Managerial Entrenchment and Shareholder Wealth Revisited: Theory and Evidence From a Recessionary Market

Does managerial entrenchment create or destroy shareholder value? This Article presents both theory and evidence that the answer to this question is not monolithic, but rather depends on factors that vary greatly with the macroeconomic climate, such as firm profitability, takeover frequency, and valuation of takeover premiums. The mainstream view, both of academics and market participants, is that entrenchment reduces accountability to shareholders and amplifies agency costs, thus decreasing shareholder wealth. Two influential studies (Bebchuk, Cohen & Ferrell (2009) and Gompers, Ishii & Metrick (2003)) present empirical evidence consistent with this conclusion, finding statistically significant negative correlations between entrenchment and stock returns during the historic bull market of the 1990s. However, there is no a priori reason to conclude that these effects will persist. Rather, a close examination of first principles suggests that the benefits attributable to the market for corporate control are substantially minimized during recessions. Testing this hypothesis using data from the recent economic crisis, this Article finds that the previously identified, statistically significant correlations between high entrenchment and negative stock returns disappeared entirely during the recent financial crisis, even for the most and least entrenched companies. In fact, the opposite effect was observed: firms with above-average levels of entrenchment outperformed less entrenched firms during the sample period. A portfolio buying firms with above-average entrenchment while simultaneously shorting firms with below-average entrenchment would have generated statistically significant annualized abnormal returns of 5.2%. Moreover, companies that entrenched themselves the most in the year prior to the current crisis outperformed companies that either reduced, maintained, or slightly increased their level of entrenchment. While correlation is not causation, these findings are consistent with the theory that there are significant costs, not just benefits, to exposing managers to an unfettered market for corporate control

Adjudicating Corporate Auctions

In light of recent developments in auction theory, this Article re-examines Delaware corporate law governing directors\u27 actions when structuring the sale of a corporation. A foundational doctrine of Delaware law is that when the board of directors resolves to sell a corporation, it must obtain the highest price reasonably available. Auction theory posits that, in certain circumstances germane to corporate takeovers, revenues can be maximized through the use of ex ante precommitments to the rules of the auction. Delaware law, however, does not fully endorse directors\u27 ability to make such precommitments, primarily out of the concern that the board will lock up a transaction for self-interested reasons. The Article\u27s core claim is that current Delaware law is unduly averse to precommitment devices that set the rules of the game in corporate auctions. Such devices can help maximize shareholder value and do not create the positional conflict that animates much of corporate takeover jurisprudence. Courts should draw a distinction between ex ante precommitments, characterized by ambivalence concerning the identity of the winning bidders, versus midstream or ex post lock-ups, in which the board favors a known buyer

Towards a Moral Agency Theory of the Shareholder Bylaw Power

Corporate bylaws are the new leading edge of a decades-long struggle between shareholders and managers over the allocation of decision-making authority in public companies. Bylaws are the only method by which shareholders can unilaterally restrict the powers and discretion of the board. Yet the scope of this statutory authority remains notoriously uncertain. Corporate law scholars generally agree that there is a limited domain in which shareholders can restrict managerial authority, but disagree on the appropriate boundary. The Delaware Supreme Court recently confronted this issue for the first time in CA, Inc. v. AFSCME Employees Pension Plan, but that decision is doctrinally problematic (indeed, internally inconsistent) and, in any event, leaves open many questions concerning the full reach of the shareholder bylaw power. This Article develops a novel theory of the shareholder bylaw power by examining that power\u27s relationship to the deeper structure of corporate law. Viewed in this context, shareholder voice (of which the bylaw power is one part) should provide an avenue for action in circumstances where shareholders\u27 other rights, i.e., the ability to exit the firm or sue its fiduciaries, are unavailing. This occurs most prominently where corporate activity implicates significant questions of social policy in addition to intracorporate economic matters. In other words, shareholders should be empowered to act as moral agents of the corporations in which they invest. This Article also addresses two threshold questions related to this theory. Do corporations need moral agents? And if so, why not rely on managers to play that role

Adjudicating Corporate Auctions

In light of recent developments in auction theory, this Article re-examines Delaware corporate law governing directors\u27 actions when structuring the sale of a corporation. A foundational doctrine of Delaware law is that when the board of directors resolves to sell a corporation, it must obtain the highest price reasonably available. Auction theory posits that, in certain circumstances germane to corporate takeovers, revenues can be maximized through the use of ex ante precommitments to the rules of the auction. Delaware law, however, does not fully endorse directors\u27 ability to make such precommitments, primarily out of the concern that the board will lock up a transaction for self-interested reasons. The Article\u27s core claim is that current Delaware law is unduly averse to precommitment devices that set the rules of the game in corporate auctions. Such devices can help maximize shareholder value and do not create the positional conflict that animates much of corporate takeover jurisprudence. Courts should draw a distinction between ex ante precommitments, characterized by ambivalence concerning the identity of the winning bidders, versus midstream or ex post lock-ups, in which the board favors a known buyer

Analytical study of catalytic reactors for hydrazine decomposition. One and two dimensional steady-state programs, computer programs manual

Programs manual for one-dimensional and two- dimensional steady state models of catalyzed hydrazine decomposition reaction chamber

Auto-tail dependence coefficients for stationary solutions of linear stochastic recurrence equations and for GARCH(1,1)

We examine the auto-dependence structure of strictly stationary solutions of linear stochastic recurrence equations and of strictly stationary GARCH(1, 1) processes from the point of view of ordinary and generalized tail dependence coefficients. Since such processes can easily be of infinite variance, a substitute for the usual auto-correlation function is needed

Political Uncertainty and the Market for IPOs

This Article presents a simple theory and model of the effects of political uncertainty on the market for IPOs. Our model generates four central predictions: (i) increased political uncertainty reduces the frequency of IPOs; (ii) firms that choose to conduct an IPO during periods of political uncertainty are, on average, of higher quality and generate greater return on investment in the secondary market; (iii) political uncertainty increases the cost of capital for IPO firms; but (iv) underpricing is less pronounced during periods of heightened political uncertainty. We demonstrate that each of these predictions is consistent with available empirical evidence. Our model fills gaps in two related literatures. First, the literature on political uncertainty has, at present, largely ignored its impact on corporate finance decisions such as IPO activity. Second, the literature on IPO decision-making omits political uncertainty as a key determinant of firms’ financing decisions. We demonstrate that political uncertainty acts independently of the extant theories of the going-public decision. Finally, our model illustrates that there are both costs and benefits to political uncertainty. Its net impact on the market for IPOs is thus an empirical question, not an a priori conclusion