On the importance of golden parachutes

In acquisitions, target chief executive officers (CEOs) face a moral hazard: Any personal gain from the deal could be offset by the loss of the future compensation stream associated with their jobs. Larger, more important parachutes provide greater relief for these losses. To explicitly measure the moral hazard target CEOs face, we standardize the parachute payment by the expected value of their acquisition-induced lost compensation. We examine 851 acquisitions from 1999–2007, finding that more important parachutes benefit target shareholders through higher completion probabilities. Conversely, as parachute importance increases, target shareholders receive lower takeover premia, while acquirer shareholders capture additional rents from target shareholders

REVISE AND RESUBMIT Corporate Governance and Investor Rationality: Evidence from the 1990s' Technology Bubble

Several studies document irrational investor behavior related to Internet firms during the 1990s' technology bubble. This paper investigates whether investors display the same behavior towards nonInternet firms that adopt Internet technology in the same time period. I find a positive association between short-and long-term metrics of firm performance related to the launching of commercial web sites by non-Internet companies. However, the extent to which this positive association exists is largely driven by the quality of the firms' corporate governance. These results indicate that investors were not universally irrational during the 1990s technology bubble. In addition, my findings also highlight the relevance of corporate governance in mitigating information asymmetry when technological innovations with an uncertain impact on firm value affect the economy. Why did the launching of a commercial web site generate opposite market responses for two retailers in the same industry? Differences between the two firms, reported in Another difference of potential importance between ShopKo and Cost Plus is the level of protection these firms grant their shareholders as measured by the Gompers, Ishii, and Metrick 2 In this paper, I use a broad sample of firms to study whether, based on the way companies are governed, investors react differently to firms' adoptions of new technologies. I also study whether investors' reactions to the adoption of new technologies are rational. The 1990s technology bubble provides an excellent setting to study these research questions. This period witnessed the emergence of the Internet as new commercial medium. The efficacy of this new technology was the source of considerable uncertainty. Several finance studies, discussed in the next section, document irrational investor behavior around tech stocks during the 1990s technology bubble. 2 However, none of the existing studies document whether investors were universally irrational during the period. That is, whether the irrational behavior was limited to tech stocks or whether investors were able to moderate uncertainty and act rationally. To address my research questions, as in the case-study of ShopKo and Cost Plus, I examine the effect of launching a commercial web site during the 1990s on firm value in non-Internet companies. This choice is motivated by the notion that establishing a web site is a necessary --though not sufficient--condition for any firm in order to adopt and implement the new technology and perhaps conduct business on the Internet. 3 I recognize that results supporting irrational investor behavior might also be consistent with investors' short-term or myopic behavior, (Stein (1989)), and with the notion that stock prices fail to reflect future earnings 4 Both short-and long-term payoffs are necessary to test for rational investor behavior because, under efficient markets, one would only expect to observe meaningful short term stock revaluations for events that investors believe will have a lasting and positive effect on the firm's future cash flows and profitability. In addition, the study of short-and long-term performance metrics enables me to dispel concerns over myopic investor behavior. 2. For example, 3 My initial proxy for corporate governance is the G-index, which counts restrictions on shareholder rights. Therefore, a lower (higher) G-index is commonly interpreted to proxy for strong (weak) shareholder rights and stronger (weaker) governance quality. I am aware that the use of the Gindex as an appropriate proxy for corporate governance is also the subject of debate. In robustness tests, the G-index is replaced with alternative governance metrics which yield qualitatively similar results. Initial results show that, on average, investors receive the introduction of commercial web sites enthusiastically, but I also find that operating performance declines in the years following the launching. Taken together, these results suggest that investors were overly excited in their initial evaluation of the impact of web sites on firm value and profitability, and appear consistent with both irrational and myopic behavior by investors. However, further tests which incorporate corporate governance to the analysis, do not lend support to the either one of these conjectures and allow me to reject irrational and myopic behavior hypotheses. Subsequent analyses show that the extent to which investors react positively to web site introductions is largely driven by whether the firm's level of investor protection is strong. Moreover,

Small worlds and board interlocking in Brazil: a longitudinal study of corporate networks, 1997-2007

Social Network Analysis (SNA) is an emerging research field in finance, above all in Brazil. This work is pioneering in that it is supported by reference to different areas of knowledge: social network analysis and corporate governance, for dealing with a similarly emerging topic in finance; interlocking boards, the purpose being to check the validity of the small-world model in the Brazilian capital market, and the existence of associations between the positioning of the firm in the network of corporate relationships and its worth. To do so official data relating to more than 400 companies listed in Brazil between 1997 and 2007 were used. The main results obtained suggest that the configuration of the networks of relationships between board members and companies reflects the small-world model. Furthermore, there seems to be a significant relationship between the firm’s centrality and its worth, described according to an “inverted U” curve, which suggests the existence of optimum values of social prominence in the corporate network

Are Some Outside Directors Better than Others? Evidence from Director Appointments by Fortune 1000 Firms

I analyze 1,493 first-time director appointments to Fortune 1000 boards, during 1997-99, to investigate whether certain outside directors are better than others. Reactions to director appointments are higher when appointees are CEOs of other companies than when they are not. CEOs are more likely to obtain outside directorships when the companies they head perform well. Well-performing CEOs are also more likely to gain directorships in organizations with growth opportunities. Because, for these firms, a large portion of their value hinges upon realizing their growth potential, I conclude that CEOs are sought as outside directors to enhance firm value.