Robert C. Nash

Determinants of contractual relations between shareholders and bondholders: investment opportunities and restrictive covenants

Abstract We evaluate the costs and benefits of restrictive covenants in bonds issued in 1989 and 1996. Our results indicate that firms with growth opportunities are more likely to seek to preserve flexibility in future financing activities by not including dividend or debt issuance restrictions in their bond contracts. We do not find, however, that the use of other restrictive covenants is significantly lower for firms with high investment opportunities. Instead, the use of these other covenants is primarily driven by the issuing firms likelihood of financial distress. Our results emphasize that contractual relations between firms and bondholders reflect the specific needs of the contracting parties.

The Long-Run Return to Investors in Share Issue Privatizations

We examine the long-run returns earned by domestic, international, and US investors who purchase shares at the first open-market price in 158 share issue privatizations (SIPs) from 33 countries during the period 1981-1997. We compute one-, three-, and five-year net returns for domestic, international, and US market indexes, and industry-matched comparison samples. We find statistically significant positive net returns for the 158 unseasoned SIPs for all holding periods and compared with all benchmarks. Our findings contrast with the patterns reported in previous research for equity offerings of private firms in the US and other countries.

Bank Privatization in Developing and Developed Countries: Cross-Sectional Evidence on the Impact of Economic and Political Factors

We examine how political, institutional, and economic factors are related to a countrys decision to privatize state-owned banks. Using a comprehensive panel of 101 countries from 1982 to 2000, we find that the determinants of this decision differ markedly between OECD and non-OECD nations. Political factors significantly affect the likelihood of bank privatization only in developing countries. Specifically, in non-OECD countries, a bank privatization is more likely the more accountable the government is to its people. In contrast, none of our political variables affects the bank privatization decision in developed countries. Economic factors (such as the quality of the nations banking sector) are significant determinants of bank privatization in both OECD and non-OECD nations.

On competition, risk, and hidden assets in the market for bank credit cards

Abstract The market for credit cards has been the subject of recent attention and controversy because of ‘high’ profits earned on credit cards and substantial premiums on the resale of credit-card receivables. This paper estimates risk—return profiles for credit-card banks and explores the role of intangible assets in determining resale premiums on credit-card receivables. In addition, the effects on the resale market of securitization and the opportunity cost of acquiring new accounts are analyzed. Using alternative measures of risk and alternative control groups, we find, for the years 1989 to 1995, that credit-card banks earned significantly higher returns on assets but that these returns were associated with greater risk-taking. Analysis of premia for the years 1993 to 1995 suggest that acquiring banks pay higher premia for mid-sized regional accounts than for larger, national portfolios, perhaps because of richer cross-selling opportunities.

The Effects of Changes in Corporate Governance and Restructurings on Operating Performance: Evidence from Privatizations

Using a sample of 161 firms (privatized from 1961 to 1999), our study offers evidence of how restructurings and corporate governance changes affect the firms post-privatization performance. Prior to privatization, governments may choose to restructure firms through governance changes (i.e., establish relation with strategic foreign investors, implement employee share ownership plans) and/or restructurings (i.e., acquisitions, divestitures, re-capitalizations). We first extend existing privatization research by documenting and describing these restructurings. We then conduct preliminary tests to examine whether such restructurings/governance changes have affected post-privatization operating performance. Our results suggest that both restructuring and changes in corporate governance are important determinants of postprivatization performance.

The Structure of Executive Compensation: International Evidence from 1996-2004

The primary objective of this study is to better understand the time-series and cross-sectional variation in the structure of executive compensation for non-U.S. firms. That is, has the globalization of labor markets for senior management led non-U.S. firms to design compensation contracts similar to those of U.S. firms or, are there country-specific factors that may cause compensation structures to differ? Using data from 36 non-U.S. countries over 1996-2004, we document significant cross-country differences in compensation structure (i.e., relative use of equity-based and cash-based compensation). The primary determinants of this cross-sectional variation are institutional factors related to the legal environment in each country. Specifically, firms use more equity-based compensation in countries that provide stronger protection of shareholders rights or have English common-law legal origins. Similarly, firms in countries providing strict enforcement of the rule of law use more equity-based compensation. In addition to these institutional determinants, we find some evidence that the relative use of equity-based compensation is also affected by the firms agency costs of debt and equity. The data indicate that non-U.S. firms with higher growth opportunities (and the resultant larger agency costs of equity) use relatively more equity-based compensation. We also find that larger firms and firms with lower free cash flow use more equity-based compensation. These findings are consistent with those documented by Yermack (1995) and Bryan et al. (2000) for U.S. firms. However, unlike in the U.S., our data indicate that the agency problems of debt have only a limited effect on compensation structure. Therefore, while the agency theory tested with U.S. compensation data is broadly portable to other markets, the explanatory power is not as significant when applied to non-U.S. firms. We also track compensation structures throughout the time period and seek to identify and explain relative differences between compensation polices of U.S. and non-U.S. firms. The data allow us to test whether compensation structure has converged (as would be suggested by the globalization of financial markets). Alternatively, cross-country institutional differences would suggest a continued divergence in compensation policies across nations. The data provide no evidence of international convergence of compensation structures. Our empirical analysis attributes these pervasive differences to institutional factors. That is, despite the substantial changes in capital market conditions throughout the sample period, institutional factors remain as significant determinants of compensation structure and appear to contribute to consistent cross-country differences in compensation structure.

New Evidence on the Role of the Media in Corporate Social Responsibility

Prior research suggests that the media plays an important information intermediary role in capital markets. We investigate the role of the media in influencing firms’ engagement in corporate social responsibility (CSR) activities. Using a large sample of 4396 unique firms from 42 countries over the period 2003–2012, we find strong evidence that firms engage in more CSR activities if located in countries where the media has more freedom. This relation is robust to using various proxies for media freedom, an alternative source of CSR data, and to applying the instrumental variables approach to address endogeneity. In additional analyses, we find that the positive relation between media freedom and CSR engagement is stronger for better governed firms and for larger firms. Since the media have the ability to impact reputational capital, we conclude that media freedom affects firms’ incentives to engage in costly CSR activities.

Law and Executive Compensation: A Cross-Country Study

Companies outside the U.S. use substantially less equity in their compensation mix than U.S. firms. But despite this consistent cross-sectional-difference, the pattern of changes in equity-based pay of non-U.S. companies over time appears to mirror changes in the pay of U.S. companies. The authors provide persuasive evidence that features of a nations legal environment help explain major differences in compensation structure across countries. As a general rule, companies in countries that provide greater protection of shareholder rights use larger amounts of equity-based compensation. And the equity mix also tends to be higher when a countrys legal system ensures strict enforcement of the laws that are on the books. At the same time, since the equity mix varies considerably over time within the same legal environment, it is clear that factors other than the legal environment affect compensation structure. The authors report that, after controlling for legal factors, company-specific variables that proxy for agency-conflicts not only between managers and shareholders, but between controlling and minority shareholders as well also affect the compensation mix in fairly predictable ways. The bottom line of this study is that, although we may have a global market for talent, compensation structures across countries are not likely to converge unless and until the underlying legal protections afforded shareholders converge. At the same time, the effect of agency costs in compensation design for non-U.S. firms appears to be partly conditioned by the nations legal system and the entire set of regulatory and other institutions that are affected by it.

State Ownership and Corporate Cash Holdings

Using a unique sample of newly privatized firms from 59 countries, this article provides new evidence about the agency costs of state ownership and new insight into the corporate governance role of country-level institutions. Consistent with agency theory, we find strong and robust evidence that state ownership is positively related to corporate cash holdings. Moreover, we find that the strength of country-level institutions affects the relation between state ownership and the value of cash holdings. In particular, as state ownership increases, markets discount the value of cash holdings more in countries with weaker institutions.