William N. Pugh

ESOPs, takeover protection, and corporate decision-making

ESOPs have the potential to align the interests of employees and owners and may increase firm value. However, employee ownership may also strengthen the position of entrenched management. The literature predicts that firms newly protected from takeover threat will tend to (1) increase long-term investment and (2) require additional external monitoring, and/or (3) may use leverage as part of an overall antitakeover strategy. We examined firms that have adopted ESOPs and find that firms raise the level of capital expenditures, research and development expenditures, and dividends. (JEF G320)

Does quantity reflect quality? Financial disclosure size and future performance

Purpose – This study seeks to investigate whether a firms financial disclosure size can help investors predict performance. Design/methodolgy/approach - Controlling for size and industry, the relationship between financial disclosure size and subsequent stock performance for all Standard and Poors (S and P) 500 firms over a seven-year period is examined. Findings - It is found that firms with smaller 10-Ks tend to have better subsequent performance relative to their industries. However, the findings suggest that the performance explanation may not lie in the size of the 10-K itself. Firms with smaller 10-Ks tend to perform better because they are smaller in terms of total assets and more focused, with fewer business segments. Research limitations/implications - While the study is limited to examination of S and P 500 firms, no consistent evidence is found of a relation between changes in a firms disclosure size and future performance changes. Practical implications - The results suggest that more disclosure relative to a firms size is not necessarily bad. Investors attempting to predict future firm performance cannot use the firms disclosure size alone. Originality/value - This paper extends two recent Merrill Lynch studies that appear to contradict the extant financial literatures view that increased disclosure reduces the informational asymmetry problem. While the results confirm the findings of these studies, they suggest that the performance explanation may not lie in the size of the 10-K itself.

Valuation Effects of Cancelled Debt Offerings

We examine the price behavior of the firms common stock associated with cancelled straight debt offerings. Excluding utilities, we find negative excess returns associated with offering and cancellation announcements. Further, the stronger withdrawal reactions we find, when the funds were to be used for capital expenditures, may signal a decline in profitable investment opportunities. These results are consistent with Miller and Rocks (1985) hypothesis.

State antitakeover legislation and firm financial policy

In the wake of numerous hostile corporate takeover attempts in the 1980s, many states enacted antitakeover legislation, often as a direct response to a particular takeover effort in the specific state. A number of empirical studies assess the impact of such statutes on firm value using traditional event methodology. While the event type research may capture the immediate market assessment of the impact of such legislation, the legislation can affect longer term financial policies of the affected firms. Theorists have speculated that firms less exposed to a takeover threat are more likely to pursue a longer term investment strategy, that leverage may substitute for or complement other existing takeover defenses, and that protected firms may require additional external monitoring. The results of this study indicate that protected firms increase both capital expenditures and R&D relative to assets and sales. Further, there are increases in dividends but only small changes in leverage. Firms with antitakeover amendments in place prior to the legislation show lower increases in capital spending and R&D, and modest evidence of a greater tendency to increase debt levels. While these results indicate that the laws influence subsequent firm strategy, that does not necessarily mean that these changes in policy improve firm value.

The effect of takeover defenses on the dividend decision

Many firms have sought protection from hostile takeovers by passing defensive amendments to their corporate charter and/or lobbying their state legislatures for statutory protection. Agency theory would suggest that any such takeover defenses alter the principal-agent relationship. A consequence of such a change may be a change in corporate decision making. The objective of this research is to test the effect that passage of antitakeover amendments has on a firms dividend policy. We use six alternate measures of dividend activity: total dividends paid, dividends per share and dividends relative to earnings, cash flow, market value, and book value. Our results indicate that firms that adopt antitakeover amendments, when compared to an industry control sample, tend to have a slower rate of growth in dividend payout as measured by the proxy variables. These results suggest that entrenchment is not a likely outcome of such amendments.