Kenneth Lehn

The Structure of Corporate Ownership: Causes and Consequences

This paper argues that the structure of corporate ownership varies systematically in ways that are consistent with value maximization. Among the variables that are empirically significant in explaining the variation in ownership structure for 511 U.S. corporations are firm size, instability of profit rate, whether or not the firm is a regulated utility or financial institution, and whether or not the firm is in the mass media or sports industry. Doubt is cast on the Berle-Means thesis, as no significant relationship is found between ownership concentration and accounting profit rates for this set of firms.

Growth Opportunities and Corporate Debt Policy: The Case of the U.S. Defense Industry

The U.S. defense industry provides a natural experiment for examining how changes in growth opportunities affect the level and structure of corporate debt. Compared with other firms, the growth opportunities of defense firms increased substantially during the Reagan defense buildup of the early 1980s, but then declined significantly with the end of the cold war and associated defense budget cuts in the late 1980s and early 1990s. We examine how the level and structure of corporate debt changed for a sample of 61 defense firms and a benchmark sample of 61 manufacturing firms during 1980-1995, a period spanning the changes in growth opportunities. The debt levels of weapons manufacturers, which were most affected by the changes in growth opportunities, increased significantly as their growth opportunities declined. In addition, these firms lengthened the maturity structure of their debt, decreased the ratio of private to public debt, and decreased the use of senior debt as their growth opportunities declined. The results complement other studies that have found cross-sectional relations between proxies for growth opportunities and leverage variables and validate the prominent role played by growth opportunities in the theory of corporate finance.

The causes and consequences of accounting fraud

One of the fundamental purposes of corporate accounting is to facilitate the monitoring of managers. Since managers are instrumental in the production of accounting numbers, and since it is costly to monitor their behavior in this regard, firms sometimes report fraudulent accounting numbers. This paper tests several hypotheses concerning why some firms, and not others, commit accounting fraud. This is accomplished through examination of a sample of 62 firms charged with disclosure violations by the Securities and Exchange Commission (SEC) during the period 1981-1987. We also examine whether directors of companies that commit accounting fraud are disciplined in the managerial labor market. We adopt the perspective that the decision to commit fraud is governed by the expected costs and benefits of this behavior (This approach to the study of fraud has been used elsewhere, e.g. Darby and Karni (1973); Michael R. Darby and Edi Karni, “Free Competition and the Optimal Amount of Fraud”, Journal of Law and Economics 16 (April 1973), 68-88. For a brief discussion of the economics of fraud, see Edi Karni (1989) “Fraud” in The New Palgrave: Allocation, Information, and Markets, edited by John Earwell, Murray Milgate, and Peter Newman, New York: W.W. Norton, 117-119). Accordingly, a theory of accounting fraud requires an understanding of how these costs and benefits vary across firms. Those costs and benefits can be varied by external forces, through institutions such as equity markets and independent auditors, or internally through the design of monitoring and reward systems. We will divide our attention between the external and internal forces that change the costs and benefits of accounting fraud.

Investor behavior in mass privatization: The case of the Czech voucher scheme

This paper examines the bidding behavior of investors who participated in the voucher scheme used to privatize 988 Czech enterprises. In the first round of the privatization scheme, the Czech authorities set a uniform price for all companies, creating a natural experiment for testing several hypotheses concerning the determinants of share demand in the voucher scheme. Share demand is expected to measure relative values of shares, a prediction supported by a positive and significant relation between share demand and stock market prices. Also, consistent with predictions regarding the determinants of value, we find that share demand is related to proxies for agency costs and the expected costs of financial distress. These findings are supported by other tests in which we use prices in the voucher scheme and stock market prices as alternative measures of relative values. Of particular interest is the finding that share demand is directly related to the percentage shares held by insiders; this result is relevant for the debate in former communist countries over whether privatization programs should restrict insider holdings. The investment performance of individuals does not differ significantly from the investment performance of institutional funds, suggesting that individuals did not transfer their investment points to funds unless they believed that funds were better able to assess the value of firms. The results suggest rational investor behavior, despite the absence of Czech financial markets for decades.

Corporate governance in the deregulated telecommunications industry: lessons from the airline industry

Abstract Deregulation of the telecommunications industry is likely to result in significant changes in the governance structures of telecommunications firms. In particular, ownership structures of telecoms are expected to become more concentrated, the level of executive compensation is expected to increase, executive pay is expected to become more sensitive to performance, and board sizes are expected to become smaller. Evidence from the airline industry shows that these governance changes occurred after this industry was deregulated in the US in 1978. Preliminary evidence on telecommunications firms indicates that similar changes are beginning to occur in the governance structures of telecom firms.

Disagreement and the Informativeness of Stock Returns: The Case of Acquisition Announcements

We examine whether disagreement between managers and investors relates to the informativeness of bidder returns around acquisition announcements. We predict that greater disagreement about the merits of an acquisition creates uncertainty about investors’ revaluation of acquiring firms, making returns less informative. We document an inverse relation between bidder returns and the change in bidders’ implied volatility. This relation is only significant when there is more disagreement. Also, the relation between bidder returns and the likelihood of deal completion is stronger when announcement returns are more informative, suggesting managers “listen to the market�? more when the market response is more informative.

Employee–management trust and M&A activity

We examine the relation between a firm’s corporate culture and its M&A activity. We find that firms with strong cultures make significantly smaller acquisitions than other firms. Furthermore, bidder returns and the percent change in the combined values of bidders and targets associated with large acquisitions announced by strong culture firms are negative and less than the corresponding returns for other acquirers. Finally, when firms with strong cultures make large acquisitions, their cultures are significantly more likely to suffer as compared with other strong culture firms. The results support the conclusion that corporate culture influences firms’ M&A activity.We examine the relation between the trust that employees have in management and the M&A activity of firms. We measure this trust by using rankings compiled by the Great Place to Work Institute (GPWI) from 1998 to 2011. Although the volume of M&A activity is not significantly different for firms with strong cultures of trust (“SCT firms”) versus other firms, the relative size of acquisitions announced by SCT firms is significantly smaller than the size of acquisitions announced by other firms. Furthermore, when SCT firms announce relatively large acquisitions, bidder returns and the percent change in the combined values of bidders and targets are lower than the corresponding returns for other firms. Finally, when SCT firms make large acquisitions, they are significantly more likely to suffer a loss in their GPWI ranking as compared with other SCT firms. Overall, the results are consistent with the conclusion that the M&A policies of firms are influenced by a culture of trust between employees and management.

Corporate Governance, Agility, and Survival

Abstract Most corporate research has focused on (i) dimensions of governance that are relatively easy to measure (e.g., ownership structure, boards of directors, and executive compensation) and (ii) the role that governance arrangements play in mitigating agency costs. This paper takes an evolutionary perspective to corporate governance in which the concept of corporate agility, i.e., the ease with which firms adapt to changes in their respective environments, plays a prominent role. I argue that decentralization, which is understudied in the literature, promotes agility and predict that it is directly related to corporate performance and survival during periods of rapidly changing environments. The paper also discusses how some governance features that often are viewed through the lens of either mitigating or exacerbating agency costs are cast in a different light when their effects on corporate agility are considered.

Debt, Investment and Production in the U.S. Oil Industry: An Analysis of the 2014 Oil Price Shock

The spot price of crude oil declined from

Does Limited Liability Matter: An Analysis of California Firms, 1920-1940

106.07 per barrel on June 30, 2014 to