Ken L. Bechmann

A Regulation of Bids for Dual Class Shares. Implication: Two Shares { One Price

This paper examines the consequences of a specific regulatory restriction on bids for dual class shares. Shares of different classes are often argued to have different prices because a premium will be paid to the superior voting shares in the case of a tender offer. This paper assumes a setup where regulations require that a tender offer pays the same relative premium to both classes of shares. In this setup, it is shown that both classes will sell at the same price as long as there is a strictly positive probability that either the current management is sufficiently strong or that a sufficiently strong rival will show up. Furthermore, under this weak condition the regulation is socially optimal in the sense that the management that provides the highest total firm value will be the management of the firm. Finally, the regulation is shown to favor (or protect) the holders of restricted voting shares and this is not necessarily at the expense of the holders of superior voting shares.The practical interest of this paper derives from the fact that some European countries have adopted different regulatory restrictions on bids for dual class shares. This has more or less occurred due to proposed EU Directives. The regulation examined in this paper applies to tender offers in Denmark. Empirical results on the voting premium in Denmark are shown to be consistent with the theoretical results in this paper.

The Differences Between Stock Splits and Stock Dividends: Evidence on the Retained Earnings Hypothesis

This paper investigates stock dividends and stock splits on the Copenhagen Stock Exchange (CSE), which is of interest because several of the more recent explanations for a stock market reaction can be ruled out. The main findings are that the announcement effect of stock dividends as well as stock splits is closely related to changes in a firms payout policy, but that the relationship differs for the two types of events. A stock dividend implies an increase in nominal share capital and hence a decrease in retained earnings. Firms announcing stock dividends finance growth entirely by debt (explaining the need for an increase in nominal share capital) and retained earnings. Basically all firms announcing a stock dividend with a split factor of less than two can also afford to increase their total cash dividends permanently, at least proportionally to the increase in share capital, leading to a significant announcement effect of 4.23%. Firms announcing a stock dividend with a split factor of two or more also increase total cash dividends permanently, but less than proportionally to the increase in share capital. This leads to an insignificant announcement effect of 0.08%. These findings support a retained earnings/signaling hypothesis. For stock splits, no separate announcement effect was found when a firms payout policy was controlled for. This lends support to the idea that a stock split per se is a cosmetic event on the CSE and is also consistent with the fact that making a stock split on the CSE is virtually cost free.

Disclosed Values of Option-Based Compensation - Incompetence, Deliberate Underreporting or the Use of Expected Option Life?

New accounting standards require firms to value the costs of option-based compensation (OBC). Earlier research has documented that firms in the US generally underreport the values of OBC by manipulating the model inputs used for valuation purposes. This paper examines the information on and values of OBC disclosed by Danish firms. The results show that many firms fail to provide the information required on OBC. However, this does not seem to be a deliberate attempt to hide information, but rather is the result of firms not paying enough attention to the information requirements. Similarly, when studying the disclosed values of OBC, there is no clear evidence of underreporting. For example, there is no evidence that firms use manipulated values for the Black–Scholes (Merton) model inputs in their valuations. Furthermore, firms determine the expected option life in a way that is generally consistent with the guidelines provided by the accounting standards. The only exception is when options are granted to the board of directors, as this led a few firms to underreport option values in a way that cannot be explained by an appropriate adjustment of the expected option life. These findings differ from those of the US, but are consistent with the more limited use of OBC and the lower level of attention paid to these values in Denmark. Furthermore, the financial press in Denmark and powerful Danish institutional investors seem to have a disciplinary effect on Danish firms such that most of the firms provide sufficient and accurate information even though the official consequences of not doing so are very limited.

Taxable cash dividends – A money-burning signal

Firms pay out cash to shareholders using both dividends and share repurchases despite the fact that dividends are generally taxed more heavily than share repurchases. This paper provides a general explanation for this dividend puzzle by developing a class of signaling models where the most efficient signal for a firm of sufficiently high quality always involves payout of taxable cash dividends. If the high type is not of much higher quality than the low type, the cheapest way to deter imitation from the low type is to increase share repurchases financed by a cut in investments. However, when the high type is of much higher quality than the low type, the cut in investments on the margin becomes more costly to the high type than to the low type. Hence, the most efficient signal becomes a money-burning signal, which is equally costly for both types of firms. The crucial assumption leading to this result is that a marginal cut in investments eventually becomes more costly to the high-quality firm than to the low-quality imitator. Taxable cash dividends financed by the issuance of new shares/reduced share repurchases, which only gives rise to increased taxes, is the money-burning signal.

Danish Mutual Funds: Description, Costs, Performance, and a European Comparison

Denmark has a relatively long history of high (and complicated) taxes and a well-developed welfare system. Possibly as a consequence of this, there is only a limited tradition of private investments in stocks and mutual funds. However, in parallel with discussions on the need for privately-funded pensions, this tradition seems to be changing recently.