The Journal of Finance

The Market for Corporate Assets: Who Engages in Mergers and Asset Sales and Are There Efficiency Gains?

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00398

Vojislav Maksimovic, Gordon Phillips

We analyze the market for corporate assets. There is an active market for corporate assets, with close to seven percent of plants changing ownership annually through mergers, acquisitions, and asset sales in peak expansion years. The probability of asset sales and whole‐firm transactions is related to firm organization and ex ante efficiency of buyers and sellers. The timing of sales and the pattern of efficiency gains suggests that the transactions that occur, especially through asset sales of plants and divisions, tend to improve the allocation of resources and are consistent with a simple neoclassical model of profit maximizing by firms.

Asset Efficiency and Reallocation Decisions of Bankrupt Firms

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00063

VOJISLAV MAKSIMOVIC, GORDON PHILLIPS

This paper investigates whether Chapter 11 bankruptcy provides a mechanism by which insolvent firms are efficiently reorganized and the assets of unproductive firms are effectively redeployed. We argue that incentives to reorganize depend on the level of demand and industry conditions. Using plant‐level data, we find that Chapter 11 status is much less important than industry conditions in explaining the productivity, asset sales, and closure conditions of Chapter 11 bankrupt firms. This suggests that firms that elect to enter into Chapter 11 incur few real economic costs.

The Industry Life Cycle, Acquisitions and Investment: Does Firm Organization Matter?

Published: 04/01/2008   |   DOI: 10.1111/j.1540-6261.2008.01328.x

VOJISLAV MAKSIMOVIC, GORDON PHILLIPS

We examine the effect of industry life‐cycle stages on within‐industry acquisitions and capital expenditures by conglomerates and single‐segment firms controlling for endogeneity of organizational form. We find greater differences in acquisitions than in capital expenditures, which are similar across organizational types. In particular, 36% of the growth recorded by conglomerate segments in growth industries comes from acquisitions, versus 9% for single‐segment firms. In growth industries, the effect of financial dependence on acquisitions and plant openings is mitigated for conglomerate firms. Plants acquired by conglomerate firms increase in productivity. The results suggest that organizational forms' comparative advantages differ across industry conditions.

Real and Financial Industry Booms and Busts

Published: 01/13/2010   |   DOI: 10.1111/j.1540-6261.2009.01523.x

GERARD HOBERG, GORDON PHILLIPS

We examine how product market competition affects firm cash flows and stock returns in industry booms and busts. Our results show how real and financial factors interact in industry business cycles. In competitive industries, we find that high industry‐level stock market valuation, investment, and financing are followed by sharply lower operating cash flows and abnormal stock returns. Analyst estimates are positively biased and returns comove more. In concentrated industries these relations are weak and generally insignificant. Our results are consistent with participants in competitive industries not fully internalizing the negative externality of industry competition on cash flows and stock returns.

Do Conglomerate Firms Allocate Resources Inefficiently Across Industries? Theory and Evidence

Published: 12/17/2002   |   DOI: 10.1111/1540-6261.00440

Vojislav Maksimovic, Gordon Phillips

We develop a profit‐maximizing neoclassical model of optimal firm size and growth across different industries based on differences in industry fundamentals and firm productivity. In the model, a conglomerate discount is consistent with profit maximization. The model predicts how conglomerate firms will allocate resources across divisions over the business cycle and how their responses to industry shocks will differ from those of single‐segment firms. Using plant level data, we find that growth and investment of conglomerate and single‐segment firms is related to fundamental industry factors and individual segment level productivity. The majority of conglomerate firms exhibit growth across industry segments that is consistent with optimal behavior.

Product Market Threats, Payouts, and Financial Flexibility

Published: 04/01/2013   |   DOI: 10.1111/jofi.12050

GERARD HOBERG, GORDON PHILLIPS, NAGPURNANAND PRABHALA

We examine how product market threats influence firm payout policy and cash holdings. Using firms' product text descriptions, we develop new measures of competitive threats. Our primary measure, product market fluidity, captures changes in rival firms' products relative to the firm's products. We show that fluidity decreases firm propensity to make payouts via dividends or repurchases and increases the cash held by firms, especially for firms with less access to financial markets. These results are consistent with the hypothesis that firms' financial policies are significantly shaped by product market threats and dynamics.

Private and Public Merger Waves

Published: 04/12/2013   |   DOI: 10.1111/jofi.12055

VOJISLAV MAKSIMOVIC, GORDON PHILLIPS, LIU YANG

We document that public firms participate more than private firms as buyers and sellers of assets in merger waves and their participation is affected more by credit spreads and aggregate market valuation. Public firm acquisitions realize higher gains in productivity, particularly for on‐the‐wave acquisitions and when the acquirer's stock is liquid and highly valued. Our results are not driven solely by public firms' better access to capital. Using productivity data from early in the firm's life, we find that better private firms subsequently select to become public. Initial size and productivity predict asset purchases and sales 10 and more years later.

Corporate Equity Ownership, Strategic Alliances, and Product Market Relationships

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00307

Jeffrey W. Allen, Gordon M. Phillips

This paper examines long‐term block ownership by corporations and performance changes in firms with corporate block owners. We also examine potential reasons for corporate ownership including benefits in product market relationships, alleviation of financing constraints, and board monitoring by corporate owners. We find the largest significant increases in targets' stock prices, investment, and operating profitability when ownership is combined with alliances, joint ventures, and other product market relationships between purchasing and target firms, especially in industries with high research and development. Our findings are consistent with the conclusion that block ownership by corporations has significant benefits in product market relationships.

The Impact of Bank Credit on Labor Reallocation and Aggregate Industry Productivity

Published: 09/17/2018   |   DOI: 10.1111/jofi.12726

JOHN (JIANQIU) BAI, DANIEL CARVALHO, GORDON M. PHILLIPS

We provide evidence that the deregulation of U.S. state banking markets leads to a significant increase in the relative employment and capital growth of local firms with higher productivity, and that this effect is concentrated among young firms. Using financial data for a broad range of firms, our analysis suggests that this effect is driven by a shift in the composition of local bank credit supply toward more productive firms. We estimate that this effect translates into economically important gains in aggregate industry productivity and that changes in the allocation of labor play a central role in driving these gains.