An Empirical Test of the Impact of Managerial Self‐Interest on Corporate Capital Structure
Published: 06/01/1988 | DOI: 10.1111/j.1540-6261.1988.tb03938.x
IRWIN FRIEND, LARRY H. P. LANG
This paper provides a test of whether capital structure decisions are at least in part motivated by managerial self‐interest. It is shown that the debt ratio is negatively related to management's shareholding, reflecting the greater nondiversifiable risk of debt to management than to public investors for maintaining a low debt ratio. Unless there is a nonmanagerial principal stockholder, no substantial increase of debt can be realized, which may suggest that the existence of large nonmanagerial stockholders might make the interests of managers and public investors coincide.
Insider Trading around Dividend Announcements: Theory and Evidence
Published: 09/01/1991 | DOI: 10.1111/j.1540-6261.1991.tb04621.x
KOSE JOHN, LARRY H. P. LANG
The informational role of strategic insider trading around corporate dividend announcements is studied based on the efficient equilibrium in a signalling model with endogenous insider trading. Insider trading immediately prior to the announcement of dividend initiations has significant explanatory power. For firms with insider selling prior to the dividend initiation announcement, the excess returns are negative and significantly lower than for the remaining firms (with no insider trading or just insider buying) as implied by our model. Another implication is that dividend increases may elicit a positive or negative stock price response depending on the firm's investment opportunities.
The Voluntary Restructuring of Large Firms In Response to Performance Decline
Published: 07/01/1992 | DOI: 10.1111/j.1540-6261.1992.tb03999.x
KOSE JOHN, LARRY H. P. LANG, JEFFRY NETTER
Much of the research on corporate restructuring has examined the causes and aftermath of extreme changes in corporate governance such as takeovers and bankruptcy. In contrast, we study restructurings initiated in response to product market pressures by “normal” corporate governance mechanisms. Such “voluntary” restructurings, motivated by the discipline of the product market and internal corporate controls, will play a relatively more important role in the 1990s due to a weakening in the discipline of the takeover market. Our data suggest that the firms retrenched quickly and, on average, increased their focus. There is no evidence of abnormally high levels of forced turnover in top managers. There is, however, a significant and rapid cut of 5% in the labor force. Further, the cost of goods sold to sales and labor costs to sales ratios both decline rapidly, more than 5% in the first two years after the negative earnings. The firms cut research and development, increased investment, and also reduced their debt/asset level by over 8% in the first year after the negative earnings. We also document the reasons management and analysis reported for the negative earnings. Overwhelmingly the firms blame bad economic conditions and, to a lesser extent, foreign competition.
Does Money Explain Asset Returns? Theory and Empirical Analysis
Published: 03/01/1996 | DOI: 10.1111/j.1540-6261.1996.tb05212.x
K. C. CHAN, SILVERIO FORESI, LARRY H. P. LANG
A cash‐in‐advance model of a monetary economy is used to derive a money‐based CAPM (M‐CAPM), which allows us to implement tests of asset pricing restrictions without consumption data. A test as in Fama and MacBeth of the model suggests that the money betas have some explanatory power for the cross‐sectional variation of expected returns; however, the model is rejected using conditional information. Consistent with our predictions, estimates of the curvature parameter are lower than those of the consumption CAPM (C‐CAPM) and pricing errors of the M‐CAPM tend to be smaller than those of the C‐CAPM.
Disentangling the Incentive and Entrenchment Effects of Large Shareholdings
Published: 12/17/2002 | DOI: 10.1111/1540-6261.00511
Stijn Claessens, Simeon Djankov, Joseph P. H. Fan, Larry H. P. Lang
This article disentangles the incentive and entrenchment effects of large ownership. Using data for 1,301 publicly traded corporations in eight East Asian economies, we find that firm value increases with the cash‐flow ownership of the largest shareholder, consistent with a positive incentive effect. But firm value falls when the control rights of the largest shareholder exceed its cash‐flow ownership, consistent with an entrenchment effect. Given that concentrated corporate ownership is predominant in most countries, these findings have relevance for corporate governance across the world.