Oguzhan Ozbas

Corporate Diversification and the Cost of Capital

We examine whether organizational form matters for a firms cost of capital. Contrary to conventional view, we argue that coinsurance among a firms business units can reduce systematic risk through the avoidance of countercyclical deadweight costs. We find that diversified firms have on average a lower cost of capital than comparable portfolios of standalone firms. In addition, diversified firms with less correlated segment cash flows have a lower cost of capital, consistent with a coinsurance effect. Holding cash flows constant, our estimates imply an average value gain of approximately 5% when moving from the highest to the lowest cash flow correlation quintile.

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.

Disclosure of Status in an Agency Setting

We develop a model in which the principal and the agent share private information about the value of the agent for a multi-agent organization. The principal can disclose private information and make public the relative standing or status of all agents in the organization. We study whether it is better in terms of profit and utility to disclose or to not disclose status to the group of agents. Conditions for the optimality of disclosure versus non-disclosure are characterized for the cases of exogenous and endogenous human capital.

A Theory of Shareholder Approval and Proposal Rights

This paper develops a model of corporate decision making to explore the implications of alternative forms of shareholder empowerment. We show that the right to approve managerial proposals (such as director nominations or new investment) constrains managers but not enough to bring about efficient actions. Our main implications concern the right to propose: when shareholders can initiate their own proposals, managerial agency problems can be significantly controlled; however, the right to propose can also worsen corporate decisions by inducing managers to rationally cater to extreme shareholder groups. We identify implications of our analysis for a variety of current regulatory issues concerning director elections, proxy access, bylaw amendments, and shareholder voting.This paper develops a theory of how shareholder decision rights over policies and directors affect firm value. The model highlights the distinction between the right to approve and the right to propose. The right to approve is weak; the right to propose is impactful but can help as well as hurt shareholders. Managers have an incentive to deter proposals from activist shareholders by adjusting corporate policy; one might conjecture that external pressure leads them to choose policies more appealing to other shareholders in order to reduce the electoral prospects of activist proposals. However, we show that when deterrence occurs, it is always by moving policy toward the position favored by the activist, even if this reduces shareholder wealth. Our analysis stresses the central role of voting uncertainty in determining the value consequences of shareholder rights and proxy access. (JEL D72, G34, G38, K22)

Does Religion Affect Economic Decisions? Evidence from Ramadan Loans

We examine the effects of nutrition and spiritual sentiment on economic decision-making in the context of Ramadan, an entire lunar month of daily fasting from dawn to sunset and increased spiritual reflection in the Muslim faith. Using an administrative data set of all bank loans originated in Turkey during 2003-2013, we find that small business loans originated during Ramadan are about 10 to 15 percent more likely to become delinquent within two years of origination than loans originated outside of Ramadan. Despite their worse performance, Ramadan loans have lower credit spreads than non-Ramadan loans at origination. Consistent with Ramadan-induced judgment errors committed by individual loan officers, we find no relation between origination in Ramadan and the performance of personal loans which are mostly automated, and large business loans where approval decisions are made by credit committees. Loans granted by banks whose loan officers are more likely to observe the Ramadan perform worse, and so do loans originated on hot Ramadan days when adverse physiological effects of fasting are greatest, and loans that resemble charitable lending involving financially strong lenders. Our identification strategy addresses alternative explanations including seasonality and changing borrower and loan characteristics during Ramadan.

Why Do Managers Fight Shareholder Proposals? Evidence from SEC No-Action Letter Decisions

This paper studies SEC no-action letter decisions that determine whether companies can exclude shareholder proposals from their proxy statements. During the period 2007–2019, the market reacted positively when the SEC permitted exclusion, suggesting that investors viewed those proposals as value-reducing on average. We also find that a company’s stock price drifted down over time while waiting for an SEC decision, suggesting that challenged proposals imposed “distraction�? costs on companies. The SEC’s decisions can be predicted by regulatory rules, but are also related to a proposal’s predicted votes—more popular types of proposals were less likely to be removed. We find no robust evidence that no-action letter decisions differed when the SEC was controlled by Democrats versus Republicans. Taken together, the evidence suggests that managers may be serving shareholder interests in opposing some proposals, and that the no-action letter process may be helping shareholders by weeding out value-reducing proposals.

Comments on: 'The Trouble with Instruments: Re-Examining Shock-Based IV Designs' by Atanasov and Black

Atanasov and Black (2015) (AB) analyzes potential limitations of empirical studies that use shock-based IV designs, focusing specifically on our article that studies the effect of board independence on firm value (Duchin et al., 2010). With regard to our study, AB raises three concerns with our analysis. This note presents our reaction to AB’s analysis. We agree with two of the concerns in the abstract; it turns out they do not matter for the substance of our analysis. We disagree on the critical issue concerning selection of covariates. As a guide to future research, we highlight the nature of the disagreement, and explain why we believe covariates should be motivated by theory, and why an a theoretical approach to selecting covariates can result in failure to identify effects that actually exist. An important lesson from the analysis is that researchers should exercise caution when including ad-hoc covariates in empirical specifications. We offer concluding thoughts about empirical research and causal inference.

Information Acquisition, Resource Allocation and Managerial Incentives

A managers compensation contract and the level of resources available to him jointly influence his incentives to acquire information about different investment alternatives as well as his resource allocate decisions. We show that the optimal compensation contract induces investment allocations that are more aggressive than the first-best allocation conditional on available information. The optimal level of resources may be set above or below the first-best level, depending on whether desired total investment increases or decreases with information. Both types of equilibrium investment distortions are used to motivate information acquisition by the manager. Finally, we show that choice of the level of resources can be delegated to the manager without any loss in efficiency through appropriately linking managerial compensation to the level of resources requested.