Michel A. Habib

Firm Value and Managerial Incentives: A Stochastic Frontier Approach

We examine the relation between firm value and managerial incentives in a sample of 1,487 U.S. firms in 1992-1997, for which the separation of ownership and control is complete. Unlike previous studies, we employ a measure of relative performance which compares a firm’s actual Tobin’s Q to the Q of a hypothetical fully-efficientfirm having the same inputs and characteristics as the original firm. We find that the Q of the average firm in our sample is around 10% lower than its Q, equivalent to a

An Analysis of Shareholder Agreements

1,340 million reduction in its potential market value. We investigate what causes firms to fail to reach their Q and find that our firms are more efficient, the higher are CEO stockholdings and optionholdings and the more sensitive are CEO options to firm risk. We also show that boards respond to inefficiency by subsequently strengthening incentives or replacing inefficient CEOs.

Underpricing and IPO Proceeds: A Note

Shareholder agreements govern the relations among shareholders in privately held firms, such as joint ventures and venture capital-backed companies. We provide an economic explanation for key clauses in such agreements—namely, put and call options, tag-along and drag-along rights, demand and piggy-back rights, and catch-up clauses. In a dynamic moral hazard setting, we show that these clauses can ensure that the contract parties make efficient ex ante investments in the firm. They do so by constraining renegotiation. In the absence of the clauses, ex ante investment would be distorted by unconstrained renegotiation aimed at (i) precluding value-destroying ex post transfers, (ii) inducing value-increasing ex post investments, or (iii) precluding hold-out on value-increasing sales to a trade buyer or the IPO market.

Prevention is Better than Cure: The Role of IPO Syndicates in Precluding Information Acquisition

Every equilibrium model of IPO underpricing predicts a positive relationship between ex ante uncertainty about firm value and the extent to which entrepreneurs will issue shares at a discount to their subsequent market value. Since ex ante uncertainty is unobservable, the empirical literature has used a number of proxies for such uncertainty. The purpose of this note is to show that a popular proxy, the inverse of gross flotation proceeds, may be inappropriate for the purpose of testing the positive relation predicted by theory. We prove that an inverse relation between underpricing and IPO proceeds holds true because of dilution, even as uncertainty remains unchanged.

Monitoring, Implicit Contracting, and the Lack of Permanence of Leveraged Buyouts

We treat information acquisition by potential investors in initial public offerings as endogenous. With endogenous information, the critical question is why underwriters would allow investors to spend resources acquiring superior information intended solely to effect a wealth transfer. We show that an investment banking syndicate is an institutional arrangement designed to avoid such a transfer. By inviting rival banks to share in the offering, a managing underwriter ensures they have a strong incentive to remain ignorant. We characterize the resulting outcome as one of symmetric ignorance. The desire to maintain symmetric ignorance is consistent with the observed passivity of nonmanaging syndicate participants.

Negotiating over Banking Secrecy: The Case of Switzerland and the European Union

We present a possible explanation for the lack of permanence of the very high levels of concentration of ownership that accompany leveraged buyouts. We first argue that some diffusion of ownership can be beneficial to the shareholders of a firm by encouraging the employees of the firm to enter into implicit contracts with the firm. The level of concentration of ownership that maximizes firm value is therefore that which trades off the well-known gains from monitoring with the gains from implicit contracting. We then argue that, in the process of concentrating the ownership of a firm that has excessively diffuse ownership to a level that maximizes firm value, investors in leveraged buyouts will choose an initial level of concentration of ownership that is very high. They will do so in order to put pressure on managers to breach existing implicit contracts. Following the breach of these contracts, investors will decrease the level of concentration of ownership to the level that maximizes firm value. There will be no further breach of implicit contracts, for such breach is incidental to the transformation of the firm from one that has excessively diffuse ownership to one that has the optimal level of diffusion of ownership. No change in the concentration of ownership therefore occurs once the level of diffusion of ownership that maximizes firm value has been attained. JEL Classification: G30.

Models of information aggregation in financial markets: a review

Over the period 2002 to 2003,Switzerland and the European Union (EU) were engaged in negotiations regarding banking secrecy. The EUs stated goal was for Switzerland to abolish banking secrecy. Switzerland refused and offered to impose a withholding tax on interest income instead. The two parties eventually agreed on the latter solution. We examine the effect of these negotiations on the share prices of four Swiss banks: UBS, Credit Suisse Group (CSG), Julius Baer (Baer), and Vontobel. Overall, investors believe that bank profitability will not be impacted by the imposition of the withholding tax. The event-by-event response of the share prices differs across banks. Whereas the two universal banks (UBS and CSG) primarily react to the threat of sanctions on their EU-based operations, the private banks (Baer and Vontobel) react strongly to events suggesting that banking secrecy might be abolished.

The Reluctant Defaulter: A Tale of High Government Debt

This article reviews static and dynamic models of information aggregation in the literature. It highlights the key assumptions these models make, the results they obtain and the issues that still need to be explored to further our understanding of information aggregation in financial markets.

Underpricing and Entrepreneurial Wealth Losses in Ipos:Theory and Evidence

We seek to account for the very high levels of public debt recently reached in many OECD countries. We do so by assuming that governments do their utmost to stave off default, which occurs only when a government fails to muster the funds needed for debt service. This distinguishes our work from existing work on sovereign debt, which has assumed that governments weigh the costs of debt service against those of default. The debt ratios we compute are quite close to prevailing levels: our baseline case has debt-to-GDP ratio slightly above 80%.