Internal Corporate Governance: The Role of Residual Income on Divisional Allocation of Funds

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 Residual Income (RI) plans between 1990 and 2009, we show that adoptions of these plans mitigate investment distortions and lead to value gains. Following the adoption of RI plans, diversified firms start allocating investment funds based on growth opportunities of their divisions. RI plan 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 RI plans. However, RI plans 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 RI

Foreign Cultures, Sarbanes-Oxley Act and Cross-Delisting

Using a sample of foreign firms delisting shares from the United States over the period 2000 and 2004, this paper studies the impact of Sarbanes-Oxley Act (SOX) on the cross-delisting behavior of foreign firms based on the firm characteristics, legal tradition, overall culture and degree of individualism of the country of domicile. Pre-SOX, the propensity to delist is lower for firms from countries with cultural similarities to the U.S. and higher for firms from individualistic societies. Post-SOX these trends are reversed. Consistent with the existing research we find that the delisting decision of foreign firms cross- listed in the U.S. is based on the potential gains from listing based on the growth opportunities, length of presence in the U.S. and legal regulations of the country of domicile

TARP\u27s Dividend Skippers

Most of the banks receiving capital injections from the Troubled Asset Relief Programme (TARP) issued preferred stock to taxpayers. This paper presents the factors that affect publicly traded banks’ ability to pay the scheduled TARP preferred stock dividends. Smaller banks with weaker capital ratios and more problem loans are significantly more likely to suspend payments of their bailout dividends

Alternative Paths of Convergence Toward U.S. Market and Legal Regulations: Cross Listings vs. Merging with U.S. Bidders

Non-U.S. firms have two options to converge toward U.S. capital market and legal regulations - to cross-list in the U.S. or to agree to be acquired by a U.S. bidder. We show that companies that have lower growth opportunities, are more capital intensive, and seek bonding benefits through compliance with U.S. exchange (rather than OTC market) requirements are more likely to be acquired, and that firms from civil law countries tend to cross-list. We document that the adoption of Sarbanes-Oxley Act of 2002 (SOX) led to an increase in the propensity to be acquired for firms from civil law countries, and to a greater rate of cross-listings for capital intensive firms from common law countries and for firms from countries with strong protection of investor rights. We also show that Market-to-Book values of non-U.S. firms following cross-listing in the U.S. tend to be lower when these firms were expected to be acquired. Similarly, both non-U.S. targets and U.S. bidders experience lower abnormal returns in acquisitions involving targets expected to cross-list. Our results imply the existence of optimal convergence choices of non-U.S. firms. In addition, the adoption of SOX appears to have changed some determinants of these choices due to shift in benefits and costs of compliance with U.S. regulations

Foreign cultures, Sarbanes-Oxley Act and cross-delisting

Using a sample of foreign firms listed in U.S. and delisting shares over the period 2000 and 2010, this paper studies the impact of Sarbanes-Oxley Act (SOX) on the cross-delisting behavior of foreign firms based on the firm characteristics, legal tradition, overall culture and degree of individualism of the country of domicile. Pre-SOX, the propensity to delist is lower for firms from countries with cultural similarities to the U.S. and higher for firms from individualistic societies. Post-SOX these trends are reversed. Consistent with the existing research we find that the delisting decision of foreign firms cross-listed in the U.S. is based on the potential gains from listing based on the growth opportunities, length of presence in the U.S. and legal regulations of the country of domicile. Out findings provide evidence of the cultural factors that impact the competitiveness of U.S. capital markets.ADRs Sarbanes-Oxley Act Delisting Individualism Hofstede cultural dimensions

Two step acquisitions and liquidity spread

We hypothesize that macro-level liquidity affects the choice between tender-mergers and mergers. We employ a novel methodology to test this relationship. This method finds structural breaks in the number of tender-mergers relative to mergers and finds that the structural breaks coincide strikingly well with major changes in macro-level liquidity. Consistent with our hypotheses our regression analysis finds that the number of tender offers increases with liquidity and also that the acquirer’s share of synergy increases as tender-mergers increase

The Impact of Laws, Regulations, and Culture on Cross-border Joint Ventures

Both formal (legal) and informal (culture, language, religion) institutions determine the intensity of cross-border joint ventures between one US and one foreign partner. Using a sample of cross-border joint ventures from 105 countries, we investigate the impact of country legal, cultural and business environment factors, industry factors as well as deal specific factors on the intensity of cross-border joint ventures with one US partner. Our results suggest that US firms are more likely to form joint ventures with firms from countries with weaker legal and regulatory environments and with higher cultural, language, and religious disparity from the US. However, compared to mergers between a foreign target and a US bidder, US firms are more likely to form joint ventures with firms from countries with strong laws and regulations, as well as with smaller cultural, language, and religious differences from the US. These findings are consistent with cross-border joint ventures being a “hybrid” organizational form existing in between free-market contracts and firm-like deals such as mergers and acquisitions. Our results further suggest that foreign countries receiving large US foreign direct investments and/or relying less on export and import are associated with higher intensity of cross-border joint ventures. The volume of cross-border joint ventures with US partner is higher for firm from less competitive and/or more politically stable countries. On a firm level, US firms are more likely to form cross-border joint ventures in cases of technology transfers between the joint venture partners, in deals involving partners from unrelated industries or with foreign firms not cross-listed in the US. Overall, the results suggest that cross-border joint ventures are optimal, low cost organizational form mitigating information asymmetries, hold-up costs, and poor contract enforceability, especially in environment with larger market imperfections

Network Centrality, Connections, and Information: Evidence from CEO Insider Trading Gains

CEO’s insider trading gains are affected by the position of the CEO within the hierarchy of all business executives, as assessed by the CEO’s network centrality. CEOs with high centrality are associated with significantly more positive abnormal returns following purchases of their company’s stocks, compared to the CEOs with low centrality. These results hold even after considering potential endogeneity, and CEO personal characteristics and firm determinants related to network centrality. High-centrality CEOs earn higher abnormal returns following their share purchases primarily in firms that are riskier, have weak corporate governance, or are managed by a CEO with no career background in finance. High centrality CEOs also generate more significant personal gains by selling their shares prior to bad news event experienced by their firm. Finally, trading gains are further positively affected by CEO having past connections to the current CFO. Our findings suggest high network centrality, as well as bilateral connections to people with financial knowledge, allow CEOs to more efficiently gather information about the value of their company