Tomas Jandik

Derivative lawsuits as a corporate governance mechanism: Empirical evidence on board changes surrounding filings

Legal rights of investors are recognized as an essential component of corporate governance. We assess the efficacy of these rights by examining board changes surrounding the filings of shareholder derivative lawsuits. We find that the incidence of derivative lawsuits is higher for firms with a greater likelihood of agency conflicts. We also find that derivative lawsuits are associated with significant improvements in the boards of directors. In particular, the proportion of outside representation on the board of directors increases. There is also some evidence that other board characteristics change favorably. These findings suggest that shareholder derivative lawsuits are not frivolous as is often claimed, but rather that they can serve as an effective corporate governance mechanism.

Can Diversification Create Value? Evidence from the Electric Utility Industry

Despite SEC and state-level resistance, and contrary to the trend pursued by other firms, many electric utilities have diversified into non-electric and unregulated businesses. Moreover, this failure to focus has been rewarded with higher firm values, again contrary to the discounts documented in the literature for other diversifying firms. Prior literature has questioned whether these premiums (or discounts) can be attributed to diversification per se. Rather, these premiums could arise from the characteristics of the diversifying firms, which have then endogenously chosen to diversify. In a new approach, where regulation can make the diversification decision largely exogenous, we examine the investment policies of the comparable electric-segments in the diversifying and non-diversifying utilities. We find that single segment electric utilities over-invest compared to diversifying utilities, which explains their diversification premiums and implies that diversification can create value by opening up new investment opportunites.

The Evolution of Corporate Governance and Firm Performance in Transition Economies: The Case of Sellier and Bellot in the Czech Republic

This paper investigates the evolution of corporate governance and firm performance in transition economies. It focuses on barriers that impeded adoption of optimal corporate governance at Czech ammunition manufacturer Sellier and Bellot (SB it demonstrates monitoring and incentive mechanisms can create value in transition economies; it suggests effective privatisation not only involves rapid ownership transfer but careful accounting and securities regulation and legal protection.

Value Impact of Debt Issuances by Targets of Withdrawn Takeovers

An existing finance theory predicts that managers of takeover targets will increase leverage to enhance managerial control which can, in turn, allow target managers to thwart a takeover attempt altogether. We find that targets significantly increase leverage, not only by issuing more debt, but also by repurchasing more equity. We also find that debt issuances by poorly performing target managers made between takeover announcement and withdrawal result in significantly negative abnormal returns at the time of the issuance, consistent with the entrenchment role of debt. On the other hand, debt issued by high-performing target managers is not found to result in these same negative returns. Additionally, we document that debt-increasing, poorly performing targets experience significantly more negative returns at withdrawal announcement, also followed by significantly negative post-withdrawal stock performance, while these negative effects are offset for high-performing targets. Overall, our findings suggest that managerial motivations to block takeover attempts with increased debt issuance differ and that these differences in motivation are recognized by the market.

Empirical evidence on determinants of capital structure

Based on received financial theory, we empirically examine the role of the following firm-specific determinants of leverage: bankruptcy costs, growth, variability, non-debt tax shields, collateral value, profitability, and size. For our sample, to focus on firm-specific aspects, we purposely use pooled time-series cross-sectional data from a single industry (electric and gas utilities) for the twenty-year period, 1975–1994. Our findings largely support theory, with the important exception of variability. We find that leverage is positively related with variability, contrary to the literature. We conjecture that this seemingly perverse relationship may be due to the yet unrecognized effect of variability: firms with greater variability of earnings have a greater chance that their non-debt tax shields may prove to be inadequate, and are therefore expected to take on higher levels of leverage.

Do Capital Structure Adjustments by Takeover Targets Influence Acquisition Gains

We link debt issuances by target companies around takeover announcements to enhanced target bargaining power in negotiations with bidders over merger synergy gains in completed takeovers. Announcements of debt issuances by targets – especially new bank loans – are associated with more positive target equity returns relative to those made by non-targets, particularly for debt issuances immediately surrounding the takeover announcement. At least some of these gains to targets come at the expense of bidder shareholders, as bidder equity abnormal returns at target debt issuance are negative. We further show that targets issuing debt are primarily those with relatively low acquisition abnormal returns, consistent with initially poor target bargaining power. Subsequent debt issuances by targets increase the likelihood of positive adjustments to acquisition premiums offered by acquirers.

Impact of Shareholder Proposals on the Functioning of the Market for Corporate Control

Firms receiving shareholder proposals are 16% more likely to become a target of acquisition. Such companies earn approximately 7.2% lower acquisition returns compared to gains for targets with no proposals. Higher acquisition likelihood and lower target returns are primarily associated with proposals drawing a larger proportion of favorable votes, larger voter turnout, as well as with proposals submitted shortly before takeover announcements, and motivated by the removal of antitakeover provisions. Our findings suggest that shareholder proposals can assist bidders in the identification of targets or signal the willingness of target shareholders to accept bids with lower premiums.

Adoptions and Eliminations of Economic Profit Plans and Internal Capital Markets Efficiency

Internal capital markets of diversified firms have been associated with inefficient allocation of investment funds across divisions, leading to value losses. Utilizing a sample of diversified firms that adopted or eliminated Economic Profit Plans (EPPs) between 1990 and 2009, we show that adoptions of those plans (that reward profitability, but penalize excessive capital investment) mitigate investment distortions and lead to value gains. Following the adoption of EPPs, diversified firms start allocating investment funds based on growth opportunities of their divisions. EPP adopters lower their divisional investment levels, especially in segments with below-average growth opportunities. The overall investment allocation efficiency improves, and the diversification discount diminishes after the adoption of EPPs. However, EPPs appear to be used only as temporary tools for assessing corporate performance. The plans are adopted primarily by firms expected to immediately generate plan bonuses for management, and they are frequently eliminated by firms with bad accounting performance, and low managerial bonuses. The study contributes to the literature on organizational efficiency, internal capital markets and on the importance of measures based on economic profits or residual income.

Wage Trap Model: Producer Behavior in Economies with Heterogeneous Labor Force

The main goal of this paper is to help determine why the communist (and partly even transition) economies are substantially inefficient in comparison with their market counterparts. The reasons will be analyzed with the help of the profit maximization model (based on the efficiency wage theory) leading to the existence of multiple profit optima. The inefficiency of planned and transition economies will then be considered mainly as the consequence of the impossibility to reach the highest profit optimum (this situation will be referred to as the wage trap, because the production suboptimality was due to the lack of freedom to set the optimal wage level). The results of the analysis will also be used to explain the huge discontinuous shifts in the profitability or production of certain firms in transition economies as well as of some possible initial advantages of foreign firms acting in transition economies.