The Journal of Finance

Corporate Cash Reserves and Acquisitions

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00179

Jarrad Harford

Cash‐rich firms are more likely than other firms to attempt acquisitions. Stock return evidence shows that acquisitions by cash‐rich firms are value decreasing. Cash‐rich bidders destroy seven cents in value for every excess dollar of cash reserves held. Cash‐rich firms are more likely to make diversifying acquisitions and their targets are less likely to attract other bidders. Consistent with the stock return evidence, mergers in which the bidder is cash‐rich are followed by abnormal declines in operating performance. Overall, the evidence supports the agency costs of free cash flow explanation for acquisitions by cash‐rich firms.

Decoupling CEO Wealth and Firm Performance: The Case of Acquiring CEOs

Published: 03/20/2007   |   DOI: 10.1111/j.1540-6261.2007.01227.x

JARRAD HARFORD, KAI LI

We explore how compensation policies following mergers affect a CEO's incentives to pursue a merger. We find that even in mergers where bidding shareholders are worse off, bidding CEOs are better off three quarters of the time. Following a merger, a CEO's pay and overall wealth become insensitive to negative stock performance, but a CEO's wealth rises in step with positive stock performance. Corporate governance matters; bidding firms with stronger boards retain the sensitivity of their CEOs' compensation to poor performance following the merger. In comparison, we find that CEOs are not rewarded for undertaking major capital expenditures.

The Importance of Industry Links in Merger Waves

Published: 11/19/2013   |   DOI: 10.1111/jofi.12122

KENNETH R. AHERN, JARRAD HARFORD

We represent the economy as a network of industries connected through customer and supplier trade flows. Using this network topology, we find that stronger product market connections lead to a greater incidence of cross‐industry mergers. Furthermore, mergers propagate in waves across the network through customer‐supplier links. Merger activity transmits to close industries quickly and to distant industries with a delay. Finally, economy‐wide merger waves are driven by merger activity in industries that are centrally located in the product market network. Overall, we show that the network of real economic transactions helps to explain the formation and propagation of merger waves.

Refinancing Risk and Cash Holdings

Published: 12/12/2013   |   DOI: 10.1111/jofi.12133

JARRAD HARFORD, SANDY KLASA, WILLIAM F. MAXWELL

We find that firms mitigate refinancing risk by increasing their cash holdings and saving cash from cash flows. The maturity of firms’ long‐term debt has shortened markedly, and this shortening explains a large fraction of the increase in cash holdings over time. Consistent with the inference that cash reserves are particularly valuable for firms with refinancing risk, we document that the value of these reserves is higher for such firms and that they mitigate underinvestment problems. Our findings imply that refinancing risk is a key determinant of cash holdings and highlight the interdependence of a firm's financial policy decisions.

Managerial Opportunism? Evidence from Directors' and Officers' Insurance Purchases

Published: 12/17/2002   |   DOI: 10.1111/1540-6261.00436

John M. R. Chalmers, Larry Y. Dann, Jarrad Harford

We analyze a sample of 72 IPO firms that went public between 1992 and 1996 for which we have detailed proprietary information about the amount and cost of D&O liability insurance. If managers of IPO firms are exploiting superior inside information, we hypothesize that the amount of insurance coverage chosen will be related to the post‐offering performance of the issuing firm's shares. Consistent with the hypothesis, we find a significant negative relation between the three‐year post‐IPO stock price performance and the insurance coverage purchased in conjunction with the IPO. One plausible interpretation is that, like insider securities transactions, D&O insurance decisions reveal opportunistic behavior by managers. This provides some motivation to argue that disclosure of the details of D&O insurance decisions, as is required in some other countries, is valuable.

Precautionary Savings with Risky Assets: When Cash Is Not Cash

Published: 12/19/2016   |   DOI: 10.1111/jofi.12490

RAN DUCHIN, THOMAS GILBERT, JARRAD HARFORD, CHRISTOPHER HRDLICKA

U.S. industrial firms invest heavily in noncash, risky financial assets such as corporate debt, equity, and mortgage‐backed securities. Risky assets represent 40% of firms’ financial portfolios, or 6% of total book assets. We present a formal model to assess the optimality of this behavior. Consistent with the model, risky assets are concentrated in financially unconstrained firms holding large financial portfolios, are held by poorly governed firms, and are discounted by 13% to 22% compared to safe assets. We conclude that this activity represents an unregulated asset management industry of more than $1.5 trillion, questioning the traditional boundaries of nonfinancial firms.