Asset Liquidity and Segment Divestitures

We investigate a sample of firms whose number of reported segments falls by one or more for the first time in their reporting history. The firms in our sample have a significantly larger diversification discount, underperform, and underinvest relative to comparable firms. Firms are more likely to divest segments from industries with a more liquid market for corporate assets, segments unrelated to the core activities of the firm, poorly performing segments, and small segments. The liquidity of the market for corporate assets plays an important role in explaining why some firms divest assets while others stop reporting them without divesting them, and why some firms divest core segments while others divest unrelated segments.

Corporate Focusing and Internal Capital Markets

A sample of firms that focus by divesting at least one segment allows us to investigate the characteristics of segments divested as well as the nature of focusing firms. We find that firms are more likely to divest segments unrelated to the core activities of the firm and that the probability that a segment is divested is inversely related to its relative size within the firm. In fact, a segment's relative size is the variable that has the most explanatory power in predicting which segment a firm divests. We argue that this is consistent with the importance of asset market liquidity as a determinant of the divestiture decision. Financial constraints play an important role in determining which firms focus, which segments these firms divest, and in the market's reaction to divestiture announcements. Focusing firms perform less well and invest significantly less than heir non-focusing counterparts.

Board Changes and the Director Labor Market: The Case of Mergers

We provide benchmarks for board changes over time and in response to the evolution of firm structure. Boards are more stable in the modern era. At the same time, shifts made around mergers are substantial and significantly different than those at non-merging firms. Changes to acquiring boards reflect firm needs, increased demand for executive and merger experience and bargaining between targets and acquirers, rather than agency motives. Conversely, director selection at non-merging firms is driven by general skills and diversity. Our analyses provide insight into the dynamic nature of board structure and characteristics demanded in the director labor market

The history and performance of concept stocks

Journal Of Banking & Finance, 30(9): pp. 2433-2469. http://dx.doi.org/10.1016/j.jbankfin.2004.12.006This study investigates the performance of firms with extremely high levels of market to sales value (“concept stocks”). To many observers, these stocks appear overvalued. However, proponents argue that because of their unique characteristics, traditional pricing models fail to value these firms correctly. Ex post, the debate can be resolved through an analysis of the long term performance of concept stocks. En route to testing the implied overpricing hypothesis we document several important findings. First, the identity and characteristics of concept stocks have changed markedly over time. Although the obvious recent examples are internet and biotech stocks, concept stocks vary widely by industry over the past four decades. The industries containing the most popular concept stocks evolve from oil and gas extraction in the 60s and 70s, to computer and office equipment in the 80s, and to computer-related services in the 90s. Second, although concept stocks tend to be young, small, growth stocks in the 90s, they exhibit a wide range of characteristics throughout the sample period. Third, the relative pricing of concept stocks (compared to either a control sample or the entire population) has changed dramatically over time. The average concept stock sold for approximately three times sales in the late 60s and 70s, five times sales in the 80s and nearly 17 times sales in the 90s. Finally, we find evidence supporting the overpricing hypothesis. Concept stocks underperform significantly in the long run. This underperformance is more severe for Nasdaq firms and in the most recent two decades. The results are separate from glamour, IPO, industry, or contrarian effects and remain after an extensive sensitivity analysis

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

Nurses Alumni Association Bulletin, Fall 1991

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