John J. McConnell

Additional evidence on equity ownership and corporate value

Abstract We investigate the relation between Tobins Q and the structure of equity ownership for a sample of 1,173 firms for 1976 and 1,093 firms for 1986. We find a significant curvilinear relation between Q and the fraction of common stock owned by corporate insiders. The curve slopes upward until insider ownership reaches approximately 40% to 50% and then slopes slightly downward. We also find a significant positive relation between Q and the fraction of shares owned by institutional investors. The results are consistent with the hypothesis that corporate value is a function of the structure of equity ownership.

Further evidence on the bank lending process and the capital market response to bank loan agreements

Abstract This paper investigates the hypothesis that bank loans convey information to the capital market regarding the value of the borrowing firm. Unlike previous researchers, we distinguished between new bank loans and loan renewals. For new loans, the excess stock return for borrowers around the loan announcement is not significantly different from zero. For favorable loan revisions, the excess return is significantly positive: for unfavorable revisions, it is significantly negative. We interpret these results to imply that banks play an important role as transmitters of information in capital markets, but new bank loans per se do not communicate information.

Equity ownership and the two faces of debt

We empirically investigate the relation between corporate value, leverage, and equity ownership. For ‘high-growth’ firms corporate value is negatively correlated with leverage, whereas for ‘low-growth’ firms corporate value is positively correlated with leverage. The results also hint that the allocation of equity ownership among insiders, institutions, blockholders, and atomistic outside shareholders is of marginally greater significance in low-growth than in high-growth firms. The overall interpretation of the results is that debt policy and equity ownership structure ‘matter’ and that the way in which they matter differs between firms with many and firms with few positive net present value projects.

Corporate capital expenditure decisions and the market value of the firm

Abstract This paper is an ‘event-time’ study of the common stock prices of a sample of 658 corporations around the dates on which they publicly announced their future capital expenditure plans. For industrial firms, announcements of increases (decreases) in planned capital expenditures are associated with significant positive (negative) excess stock returns. For public utility firm, neither increases nor decreases in planned capital expenditures are associated with significant excess stock returns. We interpret the evidence as being consistent with the hypothesis that managers seek to maximize the market value of the firm in making their corporate capital expenditure decisions.

THE MARKET VALUE OF CONTROL IN PUBLICLY-TRADED CORPORATIONS*

This paper tests the hypothesis that the future distribution of payoffs provided by a common stock depends upon whether ownership of the stock also conveys control over the firms activities. For 26 firms that had two classes of common stock outstanding, the class with superior voting rights traded at a premium relative to the other class. However, in four firms where the ownership structure of the firm also included a class of voting preferred stock, the class of common with superior voting rights traded at a significant discount relative to the class of common with inferior voting rights. The analysis suggests that there are both benefits and costs of corporate control.

An empirical investigation of the impact of `antitakeover' amendments on common stock prices

Abstract ‘Antitakeover’ amendments are amendments to a corporations charter that impede the ability of an ‘outsider’ to gain control of the firm. A number of individuals and institutions have onjected to such amendments on the grounds that they are not in the best interests of the shareholders of the firms that adopt them. This paper employs event-time methodology to investigate the impact of antitakeover amendments on the common stock prices of firms that adopt them. The results indicate that the announcement of such amendments is associated with a positive revaluation of stock price. Contrary to the concerns of their critics, we conclude that antitakeover amendments are proposed by managers who seek to increase the value of the firm and are approved by stockholders who share that objective.

Stock Exchange Listings, Firm Value, and Security Market Efficiency: The Impact of NASDAQ

This paper is an event-time study of OTC stocks that listed on the New York Stock Ex? change (NYSE) over the period 1966-1977. This period was chosen because it spans the introduction of the National Association of Securities Dealers Automatic Quotation (NASDAQ) communications system in the OTC market. In the pre-NASDAQ period, stocks, on average, earn significant positive abnormal returns in response to listing an? nouncements. In the post-NASDAQ period, abnormal returns in response to listing an? nouncements are statistically significantly lower than those for the pre-NASDAQ period. These results are consistent with the hypothesis that NASDAQ has reduced the benefits associated with listing on a major stock exchange. Additionally, in both the pre- and post- NASDAQ periods, stocks, on average, earn significant positive abnormal returns follow? ing the initial announcement of listing before listing actually occurs, and they earn signifi? cant negative returns immediately after listing. These anomalies are explored and the re? sults are shown to be insensitive to variations in empirical methodology.

Equity Carve‐Outs and Managerial Discretion

This study proposes a managerial discretion hypothesis of equity carve-outs in which managers value control over assets and are reluctant to carve out subsidiaries. Thus, managers undertake carve-outs only when the firm is capital constrained. Consistent with this hypothesis, firms that carve out subsidiaries exhibit poor operating performance and high leverage prior to carve-outs. Also consistent with this hypothesis, in carve-outs wherein funds raised are used to pay down debt, the average excess stock return of + 6.63 percent is significantly greater than the average excess stock return of - 0.01 percent for carve-outs wherein funds are retained for investment purposes. Copyright The American Finance Association 1998.

Valuation of asset leasing contracts

Abstract This paper describes the relation among a variety of asset leasing contracts, including: (1) cancellable operating leases; (2) leases which grant the lesse an option to extend the life of the lease; (3) leases that grant the lessee an option to purchase the leased asset at a fixed price at the maturity date of the lease; (4) leases that grant the lessee the right to purchase the leased asset at its ‘fair market value’ at the maturity date of the lease; (5) leases that grant an option to the lessee to purchase the leased asset at a prespecified price anytime during the life of the lease; (6) leases that require the lessee to purchase the leased asset at a fixed price at the maturity date of the lease; and (7) leases that contain non-cancellation provisions. The paper uses a compound option pricing framework to develop a general model for valuing (or evaluating) each of the types of leasing contracts. Numerical examples are presented to illustrate the effect of the various elements of a leasing contract — including cancellation risk and residual value risk — on equilibrium rental payments.

The Market Value of Differential Voting Rights in Closely Held Corporations

Recent advances in the theory of the firm suggest an important role for the market for corporate control. Along with competition in the managerial labor market, various monitoring and bonding mechanisms, and managerial compensation schemes, competition for the right to determine or influence investment and financing decisions can play a role in disciplining a firms managers or decision makers. Most notably, Manne (1965) and Fama (1978) view the market for corporate control as facilitating the allocation of corporate assets to their highest valued use. That is, tender offers, merger bids, and proxy contests enable outsiders to obtain control and capture gains from implementing an improved set of investment and financing decisions. Consequently, the theory of the corporation implies that the property rights associated with corporate control are valuable. Several previous studies have provided direct or indirect evidence on the value of control. These include Bradley (1980), Meeker and Joy (1980), Bradley, Desai, and Kim (1983), Dodd and Warner