Colin Mayer

New issues in corporate finance

Flow of funds data are used to compare methods of finance in 5 countries over the period 1970 to 1985. Many of the problems associated with previous studies are avoided by estimating net instead of gross financing proportions. The degree of consolidation of accounts, reciprocal arrangements between borrowers and lenders and compensating deposit requirements on borrowers no longer distort financing patterns. Corrections for inflation are provided by employing flow rather than stock figures and using own aggregation procedures to derive stock measures. Significant variations in financing emerge. These are not readily explained by traditional descriptions of corporate finance, in particular taxation. As an alternative, the paper suggests that relationships between borrowers and lenders establish forms of commitment that are conducive to the provision of long term finance. The separation between investment and finance, which has been the starting point of corporate finance theory, is untenable in a multiperiod context in which terms of finance define future allocation of control.

Hostile takeovers and the correction of managerial failure

This paper examines the disciplining function of hostile takeovers in the U.K. in 1985 and 1986. We report evidence of high board turnover and significant levels of post-takeover restructuring. Large gains are anticipated in hostile bids as reflected in high bid premiums. However, there is little evidence of poor performance prior to bids, suggesting that the high board turnover does not derive from past managerial failure. Hostile takeovers do not therefore perform a disciplining function. Instead, rejection of bids appears to derive from opposition to post-takeover redeployment of assets and renegotiation over the terms of bids.

Ownership: Evolution and Regulation

This paper is the first study of long-run evolution of investor protection, equity financing and corporate ownership in the U.K. over the 20th century. Formal investor protection only emerged in the second half of the century. We assess its influence on ownership by comparing cross-sections of firms at different times in the century and the evolution of firms incorporating at different stages of the century. Investor protection had little impact on dispersion of ownership: even in the absence of investor protection, there was a high rate of dispersion of ownership, primarily associated with mergers. Ownership dispersion in the UK relied more on informal relations of trust than on formal systems of regulation. Preliminary evidence for this comes from the geographical proximity of shareholders to their boards of directors, the absence of price discrimination in takeovers and retention of directors of target boards in merged firms.

Corporate Governance, Competition and Performance

The paper examines interrelations between corporate governance, competition and performance. Traditional theories emphasise the importance of managerial incentives and disciplining in corporate governance, and how institutional arrangements affect financing. The paper argues that ownership and control, rather than incentives, disciplining and corporate finance, are the distinguishing features of different financial systems. The insider systems of Continental Europe and Japan may be superior at implementing policies which involve relations with stakeholders. Outsider, Anglo-American, systems may be more responsive to change. Concentration of ownership may be required to establish relations between stakeholders, and this may impede product market competition ... Cet article examine les relations mutuelles entre modes de controle des entreprises, concurrence et performance de l’economie. Les theories traditionnelles soulignent l’importance des incitations et de la discipline dans la direction d’entreprise, ainsi que la maniere dont les dispositifs institutionneles jouent sur le financement. L’etude soutient que ce sont la propriete et le controle, plutot que les incitations, la discipline et la finance d’entreprise, qui distinguent les differents systemes financiers. Les systemes de financement d’Europe continentale et du Japon, qui reposent essentiellement sur le recours aux banques ou a d’autres investisseurs inities, pourraient s’averer plus efficaces dans la mise en place de politiques impliquant des relations avec l’ensemble des parties prenantes. De leur cote, les systemes angloamericains, ouverts sur les marches, pourraient etre plus receptifs au changement. Une concentration de la propriete pourrait etre necessaire pour etablir des relations entre les parties en presence, et cela pourrait faire obstacle a la concurrence sur les marches de produits ...

Structure and performance: Global interdependence of stock markets around the crash of October 1987

Using a new data source on share price indices, this paper finds no evidence that the substantial variations in the reactions to the crash of October 1987 across countries are related to the structure of markets. However, trading halts and capital controls on residents may have moderated the speed of declines in some markets. The paper also examines one measure of interlinkages between markets, the trading of foreign stocks on domestic markets, and finds this to be closely related to interdependence between markets.

The Regulatory Challenge

The last decade has witnessed the introduction of an elaborate system of regulation in the UK. Whole segments of British industry are now operating under the supervision of regulatory bodies not dissimilar to the government departments they were designed to replace. Regulation has been an inevitable part of the structural changes in the 1980s, notably the privatization programme and changes in the financial services industries. This book assesses these developments across a number of sectors (utilities, telecommunications, financial services, health, and higher education) and offers a range of perspectives for understanding the various objectives, mechanisms, and institutions involved. The book offers important insights into the way in which the structure of privatized insutries interact with the form of regulation. It has significant implications for countries that are embarking on the process of privatization, regulation, and deregulation of their industries.

Bank Control, Takeovers and Corporate Governance in Germany

This paper examines the three cases of hostile takeovers in Germany in the post Second World War period. It describes the important role played by banks in affecting the outcome of the bids: bank representatives were chairmen of the supervisory board in all three cases and banks voted a large number of proxies in important decisions affecting the bids. The paper reports that low returns were earned by shareholders of two of the target firms and offers an explanation in terms of bank control and the regulatory regime operating in Germany.

The Financing and Governance of New Technologies

This paper examines the financial sector preconditions for the successful development of high technology sectors. It argues that there is a close relation between types of activities undertaken in different countries and their institutional structures. A distinguishing characteristic of the financing of new technology firms is their evolving pattern of control by different investor groups. While stock markets are an important component of the development of the most successful firms, they are not the most common. Regulation is a significant influence on institutional structure. For the most part, Europe has opted for high levels of investor protection and low levels of diversity, while the U.S. has placed more emphasis on entry and competition in the financial sector. While most attention to date has focused on the regulation and fragility of banking systems in Japan and the Far East, careful consideration needs to be given to alternative forms of regulating other parts of the financial system as well.

How Do Financial Systems Affect Economic Performance

This paper examines the relation between financial, corporate and legal systems, and economic performance in different countries. It reviews international comparisons that undertake detailed analyses of individual, developed countries and studies that use large, cross-country data banks, including developing countries. While the former do not provide evidence of a clear relation between different types of systems and economic performance, the latter report a strong association of financial development with economic growth. A recent theoretical literature offers a way of reconciling these two sets of studies. It points to a relation between financial/ corporate systems and types of activity with some systems favouring high risk, short-term investments and others promoting long-term, relatively low risk investments. These theories also suggest that systems may be related to stages of economic development. The paper summarizes a first empirical study that reports an association between financial/ corporate systems, types of activity and stages of economic development. The paper concludes that these relationships have important implications for the design of regulation and legal systems in different countries.

Corporation Tax, Finance and the Cost of Capital

This paper examines the influence of corporate tax exhaustion on the firms financial and investment decisions. A dynamic programming model is used to establish effective marginal tax rates in the presence of a tax system that permits the carry forward of losses to future periods. The paper demonstrates that internal optimal financial structures may result which do not require the imposition of external constraints. The cost of capital is highly sensitive to the current taxable earnings of the firm and the implications of this for such tax transfer activities as leasing are discussed.