Abstract Recent advances in the general equilibrium pricing of simple put and call options lay the foundation for the development of a general theory of the valuation of contingent claims assets. This paper provides a review of: (1) the development of the general equilibrium option pricing model by Black and Scholes, and the subsequent modifications of this model by Merton and others; (2) the empirical verification of these models; and (3) applications of these models to value other contingent claim assets such as the debt and equity of a levered firm and dual purpose mutual funds.

Trading costs for listed options: The implications for market efficiency☆

Abstract This paper reexamines the anomalous evidence concerning the efficiency of the listed options exchanges. We focus on the structure of trading costs in that market, and note several costs which generally have been ignored, the largest of which is the bid-ask spread. When we adjust the published trading rules for our estimates of these trading costs, the reported abnormal returns are eliminated.

Corporate voting: Evidence from charter amendment proposals

Abstract Some argue that managers effectively control corporate voting: hence the process is meaningless. Others contend that shareholder voting motivates managers to maximize firm value. We provide evidence on this debate by analyzing the results from a large sample of management-sponsored anti-takeover amendments. Our results do not support the extreme form of either hypothesis. The evidence suggests that shareholder voting is important and indicates the circumstances where voting is most likely to constrain managers. Our results also have implications for the use of voting in political and other non-corporate contexts.

Incentives for unconsolidated financial reporting

Abstract We provide a positive analysis of a firms decision to report the operations of a financial subsidiary on a consolidated versus an unconsolidated basis. Our evidence indicates that the firm is more likely to choose consolidated reporting the greater the operating, financial, and informational interdependencies between parent and subsidiary. Moreover, our evidence offers no support for the FASB hypothesis that firms use unconsolidated financial subsidiaries to understate the fixed claims on their balance sheets.

Incentives associated with changes in consolidated reporting requirements

Abstract We examine the effects of mandated changes regarding consolidation. Analysis of FAS 94 submissions indicates: firms with unconsolidated subsidiaries lobby against FAS 94; strategic lobbying; accounting-data users lobby against FAS 94; and accounting firms support the proposal more than industrials. FAS 94 adoption produced negative returns in affected firms. In response to FAS 94, firms with unconsolidated financial subsidiaries were more likely to sell, close, or reorganize the subsidiary, retire debt, or securitize corporate assets. Finally, Canadian firms switch to unconsolidated reporting after a 1978 amendment to Canadian GAAP eliminating limitations on its use. Collectively this evidence suggests FAS 94 eliminated a valuable reporting alternative.

Globalization of financial markets

Abstract This paper examines the incentives for and impediments to globalization of financial markets. First, incentives for an optimal ownership structure, its implications for geographic dispersion of owners, and the implications for the derived demand for global trading in the firms shares are analyzed. After a brief survey of the operating procedures and regulatory environments of the New York, London and Tokyo exchanges, various exchange rules, regulatory and tax parameters are analyzed from the perspective of contributing successful competition in a global market.

Derivatives regulation: Implications for central banks

Abstract We review aspects of derivatives markets that affect central bank operations. We focus on how derivatives affect monetary policy and bank supervision, and argue that derivatives have no material adverse impact on the conduct of monetary policy. Our analysis suggests that both derivatives users and dealers face relatively small default risks from derivatives. Systemic risk, the risk of widespread default, has been largely exaggerated. Policy debates have neglected incentives of employees; the nature of this agency risk suggests that internal controls are more likely to reduce these problems than derivatives regulation.