The Journal of Finance

The Bright Side of Internal Capital Markets

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00377

Naveen Khanna, Sheri Tice

We examine capital expenditure decisions of discount firms in response to WalMart's entry into their markets. Before WalMart's entry, focused incumbents and discount divisions of diversified incumbents are similar in size, geographic dispersion, and firm debt levels. However, discount divisions of diversified firms are significantly more productive. After WalMart's entry, diversified firms are quicker to either exit the discount business or stay and fight. Also, their capital expenditures are more sensitive to the productivity of their discount business. Internal capital markets function well, as transfers are away from the worsening discount divisions. It appears diversified firms make better investment decisions.

How Target Shareholders Benefit from Value‐Reducing Defensive Strategies in Takeovers

Published: 03/01/1990   |   DOI: 10.1111/j.1540-6261.1990.tb05084.x

ELAZAR BERKOVITCH, NAVEEN KHANNA

This paper shows that target shareholders can be made better off through the use of certain types of defensive strategies that reduce the value of the target by different amounts for different bidders. In many cases, simply the threat of such strategies can make target shareholders better off. Therefore, empirical tests based on stock price reactions at the adoption of defensive strategies may be underestimating the effect of such strategies. The paper also identifies the necessary characteristics that make these strategies effective and shows that many observed defenses possess similar properties.

Insider Trading in Financial Signaling Models

Published: 12/01/1992   |   DOI: 10.1111/j.1540-6261.1992.tb04688.x

MARK BAGNOLI, NAVEEN KHANNA

We study the impact of voluntary trade by the manager. We find that, in contrast to standard signaling models, an action is good news for some firms and bad news for others, depending on observable characteristics of the firm, its managers, and their compensation plans. Further, voluntary trade eliminates separating equilibria and thus the possibility of exactly inferring the manager's private information. This may cause the manager to take inefficient actions so as to earn trading profits. Such undesirable behavior can be more effectively constrained by compensation contracts based on phantom shares or nontradeable options instead of large stockholdings.

Managers of Financially Distressed Firms: Villains or Scapegoats?

Published: 07/01/1995   |   DOI: 10.1111/j.1540-6261.1995.tb04042.x

NAVEEN KHANNA, ANNETTE B. POULSEN

In this article, we provide evidence concerning the extent to which managers are to blame when their firms become bankrupt. We study a sample of firms that file for Chapter 11 and determine the actions taken by the firms' managers during the three‐year period before the filing. We compare the sample with a control sample of firms that performed better. We suggest that the comparison provides evidence on the way managers act as their firms sink into financial trouble and whether financial distress is the result of incompetence or excessively self‐serving managerial decisions or due to factors outside of management's control. We find that managers of the Chapter 11 firms and the control firms make very similar decisions and that, on average, neither set of managers is perceived to be taking value‐reducing actions. These results do not change when we control for managerial turnover or managerial ownership. We also find that when managers are replaced in firms that eventually file for Chapter 11 protection, the market does not respond positively, regardless of whether the new managers are from inside or outside the firm. Our findings suggest that when managers are blamed for financial distress, they are serving as scapegoats.