Marlin R. H. Jensen

Agency problems and the simultaneity of financial decision making: The role of institutional ownership

Abstract This study investigated the simultaneity of four financial variables that are hypothesized to control agency costs. It builds a model showing that leverage, dividends, insider ownership, and institutional ownership are determined simultaneously as each of the variables is hypothesized to affect agency costs. We found that in 1987, institutional ownership was determined simultaneously with leverage, dividends, and insider ownership, but the coefficients do not support agency hypotheses. However, in 1993, we found a simultaneous system consistent with institutional ownership being a substitute for agency control variables.

The Role of Medium of Exchange in Merger Offers: Examination of Terminated Merger Proposals

In this study, we examine the relation between the medium of exchange (cash or stock) and valuation effects associated with terminated merger proposals. We find significantly higher returns for target shareholders after termination of cash offers than after termination of stock offers. This difference persists even when a subsequent merger bid does not follow and regardless of the following factors: the party deciding to terminate the offer, the presence of an acquisition program, prior foothold position, relative size of the acquisition, or the presence of competing offers. We conclude that target firm shares are re-valued according to private information signaled by the offer medium that pertains to the target firms stand-alone value or its unique synergy potential. Bidding firm shareholders experience insignificant returns, and these returns are not affected by any of the factors analyzed.

Does quantity reflect quality? Financial disclosure size and future performance

Purpose – This study seeks to investigate whether a firms financial disclosure size can help investors predict performance. Design/methodolgy/approach - Controlling for size and industry, the relationship between financial disclosure size and subsequent stock performance for all Standard and Poors (S and P) 500 firms over a seven-year period is examined. Findings - It is found that firms with smaller 10-Ks tend to have better subsequent performance relative to their industries. However, the findings suggest that the performance explanation may not lie in the size of the 10-K itself. Firms with smaller 10-Ks tend to perform better because they are smaller in terms of total assets and more focused, with fewer business segments. Research limitations/implications - While the study is limited to examination of S and P 500 firms, no consistent evidence is found of a relation between changes in a firms disclosure size and future performance changes. Practical implications - The results suggest that more disclosure relative to a firms size is not necessarily bad. Investors attempting to predict future firm performance cannot use the firms disclosure size alone. Originality/value - This paper extends two recent Merrill Lynch studies that appear to contradict the extant financial literatures view that increased disclosure reduces the informational asymmetry problem. While the results confirm the findings of these studies, they suggest that the performance explanation may not lie in the size of the 10-K itself.

Valuation Effects of Cancelled Debt Offerings

We examine the price behavior of the firms common stock associated with cancelled straight debt offerings. Excluding utilities, we find negative excess returns associated with offering and cancellation announcements. Further, the stronger withdrawal reactions we find, when the funds were to be used for capital expenditures, may signal a decline in profitable investment opportunities. These results are consistent with Miller and Rocks (1985) hypothesis.

Market reaction to equity offer reasons: What information do managers reveal?

Prior studies have had limited success explaining the negative market reaction to common stock announcements using firm and offer specific variables. We employ apiecewise linear model to test the relationship between announcement returns and firm and offer specific variables by specific offer reason as stated by management. We find evidence that managers are signalling the quality of the new investment when issuing equity for the offer-motive capital expenditures; this is support for the announcement of the equity issue being a signal of wasteful investment. We also find that the announcement of equity issues signals overvaluation when the equity offer is for general purposes.