Review of Corporate Finance Studies

In the Spring 2021 issue of SEE FAR, RCFS Executive Editor Andrew Ellul has written “Financing Innovation: Evidence from the Medical Field” based on a session that RCFS co-organized at the 17th Annual Conference on Corporate Finance and Financial Intermediation with the Olin Business School at Washington University.

The dual submission decisions for the SFS Cavalcade North America 2021 have been sent. If you submitted your paper as a dual submission and did not receive your decision email, please contact us.

Robert Marquez

We are pleased to announce that Robert Marquez is joining RCFS as an editor. Robert is a professor of finance at University of California, Davis. He is an expert in banking and corporate finance and is currently an associate editor at Management Science. His first day will be July 1, 2021.

“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

Mahdi Mohseni

Oğuzhan Karakaş

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

Xuan Tian

Wenyu Wang 

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