Rakesh Duggal

Institutional ownership and firm performance: The case of bidder returns

Abstract We employ corporate takeover decisions to investigate the impact of institutional ownership on corporate performance. The OLS regressions of bidder gains on institutional ownership indicate a positive relation between the two. However, we find institutional ownership to be significantly determined by firm size, insider ownership and the firms presence in the S&P 500 index. Thus, when bidder gains are regressed on the predicted values of institutional ownership in two-stage regressions, the recursive estimates do not confirm the relationship shown by the OLS regressions. Furthermore, we do not find any evidence that active institutional investors (e.g., CalPERS) as a group enhance efficiency in the market for corporate control. These findings cast doubt on the superior selection/monitoring abilities of institutional investors.

Dual office holding, corporate governance and takeover gains

Outlines various criticisms of the corporate practice of having the same individual as chief executive officer and chairman of the board but recognizes that it may also have some benefits. Uses data from a sample of US firms bidding in takeovers from 1985‐1990 to explore the relationship between takeover gains and the existence of dual office holding, insider ownership and the proportion of independent directors. Finds that dual office holding does not reduce the bidders’ wealth, possibly because it is often associated with a high proportion of independent directors who are likely to control the dual office holder in the interests of shareholders.

The control hypothesis and recurring versus accumulated free cash flow

This paper offers and investigates the hypothesis that managers are motivated to control accumulated free cash flows, as well as to control the recurring component from operations as suggested in Jensens (1986, 1988) theory on agency behavior and control. Such managers may be willing to sacrifice a portion of the recurring component of free cash flow in the form of additional interest expense, as well as to incur the additional monitoring by capital markets, in exchange for control over a greater level of accumulated free cash flow in the form of cash and equivalents. Partial support for this hypothesis is observed for a sample of acquisition targets possessing poison pill defenses, which enhances the likelihood of the required agency behavior. Target firms are observed to have above-average levels of capital expenditures, cash and equivalents, and debt. When regressed on premiums offered to target shareholders, however, only the target debt level is found to be significant.