Extreme Governance.
What are takeover defenses? (Charter amendments, Golden parachute, Poison pills, Pac man defense)
Things that make takeovers very difficult and expensive.
§ Charter amendments: in firm’s charter, impose conditions on control transfer (“shark repellent”). For example, Supermajority amendments – require over 2/3 vote to approve merger.
§ Golden parachute: an extremely lucrative severance package that is guaranteed to a firm’s senior management in the event that the firm is taken over and the managers are let go.
§ Poison pills: securities with embedded rights to buy shares in either the target or an acquirer at a deeply discounted price – Creates massive dilution for a potential corporate raider thereby making an acquisition prohibitively expensive.
§ Pac man defense: target firm counteroffers for bidder firm – Effective if target much larger than bidder.
Extreme Governance. How do dual-class shares protect from hostile takeovers?
§ Superior class of shares is usually owned by company insiders (e.g. managers). It provides insiders with a majority of votes despite much lower cash flow rights in their possession. § Thus, insiders of dual-class firms have effective control over all corporate decisions. It makes them virtually immune to hostile takeovers.
Extreme Governance. Compared to single-class firms, dual-class firms are...
§ Bigger on median terms ($295m versus $100m).
§ More levered, possible due to their reluctance to engage in equity offerings
not to lose ownership or it is possible that debt is used as an alternative control mechanism (18% versus 6% debt-to-assets ratio).
§ Older, possibly due to less possibility of being acquired (12.9 years versus 9.6)
Extreme Governance. What predicts larger size of PBOC and thus dual-class status?
- Name. If the company is named after a founder.
- Media. Control of a media company (e.g. newspaper, TV network) provides opportunities for self-advertising, manipulating the public opinion, etc.
- Activity of the founder. If the firm is young and the founder is still active, PBOC and also dual-class structure is more likely.
- Firms in the area & Sales of the area (“the only
game in town” - high PBOC).
Extreme Governance.
What are the findings?
§ Firm value is positively associated with insiders’ cash-flow rights.
§ Firm value is negatively associated with insiders voting rights.
§ Firm value is negatively associated with the wedge between the two (insider voting rights – insider cash flow rights).
The bonding hypothesis of takeover defenses.
What is the path of how takeover defenses create value?
Defenses commit firm to a prearranged business strategy whose reversal is complicated and costly. This ensures company’s business partners that the company will not act opportunistically and appropriate them, encouraging partners to make relation-specific
investments. This allows the company to gain favorable contract terms with its partners, which increases firm value.
The bonding hypothesis of takeover defenses.
What was the “hold-up problem” between IBM and Pemstar?
Pemstar could have exploited IBM’s reliance and demanded higher payments, payable by IBM in the short term, but hindering the relationship in the long run.
Pemstar defended from 5 takeover attempts after its IPO to ensure mutually beneficial relationship with IBM. In turn, this motivated IBM to invest to the relationship further.
This is how takeover relationships can be valuable – they can be used to defend a mutually beneficial relationship.
The bonding hypothesis of takeover defenses.
What is an IPO puzzle?
- Why do so many firms adopt takeover defenses when they go public?
- If takeover defenses lower share values as is widely presumed, it would be irrational for pre-IPO shareholders to implement them and suffer the resulting loss when shares are sold to outside investors.
The bonding hypothesis of takeover defenses.
What are quasi-rents ?
- The main idea of the bonding hypothesis is that takeover defenses support a firm’s commitment not to act opportunistically to appropriate(take) its counterparties’ quasi-rents.
- Quasi-rents arise when a counterparty makes a relationship-specific investment that would lose value if the firm changes its operating strategy.
The bonding hypothesis of takeover defenses.
More takeover defenses are used in the presence of the following counterparties (3)…
- Large customer. Quasi-rents are more likely to arise when the IPO firm has a dominant relation with a single customer who invests to the specialized distribution lines with its supplier.
- Dependent supplier. Pemstar invested to locating its specific plants close to IBM’s production facilities. Thus, IBM had a leverage in negotiating lower price for Pemstar’s production, which created quasi-rents appropriable by IBM.
- Strategic alliance. Alliances between companies tend to be accompanied by costly irreversible investments to fixed assets that give rise to potentially appropriable quasi-rents (e.g. RenaultNissan Alliance).
The bonding hypothesis of takeover defenses.
The number of takeover defenses is positively related to 4 additional measures of the business relationship’s value…
- Social links. Social links between the IPO firm’s CEO and the large customer’s CEO.
- Pre-IPO relationship length. Relationships of longer duration tend to involve larger relation-specific investments and thus more quasi-rents at stake.
- Long-term contracts. Expected relationship length in the post-IPO period.
- Percent of customer’s COGS. What part of large customer’s COGS does the IPO firm sales comprise. Indicates how important the IPO firm is to its customer and thus how prevalent specific investments are in the relationship.
The bonding hypothesis of takeover defenses.
What are the “Spillover” effects?
More defenses associate with larger positive returns of its large customer. Large partners of the IPO firm experience negative returns when the IPO firms are acquired.
On the Foundations of Corporate Social Responsibility.
How CSR differ in civil and common law countries?
- CSR adoption in common law countries is typically a voluntary decision, while CSR adoption in civil law countries is determined by rules.
- In the civil law countries, firms investing to CSR as mandated by law: no risk of potential litigations from stakeholders.
- The higher presence of supermajority votes in the civil law countries means that firms are insulated from myopic pressures from shareholders and can more easily engage in long-term-orientated CSR projects.
-> empirically, on average firms under a
civil law system have a higher CSR score than those under the common law.
On the Foundations of Corporate Social Responsibility.
What is the “marginal” effect theory?
Civil law firms outperform because they are more responsive to the shocks changing the demand for
CSR actions.
Two channels of firm responsiveness:
- Consumer channel – shocks trigger changes in consumer demand affecting the market value which forces firms to adjust their CSR - actually, does not differ!
- !Legal channel! – firms in more stakeholder-orientated legal environments tend to be more responsive to shocks.
Do Investors Value Sustainability?
Describe what measures investors used and mostly focused most accessing sustainability?
• Investors mostly look at globe ratings rather than pure measure of percentile or sustainability score, i.e
investors often focus on discrete rather than continuous measures
• Focus on extreme outcomes. One globe and five globe rating funds see the largest impact.
Do Investors Value Sustainability?
How institutional constraints affect (or do NOT) investors choice on sustainability?
Institutional investors are often obliged to hold high sustainability stocks or constrained not to hold low sustainability stocks.
!Actually, NO difference between institutional and
noninstitutional investors:
-> Institutional share classes face constraints that force them to behave like other investors
-> Their preferences are similar to those of other investors
Do Investors Value Sustainability?
How rational performance expectations affect investors choice on sustainability?
- Investors might rationally believe that sustainability is a positive predictor of future fund performance.
- The paper finds evidence more consistent with an inverse relation or no relation between globe ratings and returns rather than the positive relation.
Do Investors Value Sustainability?
How Irrational Expectations and Nonpecuniary
Motives affect investors choice on sustainability?
The authors run an experiment using high-level professionals and find that despite no significant differences in fund performance, risk, etc. high-globe
ratings are associated with better future performance.
ESG conscious participants when making their decision to invest more money in five-globe funds and less money in one-globe funds - Nonpecuniary Motives.
Corporate Political Contributions and Stock Returns.
What does previous research say on the
relationship between business and politics?
- Connectedness with politics appears to be important for company’s value.
- Companies experience positive value changes following the news that their shareholders are elected.
- Having an insider in the important governmental position, increases the likelihood of such companies being bailed out.
- Stock price responses of connected firms to different
political news are greater in more corrupt countries.
Corporate Political Contributions and Stock Returns.
What is “soft money”?
“soft money” (e.g. non-monetary contributions, favors and off-thebooks benefits) may have a significant role in establishing a link with a
candidate. Hard to record.
Corporate Political Contributions and Stock Returns.
What is the best candidate (higher impact on company’s value)?
- Ability to help (hold office in the same state).
- Strength of the relationship. Longer uninterrupted relations with politicians make them more trustworthy. The relationship also grows stronger for candidates belonging to the party in control.
- Power of the candidate.
Corporate Political Contributions and Stock Returns.
The best firm for politics…
- typically very large companies with more sales and more employees.
- tend to have lower returns in 36 previous
months, higher book-to-market ratio and leverage, as well as lower cash flows and profitability. - operating in regulated industries and industries
involving government purchases.
Corporate Political Contributions and Stock Returns.
What are the results?
There is a strong and robust positive correlation between corporate political contributions and firm’s abnormal future returns.
Political contributions can be seen as strongly positive NPV investments. However, ambiguity surrounding the actual value of “soft money” as contributions might conceal true costs of companies engaging in politics.
