Nihat Aktas

Legal Insider Trading and Market Efficiency

Does legal insider trading contribute to market efficiency? Using refinements proposed in the recent microstructure literature, we analyzed the information content of legal insider trading. We used data on 2110 companies subject to 59,244 aggregated daily insider trades between January 1995 and the end of September 1999. Our main finding is that, even though financial markets do not respond strongly in terms of abnormal returns to insider trading activities, the significant change in price sensitivity to relative order imbalance due to abnormal insider trades reveals that price discovery is hastened on insider trading days.

Is European M&A regulation protectionist?

Why do regulatory authorities scrutinize mergers and acquisitions? The authorities themselves claim to be combating monopoly power and protecting consumers, but the last two decades of empirical research has found little supporting evidence for such laudatory motives. An alternative is that M&A regulation is actually designed to protect privileged firms. In this paper, we provide a test of protectionism by studying whether European regulatory intervention is more likely when European firms are harmed by increased competition. Our findings are unambiguous: European regulation is protectionist. The results are robust to a variety of statistical difficulties, including endogeneity between investor valuations and regulatory actions.

Is working capital management value-enhancing? Evidence from firm performance and investments

We examine the value effect of working capital management (WCM) for a large sample of US firms between 1982–2011. Our results indicate (i) the existence of an optimal level of working capital policy; and (ii) firms that converge to that optimal level (either by increasing or decreasing their investment in working capital) improve their stock and operating performance. We also document that corporate investment is the channel through which efficient WCM translates into superior firm performance. In particular, efficient WCM allows firms to redeploy underutilized corporate resources to higher-valued use, such as the funding of cash acquisitions.

Is Working Capital Management Value-Enhancing? Evidence from Firm Performance and Investments

We examine the value effect of working capital management (WCM) for a large sample of US firms between 1982-2011. Our results indicate (i) the existence of an optimal level of working capital policy; and (ii) firms that converge to that optimal level (either by increasing or decreasing their investment in working capital) improve their stock and operating performance. We also document that corporate investment is the channel through which efficient WCM translates into superior firm performance. In particular, efficient WCM allows firms to redeploy underutilized corporate resources to higher-valued use, such as the funding of cash acquisitions.

The Emerging Role of the European Commission in Merger and Acquisition Monitoring: The Boeing–McDonnell Douglas Case

On December 21, 1989 the European Community Counsel promulgated EEC regulation no. 4064/89 and in doing so, reinforced merger operations monitoring and control at the European level. The object of this study is to evaluate the consequences of the application of this regulation to non-European companies with merger and acquisition operations under way. It is an illustration of how the parts played by the different monitoring authorities at the world level are interwoven and of the complexity of the legal and political environments peculiar to multinational firms. We focus on the Boeing ? McDonnell Douglas case because it is one of the first non-European mergers considered by the Commission. The analysis of abnormal returns on the two securities shows that the threat of a ban of the merger by the Commission where not perceived as credible at first. But when Boeing decided to request the support of the American government, just after the decision of the European Commission to extend its investigations to the long term exclusivity contacts, the role of the Commission emerged.

Corporate Serial Acquisitions: An Empirical Test of the Learning Hypothesis

Recent empirical papers report a declining trend in the cumulative abnormal return (CAR) of acquirers during an M&A program. Does this necessarily imply that acquiring CEOs are infected by hubris and are not learning from previous mistakes? We first confirm the existence of this declining trend on average. However, we find a positive CAR trend for CEOs likely to be infected by hubris, which is significantly different from the negative trend found for CEOs who are more likely to be rational. We also explore the time between successive deals and find empirical evidence to suggest that many CEOs learn substantially during acquisition programs.

Assessing the Power and Size of the Event Study Method Through the Decades

The idiosyncratic risk is a key input of the standard event study method. The recent literature has suggested that the idiosyncratic risk is not stable through time, and it has increased significantly in the nineties. This paper investigates to what extent the event study method is affected by this economic phenomenon. Using both simulation and real dataset analyses, we show that the classical event study methods suffer from a significant loss of power due to increasing idiosyncratic risk, as the intuition suggests it. A (and maybe the only) solution to alleviate the impact of increasing idiosyncratic risk consists in increasing the sample size by a factor corresponding to the ratio of average idiosyncratic variances between the analyzed periods.

Corporate Governance and Takeover Outcomes

Manuscript type Review Research Question/Issue This article reviews how and through which channels corporate governance shapes takeover outcomes. Research Findings We summarize the main findings of the empirical literature that investigates the effect of corporate governance mechanisms on takeover outcomes. The internal and external governance mechanisms that we consider are: the board of directors, the takeover market, blockholders, financial markets in general, product market competition, and the labor market. Theoretical/Academic Implications This article adopts an agency perspective of the firm and reviews the mergers and acquisitions (M&A) literature through the lens of corporate governance. We highlight how the different corporate governance mechanisms affect the takeover process and outcomes. Practitioner/Policy Implications The article systematizes the current state of the research linking corporate governance and takeovers. In doing so, we emphasize which mechanisms policymakers can use to improve the efficiency of the takeover market. Alternatively, the review also offers indications concerning mechanisms that could be used to mitigate agency conflicts and, as such, increase firm value.

CEO duality, agency costs, and internal capital allocation efficiency.

This study examines the impact of CEO duality on firms’ internal capital allocation efficiency. We observe that when the CEO is also chair of the board, diversified firms make inefficient investments, as they allocate more capital to business segments with relatively low growth opportunities over segments with high growth opportunities. The adverse impact of CEO duality on investment efficiency prevails only among firms that face high agency problems, as captured by high free cash flows, staggered board structure and low board independence. Depending on the severity of the agency problem, CEO duality is associated with a decrease in industry-adjusted investment in high-growth segments of 1% to 2.1% over the following year, relative to that in low-growth segments. However, CEOs’ equity-based compensation curbs the negative effect of CEO duality on internal capital allocation efficiency. Overall, the findings of this study offer strong support for the agency theory and postulate the internal capital allocation policy as an important channel through which CEO duality lowers firm value in diversified firms.

CEO Duality, Agency Costs, and Internal Capital Allocations

This study examines the impact of CEO duality on firms’ internal capital allocation efficiency. We observe that when the CEO is also chair of the board, diversified firms make inefficient investments, as they allocate more capital to business segments with relatively low growth opportunities over segments with high growth opportunities. The adverse impact of CEO duality on investment efficiency prevails only among firms that face high agency problems, as captured by high free cash flows, staggered board structure and low board independence. Depending on the severity of the agency problem, CEO duality is associated with a decrease in industry-adjusted investment in high growth segments of 1% to 2.1% over the following year, relative to those in low growth segments. However, CEOs’ equity-based compensation curbs the negative effect of CEO duality on internal capital allocation efficiency. Overall, the findings of this study offer strong support for the agency theory and postulate the internal capital allocation policy as an important channel through which CEO duality lowers firm value in diversified firms.