Micah S. Officer

Club Deals in Leveraged Buyouts

We analyze the pricing and characteristics of club deal leveraged buyouts (LBOs)--those in which two or more private equity partnerships jointly conduct an LBO. Using a comprehensive sample of completed LBOs of U.S. publicly traded targets conducted by prominent private equity firms, we find that target shareholders receive approximately 10% less of pre-bid firm equity value, or roughly 40% lower premiums, in club deals compared to sole-sponsored LBOs. This result is concentrated before 2006 and in target firms with low institutional ownership. These results are robust to controls for target and deal characteristics, including size, Q, measures of risk, and time and industry fixed effects. We find little support for benign motivations for club deals based on capital constraints, diversification motives, or the ability of clubs to obtain favorable debt amounts or prices, but it is possible that the lower pricing of club deals is an inadvertent byproduct of an unobserved benign motivation for club formation.

Does Freezing a Defined Benefit Pension Plan Affect Firm Risk

This paper examines the impact of a defined benefit (DB) pension plan freeze on the sponsoring firm’s risk and risk-taking activities. Using a sample of firms declaring a hard freeze on their DB plans during the period 2002-2007, we observe an increase in total risk (standard deviation of returns) following a DB plan freeze. This increase in overall risk is attributable to an increase in idiosyncratic risk, as we do not observe any significant change in systematic risk for firms freezing DB plans. Consistent with the increase in risk, yields on bonds issued by firms freezing their DB plans also increase significantly after the freeze event. When we examine investment strategies, we observe a shift in investment from capital expenditures before the freeze to more-risky R&D projects after the freeze. Firms also increase leverage following DB plan freezes. These strategies (increased focus on R&D and higher leverage) increase the operating and financial risk the firm faces. Overall, we observe an increase in risk-taking following DB plan freezes, consistent with theories that DB plans act as “internal debt�? that aligns managers’ interests with bondholders.

Does Competition Affect Earnings Management? Evidence from a Natural Experiment

We examine how exogenous increases in foreign competition affect firms’ earnings management behavior, using import tariff reductions as a natural experiment. Using a Difference-in-Differences framework, we find a significant increase in earnings management (and financial restatements) after tariff reductions that intensify foreign competition. The effect of tariff reductions on earnings management is more pronounced for firms operating in industries that are more competitive, subject to tighter financial constraints, with greater financing needs, and subject to weaker external monitoring. Our findings are consistent with Shleifer (2004), who argues that competition might induce more unethical behavior (such as earnings management).

Large Wealth Creation in Mergers and Acquisitions

We examine completed MA (ii) transaction-specific events (not firm- nor CEO-specific events); (iii) enhanced by synergies from a strategic fit in the supply chain; and (iv) executed by bidders with high valuation multiples. Our analyses also document a link between financial accounting reporting irregularities and subsequent merger performance. These findings provide important insight into the factors associated with considerable wealth creation for acquirer shareholders in M&A deals.

Currency Appreciation Shocks and Shareholder Wealth Creation in Cross-Border Mergers and Acquisitions

Using a comprehensive sample of cross-border mergers, we find that acquirers from countries experiencing large currency appreciations realize higher abnormal announcement stock returns during both the announcement period and the post-merger period. Importantly, this shareholder wealth creation effect mainly comes from those acquirers in countries with strong shareholder rights and those acquirers with better corporate governance. We further find that acquirers from countries with weak shareholder rights tend to overpay a foreign target following a currency appreciation. Collectively, this evidence suggests that the interaction of currency appreciation and agency conflicts plays an important role in acquirer shareholder value creation.

Anticipation and Returns in Event Studies

When an event is anticipated, the firm’s stock return around the announcement of the event may have an inconsistent sign: a positive sign around negative news, or vice versa. We attempt to quantify the frequency of this problem, first with a brief mathematical model and simulation, then with empirical tests that support the model, employing data on analyst upgrades. We find that more than 10% of returns can have inconsistent signs, even with low levels of anticipation. Researchers should adjust their event-study data to properly account for anticipation.

CEOs’ Military Experience, Agency Costs and Acquisition Decisions

We examine the effect of a CEO’s military service on merger and acquisition decisions and outcomes. We find that acquirers led by CEOs with military backgrounds earn significantly higher abnormal stock returns at deal announcement, and these deals exhibit higher short-run and long-run synergies. In addition, we find that the presence of military CEO attenuates the negative effect of the poor corporate governance and excess cash on acquirer returns and short-run and long-run synergies. Overall, the evidence suggests that the value system developed in the military helps lower the agency costs in acquisitions and generates better acquisition outcomes. Taken together, our results suggest a channel through which the military background of a CEO might affect firm value.

Is Skin in the Game a Game Changer? Evidence from Mandatory Changes to D&O Insurance Policies

This paper contributes to the debate over the merits of directors’ and officers’ (D&O) liability insurance by examining whether including a personal deductible in D&O insurance benefits shareholders. Exploiting a novel German law change that mandates a personal deductible for a firm’s officers, we document positive returns around the law announcement for affected firms, especially those facing high litigation risk. We also find some evidence of long-run effects: firm value increases, cash flow volatility decreases, and the quality of takeover decisions improves. Including a personal deductible appears to represent a key step towards a better design of D&O insurance contracts.

The Oscar Goes To…: Peer Pressure, Innovation Competition, and Takeovers

In this paper, we examine how firms react to their competitors’ highly publicized achievements in product innovations. We use the renowned annual R&D 100 Award granted by R&D Magazine since 1965, which has come to be known as the “Oscar of Innovation”, to measure impactful product innovations by rival industry participants. We find that a firm’s propensity to acquire another firm significantly increases following R&D awards won by competitors. A causal interpretation of our finding is supported by the use of the Uniform Trade Secrets Act (UTSA), which exogenously enhances trade secret protection at the state-level, as an instrumental variable. The increase in acquisitiveness driven by innovation envy is stronger for firms with fewer financial constraints, greater technology competition, and more overconfident CEOs.In this paper, we examine how firms react to their competitors’ highly publicized achievements in product innovations. We use the renowned annual R&D 100 Award granted by R&D Magazine since 1965, which has come to be known as the “Oscar of Innovation”, to measure impactful product innovations by rival industry participants. We find that a firm’s propensity to acquire another firm significantly increases following R&D awards won by competitors. A causal interpretation of our finding is supported by the use of the Uniform Trade Secrets Act (UTSA), which exogenously enhances trade secret protection at the state-level, as an instrumental variable. The increase in acquisitiveness driven by innovation envy is stronger for firms with fewer financial constraints, greater technology competition, and more overconfident CEOs.

Do Acquirers Benefit from Retaining Target CEOs

Acquirers do not benefit from hiring the CEOs of firms they buy, either in terms of merger announcement returns or long-run operating performance. This is especially true when the retained CEOs exhibit inferior quality (as proxied by target firm industrial efficiency or the target CEO’s educational aptitude, pay slice, or outside directorships). We find no evidence that our results are due to hard bargaining by target managers: premiums paid in M&A deals appear unrelated to the decision to hire the target CEO. These findings withstand several econometric methods we use to account for potential endogeneity, selection, and unobserved heterogeneity.