Karin S. Thorburn

Gains to Bidder Firms Revisited: Domestic and Foreign Acquisitions in Canada

We present large sample evidence on the performance of domestic and U.S. (foreign) bidder firms acquiring Canadian targets. Domestic bidders earn significantly positive average announcement period abnormal returns, while U.S. bidder returns are indistinguishable from zero. Measures of pre- and post-acquisition abnormal accounting performance are also consistent with a superior domestic bidder performance. Domestic bidder announcement returns are, on average, greatest for offers involving stock payment and for the bidders with the smallest equity size relative to the target. Neither direct foreign investment controls, horizontal product market relationships, nor acquisition propensities explain why domestic bidders outperform their U.S. competitors.

Bankruptcy auctions: costs, debt recovery, and firm survival

This paper provides large-sample evidence on the Swedish auction bankruptcy system. Compared to U.S. Chapter 11, bankruptcy auctions are substantially quicker and have lower costs. Three-quarters of the firms survive the auction as going concern, which is similar to Chapter 11 survival rates. Also, based on market values, auctions produce total debt recovery rates that are comparable to recovery rates in Chapter 11 reorganizations. The cash settlement enforces adherence to absolute priority rules. Overall, the evidence provides little support for the view that auction bankruptcy causes managers to delay filing relative to what happens under the U.S. reorganization code.

Control benefits and CEO discipline in automatic bankruptcy auctions

We argue that the existence of CEO private control benefits complements managerial reputation in counteracting costly shareholder risk-shifting incentives during severe financial distress, when job-loss may be imminent. We examine this argument empirically using bankruptcy filings in Sweden, where a filing automatically terminates CEO employment and requires the firm to be sold in an open auction. The median CEO income loss is a dramatic 40%, suggesting that bankruptcy filing damages CEO reputation. Empirical proxies for both CEO reputation and control benefits are significant determinants of the probability of the CEO being rehired by the buyer in the auction, as predicted. Moreover, we find that the rehired CEOs generate a post-bankruptcy accounting performance at par with industry rivals. The surprisingly strong survival characteristics of the reorganized firms are consistent with managerial conservatism ex ante, and help alleviate creditor concern with costly asset substitution designed to delay filing in an automatic bankruptcy auction system.

Markup Pricing Revisited

We examine whether pre-bid target stock price runups lower bidder takeover gains and deter short-term toehold purchases in the runup period. A dollar increase in the runup raises the initial offer price by

Corporate Restructuring: Breakups and LBOs

0.80 (markup pricing). Bidder gains, while decreasing in offer price markups, are increasing in runups, suggesting that runups are interpreted by the negotiating parties as reflecting increases in target stand-alone values. We also show that short-term toehold purchases increase runups. However, when purchased by the initial bidder (as opposed to by other investors), short-term toeholds lower markups, possibly because they provide evidence to the target that the runup anticipates the pending offer premium (supporting substitution between the runup and the markup). We conclude that markup pricing per se is unlikely to deter short-term toehold aquisitions.

Comment on 'Top Management Compensation and the Structure of the Board of Directors in Commercial Banks'

This essay surveys the empirical literature on corporate breakup transactions (divestitures, spinoffs, equity carveouts, tracking stocks), leveraged recapitalizations, and leveraged buyouts (LBOs). Many breakup transactions are a response to excessive conglomeration and reverse costly diversification discounts. The empirical evidence shows that the typical restructuring creates substantial value for shareholders. The value-drivers include elimination of costly cross-subsidizations characterizing internal capital markets, reduction in financing costs for subsidiaries through asset securitization and increased divisional transparency, improved (and more focused) investment programs, reduction in agency costs of free cash flow, implementation of executive compensation schemes with greater pay-performance sensitivity, and increased monitoring by lenders and LBO sponsors. Buyouts after the turn of the century create value similar to LBOs of the 1980s. Recent developments include club deals (consortiums of LBO sponsors bidding together), fund-to-fund exits (LBO funds selling the portfolio firm to another LBO fund), a highly liquid (until mid-2007) leveraged loan market, and evidence of persistence in fund returns (perhaps because brand-sponsors borrow at better rates). The perhaps greatest challenge to the restructuring literature is to achieve a modicum of integration of the analysis across transaction types. Another challenge is to produce precise estimates of the expected return from buyout investments in the presence of limited data on those portfolio companies which do not return to public status.

How Costly Is Forced Gender-Balancing of Corporate Boards?

As argued by Jensen (1993), the primary tasks of a firm’s board of directors are to advise, hire, fire and determine the level and form of managerial compensation. Managerial pay can be structured as part cash and in part be tied to a performance index, such as corporate earnings or the firm’s stock price. The latter effectively aligns the interest of managers with those of stockholders, which in turn reduces agency problems related to free cash flow, managerial time horizons and effort levels. At the same time, stock-based compensation increases managerial exposure to non-diversifiable risk, which may cause risk-averse managers to underinvest in risky projects. The trade-off between the benefits of managerial incentive alignment and the cost of underinvestment is largely an empirical issue, and the widespread observation that managerial compensation is primarily paid in cash 1 suggests that managerial risk aversion weighs heavily or that boards generally resort to substitute monitoring mechanisms. The paper by Angbazo and Narayanan (1997) is part of a rapidly growing empirical literature attempting to identify important cross-sectional determinants of the form of executive compensation. Motivated in particular by the early work of Fama (1980) and Fama and Jensen (1983), this literature conjectures that executive pay is not only motivated by manager‐shareholder incentive alignment and risk preferences, but also by the workings of the firm’s corporate governance structure. This literature recognizes that the board of directors is an imperfect agent for shareholders, as board members have their own private incentives and struggle with informational asymmetries vis-` the top management, all of which affects the board’s monitoring effectiveness. As discussed below, this view suggests that factors such as board size, board longevity (tenure), the proportion of the board consisting of independent or outside directors, whether the CEO is also chairman of the board, the role of institutional investors as board members, etc., along with 1 See, e.g., Jensen and Murphy (1990), Holthausen and Larcker (1993), and Hwang and Anderson

Penalty-Free Prepayments, Credit Rationing, and the Use of Upfront Fees in Bank Loans

In 2005, Norway was the first country to mandate gender-balanced corporate boards, forcing the percentage of female directors to 40% by 2008. Our robust valuation estimation and operating performance analysis fail to reject a value-neutral impact of the quota, even for firms with all-male boards. We further show that firms maintained overall board CEO experience, and that they refrained from either increasing board size (to keep male directors) or changing legal form to avoid mandatory gender-balancing altogether. This apparent indifference to the quota constraint strongly suggests that it was viewed as a low-cost regulation by existing shareholders as well as by market participants.A board gender quota reduces firm value if it forces the appointment of under-qualified female directors. We examine this costly constraint hypothesis using the natural experiment created by Norways 2005 board gender-quota law. This law drove the average fraction of female directors from 5% in 2001 to 40% by 2008, producing a large exogenous shock to director experience and independence. However, statistically robust analyses of quota-induced shareholder announcement returns, and of long-run stock and accounting performance, fail to reject the hypothesis of a zero valuation effect of this shock to board composition. Moreover, firms did not expand board size, nor is there significant evidence of quota-induced corporate conversions to a (non-public) legal form exempted from the quota law. Finally, our evidence on female director turnover and a novel network-based measure of director gender-power gap also fails to suggest that qualified female directors were in short supply.

Insolvency Risks and the Role of Insolvency Law

I argue that non-price credit rationing is a way to maintain borrowers’ flexibility to prepay freely. In my model, if voluntary prepayments are penalty-free, over time good borrowers prepay their loans while bad borrowers stay. This self-selection to prepay leaves the lender with bad borrowers only. Increasing the interest rate alone is not sufficient to compensate the lender for the prepayment risk, and hence the lender resorts to non-price credit rationing. In addition, the lender may employ a non-linear pricing approach in which an upfront fee is charged for loans with relatively high prepayment risk and low refinancing costs. Empirical evidence supports this prediction. Using a sample of 64,555 term loans to U.S. firms between 1987 and 2011, I find that a 100 basis points increase in the loan spread, measuring prepayment risk, leads to a 5.3 basis points average increase in the upfront fee. Moreover, loans with higher refinancing costs, e.g. syndication loans (vs. traditional bank loans), are in general associated with lower upfront fees.

Merger negotiations and the toehold puzzle

Insolvency law plays a prominent role in the area of commercial risk and risk management. All commercial contracts must be drafted against the background of insolvency law. And all lenders, at the time of evaluating and extending credit, must consider the bankruptcy implications of their loan decisions. The efficacy of a lender’s decisions is tested only when a borrower is in financial distress and bankruptcy is one of the likely outcomes. So study of insolvency laws and their operation must accompany studies of commercial risk and risk management.