Journal of Applied Corporate Finance最新文献

An appropriate subtitle for this article might well be “The Evolution Lives! Long Live the Evolution!” Previous articles in this journal have described innovations in financial security design and the forces that give rise to such innovations.1 In this article, we expand upon and update those articles by documenting changes over the past 30 years in the way US public corporations finance themselves both in public and private security markets.2

The past articles have focused mainly on innovations in the kinds of securities issued. But major changes have also occurred in the way securities are issued, and in the national markets where they are issued. Traditional registered offerings have been partly displaced by shelf registered offerings and Rule 144A private offerings. And once exclusively domestic US offerings are increasingly being supplemented by foreign market offerings by US companies, and by simultaneously domestic and foreign offerings. In the research summarized in this article, we tracked not only the kinds of securities (both by number and by dollar amount) issued each year by US public companies between 1970 and 1997, but also their method of issuance and the locale of the offerings.

In a 1992 article in this journal entitled “An Overview of Corporate Securities Innovation,” John Finnerty traced innovations (through the first half of 1991) in the design of securities issued by US corporations by identifying the year in which the design first appeared.3 Our study extends that article's findings in two ways: (1) by updating developments in the design of corporate securities through the end of 1997 and (2) by presenting an annual time series of security issues classified according to the design of the security from 1970 through 1997.

Our updating of new developments in security design provides clear evidence that the pace of innovation in securities design has not slackened. For example, whereas Finnerty identified 40 types of securities that were first issued by US companies in the 1980s,4 our study found 34 kinds that were first issued during the first eight years of the 1990s.5 Among these securities were equity indexed bonds, commodity indexed preferred stock, convertible exchangeable notes, and dividend enhanced convertible securities.

Our study also attempted to identify which innovations have prospered over time and which have languished or even disappeared. For example, the first non-convertible floating rate note (FRN) was issued in 1974. The use of FRNs increased steadily throughout the next 24 years and, in 1997 alone, US public companies issued 1411 FRNs with an aggregate face value of $139.8 billion. By contrast, after the first convertible adjustable rate bond (CARB) came to market in 1981, 10 additional CARBs were issued during the remainder of the 1980s, and none have been issued since. Our findings suggest that financial innovation is a trial and error process in which “failure is

Do the media play a role in corporate governance and, if so, how? Those questions are broad and their answers have broad implications. This is especially so in countries such as the U.S. that are characterized by a free and vigorous business press. By corporate governance, we mean the traditional role of corporate governance in monitoring corporate management to ensure that top managers act in shareholders’ interests. So the questions are whether this active media coverage plays a role in guiding corporate managers to act in shareholders’ interests and, if so, how do they do it.

Academic studies have proposed that the media can play such a role by influencing the value of top managers’ reputational capital.1 In this framework, a manager's reputational capital is viewed as the present value of his future wages and employment opportunities.2 The media are said to affect such values by reporting on managers’ actions and by shaping perceptions of those actions. And to the extent that they influence managers’ reputational capital, the media can play a role in guiding managers’ actions. Whether they do so—and whether they do so in ways that are in shareholders’ interests—are open questions. We address those questions in one specific set of circumstances: namely, when would-be acquirers are considering whether to carry out or abandon acquisition attempts that the market perceives as “value-reducing.”

Several prior studies have reported that would-be acquirers are significantly more likely to abandon takeover attempts when the market responds to the announcement of the proposed acquisition with a downward revision of the potential acquirer's stock price. A common interpretation of this finding is that “managers listen to the market.” But this begs the question: why do managers listen to the market?

Our answer to that question is that acquirers’ top managers—their CEOs—have two sets of skin in the game. First, and perhaps obviously, the CEO owns stock in the acquiring company. Call this his financial capital. To the extent that cancellation of a proposed “value-reducing” takeover results in recovery of the announcement period stock price decline and the CEO owns shares in the company, the CEO stands to gain from that price recovery.

Second, we propose that the CEO stands to gain from the recovery of his personal reputational capital that may also have been diminished as a result of the market's perception that the announced takeover attempt is value-destroying. The media influence the CEO's reputational capital by interpreting and disseminating information about the CEO's acquisition decisions. The worse the tone of the media coverage and the broader its dissemination, the greater the negative impact on the CEO's reputational capital. To the extent that the CEO's reputational capital has been diminished by media coverage of the takeover attempt, abandonment of that attempt may be associated with a recovery of that loss.

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April 2, 1998         Nashville, Tennessee

JOEL STERN: Good afternoon. I'm Joel Stern, managing partner of Stern Stewart & Co., and, on behalf of our hosts here at Vanderbilt's Owen Graduate School of Management, I want to welcome you all to this discussion of corporate capital structure. Before getting into our subject matter, let me take a moment to thank Hans Stoll for organizing this conference on “Financial Markets and the Corporation.” I also want to take this opportunity to salute Professor Martin Weingartner—in whose honor this conference is being held—at the conclusion of a long and productive career. Marty's contributions to the field of corporate finance are many and considerable; and, though he may be stepping down from his formal position, we expect to continue to hear from him for many more years.

The subject of today's meeting is corporate capital structure: Does capital structure matter? And, if so, how and why does it matter? Although these questions have been seriously debated in the academic finance profession for almost 40 years, we seem to be no closer to a definitive answer than we were in 1958, when Merton Miller and Franco Modigliani published their article presenting the first of their two famous “irrelevance” propositions.

Following the M&M propositions, academic researchers in the 1960s and 1970s turned their attention to various market “imperfections” that might make firm value depend on capital structure and dividend policy. The main suspects were (1) a tax code that encourages debt by making interest payments, but not dividends, tax deductible, and (2) expected costs of financial distress, including corporate underinvestment, that can become important as you increase the amount of debt in the capital structure. Toward the end of the 1970s, there was also discussion of “signaling” effects—for example, the tendency for the stock market to respond negatively to announcements of new stock issues.

A defining moment in the academic capital structure debate came in 1984, when Professor Stewart Myers devoted his Presidential address to the American Finance Association to something he called “The Capital Structure Puzzle.” The puzzle was this: Most academic discussions of capital structure were based on the assumption that companies make financing decisions that are guided by a target capital structure—a proportion of debt to equity that management aims to achieve, if not at all times, then at least as a long-run average. But the empirical evidence suggested otherwise. Rather than adhering to targets, Professor Myers observed, most large U.S. public companies behaved as if they were following a financial “pecking order.” They were funding investment with retained earnings rather than external financing if possible; and if external funding was necessary, they issued debt first and equity only as a last resort.

Since then, the capital structure debate has raged on. Harvard profess

Monthly Income Preferred Stock (MIPS), Quarterly Income Preferred Stock (QUIPS), and Trust Originated Preferred Stock (TOPrS) all carry the title of preferred stock. As in the case of other forms of preferred stock, if the issuer fails to make a promised periodic payment, investors cannot force the issuer into bankruptcy. Unlike conventional preferred stock, however, when the promised periodic payments are made, these new securities are deductible by the issuer for tax purposes. In short, MIPS, QUIPS and TOPrS appear to have the tax advantages of debt without the potential for bankruptcy with its attendant costs.

Sounds like a good idea for corporate issuers. And between October of 1993—when Texaco, Inc. issued the first of this kind of security—and the end of 1997, at least 285 other corporate issuers came to that conclusion. In the aggregate, these issuers have raised in excess of $27 billion with the issuance of this novel hybrid security.

But the novelty of MIPS, QUIPS and TOPrS may be more apparent than real. That is not to say that the issuers of MIPS, QUIPS, and TOPrS have been duped in any way. As we will describe in more detail later, MIPS, QUIPS, and TOPrS do present the promise of the tax advantages of debt coupled with the financial flexibility of preferred stock. But there is another security—namely, “income bonds”—that has offered these same advantages for at least the past 100 years. With an income bond, the issuer is obligated to pay interest if, but only if, the company's before-tax earnings exceed the interest payments that are due. And, if the interest payments are made, they are fully deductible for tax purposes. If the interest is not earned and, therefore, not paid, investors cannot force the issuer into bankruptcy.

As described in an article called “The Income Bond Puzzle,” which appeared in a predecessor to this journal, income bonds were issued in the U. S. as early as 1873 and continued to be issued during the late 1800s in the course of various railroad reorganizations.1 Income bonds saw another brief flurry of activity during the 1930s, but have been essentially dormant for the past 60 years. The puzzle in the income bond puzzle is that a security that appears to combine the virtues of debt and preferred stock, and appears to dominate both, was nearly totally ignored by the corporate sector for 60 years. The recent volcanic eruption of MIPS, QUIPS, and TOPrS adds a further twist to the puzzle. These securities appear to offer nothing new. Why are they so popular while income bonds are ignored? The puzzle surrounding the dormancy of income bonds and the popularity of MIPS, QUIPS and TOPrS is actually a smaller part of a larger question: What are the forces that fuel evolution in the design of financial instruments?

In this article, we do not fully answer either of these questions. Our ambitions are more modest.2 We describe MIPS, QUIPS, and TOPrS in greater detail and review their features in

Prepacked bankruptcies, or “prepacks,” are considered a hybrid form of distressed restructuring because they share certain characteristics with both of the widely used alternatives for reorganizing distressed companies—out-of-court restructurings (OCRs) and traditional Chapter 11 reorganizations. Prepacks are similar to OCRs in that creditors and the debtor agree to the major terms of the reorganization outside of the court. Prepacks are similar to traditional Chapter 11 filings in that the reorganization occurs under court supervision, confirmation of the plan requires approval by two-thirds in amount and one-half in number by each class of claimholder, and all claimholders must exchange their old securities in accordance with the terms of the plan. In a prepack, the Chapter 11 bankruptcy petition and a plan of reorganization are filed simultaneously with the court.

In a 1991 article in this journal, John McConnell and Henri Servaes laid out a number of hypotheses as to why distressed firms might use prepackaged bankruptcies to reorganize.1 At the time of their article, however, prepacks were still relatively uncommon and these authors were limited to an “anecdotal” discussion of four cases to make their points. With the passage of time and the growth in the number of prepacks, we have been able to assemble data for a substantial sample of prepacks.

Our study of prepacks complements a growing literature on the outcomes of various forms of distressed reorganization. A significant concern in this literature is whether the various reorganization procedures are efficient. Inefficient reorganization procedures can result in excessively high direct costs or sub-optimal financing and investment decisions by firms. The most efficient organization procedure is the one that creates the greatest value for the firm, net of all costs. Although efficiency cannot be observed directly, we provide evidence on a number of indirect measures of efficiency—for instance, the time required to reorganize, the cost of reorganizing, and the recovery rates by creditors.

Where the data are available, we compare prepacks to OCRs and traditional Chapter 11s. We find that on most dimensions considered, prepacks lie between the two alternative means of reorganizing financially distressed firms. For example, prepacks have higher costs of reorganizing (as a fraction of assets) than OCRs, but lower costs than conventional bankruptcies. These findings buttress the idea that prepacks are a hybrid form of reorganization that contain some aspects of both OCRs and traditional Chapter 11s.

Our sample consists of 49 financially distressed firms that filed prepacks over the period 1986 through June 1993. Crystal Oil, which filed a prepack in 1986, is widely regarded as the first prepack of a large firm. Following Crystal Oil, the next two prepacks in our sample occurred in 1989 with combined assets of $1.7 billion. In the years thereafter, four took place in 19

A new kind of bankruptcy has emerged in the last few years. It can be thought of as a “hybrid” form—one that attempts to combine the advantages (and exclude the disadvantages) of the two customary methods of reorganizing troubled companies: workouts and bankruptcy.

In a workout, a debtor that has already violated its debt covenants (or is about to do so) negotiates a relaxation or restructuring of those covenants with its creditors. In many cases, the restructuring includes an exchange of old debt securities for a package of new claims that can include debt, equity, or cash. Informal reorganizations take place outside the court system, but typically involve corporate officers, lenders, lawyers, and investment bankers. And though such negotiations are often contentious and protracted, informal workouts are widely held to be less damaging, less expensive, and, perhaps, less stressful than reorganizations under Chapter 11.1

Recently, however, a number of firms that have had most or all of the ingredients in place for a successful workout outside the courtroom have filed for bankruptcy anyway. In such cases, the distressed firms file a plan of reorganization along with their filing for bankruptcy. And largely because most creditors have agreed to the terms of the reorganization plan prior to the Chapter 11 filing, the time (and presumably the money) actually spent in Chapter 11 has been significantly reduced.2

Kroy, Inc., an Arizona-based maker of low-tech office labeling equipment, is a good example. After undergoing a leveraged buyout in 1986, the company suffered a slump in sales and profit margins that left it unable to meet its debt obligations. The company's primary lenders were the Minneapolis First Bank and Quest Equities Corporation. Both were receptive to a pre-negotiated bankruptcy reorganization. With a pre-negotiated plan in place, the company filed its plan of reorganization along with its bankruptcy petition on May 15, 1990. The company emerged from bankruptcy proceedings 89 days later. Such an untraditional reorganization has been dubbed “prepackaged bankruptcy.”3

The appearance of this new mechanism for corporate reorganization gives rise to a number of questions: How are they structured? Are they motivated by real economic gains and, if so, what are the sources of such gain? What are the particular circumstances in which a prepackaged bankruptcy is more sensible than an informal reorganization outside the courts? What does the future hold for prepackaged bankruptcy reorganizations?

The first major corporation to undergo a prepackaged bankruptcy reorganization was Crystal Oil Company, an independent crude oil and natural gas exploration and production company headquartered in Louisiana. The company filed for bankruptcy on October 1, 1986 and emerged less than three months later, its capital structure completely reorganized. The total indebtedness of the firm was reduced from $277 million to $129 milli

The 1980's promise to be an exciting decade for American capital markets. Recent descriptions of our financial environment have featured such problems as capital shortages, inflation at unprecedented rates, and more than the usual amount of volatility and uncertainty in the credit markets. It is a time of financial innovation; deep discount bonds, GNMA pass-through securities, and financial futures and options are only a few of the new financing instruments that are now being developed and introduced at an unusually rapid pace. It is also a time of financial crisis, in which several very large publicly-held firms have failed or approached the brink of failure.

In such an environment, it is important for the practicing financial manager to be familiar with the full array of financial instruments at his disposal. Our intention in this article is to draw attention once again to a frequently advocated, but infrequently used class of corporate security: the income bond.

Before investigating this income bond “puzzle,” let's first review the features of the income bond.

Income bonds are hybrid instruments which combine the features of straight debt securities and preferred stock. Like straight debt, income bonds are a contractual obligation of the issuer; they give the holder a claim on the company's earnings that ranks ahead of all equities, preferred and common. At the same time, however, they represent a contingent claim: interest is payable only if earned. And, because the income bond is in fact a debt instrument, the interest payments are tax deductible to the corporate issuer.

That the payment of coupon interest depends on the level of the issuer's reported accounting earnings, is, of course, the most important characteristic distinguishing income bonds from other debt instruments. If sufficient accounting earnings are available after the deduction of operating expenses, allowable fixed asset depreciation, and interest payments with a prior claim on income, then the interest due on the income bonds must be paid. But if reported earnings (after deduction of the various allowed expenses) are not sufficient to cover contingent interest payments, the corporation may pass the payment with no change in the ownership structure of the company.

Thus, when a contingent interest payment is omitted, the bond technically is not in default, and bondholders obtain no additional control over the company (except for the possible future claim to accumulated interest). In contrast, when an interest payment is omitted on a fixed-interest bond, it is considered to be in default, and the bondholders may force the company into bankruptcy.

It is also worth noting, however, that income bonds can take on many of the characteristics of more conventional forms of debt. They may be callable, convertible into common stock, or subordinated to other classes of debt securities. They may contain sinking fund provisions. Also, and perha

To many observers, it has long seemed evident that there is a potential conflict between the interests of the investment bankers that do M&A advisory work and the shareholders of the acquiring companies they advise. The potential conflict arises because advisory contracts are structured to reward the bankers for “getting deals done,” with much less reward for deals that do not get done. In other words, contracts are structured so that the bankers generate the lion's share of their fees from those transactions in which their corporate clients end up acquiring the companies they target—but negligible amounts for advisory work that does not lead to a transaction.

Unfortunately for shareholders of the acquiring corporation, overpaying for an acquisition is a fairly surefire way of ensuring that an acquisition takes place. Indeed, there is a body of evidence from the 1970s and 1980s that suggests that acquirers, on average, were willing to do just that.1 In the many M&A deals that got done during those decades, the shareholders of the companies acquired usually seemed to fare significantly better, on average, than the shareholders of the companies doing the acquiring.2

And yet, as that columnist went on to point out, Wasserstein's career on Wall Street did not seem to have suffered from his reputed indifference to the shareholders of his corporate clients. Early scholarly evidence on that question tended to support the notion that banks and bankers were not penalized for facilitating overpriced deals.

In a study that was recently published in the Review of Financial Studies, we re-examined the evidence on the questions: Do bankers pay any penalty for advising on value-destroying acquisitions? Or, conversely, is there any reward to bankers for creating value for their acquisition-minded clients? These questions would seem to be important given that, in the United States alone, corporate acquirers paid investment banks over $20 billion in advisory fees to facilitate their acquisitions during the decade 2002–2011.5

One of the first studies of advisory contracts in mergers and acquisitions was conducted by Robyn McLaughlin, while a finance professor at Boston College, and its findings were published in an article in the Journal of Financial Economics in 1990. McLaughlin studied advisory contracts in corporate tender offers from 1978 to 1985. He observed that the compensation advisors are paid—the advisory fees—were not contingent on whether the transaction creates value for the client, which is the acquirer. In the typical contract, more than 80% of the advisory fee was paid only if the acquisition was completed. He noted that such contracts appeared to create a severe conflict of interest in which the advisor had an incentive to complete the acquisition regardless of the valuation consequences for the acquirers’ shareholders.

When discussing his findings, McLaughlin went on to speculate that other me

The notion that investor base has an effect on share value has intuitive appeal and is strongly supported by “streetlore.” But standard finance theory, as represented by the familiar Capital Asset Pricing Model (CAPM) or its recent challenger, the Arbitrage Pricing Theory (APT), does not attribute any particular role to the size of investor base as a determinant of share values. Indeed, from the perspective of traditional finance theory, each of the corporate actions cited above is viewed as value neutral. Yet empirical research suggests that certain of these corporate practices are associated, at least on average, with an increase in share values. While various explanations have been offered for these increases in share value, the role of investor base has been largely unexplored.

In this article, we report the results of our recent study of 273 companies that during the 1980s decided to switch the trading locale of their shares from the over-the-counter (OTC) or NASDAQ market to the NYSE.1 We found that share prices increased by about 6%, on average, at the time the stocks became listed on the NYSE, and that the investor base of these firms increased by almost 20%. We also found that the average stock experienced a reduction in bid/ask spread of about 5% after listing. In an analysis of the relation among share prices, investor base, and bid/ask spread, we found that the stock price increase was significantly correlated with both the percentage increase in investor base and the reduction in bid/ask spread.

In short, our analysis supports the popular idea that an expanded shareholder base can increase a firm's stock price.

We are not, of course, the first to study the effect of an NYSE listing on share price. That honor appears to belong to a study published in the Journal of Business in 1937.2 Like most research on listings that came after it, this early study came to the conclusion that a new listing on the NYSE is associated with an increase in stock price.3 Financial theorists have tended to attribute this increase in value to the increase in “liquidity” that is said to accompany stocks that switch to the NYSE. Typical of this thinking is a 1986 study (involving one of the present authors)4 which argues that the differences in the market structure and means of transacting between the NYSE and the OTC market could lead to a lower cost of transacting and, therefore, greater liquidity. The greater liquidity, in turn, leads to a higher stock price.

We conducted our analysis on a sample of 273 NASDAQ stocks that became newly-listed on the NYSE during the period August 1980 through December 1989. This sample includes all stocks that listed over this period (except those that listed during October 1987) for which sufficient data were available to conduct the study. The sample covers a wide range of industries, with firms representing 50 of the 83 possible two-digit Standard Industrial Classification (SIC) codes. Of

Viewed at a distance and with scholarly detachment, financial innovation is a simple process. Some kind of “shock”—say, a sudden increase in interest rates volatility or a significant regulatory change – is introduced into the economic system. The shock alters the preferences either investors or issuers in such a way that there then exists no financial instrument capable of satisfying a newly-created demand. Observing the unsatisfied demand, an entrepreneur moves quickly to seize the opportunity by creating a new financial instrument. In the process, the entrepreneur reaps an economic reward for his efforts, investors and issuers are better served, and the entire economic system is improved.

On closer inspection, however, the actual process of financial innovation turns out, like most other human endeavors, to be a lot less tidy than economists’ models would have it. In this article, we provide an “up-close” view of the origin and evolution of one financial instrument—the Liquid Yield Option Note (LYON).

The LYON is a highly successful financial product introduced by Merrill Lynch in 1985. Between April 1985 and December 1991, Merrill Lynch served as the underwriter for 43 separate LYON issues, which together raised a total of $11.7 billion for corporate clients. LYON issuers include such well-known firms as American Airlines, Eastman Kodak, Marriott Corporation, and Motorola. In 1989, other underwriters entered the market and have since brought an additional 13 LYON-like issues to market. In the words of a recent Wall Street Journal article, the LYON is “one of Wall Street's hottest and most lucrative corporate finance products.”1

As academics examining a new security, we begin by posing the questions: What does the LYON provide that was not available previously? Does the LYON really increase the welfare of investors and issuers, or is it simply a “neutral mutation”—that is, a now accepted practice that serves no enduring economic purpose, but is sufficiently harmless to avoid being extinguished by competitive forces.2

In the spirit of full disclosure, however, we must admit that we are not entirely disinterested observers. Our association with the LYON is longstanding. When the early LYON issues were being brought to market in April 1985, questions arose about LYON pricing. We were hired by Merrill Lynch to develop a model for analyzing and pricing this new financial instrument. A by-product of this assignment was the opportunity to learn about the train of events that led to the creation of the LYON, and we have since followed the evolution of this market with interest. In the pages that follow, we relate what we have observed, thought, and contributed during the development of this new security.

The LYON is a complex security. It is a zero coupon, convertible, callable, and puttable bond. None of these four features is new, it is only their combination that makes the LYON an innovation. These gen