Ownership, Managerial Control and the Governance of Companies Listed on the Brussels Stock Exchange

This paper examines how corporate control is exerted in companies listed on the Brussels Stock Exchange. There are several alternative corporate governance mechanisms which may play a role in disciplining poorly performing management: blockholders (holding companies, industrial companies, families and institutions), the market for partial control, debt policy, and board composition. Even if there is redundancy of substitute forms of discipline, some mechanisms may dominate. We find that top managerial turnover is strongly related to poor performance measured by stock returns, accounting earnings in relation to industry peers and dividend cuts and omissions. Tobit models reveal that there is little relation between ownership and managerial replacement, although industrial companies resort to disciplinary actions when performance is poor. When industrial companies increase their share stake or acquire a new stake in a poorly performing company, there is evidence of an increase in executive board turnover, which suggest a partial market for control. There is little relation between changes in ownership concentration held by institutions and holding companies, and disciplining. Still, high leverage and decreasing solvency and liquidity variables are also followed by increased disciplining, as are a high proportion of nonexecutive directors and the separation of the functions of CEO and chairman.Corporate finance;corporate control;ownership structures;government regulation

Contractual Corporate Governance

Companies have the choice to deviate from their national corporate governance standards by opting into another system. They can do so via contractual devices – such as cross-border mergers and acquisitions, (re)incorporations, and cross-listings – which enable firms to choose their preferred level of investor protection and regulation. This paper reviews these three main contractual governance devices, their effect on value, and whether their adoption by firms induces a race to the bottom or a race to the top. Indeed, firms may opt for less shareholder-orientation or investor protection (shareholder-expropriation hypothesis) rather than for more stringent rules that require firms to focus on shareholder value (bonding hypothesis).Contractual corporate governance;corporate governance regulation;cross-border mergers and acquisitions;cross-listings;reincorporations;shareholder protection;creditor protection;spillover effects

What Determines the Financing Decision in Corporate Takeovers: Cost of Capital, Agency Problems or the Means of Payment?

While the means of payment in takeovers has been a focal point in the takeover literature, what has largely been ignored is the analysis of how the takeover bid is financed and what its impact is on the expected value creation of the takeover. This paper investigates the sources of transaction financing in European corporate takeovers launched during the period 1993- 2001 (the fifth takeover wave). Using a unique dataset, we show that the external sources of financing (debt and equity) are frequently employed in takeovers involving cash payments. Acquisitions with the same means of payment but different sources of transaction funding are quite distinct. For instance, a significantly negative price revision following the announcement of a takeover is not unique to the equity-paid M&As; it is also observed in any other deals that involve equity financing (including cash-paid and mixed-paid M&As). Also, acquisitions financed with internally generated funds significantly underperform those financed with debt. Our multinomial logit and nested logit analyses show that the takeover financing decision is influenced by the bidder’s pecking order preferences, its growth potential, and its corporate governance environment, all of which are related to the cost of external capital. There is also evidence that the choice of equity versus internal cash or debt financing is influenced by the bidder’s strategic preferences with respect to the means of payment. We find no evidence of financing decisions driven by agency conflicts between managers and shareholders or between shareholders and creditors.mergers and acquisitions;takeovers;means of payment;financing decision;cost of capital;agency problem;pecking order;corporate governance regulation;nested logit

Is Investment-Cash Flow Sensitivity Caused by the Agency Costs or Asymmetric Information? Evidence from the UK

We investigate the investment-cash flow sensitivity of a large sample of the UK listed firms and confirm that investment is strongly cash flow-sensitive.Is this suboptimal investment policy the result of agency problems when managers with high discretion overinvest, or of asymmetric information when managers owning equity are underinvesting if the market (erroneously) demands too high a risk premium?We find that the observed cash flow sensitivity results mainly from the agency costs of free cash flow.The magnitude of the relationship depends on insider ownership in a nonmonotonic way.Furthermore, we obtain that outside blockholders, such as financial institutions, the government, and industrial firms (only at high control levels), reduce the cash flow sensitivity of investment via effective monitoring.Finally, financial institutions appear to play a role in mitigating informational asymmetries between firms and capital markets.We corroborate our findings by performing additional tests based on the stochastic efficient frontier approach and power indices.investment-cash flow sensitivity;ownership and control;asymmetric information;liquidity constraints;agency costs of free cash flow;large shareholder monitoring;Shapley values

The Performance of the European Market for Corporate Control: Evidence from the 5th Takeover Wave

For the 5th takeover wave, European M&As were expected to create significant takeover value: the announcement reactions were strongly positive for target shareholders (more than 35%) and the bidding shareholders also expected to gain a small though significant increase in market value of 0.5%.While, most of the expected takeover synergies are captured by the target firm shareholders, The combined value creation is significantly positive.However, the expected value strongly depends on the wave pattern, with optimistic expectations at the climax of the wave and a more pessimistic outlook at the decline.We establish that the characteristics of the target and bidding firms and of the bid itself have a significant impact on takeover returns.While some of our results have been documented for other markets of corporate control (e.g.US), a comparison of the UK and Continental European M&A markets reveals that the corporate environment is an important factor affecting the market reaction to takeovers: (i) In case a UK firm is taken over, the abnormal returns exceed those in bids involving a Continental European target.(ii) The presence of a large shareholder in the bidding firm has a significantly positive effect on the takeover returns in the UK and a negative one in Continental Europe.(iii) Weak investor protection and low disclosure environment in Continental Europe enable bidding firms to invent takeover strategies that allow them to act opportunistically towards target firm's incumbent shareholders; more specifically, partial acquisitions and acquisitions with undisclosed terms of transaction.takeovers;mergers and acquisitions;diversification;hostile takeover;means of payment;cross-border acquisitions;private target;partial acquisitions

Public-to-Private Transactions: LBOs, MBOs, MBIs and IBOs

This paper shows that a vibrant and economically important public-to-private market has reemerged in the US, UK and Continental Europe, since the second half of the 1990s.The paper shows recent trends and investigates the motives for public-to-private and LBO transactions.The reasons for the potential sources of shareholder wealth effects during the transaction period are examined: a distinction is made between tax benefits, incentive realignment, transaction costs savings, stakeholder expropriation, takeover defenses and corporate undervaluation.The paper also attempts to relate these value drivers to the post-transaction value and to the duration of the private status.Finally, the paper draws some conclusions about whether or not public-to-private transactions are useful devices for corporate restructuring.management buyouts;public-to-private transactions;going-private deals;leveraged buyouts;management buyins

Us Knows Us in the UK: On Director Networks and CEO Compensation

We analyze the relation between CEO compensation and networks of executive and non-executive directors for all listed UK companies over the period 1996-2007. We examine whether networks are built for reasons of information gathering or for the accumulation of managerial influence. Both indirect networks (enabling directors to collect information) and direct networks (leading to more managerial influence) enable the CEO to obtain higher compensation. Direct networks can harm the efficiency of the remuneration contracting in the sense that the performance sensitivity of compensation is then lower. We find that in companies with strong networks and hence busy boards the directors’ monitoring effectiveness is reduced which leads to higher and less performance-sensitive CEO compensation. Our results suggest that it is important to have the ‘right’ type of network: some networks enable a firm to access valuable information whereas others can lead to strong managerial influence that may come at the detriment of the firm and its shareholders. We confirm that there are marked conflicts of interest when a CEO increases his influence by being a member of board committees (such as the remuneration committee) as we observe that his or her compensation is then significantly higher. We also find that hiring remuneration consultants with sizeable client networks also leads to higher CEO compensation especially for larger firms.Executive remuneration;Professional and social networks;Corporate governance;Managerial Power;Remuneration consultants

How Relevant is Dividend Policy under Low Shareholder Protection?

This paper reopens the debate on the substitutability of dividends and shareholder control in mitigating free cash flow concerns, by examining dividend behavior when shareholder control is restricted in the firm.We consider the stakeholder-oriented governance regime of the Netherlands, where shareholdings are concentrated, but shareholder rights are often severely restricted by a legally imposed governance regime and anti-shareholder devices such as Dutch-style poison pills.We find that dividend payouts are generally low, unresponsive to earnings changes and show little relationship with size, leverage, and investment opportunities.Shareholder power restrictions affect dividend behavior to varying degrees, but those that do are used by the vast majority of Dutch listed firms.Once accounting for these, we find no evidence that strong shareholders would allow firms to relax their dividend policy, as has been proposed in the existing literature.As shareholders, institutional investors and managers actually force higher payouts.Thus, it seems that dividends often complement rather than substitute shareholders efforts to alleviate agency concerns.This finding is unlikely to be specific to the Netherlands, and could possibly be extended to other stakeholder-oriented governance regimes.Dividend policy;Corporate governance;Shareholder power restrictions;Ownership and control

Control Structures and Payout Policy

This paper examines the payout policies of UK firms listed on the London Stock Exchange during the 1990s.It complements the existing literature by analyzing the trends in both dividends and total payouts (including share repurchases).In a dynamic panel data regression setting, we relate target payout ratios to control structure variables.Profitability drives payout decisions of the UK companies, but the presence of strong block holders or block holder coalitions considerably weakens the relationship between corporate earnings and payout dynamics.While the impact of the voting power of shareholders coalitions on payout ratios is found to be always negative, the magnitude of this effect differs across different categories of block holders (i.e. industrial firms, outside individuals, directors, financial institutions).The controlling shareholders appear to trade off the agency problems of free cash flow against the risk of underinvestment, and try to enforce payout policies that optimally balance these two costs.Finally, the paper improves upon some methodological flaws of the recent empirical studies of payout policy.Payout policy;dividend payout;share repurchases;partial adjustment;ownership and control;voting power;Banzhaf power indices;corporate governance;free cash flow;pecking order