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| FINANCING BIDDERS IN TAKEOVER CONTESTS Journal of Financial Economics 117(3), September 2015, 534–557. (download/ from journal) EFA Annual Meeting 2012 Abstract | |
| This paper argues that endogenizing the choice of financing for cash bids is just as important as endogenizing the payment method in takeovers. The paper shows that acquirers issue equity to finance their cash bids only if they lack access to competitive financing. This leads to underbidding and lower takeover premiums. The opposite holds for debt financing, which leads to overbidding. Endogenizing the payment method reveals that equity bids carry lower premiums than cash bids financed at competitive terms. The model's insights find preliminary empirical support and could help explain existing evidence, which seems at odds with prior theory. |
| INDIRECT COSTS OF FINANCIAL DISTRESS AND BANKRUPTCY LAW with Zacharias Sautner
Review of Finance, forthcoming (download) AFA Annual Meeting 2014, EFA Annual Meeting 2009 Abstract | |
| We argue that stronger debt enforcement in bankruptcy can reduce indirect costs of financial distress: (i) by increasing the likelihood of restructuring outside bankruptcy and (ii) by improving the recovery rate of stakeholders, such as trade creditors, through explicit legal provisions. Consistent with these predictions, we find that when debt enforcement is stronger, financially distressed firms are less exposed to indirect distress costs in the form of reduced access to trade credit and forgone sales. We document these effects in a panel of firms from 40 countries with heterogeneous debt enforcement characteristics and in differences-in-differences tests exploiting several recent bankruptcy reforms. |
| NON-PRECAUTIONARY CASH HOARDING AND INVESTMENT IN GROWTH FIRMS with Arnoud Boot (download) AFA Annual Meeting 2016, AEA Annual Meeting 2015 Abstract | |
| We analyze the trade-off faced by growth firms between hoarding cash (and delaying investment) and incurring dilution from external financing. Such non-precautionary hoarding features a self-reinforcing effect: firms with better investment opportunities hoard less and use more external financing, potentially growing successful and cash-rich more quickly. Contrary to common beliefs, we show that firms that stay private hoard and delay investment less than when they go public, once accounting for self-selection. Furthermore, competition can cause longer delays and more cash hoarding, and asymmetric information drives growth firms to reduce hoarding. We show how these insights can explain conflicting empirical evidence. |
| GROWTH FIRMS AND RELATIONSHIP FINANCE: A CAPITAL STRUCTURE APPROACH with Roman Inderst (download) AFA Annual Meeting 2014 Abstract | |
| We analyze how relationship finance, such as venture capital and relationship lending, affects growth firms' capital structure choices. We show that relationship investors that obtain privileged information about a growth firm optimally cash in on their "certification power" by pushing it to finance follow-up investments with equity. The firm underinvests if its owner refuses to accept the associated dilution. However, this problem is mitigated if the firm's initial relationship financing involves high leverage or offers initial investors preferential treatment in liquidation. By contrast, if initial investors have no certification power, firms optimally lever up only in later rounds. Our implications for relationship and venture capital financing highlight that the degree of investor dominance is a key determinant of growth firms' capital structure decisions. Methodologically, one of our paper's novel contributions is to characterize the key role played by, so-called, "countervailing incentives" in dynamic financial contracting. |
| CEO FIT, CONTRACT HORIZON, AND TURNOVER (download) AFA Annual Meeting 2018 Abstract | |
| This papers studies how boards hire and replace managers that have better information how their fit with the firm changes over time. Boards seed out managers whose fit deteriorates by relying on noisy firm performance or severance pay that compensates managers for not trying to avoid termination. The cost of severance is higher when managers' outside options are low. Hence, boards rely more often on firm (under)performance, which might appear as lack of relative performance evaluation. Renewable fixed-term contracts offer boards a widely-used mechanism that allows them to periodically replace managers without severance (at renewal dates). The paper has novel implications for the determinants of contract horizon, turnover-performance sensitivity, and CEO age. |
| COORDINATION WITH PUBLIC AND PRIVATE OWNERSHIP AND INNOVATION with Arnoud Boot (download) Abstract | |
| We argue that public ownership allows firms to coordinate and engage in rent seeking on existing technologies. The prospect of such coordination enhances firm value, yet reduces commitment to developing new technologies. We find that public ownership may still dominate for innovative firms if the expected profitability of the new technology is low or very high. For intermediate values, private ownership dominates. A further important factor is whether incumbents seek coordination through acquiring controlling or non-controlling stakes. Also the size of the innovative firms vis-à-vis the incumbent plays a role. Our analysis sheds light on the conflicting evidence relating public ownership and innovation, and links declines in public ownership to an increase in takeover activity. |
| PRESERVING 'DEBT CAPACITY' OR 'EQUITY CAPACITY': A DYNAMIC THEORY OF SECURITY DESIGN UNDER ASYMMETRIC INFORMATION (2012) with Roman Inderst (download) 4th Paris Spring Corporate Finance Conference Abstract | |
| In a dynamic model of optimal security design, we show when firms should preserve "equity capacity" through choosing high target leverage or "debt capacity" through choosing low target leverage. Thereby, firms reduce a problem of underinvestment or overinvestment when they must raise future financing under asymmetric information. Which problem arises depends on whether additional financing is raised at competitive terms or whether there is a lock-in with initial investors. Firms initial (or target) capital structure matters as it affects the "outside option" of both insiders and outside investors. Our theory also entails implications for start-up and venture capital financing. |