James G. Tompkins

A Modified Version of the Lewellen and Badrinath Measure of Tobin's Q

Lewellen and Badrinath (1997) propose a superior method of measuring Tobins Q. Unfortunately, their method is prone to a high percentage of missing observations and results in selecting samples of larger and more mature firms with lower Q statistics. We propose a slight modification that preserves the appeal of their method, yet almost doubles the sample size, avoids sampling problems, and is statistically indistinguishable from their Q measure. In addition, we clarify a step in the Lewellen and Badrinath Q calculation, which was inadvertently omitted in their explanation, and, if left undone, can result in downward-biased measures of Q.

Winners and Losers as Financial Service Providers Converge: Evidence from the Financial Modernization Act of 1999

The Financial Modernization Act of 1999 dramatically increased insurers’ and investment banks’ authority to provide an array of financial services and allowed commercial banks to offer investment banking and insurance services. In this paper we examine the market response to this legislation. We find a strong positive response among insurance companies and investment banks, and no significant response among commercial banks. Larger institutions in all three financial sectors earn higher abnormal returns. Additionally, better performing banks earn higher abnormal returns. Our results suggest that allowing financial convergence can add value through synergies and that large players are needed to exploit the scope economies.

Corporate governance and investor reactions to seasoned equity offerings

Purpose - The purpose of this paper is to study the role of corporate governance in abnormal returns around announcements of seasoned equity offerings (SEOs) by publicly traded US firms from 2001 to 2004. Design/methodology/approach - Cross-sectional regression analysis was used to determine which variables are important to the markets reaction to the SEO, with a particular focus on corporate governance variables. Findings - It was found that investors react more positively for firms in which different people hold the CEO and board chairman positions. Limited evidence was found that investor reaction is more positive when the board has a greater representation of outside directors, the CEO has less ownership, and the board is not too large. These findings suggest that investors react more favorably to SEOs by firms with stronger corporate governance mechanisms that reduce adverse selection or agency problems. Practical implications - This papers findings are evidence that stronger boards can reduce a firms cost of raising additional equity capital.

Corporate value and ownership structure in the post-takeover period: what role do institutional investors play

Several recent papers show that dissident institutions have more influence with management when the level of institutional ownership in the target firm is high. This paper investigates whether increased institutional ownership and institutional ownership concentration reduce agency costs and thus increase corporate value. We find that corporate value is positively related to institutional ownership but negatively related to institutional ownership concentration. This implies that the linkage between corporate value and institutional ownership is driven by momentum trading and supports the view that the bulk of institutional investors remain passive in regards to monitoring. Whether the relaxation of restrictions on institutional communication and ownership (by individual institutions) would facilitate more efficient managerial oversight remains a debatable point.

Outside director‐shareholder agency conflicts: evidence from bank consolidation

Purpose – Takeovers create a potential conflict of interest between target shareholders and directors. While mergers generally create value for the target shareholders, their directors will typically lose their board seats and likely face a financial loss or loss of prestige. The purpose of this paper is to examine evidence to support or refute that directors may act in their own best interests at the expense of shareholders.Design/methodology/approach – The authors reason that if directors act in their own best interests, then acquiring firms will seek targets with older board members who are closer to director retirement and are therefore less reluctant to give up their board seats. The paper uses data of 528 banks between 1999 and 2004 to estimate logistic regressions controlling for variables relevant to takeover probability. In the hypotheses, the authors test for the significance of the average director age on a board.Findings – The paper finds a highly positive significant relation between the aver...

Estate Taxes and the Investment Decision in Closely Held Firms

Closely held businesses differ from their publicly held counterparts in the relative importance assigned to planning for estate taxes. When faced with the prospect of an estate taxes liability, owners of closely held businesses may alter their investment behavior. This essay presents a simple model of the investment decision in a closely held business. While finance theory prescribes that firms maximize their value through funding capital projects with positive net present values, this model suggests that the presence of estate taxes may induce the firm to reject projects which, if funded, would add value to the firm. Further, the propensity to pass on value-adding projects increases with both the estate tax rate and the age of the business owner.