Publications:

1. Termination fees in mergers and acquisitions

Journal of Financial Economics 69(3), September 2003, pp.431-467.

The paper provides evidence on the effects of including a target termination fee in a merger contract. I test the implications of the hypothesis that termination fees are used by selfinterested target managers to deter competing bids and protect ‘‘sweetheart’’ deals with white knight bidders, presumably resulting in lower premiums for target shareholders. An alternative hypothesis is that target managers use termination fees to encourage bidder participation by ensuring that the bidder is compensated for the revelation of valuable private information released during merger negotiations. My empirical evidence demonstrates that merger deals with target termination fees involve signi?cantly higher premiums and success rates than deals without such clauses. Furthermore, only weak support is found for the contention that termination fees deter competing bids. Overall, the evidence suggests that termination fee use is at least not harmful, and is likely bene?cial, to target shareholders.

2. Collars and renegotiation in mergers and acquisitions

Journal of Finance 59(6), December 2004, pp.2719-2743.

I examine the motivation for, and effect of, including a collar in a merger agreement. The most important cross-sectional determinants of the bid structure (cash vs. stock, and whether to include a collar) are the market-related stock return standard deviations for the bidder and target. This evidence supports the hypothesis that the method of payment is dependent on the sensitivities of the bidder and target to market-related risk because either has the incentive to demand renegotiation of the merger terms if the value of the bidder’s offer changes materially relative to the value of the target during the bid period. 

3. The market pricing of implicit options in merger collars

Journal of Business 79(1), March 2006, pp.115-136.

Almost 20% of stock-swap merger bids contain collars that affect the payment received by target shareholders. I argue that a collar bid offers two sources of value to target shareholders: the basic offer premium and the value of the implicit collar options. I hypothesize that the market should price both sources of value implicit in a collar merger bid. I value the implicit collar options, and find that the market prices both the offer premium and option value equally. This suggests that market participants are cognizant of the “fine print” of merger agreements, and in particular implies that the two offer components are substitutable.

4. The price of corporate liquidity: Acquisition discounts for unlisted targets

Journal of Financial Economics 83(3), March 2007, pp.571-598.

This paper documents average acquisition discounts for stand-alone private firms and subsidiaries of other firms (unlisted targets) of 15% to 30% relative to acquisition multiples for comparable publicly traded targets. My results are strongly consistent with the notion that sale prices for unlisted targets are affected by both the need for, and availability of, the liquidity provided by the buyer. Corporate parents are significantly liquidity-constrained prior to the sale of a subsidiary, particularly when the subsidiary is being sold for cash. Furthermore, acquisition discounts are significantly greater when debt capital is relatively more expensive to obtain, and when the parent firm has below-market stock returns in the 12 months prior to the sale.  

5. Are performance based arbitrage effects detectable? Evidence from merger arbitrage

Journal of Corporate Finance 13(5), December 2007, pp.793-812.

This paper examines the predictions of the performance based arbitrage hypothesis for the merger arbitrage market. Performance based arbitrage (Shleifer and Vishny (1997)) is the notion that funds under management are withdrawn from arbitrageurs following trading losses, resulting in inefficient prices for securities subject to arbitrage trades. I examine general comovement in merger arbitrage spreads and the response of spreads to large arbitrage losses and substantial changes in deal flow. I find little evidence that merger arbitrage spreads exhibit systematic comovement or are substantially affected by important liquidity events in this market.

6. Inter-firm linkages and the wealth effects of financial distress along the supply chain (with Mike Hertzel, Zhi Li, and Kim Rodgers)

Journal of Financial Economics 87(2), February 2008, pp.374-387.

Extant research examines the extent to which bankruptcy has intra-industry valuation consequences.  This study broadens the investigation by examining the wealth effects of distress and bankruptcy filing for suppliers and customers of filing firms.  On average, important wealth effects occur prior to and at bankruptcy filings and extend beyond industry competitors along the supply chain.  Specifically, distress related to bankruptcy filings is associated with negative and significant stock price effects for suppliers.  Supplier wealth effects are more negative when intra-industry contagion is more severe.  We also investigate the importance of industry structure, specialized product nature, and leverage on supply chain effects.

7. Target-firm information asymmetry and acquirer returns (with Mike Stegemoller and Annette Poulsen)

Review of Finance, forthcoming

This paper shows that acquirer returns are significantly higher in stock-swap acquisitions of targets that are difficult to value. This finding contributes to an explanation of the determinants of, and value gains from, using stock as a method of payment. We argue that the effects of target-valuation uncertainty on both the method of payment and the market reaction to announced acquisitions are more likely to be apparent in samples of private acquisitions, and that these effects can be masked in samples of acquisitions of publicly held targets. Nevertheless, our results hold for publicly traded targets in multivariate analysis.

Working papers:

1. Industry contagion in loan spreads (with Mike Hertzel)

Spreads on new and renegotiated corporate loans are significantly higher when the loan originates (or is renegotiated) in the two years surrounding bankruptcy filings by industry rivals. This contagion appears to be an industry, not an economy-wide, phenomenon, and is particularly severe in the middle of industry bankruptcy waves. Furthermore, contagion in loan spreads is mitigated in concentrated industries, consistent with the hypothesis and evidence in Lang and Stulz (1992) that bankruptcy filings in concentrated industries can have positive consequences for rivals (increased market share and/or power). There is also some evidence that contagion affects non-spread terms in loan contracts. Evidence that contagion in loan spreads persists even after controlling for the current and future financial health of borrowing firms suggests that loan spread contagion is potentially socially costly.

2. The variability of IPO initial returns (with Michelle Lowry and Bill Schwert, revise and resubmit at the Journal of Finance)

The monthly volatility of IPO initial returns is substantial and fluctuates dramatically over time. Moreover, the monthly volatility of initial returns is significantly positively correlated with monthly mean initial returns. This contrasts strongly with the strong negative correlation between the mean and volatility of secondary-market returns. Consistent with IPO theory, our empirical findings suggest that information asymmetry about the firm’s market value drives this positive correlation. Specifically,  months in which a greater portion of the offerings are for companies for which information asymmetry is likely to be a problem tend to have higher average initial returns and a higher volatility of initial returns. Moreover, information asymmetry proxies are able to explain much of the positive correlation between average initial returns and the variability of initial returns, and the same proxies are significantly associated with both the level and dispersion of initial returns at the firm level.

 3. Overinvestment, corporate governance, and dividend initiations

Firms with high agency costs of overinvestment have significantly more positive dividend initiation announcement returns than other firms do. This paper presents the results from three experiments consistent with this conclusion: (i) dividend initiation announcement returns are significantly more positive for firms with low Tobin’s Q and high cash flow; (ii) following an exogenous event (the dividend tax cut of 2003) which changed the equilibrium tradeoff between hoarding cash and paying it out, firms with weak governance (i.e. those that are more likely to overinvest) have significantly more positive initiation announcement returns; and (iii) firms with low Q significantly reduce their cash hoarding in the years following dividend initiations. Combined, these results are consistent with the hypothesis that initiating dividends reduces the agency costs of free cash flow and that the market reaction to dividend initiation announcements rationally anticipates the lower agency costs of free cash flow or overinvestment.