We use industry commodity flows information to measure vertical relations in completed mergers from 1962 to 1996. Almost one‐third of the mergers display vertical relatedness. Vertical merger ...activity is more intensive in the 1980s and 1990s and less so in the 1960s and the 1970s. Vertical mergers generate positive wealth effects that are significantly larger than those for diversifying mergers; the wealth effects in vertical mergers are comparable to those in pure horizontal mergers.
The U.S. defense industry provides a natural experiment for examining how changes in growth opportunities affect the level and structure of corporate debt. The growth opportunities of defense firms, ...compared with other firms, increased substantially during the Reagan defense buildup of the early 1980s but then declined significantly with the end of the cold war and associated defense budget cuts in the late 1980s and early 1990s. We examine how the level and structure of corporate debt changed for a sample of 61 defense firms and a benchmark sample of 61 manufacturing firms during 1980–95, a period spanning the changes in growth opportunities. The debt levels of weapons manufacturers, which were most affected by the changes in growth opportunities, increased significantly as their growth opportunities declined. In addition, these firms lengthened the maturity structure of their debt, decreased the ratio of private to public debt, and decreased the use of senior debt as their growth opportunities declined. The results complement other studies that have found cross-sectional relations between proxies for growth opportunities and leverage variables and validate the prominent role played by growth opportunities in the theory of corporate finance.
ABSTRACT
How does capital market access affect the capital structure decisions of firms? To examine this question, we compare the financing decisions of a large sample of private and public companies ...from 18 different European countries. We find significant differences in the leverage policies of private and public firms. Private firms have much higher leverage ratios than public firms. In particular, the leverage of private firms is more negatively related to past profitability, consistent with their less active adjustment. Other evidence corroborates sluggish adjustment and suggests that private firms face significantly higher cost of accessing external capital markets. When we compare private and public firms in countries that differ on creditor rights and contract enforceability, we find more pronounced differences in the leverage policies of private and public firms in countries that are strong on legal rights and their enforcement. In countries with weak rights and poor enforcement, the financing policies of public firms begin to resemble those of private firms.
The empirical implications of the trade-off theory, the market timing theory, and Welch's theory Journal of Political Economy (in press) of capital structure are examined using aggregate US data for ...1952 to 2000. There is a long-run leverage ratio to which the system reverts. Deviations from that ratio help to predict debt adjustments, but not equity adjustments. A high market-to-book ratio is associated with subsequent debt reduction, but there is no effect in the equity market.
We examine corporate investment spending around the asset price bubble in Japan in the late 1980s and make three contributions to our understanding of how stock valuations affect investment. First, ...investment responds significantly to nonfundamental components of stock valuations during asset price shocks; fundamentals matter less. Clearly, the stock market is not a sideshow. Second, the time series variation in the investment cash flow sensitivity is affected more by changes in monetary policy than by shifts in collateral values. Third, asset price shocks primarily affect firms that rely more on bank financing and not necessarily those that use equity financing.
Extant literature suggests that bank lending results in greater information production and control over corporate borrowers. We show that bank lending creates positive externalities in that it ...improves the contracting environment for other public debt providers. Focusing on the maturity structure of Japanese corporate debt issues, we provide evidence that a higher proportion of bank debt results in public debt of longer maturity. More importantly, the sensitivity of the debt maturity to bank debt ratio is significantly higher for independent firms compared with that of keiretsu-affiliated firms. The evidence is consistent with keiretsu firms having less agency costs of debt compared with independent firms.
This paper examines a recent financial innovation in corporate bond contracts, referred to as the clawback provision. A
clawback provision in debt contracts gives the issuer an option to redeem a ...specified fraction of the bond issue within a specified period at a predetermined price and with funds that must come from a subsequent equity offering. We argue that issuers use clawback provisions to mitigate the wealth losses that would otherwise occur when new equity is offered. Consistent with the hypotheses, the evidence shows that bond offerings are more likely to include a clawback provision if their issuers are private, have more intangible assets, have fewer liquid assets, and are unregulated. We also estimate the price of clawback provisions and find that yield spreads on bonds with clawback provisions are a median of 86 basis points higher relative to what they otherwise would be.
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