The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.
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The Choice of Payment Method in European Mergers and Acquisitions
Published: 05/03/2005 | DOI: 10.1111/j.1540-6261.2005.00764.x
MARA FACCIO, RONALD W. MASULIS
We study merger and acquisition (M&A) payment choices of European bidders for publicly and privately held targets in the 1997–2000 period. Europe is an ideal venue for studying the importance of corporate governance in making M&A payment choices, given the large number of closely held firms and the wide range of capital markets, institutional settings, laws, and regulations. The tradeoff between corporate governance concerns and debt financing constraints is found to have a large bearing on the bidder's payment choice. Consistent with earlier evidence, we find that several deal and target characteristics significantly affect the method of payment choice.
The Impact of Preferred‐for‐Common Exchange Offers on Firm Value
Published: 09/01/1986 | DOI: 10.1111/j.1540-6261.1986.tb04549.x
J. MICHAEL PINEGAR, RONALD C. LEASE
This paper examines the impact of capital structure changes which have no corporate tax consequences. Specifically, exchange offers involving preferred and common stock are analyzed. We find that systematic changes in firm value occur when companies announce preferred‐for‐common exchange offers. Consequently, we interpret our results to be consistent with a signalling hypothesis. We also find weaker evidence suggesting the existence of agency cost effects or wealth redistributions across security classes. Our findings imply that capital structure changes need not alter the tax status of the issuing firm to affect firm value.
Defensive Mechanisms and Managerial Discretion
Published: 04/18/2012 | DOI: 10.1111/j.1540-6261.1997.tb01117.x
RONALD GIAMMARINO, ROBERT HEINKEL, BURTON HOLLIFIELD
We study a model where firms may possess free cash flow and takeovers may be disruptive. We show that the possibility of a takeover, combined with defensive mechanisms and the ability to pay greenmail, can solve the free cash flow problem in an efficient way. The payment of greenmail reveals information that generates a stock price decline that exceeds the value of the greenmail payment, even though the payment of greenmail is value maximizing. Optimal defensive measures limit takeover attempts if the target stock price is too low. We also provide cross‐sectional implications of the analysis.
Founding‐Family Ownership and Firm Performance: Evidence from the S&P 500
Published: 05/06/2003 | DOI: 10.1111/1540-6261.00567
Ronald C. Anderson, David M. Reeb
We investigate the relation between founding‐family ownership and firm performance. We find that family ownership is both prevalent and substantial; families are present in one‐third of the S&P 500 and account for 18 percent of outstanding equity. Contrary to our conjecture, we find family firms perform better than nonfamily firms. Additional analysis reveals that the relation between family holdings and firm performance is nonlinear and that when family members serve as CEO, performance is better than with outside CEOs. Overall, our results are inconsistent with the hypothesis that minority shareholders are adversely affected by family ownership, suggesting that family ownership is an effective organizational structure.
Agency Problems at Dual‐Class Companies
Published: 07/16/2009 | DOI: 10.1111/j.1540-6261.2009.01477.x
RONALD W. MASULIS, CONG WANG, FEI XIE
Using a sample of U.S. dual‐class companies, we examine how divergence between insider voting and cash flow rights affects managerial extraction of private benefits of control. We find that as this divergence widens, corporate cash holdings are worth less to outside shareholders, CEOs receive higher compensation, managers make shareholder value‐destroying acquisitions more often, and capital expenditures contribute less to shareholder value. These findings support the agency hypothesis that managers with greater excess control rights over cash flow rights are more prone to pursue private benefits at shareholders’ expense, and help explain why firm value is decreasing in insider excess control rights.
Political Connections and Corporate Bailouts
Published: 01/11/2007 | DOI: 10.1111/j.1540-6261.2006.01000.x
MARA FACCIO, RONALD W. MASULIS, JOHN J. McCONNELL
We analyze the likelihood of government bailouts of 450 politically connected firms from 35 countries during 1997–2002. Politically connected firms are significantly more likely to be bailed out than similar nonconnected firms. Additionally, politically connected firms are disproportionately more likely to be bailed out when the International Monetary Fund or the World Bank provides financial assistance to the firm's home government. Further, among bailed‐out firms, those that are politically connected exhibit significantly worse financial performance than their nonconnected peers at the time of and following the bailout. This evidence suggests that, at least in some countries, political connections influence the allocation of capital through the mechanism of financial assistance when connected companies confront economic distress.
Family‐Controlled Firms and Informed Trading: Evidence from Short Sales
Published: 01/17/2012 | DOI: 10.1111/j.1540-6261.2011.01714.x
RONALD C. ANDERSON, DAVID M. REEB, WANLI ZHAO
We investigate the relation between organization structure and the information content of short sales, focusing on founder‐ and heir‐controlled firms. Our analysis indicates that family‐controlled firms experience substantially higher abnormal short sales prior to negative earnings shocks than nonfamily firms. Supplementary testing indicates that family control characteristics intensify informed short selling. Further analysis suggests that daily short‐sale interest in family firms contains useful information in forecasting stock returns; however, we find no discernable effect for nonfamily firms. This analysis provides compelling evidence that informed trading via short sales occurs more readily in family firms than in nonfamily firms.
Corporate Governance and Acquirer Returns
Published: 08/14/2007 | DOI: 10.1111/j.1540-6261.2007.01259.x
RONALD W. MASULIS, CONG WANG, FEI XIE
We examine whether corporate governance mechanisms, especially the market for corporate control, affect the profitability of firm acquisitions. We find that acquirers with more antitakeover provisions experience significantly lower announcement‐period abnormal stock returns. This supports the hypothesis that managers at firms protected by more antitakeover provisions are less subject to the disciplinary power of the market for corporate control and thus are more likely to indulge in empire‐building acquisitions that destroy shareholder value. We also find that acquirers operating in more competitive industries or separating the positions of CEO and chairman of the board experience higher abnormal announcement returns.
An Incentive Approach to Banking Regulation
Published: 09/01/1993 | DOI: 10.1111/j.1540-6261.1993.tb04766.x
RONALD M. GIAMMARINO, TRACY R. LEWIS, DAVID E. M. SAPPINGTON
We examine the optimal design of a risk‐adjusted deposit insurance scheme when the regulator has less information than the bank about the inherent risk of the bank's assets (adverse selection), and when the regulator is unable to monitor the extent to which bank resources are being directed away from normal operations toward activities that lower asset quality (moral hazard). Under a socially optimal insurance scheme: (1) asset quality is below the first‐best level, (2) higher‐quality banks have larger asset bases and face lower capital adequacy requirements than lower‐quality banks, and (3) the probability of failure is equated across banks.
A Re‐Examination of Shareholder Wealth Effects of Calls of Convertible Preferred Stock
Published: 12/01/1989 | DOI: 10.1111/j.1540-6261.1989.tb02661.x
ERIC L. MAIS, WILLIAM T. MOORE, RONALD C. ROGERS
Common stock price reactions to announcements of 67 calls of in‐the‐money convertible preferred stocks are examined, and a significant average abnormal return of −1.6 percent is documented. The finding is robust to the choice of estimation period and the assumed return‐generating process. Annual dividend obligations for the called preferred issues in the sample typically are greater than the dividends for the common shares into which they are converted, and announcement‐period abnormal returns are negatively correlated with changes in dividends. Moreover, calls that result in dilution of voting rights appear to have greater adverse valuation effects than calls that do not alter voting rights concentration.
Equilibrium in a Dynamic Limit Order Market
Published: 09/16/2005 | DOI: 10.1111/j.1540-6261.2005.00795.x
RONALD L. GOETTLER, CHRISTINE A. PARLOUR, UDAY RAJAN
We model a dynamic limit order market as a stochastic sequential game with rational traders. Since the model is analytically intractable, we provide an algorithm based on Pakes and McGuire (2001) to find a stationary Markov‐perfect equilibrium. We then generate artificial time series and perform comparative dynamics. Conditional on a transaction, the midpoint of the quoted prices is not a good proxy for the true value. Further, transaction costs paid by market order submitters are negative on average, and negatively correlated with the effective spread. Reducing the tick size is not Pareto improving but increases total investor surplus.
Predicting Stock Returns in an Efficient Market
Published: 09/01/1990 | DOI: 10.1111/j.1540-6261.1990.tb02429.x
RONALD J. BALVERS, THOMAS F. COSIMANO, BILL MCDONALD
An intertemporal general equilibrium model relates financial asset returns to movements in aggregate output. The model is a standard neoclassical growth model with serial correlation in aggregate output. Changes in aggregate output lead to attempts by agents to smooth consumption, which affects the required rate of return on financial assets. Since aggregate output is serially correlated and hence predictable, the theory suggests that stock returns can be predicted based on rational forecasts of output. The empirical results confirm that stock returns are a predictable function of aggregate output and also support the accompanying implications of the model.
Agency, Firm Growth, and Managerial Turnover
Published: 09/25/2017 | DOI: 10.1111/jofi.12583
RONALD W. ANDERSON, M. CECILIA BUSTAMANTE, STÉPHANE GUIBAUD, MIHAIL ZERVOS
We study managerial incentive provision under moral hazard when growth opportunities arrive stochastically and pursuing them requires a change in management. A trade‐off arises between the benefit of always having the “right” manager and the cost of incentive provision. The prospect of growth‐induced turnover limits the firm's ability to rely on deferred pay, resulting in more front‐loaded compensation. The optimal contract may insulate managers from the risk of growth‐induced dismissal after periods of good performance. The evidence for the United States broadly supports the model's predictions: Firms with better growth prospects experience higher CEO turnover and use more front‐loaded compensation.