Guiding Seminar 4 Flashcards
What are the factors that determine the ability of a political candidate to benefit the contributing firm? (Corporate Political Contributions and Stock Returns)
There is a strong and robust positive correlation between corporate political contributions and the firm’s abnormal future returns.
The effect is stronger for firms that support a higher number of candidates holding office in the same state the firm is based in.
Political candidates give benefits to large companies as they have large capital and pay a lot of taxes.
Why are one-share-one-vote shares valued less in the dual-class system? How does this affect the external financing of the firm? (Extreme Governance: An Analysis of Dual-Class Companies in the United States)
One-vote shares are worth less under the dual-class structure. This is because inferior shareholders have less control and thus can be more easily expropriated leading to worse performance of the firm. Superior shareholders, on the other hand, enjoy PBOC. This makes the firm more levered, possibly due to their reluctance to engage in equity offerings not to lose ownership or it is possible that debt is used as an alternative control mechanism (18% versus 6% debt-to-assets ratio).
What is the bonding hypothesis? (The bonding hypothesis of takeover defenses: Evidence from IPO firms)
The “bonding hypothesis” examines another path of how takeover defenses create value:
▪ (!) Defenses commit the firm to a prearranged business strategy whose reversal is complicated and costly. This ensures the company’s business partners that the company will not act opportunistically and appropriate them, encouraging partners to make relation-specific
investments. This allows the company to gain favorable contract terms with its partners, which increases firm value.
What are the four factors that enlarge the value of existing business ties? (The bonding hypothesis of takeover defenses: Evidence from IPO firms)
- Social links. Social links between the IPO firm’s CEO and the large customer’s CEO make the connection more personal.
- Pre-IPO relationship length. Relationships of longer duration tend to involve larger relation-specific investments and thus more quasi-rents at stake.
- Long-term contracts. Expected relationship length in the post-IPO period. Similarly, longer expected duration contracts involve greater investments.
- Percent of customer’s COGS. What part of a large customer’s COGS does the IPO firm sales comprise? Indicates how important the IPO firm is to its customers and thus how prevalent specific investments are in the relationship.
What is the stakeholder-orientated perspective in the context of legal origins? (On the Foundations of
Corporate Social Responsibility)
Due to their stakeholder-orientated perspective, civil law systems (their rules) support CSR to a larger extent than common law regimes. Stakeholder-oriented perspective - maximize their profits.
Explain how takeover defenses can be valuable to investors. (The bonding hypothesis of takeover defenses: Evidence from IPO firms)
Defenses commit the firm to a prearranged business strategy whose reversal is complicated and costly. This ensures the company’s business partners that the company will not act opportunistically and appropriate them, encouraging partners to make relation-specific investments. This allows the company to gain a favorable contract. terms with its partners, which increases firm value.
What are takeover defenses? (Extreme Governance: An Analysis of Dual-Class Companies in the United States)
In simple terms, these are things that make takeovers very difficult and expensive.
For example,
1. Charter amendments (imposing conditions on control transfer- require over 2/3 of votes to approve merger),
2. Golden parachute (lucrative severance package guaranteed to the management if the firm is taken over and the managers are let go).
3. Poison pills- securities with embedded rights to buy shares at a deeply discounted price in either the target or an acquirer–> acquisition prohibitively expensive
4. Pac man defense- target firm counteroffers for bidder firm.
What predicts a larger size of PBOC and thus dual-class status? (Extreme Governance: An Analysis of Dual-Class Companies in the United States)
- Name. If the company is named after a founder, this might indicate a “personal” stake involved.
- Media. Control of a media company (e.g. newspaper, TV network) provides opportunities for self-advertising, manipulating public opinion, etc.
- The activity of the founder. If the firm is young and the founder is still active, PBOC and also dual-class structure is more likely.
- Firms in the area & Sales of the area.
• The fewer firms there are in the firm’s metropolitan area, the more likely the firm is a major employer and “the only game in town”, which entails private benefits for insiders with dual-class shares.
• Firms with an important local presence may use dual-class status as a promise to local authorities that the firm will resist takeovers in order to honor implicit contracts with local governments and other stakeholders.
What are the paper’s findings of relations with the firm’s value? (Extreme Governance: An Analysis of Dual-Class Companies in the United States)
▪ Firm value is positively associated with insiders’ cash-flow rights.
▪ Firm value is negatively associated with insider voting rights.
▪ Firm value is negatively associated with the wedge between the two (insider voting rights – insider cash flow rights).
What is the bonding hypothesis? (The bonding hypothesis of takeover defenses: Evidence from IPO firms)
The “bonding hypothesis” examines another path of how takeover defenses create value:
▪ (!) Defenses commit firm to a prearranged business strategy whose reversal is complicated and costly. This ensures the company’s business partners that the company will not act opportunistically and appropriate them, encouraging partners to make relation-specific
investments. This allows the company to gain favorable contract terms with its partners, which increases firm value.
What is an IPO puzzle? How does IPO solve it? (The bonding hypothesis of takeover defenses: Evidence from IPO firms)
▪ Why do so many firms adopt takeover defenses when they go public?
▪ If takeover defenses lower share values as is widely presumed, it would be irrational for pre-IPO shareholders to implement them and suffer the resulting loss when shares are sold to outside investors
Answer: takeover defenses increase a firm’s value due to the bonding hypothesis (close relations of the current managers with other companies).
The bonding hypothesis of takeover defenses: Evidence from IPO firms
What are quasi-rents?
▪ The main idea of the bonding hypothesis is that takeover defenses support a firm’s commitment not to act opportunistically to appropriate(take) its counterparties’ quasi-rents.
▪ Quasi-rents arise when a counterparty makes a relationship-specific investment that would lose value if the firm changes its operating strategy.
The bonding hypothesis of takeover defenses: Evidence from IPO firms
What are the three relationships worth defending?
- Large customer. Quasi-rents are more likely to arise when the IPO firm has a dominant relation with a single customer who invests to the specialized distribution lines with its supplier.
- Dependent supplier. Pemstar invested to locating its specific plants close to IBM’s production facilities. Thus, IBM had a leverage in negotiating lower price for Pemstar’s production, which created quasi-rents appropriable by IBM.
- Strategic alliance. Alliances between companies tend to be accompanied by costly irreversible investments to fixed assets that give rise to potentially appropriable quasi-rents (e.g. RenaultNissan Alliance).
The bonding hypothesis of takeover defenses: Evidence from IPO firms
What are the bonding effects on firm’s performance?
If the business ties are present, then:
- Higher ROA and higher valuation of the IPO firm (more takeover defenses)
- IPO can reduce the firm’s financial constraints and enable larger investments to the relationship (IPO is good news to a firm’s large customers)
- Higher potential payoff associated with a higher risk that the relationship could be damaged. (At the same time, IPO bad news for the trading partners (puts the business relationship at risk)).
- Spillover effects- more defenses associated with larger positive returns of the firm’s large customers. (and negative returns for partners when the IPO firm is acquired). The customers depend on the firm and the long-lasting relationship.
The bonding hypothesis of takeover defenses: Evidence from IPO firms
What are the conclusions?
▪ Takeover defenses protect managers from being replaced who then maintain their promised commitments in business relations with large customers, suppliers or partners in alliance.
▪ Firm’s business partners are then encouraged to make further relation-specific investments that are mutually beneficial.
▪ The closer the business relationship, the more takeover defenses are employed for its protection.
▪ More philosophical standpoint: contracts arise when the costs of executing them are less than the gains from trade (Coase theorem).
Antitakeover defenses economize on having to build new contracts of business relationships from scratch, increasing net gains from trade.
▪ Only young IPO firms are under the scope of the paper. What if with age, relationships are no longer worth defending?
