Nilanjan Sen

An examination of the relationship of governance mechanisms to performance

The purpose of this paper is to draw together the many different facets of corporate governance that have been examined in the extensive literature in both strategic management and finance. In particular, we are interested in the relationship between the typical agency theory constructs of monitoring, incentives and ownership structure, with financial performance. First, we catalog this large body of work to see where there are still unanswered questions. We find that previous work has generally focused on examining subsets of governance mechanisms, typically studying one or two governance variables in any one study. Our view is that the most critical issue still to examine, is the ability of firms to choose among a number of different governance mechanisms in order to create the appropriate structure for that firm, given the environment in which it operates. We identify a sample of firms and examine CEO compensation, CEO tenure, board composition, leadership structure and ownership structure and their co...

Board Monitoring and Antitakeover Amendments

This study examines the joint influence of board composition, leadership structure, and board ownership structure on the markets reaction to corporate antitakeover amendment proposals. The stock price reaction to antitakeover amendments is more negative when the board is dominated by inside and affiliated outside board members. Further, for firms in which the CEO also chairs the board, the reaction becomes increasingly negative as inside and affiliated outside board members increase their ownership stake in the firm and proportional representation on the board. In contrast, board composition and ownership structure have little power to explain the stock price reaction when the CEO does not chair the board. We conclude that monitoring by outside independent board members is important particularly when the CEO is also the board chair.

God Save the Queen and Her Dividends: Corporate Payouts in the United Kingdom

We examine whether the decline in the number of dividend payers is purely a U.S. phenomenon or is part of a global trend. Focusing on the United Kingdom, a capital market comparable in maturity and sophistication to that of the United States, we find that the number of U.K. firms paying dividends declines from 75.9% to 54.5%. After controlling for firm size and profitability, we find a declining propensity to pay dividends over the 1998–2002 subperiod. We conclude that a shift in catering incentives appears most likely explain these recent changes in U.K. payout policies.

Corporate focus versus diversification: the role of growth opportunities and cashflow

Abstract We examine the valuation impact of corporate diversification strategies through an analysis of a set of international joint ventures which contain both focus-decreasing and focus-increasing investments. Consistent with previous findings reported for US firms, we find that focus-increasing joint ventures create value for shareholders. However, we do not find that corporate diversification uniformly reduces shareholder value, either at the announcement of the project or in the long-run. Diversifying joint ventures negatively impact shareholder wealth only when the investing firms have poor growth opportunities and a weak cashflow position. After controlling for the q and cashflow effects, we find no significant difference in the market reaction to focus-increasing and -decreasing joint ventures. Such a result implies that the impact of diversification on shareholder wealth is not absolute, but rather is conditional upon the financial resources and growth opportunities available to the firm.

The impact of firm diversification and focus: The Japanese experience

Abstract This paper examines the reaction of Japanese and American firms to the initial public announcement of international mergers, acquisitions, and joint ventures between Japanese and American firms. We study a sample of 111 initial announcements of these events during the period 1980–1991. In addition, of the Japanese firms included in our sample, 60 were members of a Keiretsu. We find that on average both the Japanese and American firms showed a significant positive reaction to the initial public announcement of the event. We also find the reaction of American firms to focused events to be much larger than to non-focused events, 6.2% on the announcement day vs. 1.3%. In contrast, we find that while the overall reaction of Japanese firms to the announcement was positive, the reaction of Japanese firms to focused events was negative and insignificant while the reaction to non-focused events was significant and positive. Upon further examination it is found that non-focus combinations were only significant and positive for Keiretsu firms. The interpretation of these results is that the relationship between Keiretsus and the Japanese firms serves to repress investment in negative net present value projects and subsidization of poorly performing business units, while offsetting the increased cost of information that occurs as a firm diversifies. Moreover, as diversification opens up a larger universe of possible projects and mergers, unfocused mergers and acquisitions may be of more value, provided non-focus agency costs can be controlled.

Firm value and the diversification choice: international evidence from global and industrial diversification

Our study examines the nature of industrial and global diversification for a sample of more than 12 000 firms across 35 emerging and developed countries during the period 1991–2006. Consistent with previous studies, we find that industrial diversification, either alone or combined with global diversification, results in a reduction of firm excess value. Global diversification alone, however, does not exert a significant impact on excess value. In an analysis of the decision to diversify, we find that firms in civil law countries or less developed nations are more likely to diversify, suggesting the greater utility of internal capital markets in economies where it is difficult to raise external capital. We observe that high leverage, larger size, lower levels of growth, R&D, free cash flow, profitability and Tobins q encourage firms to diversify industrially. Higher values of q, firm size, R&D expenditures, free cash flow and liquidity, but reduced growth rates and profitability are associated with global diversification.

An explanation of bidder returns in corporate acquisitions: the case of Japanese acquisitions of U.S. firms

Abstract Over the past three decades researchers have found a dramatic drop in the returns generated by acquiring firms in domestic acquisitions, dropping to a level insignificantly different from zero during the 1980s. In this paper we find this not to be the case for Japanese firms that acquire domestic U.S. firms. Moreover, contrary to what has been found for domestic acquisitions, a positive relationship was found between free cash flow and the returns accrued by the Japanese acquiring firm. This result may be a result of the institutional participation in the management of Japanese firms playing a role in eliminating agency problems for them.

Determinants of bidder competition in corporate takeovers

The importance of bidder competition in the corporate takeover process has long been recognized in theoretical models. This paper provides empirical tests of those models. The results indicate that resistance by target management to an initial bid encourages multiple bidders. Competing bidders are less likely to enter in cases where the target is large, but more likely to arise when the initial bidder is highly levered. High initial bids (preemptive bids) are found to discourage entry by additional firms. Surprisingly, targets with high levels of free cash flow tend not to be the recipients of multiple bids.

Investor protection effects on corporate liquidity and the cost of capital

Studies by LaPorta et al. (2000, 2002) show that the strong protection of investor rights encourage the development of capital markets and are associated with higher levels of firm valuation as measured by Tobins Q. Related research finds that well-developed capital markets produce higher rates of economic growth and allocate capital more efficiently. These studies fail, however, to explain how the investor protection environment produces higher firm values or facilitates the more efficient allocation of investment capital. Using a sample of 158 ADRs representing 26 different countries, this study provides such a linkage by examining the effect of investor protection levels on share liquidity and the firms cost of capital. We find that lower levels of investor protection reduce share liquidity while simultaneously resulting in a higher cost of equity capital. The combination of less liquidity with a higher cost of capital suggests an explanation for the lower values observed for firms incorporated in countries with fewer investor protections.

CORPORATE GOVERNANCE IN SINGAPORE: THE IMPACT OF DIRECTORS’ EQUITY OWNERSHIP

We examine whether the curvilinear relationship between directors’ equity ownership and firm performance exists in a non-Western economy such as Singapore. We find that it does, although the inflection points are much higher than that generally cited for U.S. firms. We then compare this relationship across two kinds of firms that are not common to the U.S. marketplace. We observe for founder-controlled firms that the impact of director ownership is insignificant. We also examine government-linked corporations and in spite of the presence of a government blockholder, find that the pattern of alignment, entrenchment and then alignment remains operative.