Eli Ofek

Diversification's effect on firm value

Abstract We estimate diversifications effect on firm value by imputing stand-alone values for individual business segments. Comparing the sum of these stand-alone values to the firms actual value implies a 13% to 15% average value loss from diversification during 1986–1991. The value loss is smaller when the segments of the diversified firm are in the same two-digit SIC code. We find that overinvestment and cross-subsidization contribute to the value loss. The loss is reduced modestly by tax benefits of diversification.

Exchange Rate Exposure, Hedging, and the Use of Foreign Currency Derivatives

We examine whether firms use foreign currency derivatives for hedging or for speculative purposes. Using the sample of all SP the use of derivatives significantly reduces the exchange-rate risk firms face. We also find that the decision to use derivatives depends on exposure factors (i.e. foreign sales and foreign trade) and on variables largely associated with theories of optimal hedging (i.e., size and R&D expenditures), and that the level of derivatives used depends only on a firms exposure through foreign sales and trade.

Asset Sales and Increase in Focus

We find that asset sales lead to an improvement in the operating performance of the sellers remaining assets in each of the three years following the asset sale. The improvement in performance occurs primarily in firms that increase their focus; this change in operating performance is positively related to the sellers stock return at the divestiture announcement. The announcement stock returns are also greater for focus-increasing divestitures. Further, we find evidence that some of the sellers gains result from a better fit between the divested asset and the buyer.

Taking Stock: Equity-Based Compensation and the Evolution of Managerial Ownership

We investigate the impact of stock-based compensation on managerial ownership. We find that equity compensation succeeds in increasing incentives of lower-ownership managers, but higher-ownership managers negate much of its impact by selling previously owned shares. When executives exercise options to acquire stock, nearly all of the shares are sold. Our results illuminate dynamic aspects of managerial ownership arising from divergent goals of boards of directors, who use equity compensation for incentives, and managers, who respond by selling shares for diversification. The findings cast doubt on the frequent and important theoretical assumption that managers cannot hedge the risks of these awards. Copyright The American Finance Association 2000.

Investor Valuation of the Abandonment Option

We investigate whether investors price and the real option to abandon the firm for its liquidation value. Theory prices this real option as an American put with both a stochastic strike price (liquidation value) and a stochastic value of the underlying security (the value of cash flows). The major empirical implications are that firm value increases in liquidation value, after controlling for expected going-concern cash flows, and that more generalizable assets produce more abandonment option value. We use both discounted analyst forecasts of future earnings and industry-median cash flow multipliers to proxy for expected going-concern cash flows, and we rely on prior literature to categorize assets as more or less specialized. Using these measures, we find strong support for the major empirical predictions of abandonment put option theory.

Capital structure and firm response to poor performance: An empirical analysis

Abstract This paper tests the relation between capital structure and a firms response to short-term financial distress. In a sample of 358 firms that perform poorly for a year, higher predistress leverage increases the probability of operational actions, particularly asset restructuring and employee layoffs. Higher predistress leverage also increases the probability of financial actions such as dividend cuts. These results are consistent with Jensens (1989) argument that higher predistress leverage increases the speed with which a firm reacts to poor performance. Interestingly, higher managerial holdings reduce the probability of operational actions, especially those that do not generate cash.

Mergers as a Means of Restructuring Distressed Firms: An Empirical Investigation

We examine 38 takeovers of distressed firms and find that these takeovers are more likely to involve firms in the same industry and less likely to be hostile takeovers than are acquisitions in general. We use five different measures to evaluate post-merger performance of the combined bidder and target firms. All performance measures suggest that bidders are unable to successfully restructure targets. The market demonstrates an ability to forecast the success of restructuring. Restructuring success is negatively related to the size of premium paid by the bidder for the target and positively related to the financial distress of the target.

What's in it for Me? Personal Benefits Obtained by CEOS Whose Firms are Acquired

We study benefits received by target company CEOs in completed mergers and acquisitions. These executives obtain wealth increases with a median of

Managerial Entrenchment and Capital Structure Decisions

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Dotcom Mania: The Rise and Fall of Internet Stock Prices

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