James S. Ang

Agency Costs and Ownership Structure

We provide measures of absolute and relative equity agency costs for corporations under different ownership and management structures. Our base case is Jensen and Mecklings (1976) zero agency-cost firm, where the manager is the firms sole shareholder. We utilize a sample of 1,708 small corporations from the FRB/NSSBF database and find that agency costs (i) are significantly higher when an outsider rather than an insider manages the firm; (ii) are inversely related to the managers ownership share; (iii) increase with the number of nonmanager shareholders, and (iv) to a lesser extent, are lower with greater monitoring by banks.

Earnouts in Mergers: Agreeing to Disagree and Agreeing to Stay

We examine a large sample of mergers involving earnout payments made by bidders to target shareholders. Our findings suggest that earnouts serve two not mutually exclusive functions: as risk reduction mechanisms against misvaluation of high asymmetric information targets, and as retention bonuses for target human capital in mergers with feasible contract implementation. Around the merger announcement, bidder shareholders show significant positive responses, which are not reversed over the subsequent 3 years. In the postmerger period, the frequency of earnout payment and the percentage of target managers staying beyond the earnout period are high, supporting the use of earnouts as retention bonuses. Copyright 2000 by University of Chicago Press.

The underwriting experience of commercial bank affiliates prior to the Glass-Steagall Act: A reexamination of evidence for passage of the act

Abstract We examine a major rationale for the passage of the Glass-Steagall Act separating commercial and investment banking activities in the U.S: that these banks abused their superior knowledge by misrepresenting the quality of inferior security issues or passing off bad commercial loans through publicly offered security issues. This issue is of current interest, even in todays more relaxed environment in the U.S. and in the universal banking system in Europe, since there are still lingering doubts that such abuses will not recur. In a systematic study of the performance of bond issues underwritten by different classes of underwriters prior to the passage of the Glass-Steagall Act, we find bank affiliate issue default rates were lower, ex ante yields were lower, ex post prices were higher, and the relative ability of ex ante yields to predict ex post performance no different than investment bank issues. The results hold for all categories of bond issues: domestic corporate, foreign corporate, and foreign governments. We have also isolated the performance of the bonds underwrit National City Company and Chase Securities Corporation, which were targets of the Pecora hearing. These two bank affiliates were found to issue bonds of lesser quality than the other bank affiliates, but no worse than those of the investment banks.

Composite Measures for the Evaluation of Investment Performance

The composite measures of investment performance: the reward-to-variability index, by Sharpe ([29], [30]) and Lintner [23], and the reward-to-volatility index, by Treynor [33], were developed after Markowitz ([24], [25]) and Tobin [32] popularized the mean-variance framework of analyzing the problems of certain investments. Since these are ex ante measures they are not directly applicable to the evaluation of ex post performance. A theoretical basis for doing so has been provided by Jensen ([17], [18]) who also developed another composite performance measure, the predictability index. In practice, these composite measures have been found to have problems. Foremost, they have been observed to exhibit systematic biases. Various causes of the biases have been proposed. These are: the existence of unequal lending and borrowing rates, the failure to consider higher moments of return distributions, and the elusive “true†holding period.

Concealing and confounding adverse signals: insider wealth-maximizing behavior in the IPO process

We study a known negative signal, the sale of insider shares in an IPO and find that insiders adopt two concealment strategies consistent with wealth-maximizing behavior. First, insiders underreport the number of personally owned shares in the prominent original prospectus and use an obscure amendment to communicate the true higher level of shares to be offered. Second, when insiders increase shares in a later amendment, they tend to either increase secondary shares disproportional to primary share increases, or to reduce primary shares to wholly or partly conceal the increase in secondary shares offered. Insiders confound the negative secondary share signal by simultaneously sending a positive lockup signal. r 2002 Elsevier Science B.V. All rights reserved.

Direct evidence on the marginal rate of taxation on dividend income

Abstract Miller and Scholes (1978) hypothesize that the marginal tax rate on dividend income may be less than the marginal rate of tax on capital gains. Their hypothesis is dependent upon individuals utilizing existing provisions of the Code which serve to reduce the taxation of dividends. In this study, estimates of the marginal and effective rates of tax on dividend income for the year 1979 are presented using the Statistics of Income sample of returns. The average marginal rate of tax on dividend income is estimated to be 40%, while the average effective rate of tax is estimated to be 30%.

Pay at the executive suite: How do US banks compensate their top management teams?

This study examines how a large sample of US banks compensates their top management teams (i.e., the top four to five highest ranking executives in each bank). We observe two tiers of compensation in the executive suite: the Chief Executive Officer (CEO) and the rest of the top management team. CEOs receive not only greater pay in absolute dollar, but are also rewarded more in relation to performance, as manifested in having a larger portion of their pay in performance contingent compensation. Below the CEO, top executives have similar compensation structure and pay to performance elasticities. The results are robust to a significant size effect, and alternate measures of performance. 2002 Elsevier Science B.V. All rights reserved.

Firm Transparency and the Costs of Going Public

We demonstrate in this study that firms that are more transparent pay less, in all components of issuance costs, to go public. We employ a sample of 334 previous leveraged buyouts and a characteristic-matched control sample to test the hypothesis that greater firm transparency before the issue decreases the flotation costs of the initial public offering. These flotation costs are divided into initial underpricing, the underwriter discount, administrative expenses, and the overallotment option required to take the firm public. Our results provide further evidence of the asymmetric information hypothesis as it applies to initial public offerings.

Transparency in Chinese stocks: A study of earnings forecasts by professional analysts

Abstract We utilize individual analysts forecasts of Chinese stocks to measure the transparency of the Chinese capital market. We find that the aggregate analysts forecast errors of all Chinese shares are around twice that of their control group, the shares of Hong Kong companies, and are also higher than those of several developed and developing Asia Pacific countries. The measure depends on factors related to the transparency of a market such as the location of the exchange and the market value of the firms. We present evidence that lack of transparency of shares in a country could be costly. Specifically, market valuations of more (less) transparent Chinese shares are priced higher (lower).

Long range planning in large United States Corporations—A survey

Abstract This paper presents the results of a survey of the application of strategic and corporate planning in 500 large U.S. Corporations. The authors sought to update and provide new understanding on a number of important issues including; the extent of long range planning in these firms, the organizational structure of their planning function, the prevailing attitude towards long range planning in the firm, the planning process in terms of content and revision frequency, and the perceived benefits and problems associated with long range planning. In concentrating upon these issues the authors provide an interesting and important insight into the current application of strategic and corporate planning processes as well as giving a number of indications as to where the theory lags behind the practice.