Michael S. Weisbach

Outside directors and CEO turnover

Abstract This paper examines the relation between the monitoring of CEOs by inside and outside directors and CEO resignations. CEO resignations are predicted using stock returns and earnings changes as measures of prior performance. There is a stronger association between prior performance and the probability of a resignation for companies with outsider-dominated boards than for companies with insider-dominated boards. This result does not appear to be a function of ownership effects, size effects, or industry effects. Unexpected stock returns on days when resignations are announced are consistent with the view that directors increase firm value by removing bad management.

The Determinants of Board Composition

We identify factors that lead to changes among corporate directors. We hypothesize that the CEO succession process and firm performance will affect board composition. Our findings are consistent with both hypotheses. When their CEO nears retirement, firms tend to add inside directors (who may be possible candidates to be the next CEO) Just after a CEO change, inside directors with short tenures appear more likely to leave the board (they, perhaps, being the losing candidates). We also find that inside directors are more likely to leave the board and outside directors more likely to join after a firm performs poorly and when a firm leaves a product market.

Financial Flexibility and The Choice Between Dividends and Stock Repurchases

This paper measures the growth in open market stock repurchases and the manner in which stock repurchases and dividends are used in U.S. corporations. Stock repurchases and dividends are used at different times from one another, by different kinds of firms. Stock repurchases are very pro-cyclical, while dividends increase steadily over time. Dividends are paid by firms with higher “permanent” operating cash flows, while repurchases are used by firms with higher “temporary”, non-operating cash flows. Repurchasing firms also have much more volatile cash flows and distributions. Finally, firms repurchase stock following poor stock market performance and increase dividends following good performance. These results are consistent with the view that the flexibility inherent in repurchase programs is one reason why they are sometimes used instead of dividends.

Actual Share Reacquisitions in Open-Market Repurchase Programs

Unlike Dutch auction repurchases and tender offers, open-market repurchase programs do not precommit firms to acquire a specified number of shares. In a sample of 450 programs from 1981 to 1990, firms on average acquire 74 to 82 percent of the shares announced as repurchase targets within three years of the repurchase announcement. We find that share repurchases are negatively related to prior stock price performance, suggesting that firms increase their purchasing depending on its degree of perceived undervaluation. In addition, repurchases are positively related to levels of cash flow, which is consistent with liquidity arguments. Copyright The American Finance Association 1998.

The Influence of Institutions on Corporate Governance through Private Negotiations: Evidence from TIAA-CREF

This paper analyzes the process of private negotiations between financial institutions and the companies they attempt to influence. It relies on a private database consisting of the correspondence between TIAA-CREF and 45 firms it contacted about governance issues between 1992 and 1996. This correspondence indicates that TIAA-CREF is able to reach agreements with targeted companies more than 95 percent of the time. In more than 70 percent of the cases, this agreement is reached without shareholders voting on the proposal. We verify independently that at least 87 percent of the targets subsequently took actions to comply with these agreements. Copyright The American Finance Association 1998.

Motivations for public equity offers. An international perspective.

This paper examines the extent to which investment financing and market-timing explanations motivate public equity offers. We consider a sample of 16,958 initial public offerings and 12,373 seasoned equity offerings from 38 countries between 1990 and 2003. We provide estimates of the change in each accounting variable for each dollar raised in an equity offer, and for each dollar of internally generated cash. Our estimates imply that firms invest 18.8 cents in R&D and 7.3 cents in capital expenditures for an incremental dollar raised in an equity offer during the year following the offer, rising to 84.8 cents and 14.3 cents when the change is measured over a four-year period. These findings are consistent with one motive for the equity offer being to raise capital for investment. However, firms also hold onto much of the cash they raised, and this fraction is higher when the firm has a high q. In addition, firms are more likely to issue secondary shares, which are usually sold by insiders, when q is high, enabling insiders to benefit personally from potential overvaluation. These results suggest that market timing as well as investment financing is a motivation for equity offers.

CEO turnover and the firm's investment decisions

This paper examines the relation between management turnover and divestitures of recently acquired divisions. The empirical results indicate that at the time of a management change, there is an increased probability of divesting an acquisition at a loss or one considered unprofitable by the press. The probability increases by about the same amount regardless of whether the change is an apparent age-65 retirement or a resignation. Overall, the results are consistent with a variety of agency-based theories of corporate investment and suggest that management changes are important events for corporations because they lead to reversals of poor prior decisions.

The Economic Effects Of Franchise Termination Laws

* We would like to thank Blake Rhodes and Pam Schommer for excellent research assistance, participants in workshops at Arizona State University, University of California, Berkeley, the University of Chicago, Dartmouth College, Iowa State University, the Justice Department, the University of Rochester, and the University of Utah, as well as Jeff Coles, Arnold Cowan, Jim Dana, Franklin M. Fisher, Stuart Gilson, Ben Hermalin, Cliff Holderness, Gregg Jarrell, Alan Krueger, Wayne Mikkelson, Walter Oi, Jim Poterba, Ajai Singh, Cliff Smith, Kathy Spier, David Weisbach, Jamie Zender, Jerry Zimmerman, and, especially, Kevin J. Murphy and an anonymous referee for comments on an earlier draft. Brickley and Weisbach thank the Managerial Economics Research Center of the University of Rochester and the John M. Olin Foundation, and Dark thanks the College of Business at Iowa State University for financial support. Brickley also thanks the Garn Institute of Finance at the University of Utah for financial assistance. 1 See Mark Robichaut, Franchise Rules Are Back Off Drawing Board, Wall St. J., July 6, 1990, at Bl. Note that, in this article, we focus on laws that apply to business-format franchises. For an analysis of state laws in automobile franchising, see Richard L. Smith II, Franchise Regulation: An Economic Analysis of State Restrictions on Automobile Distribution, 25 J. Law & Econ. 125 (1982). Richard A. Epstein, Unconscionability: A Critical Appraisal, 18 J. Law & Econ. 293, 314-15 (1975); and Paul H. Rubin, The Theory of the Firm and the Structure of the Franchise Contract, 21 J. Law & Econ. 223 (1978). Other work on the economics of franchising includes James A. Brickley & Frederick H. Dark, The Choice of Organizational Form: The Case of Franchising, 18 J. Fin. Econ. 401 (1987); James A. Brickley, Frederick H. Dark, & Michael S. Weisbach, An Agency Perspective on Franchising, 20 Fin. Mgmt. (1991, in

Measuring Investment Distortions When Risk-Averse Managers Decide Whether to Undertake Risky Projects

This paper examines distortions in corporate investment decisions when a new project changes firm risk. It presents a dynamic model in which a self-interested, risk-averse manager makes investment decisions at a levered firm. The model, calibrated using data from public firms, is used to estimate the magnitude of distortions in investment decisions. Despite potential wealth transfers from debtholders, managers compensated with equity prefer safe projects to risky ones. Important factors in this decision are the expected changes in the values of future tax shields and bankruptcy costs when firm risk changes. We also evaluate the extent to which this effect varies with firm leverage, managerial risk aversion, managerial non-firm wealth, project size, debt duration, and the structure of management compensation packages.

Horses and Rabbits? Trade-Off Theory and Optimal Capital Structure

This paper examines optimal capital structure choice using a dynamic capital structure model that is calibrated to reflect actual firm characteristics. The model uses contingent claim methods to value interest tax shields, allows for reorganization in bankruptcy, and maintains a long-run target debt to total capital ratio by refinancing maturing debt. Using this model, we calculate optimal capital structures in a realistic representation of the traditional trade-off model. In contrast to previous research, the calculated optimal capital structures do not imply that firms tend to use too little leverage in practice. We also estimate the costs borne by a firm whose capital structure deviates from its optimal target debt to total capital ratio. The costs of moderate deviations are relatively small, suggesting that a policy of adjusting leverage infrequently is likely to be reasonable for many firms.