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Volume 64: Issue 3 (June 2009)

Do Stock Mergers Create Value for Acquirers?

Pages: 1061-1097  |  Published: 5/2009  |  DOI: 10.1111/j.1540-6261.2009.01459.x  |  Cited by: 256


This paper finds support for the hypothesis that overvalued firms create value for long‐term shareholders by using their equity as currency. Any approach centered on abnormal returns is complicated by the fact that the most overvalued firms have the greatest incentive to engage in stock acquisitions. We solve this endogeneity problem by creating a sample of mergers that fail for exogenous reasons. We find that unsuccessful stock bidders significantly underperform successful ones. Failure to consummate is costlier for richly priced firms, and the unrealized acquirer‐target combination would have earned higher returns. None of these results hold for cash bids.

Level Playing Fields in International Financial Regulation

Pages: 1099-1142  |  Published: 5/2009  |  DOI: 10.1111/j.1540-6261.2009.01460.x  |  Cited by: 70


We analyze the desirability of level playing fields in international financial regulation. In general, level playing fields impose the standards of the weakest regulator upon the best‐regulated economies. However, they may be desirable when capital is mobile because they counter a cherry‐picking effect that lowers the size and efficiency of banks in weaker economies. Hence, while a laissez faire policy favors the better‐regulated economy, level playing fields are good for weaker regulators. We show that multinational banking mitigates the cherry‐picking effect, and reduces the damage that a level playing field causes in the better‐regulated economy.

Bank Loan Supply, Lender Choice, and Corporate Capital Structure

Pages: 1143-1185  |  Published: 5/2009  |  DOI: 10.1111/j.1540-6261.2009.01461.x  |  Cited by: 258


This paper explores the relevance of capital market supply frictions for corporate capital structure decisions. To identify this relationship, I study the effect on firms' financial structures of two changes in bank funding constraints: the 1961 emergence of the market for certificates of deposit, and the 1966 Credit Crunch. Following an expansion (contraction) in the availability of bank loans, leverage ratios of bank‐dependent firms significantly increase (decrease) relative to firms with bond market access. Concurrent changes in the composition of financing sources lend further support to the role of credit supply and debt market segmentation in capital structure choice.

Information Immobility and the Home Bias Puzzle

Pages: 1187-1215  |  Published: 5/2009  |  DOI: 10.1111/j.1540-6261.2009.01462.x  |  Cited by: 578


Many argue that home bias arises because home investors can predict home asset payoffs more accurately than foreigners can. But why does global information access not eliminate this asymmetry? We model investors, endowed with a small home information advantage, who choose what information to learn before they invest. Surprisingly, even when home investors can learn what foreigners know, they choose not to: Investors profit more from knowing information others do not know. Learning amplifies information asymmetry. The model matches patterns of local and industry bias, foreign investments, portfolio outperformance, and asset prices. Finally, we propose new avenues for empirical research.

International Taxation and the Direction and Volume of Cross‐Border M&As

Pages: 1217-1249  |  Published: 5/2009  |  DOI: 10.1111/j.1540-6261.2009.01463.x  |  Cited by: 144


We show that the parent‐subsidiary structure of multinational firms created by cross‐border mergers and acquisitions is affected by the prospect of international double taxation. Specifically, the likelihood of parent firm location in a country following a cross‐border takeover is reduced by high international double taxation of foreign‐source income. At the same time, countries with high international double taxation attract smaller numbers of parent firms. A unilateral elimination of worldwide taxation by the United States is simulated to increase the proportion of parent firms locating in the United States following cross‐border mergers and acquisitions from 53% to 58%.

Determinants of Vertical Integration: Financial Development and Contracting Costs

Pages: 1251-1290  |  Published: 5/2009  |  DOI: 10.1111/j.1540-6261.2009.01464.x  |  Cited by: 186


We study the determinants of vertical integration in a new data set of over 750,000 firms from 93 countries. We present a number of theoretical predictions on the interactions between financial development, contracting costs, and the extent of vertical integration. Consistent with these predictions, contracting costs and financial development by themselves appear to have no effect on vertical integration. However, we find greater vertical integration in countries that have both greater contracting costs and greater financial development. We also show that countries with greater contracting costs are more vertically integrated in more capital‐intensive industries.

Eat or Be Eaten: A Theory of Mergers and Firm Size

Pages: 1291-1344  |  Published: 5/2009  |  DOI: 10.1111/j.1540-6261.2009.01465.x  |  Cited by: 176


We propose a theory of mergers that combines managerial merger motives with an industry‐level regime shift that may lead to value‐increasing merger opportunities. Anticipation of these merger opportunities can lead to defensive acquisitions, where managers acquire other firms to avoid losing private benefits if their firms are acquired, or “positioning” acquisitions, where firms position themselves as more attractive takeover targets to earn takeover premia. The identity of acquirers and targets and the profitability of acquisitions depend on the distribution of firm sizes within an industry, among other factors. We find empirical support for some unique predictions of our theory.

Oil Futures Prices in a Production Economy with Investment Constraints

Pages: 1345-1375  |  Published: 5/2009  |  DOI: 10.1111/j.1540-6261.2009.01466.x  |  Cited by: 78


We document a new stylized fact, that the relationship between the volatility of oil futures prices and the slope of the forward curve is nonmonotone and has a V‐shape. This pattern cannot be generated by standard models that emphasize storage. We develop an equilibrium model of oil production in which investment is irreversible and capacity constrained. Investment constraints affect firms' investment decisions and imply that the supply elasticity changes over time. Since demand shocks must be absorbed by changes in prices or changes in supply, time‐varying supply elasticity results in time‐varying volatility of futures prices. Estimating this model, we show it is quantitatively consistent with the V‐shape relationship between the volatility of futures prices and the slope of the forward curve.

The Price of Correlation Risk: Evidence from Equity Options

Pages: 1377-1406  |  Published: 5/2009  |  DOI: 10.1111/j.1540-6261.2009.01467.x  |  Cited by: 291


We study whether exposure to marketwide correlation shocks affects expected option returns, using data on S&P100 index options, options on all components, and stock returns. We find evidence of priced correlation risk based on prices of index and individual variance risk. A trading strategy exploiting priced correlation risk generates a high alpha and is attractive for CRRA investors without frictions. Correlation risk exposure explains the cross‐section of index and individual option returns well. The correlation risk premium cannot be exploited with realistic trading frictions, providing a limits‐to‐arbitrage interpretation of our finding of a high price of correlation risk.

IPO Underpricing over the Very Long Run

Pages: 1407-1443  |  Published: 5/2009  |  DOI: 10.1111/j.1540-6261.2009.01468.x  |  Cited by: 158


A central measure of the efficiency of the Initial Public Offering (IPO) market is the extent to which issues are underpriced. We present new and comprehensive evidence covering British IPOs since World War I. During the period from 1917 to 1945, public offers were underpriced by an average of only 3.80%, as compared to 9.15% in the period from 1946 to 1986, and even more after the U.K. stock market was deregulated in 1986. The post‐WWII rise in underpricing cannot be attributed to changes in firm composition, and occurred in spite of improvements in regulation, disclosure, and the prestige of IPO underwriters.

Trading Costs and Returns for U.S. Equities: Estimating Effective Costs from Daily Data

Pages: 1445-1477  |  Published: 5/2009  |  DOI: 10.1111/j.1540-6261.2009.01469.x  |  Cited by: 743


The effective cost of trading is usually estimated from transaction‐level data. This study proposes a Gibbs estimate that is based on daily closing prices. In a validation sample, the daily Gibbs estimate achieves a correlation of 0.965 with the transaction‐level estimate. When the Gibbs estimates are incorporated into asset pricing specifications over a long historical sample (1926 to 2006), the results suggest that effective cost (as a characteristic) is positively related to stock returns. The relation is strongest in January, but it appears to be distinct from size effects.

Rank‐Order Tournaments and Incentive Alignment: The Effect on Firm Performance

Pages: 1479-1512  |  Published: 5/2009  |  DOI: 10.1111/j.1540-6261.2009.01470.x  |  Cited by: 338


We investigate simultaneously the impact of promotion‐based tournament incentives for VPs and equity‐based (alignment) incentives for VPs and the chief executive officer (CEO) on firm performance. We find that tournament incentives, as measured by the pay differential between the CEO and VPs, relate positively to firm performance. The relation is more positive when the CEO nears retirement and less positive when the firm has a new CEO, and weakens further when the new CEO is an outsider. Our analysis is robust to corrections for endogeneity of all our incentive measures and to several alternative measures of tournament incentives and firm performance.


Pages: 1513-1514  |  Published: 5/2009  |  DOI: 10.1111/j.1540-6261.2009.01471.x  |  Cited by: 0

Back Matter

Pages: 1515-1519  |  Published: 5/2009  |  DOI: 10.1111/j.1540-6261.2009.01490.x  |  Cited by: 0