We provide one of the first large sample comparisons of cash policies in public and private U.S. firms. We first show that despite higher financing frictions, private firms hold, on average, about ...half as much cash as public firms do. By examining the drivers of cash policies for each group, we are able to attribute the difference to the much higher agency costs in public firms. By combining evidence from across public and private firms as well as within public firms across different qualities of governance, we are able to reconcile existing mixed evidence on the effects of agency problems on cash policies. Specifically, agency problems affect not only the target level of cash, but also how managers react to cash in excess of the target.
Refinancing Risk and Cash Holdings HARFORD, JARRAD; KLASA, SANDY; MAXWELL, WILLIAM F.
The Journal of finance (New York),
June 2014, Letnik:
69, Številka:
3
Journal Article
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We find that firms mitigate refinancing risk by increasing their cash holdings and saving cash from cash flows. The maturity of firms' long-term debt has shortened markedly, and this shortening ...explains a large fraction of the increase in cash holdings over time. Consistent with the inference that cash reserves are particularly valuable for firms with refinancing risk, we document that the value of these reserves is higher for such firms and that they mitigate underinvestment problems. Our findings imply that refinancing risk is a key determinant of cash holdings and highlight the interdependence of a firm's financial policy decisions.
Building on two sources of exogenous shocks to analyst coverage (broker closures and mergers), we explore the causal effects of analyst coverage on mitigating managerial expropriation of outside ...shareholders. We find that as a firm experiences an exogenous decrease in analyst coverage, shareholders value internal cash holdings less, its CEO receives higher excess compensation, its management is more likely to make value-destroying acquisitions, and its managers are more likely to engage in earnings management activities. Importantly, we find that most of these effects are mainly driven by the firms with smaller initial analyst coverage and less product market competition. We further find that after exogenous brokerage exits, a CEO׳s total and excess compensation become less sensitive to firm performance in firms with low initial analyst coverage. These findings are consistent with the monitoring hypothesis, specifically that financial analysts play an important governance role in scrutinizing management behavior, and the market is pricing an increase in expected agency problems after the loss in analyst coverage.
We represent the economy as a network of industries connected through customer and supplier trade flows. Using this network topology, we find that stronger product market connections lead to a ...greater incidence of cross-industry mergers. Furthermore, mergers propagate in waves across the network through customer-supplier links. Merger activity transmits to close industries quickly and to distant industries with a delay. Finally, economy-wide merger waves are driven by merger activity in industries that are centrally located in the product market network. Overall, we show that the network of real economic transactions helps to explain the formation and propagation of merger waves.
We study the effect of investor horizons on a comprehensive set of corporate decisions. We argue that monitoring by long-term investors generates decision making that maximizes shareholder value. We ...find that long-term investors strengthen governance and restrain managerial misbehaviors such as earnings management and financial fraud. They discourage a range of investment and financing activities but encourage payouts. Innovation increases, in quantity and quality. Shareholders benefit through higher profitability that the stock market does not fully anticipate, and lower risk.
Analysts strategically allocate more effort to portfolio firms that are relatively more important to their careers. Thus, the other firms the analysts cover indirectly affect a firm’s information ...environment. Controlling for analyst and firm characteristics, we find that an analyst makes more accurate, frequent, and informative earnings forecasts and recommendations for firms ranked higher within her portfolio based on proxies for importance to institutions. A firm’s relative rank widely varies across analysts, but its information environment improves when a larger proportion of analysts consider it to be relatively important. Analysts experience more favorable career outcomes when strategically allocating their efforts.
Prior work has established that entrenched managers make value-decreasing acquisitions. In this study, we determine how they destroy that value. Overall, we find that value destruction by entrenched ...managers comes from a combination of factors. First, they disproportionately avoid private targets, which have been shown to be generally associated with value creation. Second, when they do buy private targets or public targets with blockholders, they tend not to use all-equity offers, which has the effect of avoiding the transfer of a valuable blockholder to the bidder. We further test whether entrenched managers simply overpay for good targets or choose targets with lower synergies. We find that while they overpay, they also choose low synergy targets in the first place, as shown by combined announcement returns and post-merger operating performance.
Operating leverage increases profitability and reduces optimal financial leverage. Thus, operating leverage generates a negative relation between profitability and financial leverage that is thought ...to be inconsistent with the trade-off theory but is commonly observed in the data. We demonstrate the effect of operating leverage on firms' profitability and financial leverage, as well as on the empirical relation between profitability and financial leverage, by using China's entry into the World Trade Organization in 2001 and its effect on the capital–labor ratio of U.S. firms.
When the fraction of a firm's cash held overseas is greater, its shareholders value that cash lower. This goes beyond a pure tax effect: the repatriation tax friction disrupts the firm's internal ...capital market, distorting its investment policy. Firms underinvest domestically and overinvest abroad. Our findings are more pronounced when firms are subject to higher repatriation tax rates, higher costs of borrowing, and more agency problems. Overall, our evidence suggests that a combination of taxes, financing frictions, and agency problems leads to a valuation discount for foreign cash and documents real effects of how foreign earnings are taxed.
Monitoring: Which institutions matter? Chen, Xia; Harford, Jarrad; Li, Kai
Journal of financial economics,
11/2007, Letnik:
86, Številka:
2
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Within a cost–benefit framework, we hypothesize that independent institutions with long-term investments will specialize in monitoring and influencing efforts rather than trading. Other institutions ...will not monitor. Using acquisition decisions to reveal monitoring, we show that only concentrated holdings by independent long-term institutions are related to post-merger performance. Further, the presence of these institutions makes withdrawal of bad bids more likely. These institutions make long-term portfolio adjustments rather than trading for short-term gain and only sell in advance of very bad outcomes. Examining total institutional holdings or even concentrated holdings by other types of institutions masks important variation in the subset of monitoring institutions.
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