The Journal of Finance

Why Hang on to Losers? Divestitures and Takeovers

Published: 09/01/1992   |   DOI: 10.1111/j.1540-6261.1992.tb04663.x

ARNOUD W. A. BOOT

We study the divestiture decisions of managers who care about their reputations. Managers' divestiture and investment decisions are publicly observable, but managers privately observe signals with respect to the future payoff distribution of investments they have initiated. We establish that in equilibrium there is too little divestiture. These inefficiencies create the opportunity for wealth‐enhancing divestiture‐motivated takeovers. A key result is that only managers of targets with “middle of the road” asset specificity should consider the takeover threat credible. These findings suggest that uniqueness of assets is an important determinant of both agency costs and takeover activity. Our analysis leads to several empirical predictions.

Security Design

Published: 09/01/1993   |   DOI: 10.1111/j.1540-6261.1993.tb04757.x

ARNOUD W. A. BOOT, ANJAN V. THAKOR

We explain why an issuer may wish to raise external capital by selling multiple financial claims that partition its total asset cash flows, rather than a single claim. We show that, in an asymmetric information environment, the issuer's expected revenue is enhanced by such cash flow partitioning because it makes informed trade more profitable. This approach seems capable of shedding light on corporate incentives to issue debt and equity, as well as on financial intermediaries' incentives to issue multiple classes of claims against portfolios of securitized assets.

Can Relationship Banking Survive Competition?

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00223

Arnoud W. A. Boot, Anjan V. Thakor

How will banks evolve as competition increases from other banks and from the capital market? Will banks become more like capital market underwriters and offer passive transaction loans or return to their roots as relationship lending experts? These are the questions we address. Our key result is that as interbank competition increases, banks make more relationship loans, but each has lower added value for borrowers. Capital market competition reduces relationship lending (and bank lending shrinks), but each relationship loan has greater added value for borrowers. In both cases, welfare increases for some borrowers but not necessarily for all.

Market Liquidity, Investor Participation, and Managerial Autonomy: Why Do Firms Go Private?

Published: 07/19/2008   |   DOI: 10.1111/j.1540-6261.2008.01380.x

ARNOUD W. A. BOOT, RADHAKRISHNAN GOPALAN, ANJAN V. THAKOR

We focus on public‐market investor participation to analyze the firm's decision to stay public or go private. The liquidity of public ownership is both a blessing and a curse: It lowers the cost of capital, but also introduces volatility in a firm's shareholder base, exposing management to uncertainty regarding shareholder intervention in management decisions, thereby affecting the manager's perceived decision‐making autonomy and curtailing managerial inputs. We extract predictions about how investor participation affects stock price level and volatility and the public firm's incentives to go private, providing a link between investor participation and firm participation in public markets.

The Entrepreneur's Choice between Private and Public Ownership

Published: 03/09/2006   |   DOI: 10.1111/j.1540-6261.2006.00855.x

ARNOUD W. A. BOOT, RADHAKRISHNAN GOPALAN, ANJAN V. THAKOR

We analyze an entrepreneur/manager's choice between private and public ownership. The manager needs decision‐making autonomy to optimally manage the firm and thus trades off an endogenized control preference against the higher cost of capital accompanying greater managerial autonomy. Investors need liquid ownership stakes. Public capital markets provide liquidity, but stipulate corporate governance that imposes generic exogenous controls, so the manager may not attain the desired trade‐off between autonomy and the cost of capital. In contrast, private ownership provides the desired trade‐off through precisely calibrated contracting, but creates illiquid ownership. Exploring this tension generates new predictions.