Gordon M. Phillips

The Market for Corporate Assets: Who Engages in Mergers and Asset Sales and are there Efficiency Gains?

We analyze the market for firms, divisions, and plants of manufacturing firms using a large sample of plant-level data for the period 1974-92. There is an active market for corporate assets, with over 7 percent of plants transacted through mergers and asset sales in expansion years in the economy. Transactions through partial firm sales represent more than half of these transactions. The probability of asset sales and full firm transactions is related to firm organization and buyer and seller ex ante productivity. We find that these transactions result in ex post productivity increases especially for asset sales from peripheral divisions of selling firms to main divisions of other buyers. Finally we find that productivity increases are significantly higher the more productive the buying firm. This timing of sales and the pattern of productivity gains suggests that the transactions that occur, especially through asset sales of plants and divisions, tend to improve the allocation of resources and are consistent with a simple neoclassic model of profit maximizing by firms. The decision to participate in the market for corporate assets and the subsequent gains realized from transactions are affected both by firm productivity and firm organization.

Do Conglomerate Firms Allocate Resources Inefficiently Across Industries? Theory and Evidence

We develop a profit-maximizing neoclassical model of optimal firm size and growth across different industries based on differences in industry fundamentals and firm productivity. In the model, a conglomerate discount is consistent with profit maximization. The model predicts how conglomerate firms will allocate resources across divisions over the business cycle and how their responses to industry shocks will differ from those of single-segment firms. Using plant level data, we find that growth and investment of conglomerate and single-segment firms is related to fundamental industry factors and individual segment level productivity. The majority of conglomerate firms exhibit growth across industry segments that is consistent with optimal behavior. Copyright The American Finance Association 2002.

The Industry Life Cycle and Acquisitions and Investment: Does Firm Organization Matter?

We examine the effect of financial dependence on acquisition and investment within existing industries by single-segment and conglomerate firms for industries undergoing different long run changes in industry conditions. Conglomerates and single-segment firms differ more in rates of within-industry acquisitions than in capital expenditure rates, which are similar across organizational type. In particular, 36 percent of within-industry growth by conglomerate firms in growth industries is from intra-industry acquisitions, compared to nine percent for single segment firms. Financial dependence, a deficit in a segment%u2019s internal financing, decreases the likelihood of within-industry acquisitions and opening new plants, especially for single-segment firms. These effects are mitigated for conglomerates in growth industries. The findings persist after controlling for firm size and segment productivity. Acquisitions lead to increased efficiency as plants acquired by conglomerate firms in growth industries increase in productivity post acquisition. The results are consistent with the comparative advantages of different firm organizations differing across long-run industry conditions.

Do Conglomerate Firms Allocate Resources Inefficiently

We develop a profit-maximizing neoclassical of optimal firm size and growth across different industries. The model predicts how conglomerate firms will allocate resources across divisions over the business cycle and how their responses to industry shocks will differ from those of single-segment firms. We test our model and find that growth of conglomerate and single-segment firms is related to neoclassical theory. Conglomerates grow less in a particular segment of their other segments are more productive and if their other segments experience a larger positive demand shock. We find that the growth rates of peripheral segments are very sensitive to relative productivity and that conglomerates sharply cut the growth of unproductive peripheral segments. We do find some evidence consistent with agency problems for conglomerate firms that are broken up. However, the majority of conglomerate firms exhibit growth across business segments that is consistent with optimal behavior.

Why do public firms issue private and public securities

The market for public firms issuing private equity, debt, and convertible securities is large. Of the over 13,000 issues we examine, more than half are in the private market. Our results show asymmetric information plays a major role in the choice of security type within public and private markets and in the choice of market in which to issue securities. In the public market, firms’ predicted probability of issuing equity declines and issuing debt increases with measures of asymmetric information. There is a weak reversal of this sensitivity in the private market. We also find a large sensitivity of the choice of public versus private markets to asymmetric information, risk and market timing for debt, convertibles, and in particular, equity issues.

Real Asset Illiquidity and the Cost of Capital

We show that firms with more illiquid real assets have a higher cost of capital. This effect is stronger when real illiquidity arises from lower within-industry acquisition activity. Real asset illiquidity increases the cost of capital more for firms that face more competition, have less access to external capital or are closer to default, and for those facing negative demand shocks. The effect of real asset illiquidity is distinct from that of firms’ stock illiquidity or systematic liquidity risk. These results suggest that real asset illiquidity reduces firms’ operating flexibility and through this channel its cost of capital.

Is There an Optimal Industry Financial Structure

We examine how intra-industry variation in financial structure relates to industry factors and whether real and financial decisions are jointly determined within competitive industries. We find that industry and group factors beyond standard industry fixed effects are also important to firm financial structure. Firm financial leverage, capital intensity, and cash-flow risk are interdependent decisions that depend on the firms proximity to the median industry capital-labor ratio, the actions of firms within its industry quintile, and its status as entrant, incumbent, or exiting firm. Our results support competitive industry equilibrium models of financial structure in which debt, technology, and risk are simultaneous decisions.

Corporate Equity Ownership and Product-Market Relationships

This paper investigates an unexplored dimension of block-equity ownership: benefits in product-market relationships between corporations. We find significant increases in investment and operating performance for firms that have product-market relationships with their corporate owners. We also find that the size of equity stakes is positively related to measures of asset specificity and growth options, especially when firms can fund subsequent investment with internal funds. Investment of target firms with business relationships with their corporate owners also significantly increases with Tobins q following the block equity purchases. We find a strong association of investment with Tobins q for firms in which there is repeated interaction through supply and distribution agreements between the firm and its equity owner. Our evidence indicates that benefits in product-market relationships are an important motivation for corporate equity ownership. The evidence is consistent with the view that an equity position by an outside corporation is important in aligning incentives between contracting firms to expand joint investment opportunities and reduce the costs of generating and maintaining business agreements and alliances.

CEOs and the Product Market: When are Powerful CEOs Beneficial?

We examine whether industry product market conditions are important in assessing the benefits and costs of chief executive officer (CEO) power. We find that firms are more likely to have powerful CEOs in high demand product markets where firms are facing entry threats. In these markets, investors react favorably to announcements granting more power to CEOs, and CEO power is associated with higher market value, sales growth, investment, advertising, and the introduction of more new products. Our results remain significant when addressing the endogeneity of CEO power by instrumenting CEO power with past non-CEO executive and director sudden deaths.

Discussion of A Measure of Competition Based on 10‐K Filings

Li, Lundholm, Minnis (henceforth LLM) examine one of the most central and important areas of economics: competition. Competition is what is viewed as promoting efficiency and what keeps the price of a product closer to its marginal cost. The topic dates back to Adam Smith [1776] in the Wealth of Nations. George Stigler won the Nobel prize in 1982 for his “seminal studies of industrial structures, functioning of markets and causes and effects of public regulation.” Competition has its own Wikipedia entry. According to Wikipedia “Competition in biology, ecology, and sociology, is a contest between organisms, animals, individuals, groups, etc., for territory, a niche, or a location of resources, for resources and goods.”1 Competition has an important policy focus as society wishes to ensure that the contest or game is “fair.” One of the chief parts of competition enforcement in business is to ensure companies do not take actions that restrain competition and result in harm to consumers (or firms) through prices that are systematically higher (or lower) than the cost of production. Competition has many attributes and extensive research and policy interest. An examination of competition typically begins by determining the market or location over which competitors are competing. Second, the identity of current or potential competitors competing in the product space is determined. Third, regulators or analysts would determine the type of competition and whether it is unidimensional: competition through prices (Bertrand competition), quantities (Cournot competition), or whether