William A. Kracaw

Corporate takeovers, firm performance, and board composition

This paper examines the relationship between corporate takeovers and the hoard of directors as alternative control mechanisms to discipline top management. Previous research shows that CEO turnover subsequent to corporate takeovers is inversely related to pre-takeover market-related performance. We find this relation is concentrated in targets with insider-dominated boards of directors. Our results support the notion that, as an alternative control device, takeovers serve as a substitute for outside directors. Further, we show that the discipline associated with corporate takeovers extends beyond top management to effect restructuring of the entire board. The nature of the discipline depends on the composition of the target board prior to the takeover. Disciplinary takeovers result in two general effects: (1) for inside-dominated targets, the number of inside directorships decreases while the number of outside directorships remains about the same; and (2) for outside-dominated boards, the number of inside directorships increases while the number of outside directorships decreases. As a result, the board is recomposed toward a more even balance between inside and outside directorships

Optimal Managerial Incentive Contracts and the Value of Corporate Insurance

This paper investigates the impact of managerial hedging on shareholder wealth when managers are able to choose the level of effort they expend in managing firms investments. We demonstrate that shareholders will prefer managers to hedge observable unsystematic risks because they expect that this will induce managers to be more productive. We begin with the case where the risk being hedged is independent of managerial effort. In this case, we show that if shareholders are able to adjust incentive contracts either in anticipation of hedging or after observing hedging, but before managers expend effort, then they will benefit from that hedging. When the insurable risk is also dependent on managerial effort, then we have what we term an “embedded moral hazard” problem. In this case, the optimal contract may entail either over or under insurance by the manager, relative to that preferred by shareholders.

Day-of-the-Week Effects in Financial Futures: An Analysis of GNMA, T-Bond, T-Note, and T-Bill Contracts

This paper provides a comprehensive study of weekly seasonal effects in GNMA, T-bond, T-note, and T-bill futures returns. Two distinct patterns are found in returns on GNMA, T-bond, and T-note contracts, while no seasonals are noted for T-bill futures. A negative Monday seasonal—similar to the well-known Monday effect in stock returns—is found for GNMA and T-bond contracts. A positive Tuesday seasonal is found on GNMA, T-bond, and T-note contracts. Our evidence indicates that the significance of weekly seasonals depends in an important way on the time period studied. The negative Monday phenomenon occurs only in the data before 1982, while the positive Tuesday effect is present only after 1984. In addition, we find that both seasonal phenomena occur only during months prior to a delivery month. This effect appears to be related to the calendar month. More specifically, the Monday effect is apparently concentrated during February, while the Tuesday effect is concentrated during May.

Financial risk management : fixed income and foreign exchange

Financial risk management : fixed income and foreign exchange , Financial risk management : fixed income and foreign exchange , کتابخانه دیجیتال و فن آوری اطلاعات دانشگاه امام صادق(ع)

The Market for Managerial Labor Services and Capital Market Equilibrium

This paper presents a model of equilibrium in a capital market for linear shares of risky firms andin a market for managerial labor in which market participants function as both investors and managers. The model yields interesting and relevant equilibrium conditions that integrate earlier separate treatments of the capital market with human capital and the incentive contracting problem regarding shirking.The theory developed here provides a microeconomic explanation of how the price of risk established in the capital market is relevant to the labor contracting problem. The analysis also provides a logical rationale for the division of responsibilities between a board of directors and the management of the firm.

Intermediation and the market for interest rate swaps

Abstract This paper analyzes the role of financial intermediaries as marketmakers in the market for interest rate swaps. We argue that intermediaries which hold large nontraded portfolios of swaps are efficient alternatives to direct hedging by counterparties in publicly traded cash and futures instruments. The efficiency afforded by the swap marketmaker derives from reduction in transactions costs, diversification of basis risk, and reduced agency costs of debt. The analysis provides an explanation for the existence and success of the swaps market as a means for spreading risk and for its dominance by large financial institutions.

Inflation, Corporate Growth, and Corporate Leverage

M The effect of inflation on firms financing and investment decisions has been a recurring topic of analysis. Attention has been devoted to both the managerial implications and the security valuation consequences of broad-based upward movements in nominal product and factor-input prices. A generally separate stream of research has dealt with the equilibrium rate of growth a corporation can sustain, given its operating characteristics.2 Because the two topic areas have only occasionally intersected, there are some influences of inflation on the investment opportunities and financial strategies of the growing firm that we feel have yet to be fully appreciated. We attempt to address those here. Our objectives are both pedagogical and analytical. We synthesize various elements of prior research and extend the content of that research, within a unified framework. The analysis is differentiated from previous literature by a more thorough treatment of the effects of the corporate income tax, asset turnover, fixed asset replacement requirements, and corporate debt and liquidity policies on sustainable growth. We thereby provide a more complete statement of the conditions under which inflation will preserve a firms real growth opportunities. The potential implications of those conditions for the corporate leverage decision are then examined.

Sorting Equilibria in Financial Markets: The Incentive Problem

In a recent paper [3] we developed a theory of financial intermediariesas information producers. We argued that financial intermediaries are one class of market participants who specialize in the production of information and sell that informationtofirms with investments to finance which can profit from its distribution. In order to focus on financial intermediation, we sacrificed considerable generality in our model ofcompetitive information production in capital markets. In particular we assumed that there were only two types of assets available in the market known as type A and type B firms. Second, we assumed that information would be produced about all assets by only one information producer or that information was a declining cost industry. The approach we utilized is actually a special case of what has been called a screening or certification process (see Stiglitz [6] and Viscusi [7]), and what we prefer to callsorting. The sorting market is a market where high value and low value assets are distinguished by market participants who specialize in sorting. It is similar, but not identical, to the process of signaling developed by Spence [5] and applied to financial markets by Ross [4] and Bhattacharya [1]. Yet, the extant literature on sorting has, by and large, ignored the opportunity for thosewho stand to lose from sorting to offer side payments to thwart the sorting process. While the problem of side payments may be of minor significance for some applications of sorting and signaling models, the prospect of side payments appears to be an important if not crucial issue infinancial markets.