The Journal of Finance

Liquidation Values and Debt Capacity: A Market Equilibrium Approach

Published: 09/01/1992   |   DOI: 10.1111/j.1540-6261.1992.tb04661.x

ANDREI SHLEIFER, ROBERT W. VISHNY

We explore the determinants of liquidation values of assets, particularly focusing on the potential buyers of assets. When a firm in financial distress needs to sell assets, its industry peers are likely to be experiencing problems themselves, leading to asset sales at prices below value in best use. Such illiquidity makes assets cheap in bad times, and so ex ante is a significant private cost of leverage. We use this focus on asset buyers to explain variation in debt capacity across industries and over the business cycle, as well as the rise in U.S. corporate leverage in the 1980s.

The Limits of Arbitrage

Published: 04/18/2012   |   DOI: 10.1111/j.1540-6261.1997.tb03807.x

Andrei Shleifer, Robert W. Vishny

Textbook arbitrage in financial markets requires no capital and entails no risk. In reality, almost all arbitrage requires capital, and is typically risky. Moreover, professional arbitrage is conducted by a relatively small number of highly specialized investors using other people's capital. Such professional arbitrage has a number of interesting implications for security pricing, including the possibility that arbitrage becomes ineffective in extreme circumstances, when prices diverge far from fundamental values. The model also suggests where anomalies in financial markets are likely to appear, and why arbitrage fails to eliminate them.

A Survey of Corporate Governance

Published: 04/18/2012   |   DOI: 10.1111/j.1540-6261.1997.tb04820.x

Andrei Shleifer, Robert W. Vishny

This article surveys research on corporate governance, with special attention to the importance of legal protection of investors and of ownership concentration in corporate governance systems around the world.

A Model of Shadow Banking

Published: 01/30/2013   |   DOI: 10.1111/jofi.12031

NICOLA GENNAIOLI, ANDREI SHLEIFER, ROBERT W. VISHNY

We present a model of shadow banking in which banks originate and trade loans, assemble them into diversified portfolios, and finance these portfolios externally with riskless debt. In this model: outside investor wealth drives the demand for riskless debt and indirectly for securitization, bank assets and leverage move together, banks become interconnected through markets, and banks increase their exposure to systematic risk as they reduce idiosyncratic risk through diversification. The shadow banking system is stable and welfare improving under rational expectations, but vulnerable to crises and liquidity dry‐ups when investors neglect tail risks.

Do Managerial Objectives Drive Bad Acquisitions?

Published: 03/01/1990   |   DOI: 10.1111/j.1540-6261.1990.tb05079.x

RANDALL MORCK, ANDREI SHLEIFER, ROBERT W. VISHNY

In a sample of 326 US acquisitions between 1975 and 1987, three types of acquisitions have systematically lower and predominantly negative announcement period returns to bidding firms. The returns to bidding shareholders are lower when their firm diversifies, when it buys a rapidly growing target, and when its managers performed poorly before the acquisition. These results suggest that managerial objectives may drive acquisitions that reduce bidding firms' values.

Contrarian Investment, Extrapolation, and Risk

Published: 12/01/1994   |   DOI: 10.1111/j.1540-6261.1994.tb04772.x

JOSEF LAKONISHOK, ANDREI SHLEIFER, ROBERT W. VISHNY

For many years, scholars and investment professionals have argued that value strategies outperform the market. These value strategies call for buying stocks that have low prices relative to earnings, dividends, book assets, or other measures of fundamental value. While there is some agreement that value strategies produce higher returns, the interpretation of why they do so is more controversial. This article provides evidence that value strategies yield higher returns because these strategies exploit the suboptimal behavior of the typical investor and not because these strategies are fundamentally riskier.

Legal Determinants of External Finance

Published: 04/18/2012   |   DOI: 10.1111/j.1540-6261.1997.tb02727.x

RAFAEL PORTA, FLORENCIO LOPEZ‐DE‐SILANES, ANDREI SHLEIFER, ROBERT W. VISHNY

Using a sample of 49 countries, we show that countries with poorer investor protections, measured by both the character of legal rules and the quality of law enforcement, have smaller and narrower capital markets. These findings apply to both equity and debt markets. In particular, French civil law countries have both the weakest investor protections and the least developed capital markets, especially as compared to common law countries.

Agency Problems and Dividend Policies around the World

Published: 03/31/2007   |   DOI: 10.1111/0022-1082.00199

Rafael La Porta, Florencio Lopez‐de‐Silanes, Andrei Shleifer, Robert W. Vishny

This paper outlines and tests two agency models of dividends. According to the “outcome model,” dividends are paid because minority shareholders pressure corporate insiders to disgorge cash. According to the “substitute model,” insiders interested in issuing equity in the future pay dividends to establish a reputation for decent treatment of minority shareholders. The first model predicts that stronger minority shareholder rights should be associated with higher dividend payouts; the second model predicts the opposite. Tests on a cross section of 4,000 companies from 33 countries with different levels of minority shareholder rights support the outcome agency model of dividends.