“Investor Rewards to Climate Responsibility: Stock-Price Responses to the Opposite Shocks of the 2016 and 2020 U.S. Elections” by Stefano Ramelli, Alexander F. Wagner, Richard Zeckhauser, and Alexandre Ziegler
Do staggered (or classified) boards harm shareholder value through entrenchment or help through stability? In a forthcoming RCFS paper, “Staggered Boards and the Value of Voting Rights,” Oğuzhan Karakaş and Mahdi Mohseni revisit this question by using a novel methodology and provide causal evidence on the entrenchment view of staggered boards. Existence of staggered boards, where only a fraction of board members is up for election in a year, has been argued to be an effective and prevalent antitakeover measure for public corporations. Analyzing the impact of staggered boards on the value of shareholder voting rights (i.e., the voting premium), this paper shows that firms with staggered boards have higher voting premiums. Authors estimate the voting premium as the price difference between the stock (i.e., voting share) and the nonvoting share that is synthesized using options, normalized by the stock price. The study reports, for example, firms destaggering their boards have a 65% decrease in their voting premium, while firms staggering their boards experience a 169% increase in their voting premium. Moreover, exploiting plausibly exogenous court rulings, the paper finds that weakening of the staggered firms leads to lower voting premiums, providing strong corroborating evidence on a causal effect. Authors argue that these findings are consistent with the entrenchment view of staggered boards, as the voting premium reflects private benefits of control and inefficiencies in managing firms. It is interesting and important to note, however, that the documented entrenchment effect varies across firms, more pronounced on mature firms and those in noncompetitive industries. Hence, one should be cautious about “one-size-fits-all” approach toward staggered boards.
Spotlight by Isil Erel
Photos courtesy of Oğuzhan Karakaş and Mahdi Mohseni
Differences in their objective functions lead to possible conflicts of interests between various stakeholders of firms; e.g., between shareholders and employees. These conflicts are more likely to manifest when firms face important investment or governance decisions, specifically, at times of mergers and acquisitions. How does the power of a firm’s labor force affect its exposure and gains in takeovers? In a forthcoming RCFS paper, “Hard Marriage with Heavy Burdens: Organized Labor as Takeover Deterrents,” Xuan Tian and Wenyu Wang study this question using a clever research design. They use the “locally” exogenous variation in labor power created by close-call union elections in a regression discontinuity design. Authors find causal adverse effects of increased labor power on target firms’ takeover exposure, with reductions in target offer premium and announcement returns and longer deal completion times. Authors also explore plausible underlying mechanisms and show that these results are stronger for more powerful and conflict-provoking unions, where the opinions of the target and the acquirer labor forces are more likely to be in conflict. Interestingly, though, the authors also find that the total value created in these takeovers of stronger, unionized labor force is not lower in terms of combined firm announcement returns, post-merger profitability, and long-term market valuation. It is because bidders of unionized targets are more experienced, tougher negotiators that face fewer union threats themselves. Overall, this paper provides new and important insights into the real effects of employee power in the market for corporate control.
Spotlight by Isil Erel
Photos courtesy of Xuan Tian and Wenyu Wang
First published February 4, 2021
“How do Capital Requirements Affect Loan Rates? Evidence from High Volatility Commercial Real Estate” by David P. Glancy and Robert J. Kurtzman
“Golden Handcuffs and Corporate Innovation: Evidence from Defined Benefit Pension Plans” by Huu Nhan Duong, Bin Qiu, and S. Ghon Rhee
“Effect of the Equity Capital Ratio on the Relationship between Competition and Bank Risk-taking Behavior” by Kuncheng Zheng and Jia Hao
It is not just managers that can have a short-term orientation—the forthcoming theoretical paper “Competition for Flow and Short-Termism in Activism,” by Mike Burkart and Amil Dasgupta, shows that activist funds too can focus on the short term. In the model, activists add value by preventing wastage by the manager. To signal their type to their own investors, they take a short-term action such as boosting leverage to make a high payout. However, in the long term, a debt overhang problem can arise, resulting in a positive NPV project being forgone in some states. A similar dilemma comes up with other actions that boost the firm in the short term at the expense of long-term performance, such as reducing R&D expenditure. Actions by activist funds therefore exacerbate the exposure of the firm to the business cycle, with interventions in good times leading to investor payouts, and subsequent economic downturns placing the firm under greater stress. This pattern has been observed recently with some private equity financed firms, and the model applies well to hedge funds as well. The paper highlights that while activist funds have a valuable role to play in corporate governance, they may introduce their own frictions into the process, by acting as short-term investors.
Spotlight by Uday Rajan
Photos courtesy of Mike Burkart and Amil Dasgupta
First published December 11, 2020
We are deeply saddened by the passing of our colleague and friend, Craig Holden. Craig was the Gregg T. and Judith A. Summerville Chair of Finance at the Kelley School of Business at Indiana University and the current Department Chair. He was a prolific scholar and advisor to many students. In his role as SFS Secretary/Treasurer, which he began in 2012, Craig was a tremendous contributor to the SFS and its journals. He was a champion of international research collaboration, online publication, and was instrumental in improvements that changed how we interact with papers online. Most recently, when the 2020 Cavalcade was going to be canceled due to COVID-19, Craig volunteered to host the entire event virtually with the Kelley School. With only a few weeks of lead time, he managed to design an online conference format that was a great success and serves as a model for many other conferences. Craig was a wonderful colleague who cared greatly for his coworkers, his students, and for the profession. He spoke fondly of his family, of the Kelley School of Business, and of UCLA, where he earned his PhD. The SFS is better for his involvement these past nine years, and we will miss him greatly.
RCFS has a submission option for papers that were previously reviewed by other journals. The goal of such review process is to help the editors arrive at a quick and informed decision on a paper based on feedback received by the authors from previous submissions. A paper is eligible for this optional review process if it was previously submitted to a few select journals; please see Prior Review Policy for details. If you choose this option, you will be asked to upload the reviews from previous submissions of your paper to other journals. All material and correspondence sent to RCFS will be treated as private and confidential.