Person:

Becker, Bo

We use the Business Roundtable’s challenge to the SEC’s 2010 proxy access rule as a natural experiment to measure the value of shareholder proxy access. We find that firms that would have been most vulnerable to proxy access, as measured by institutional ownership and activist institutional ownership in particular, lost value on October 4, 2010, when the SEC unexpectedly announced that it would delay implementation of the Rule in response to the Business Roundtable challenge. We also examine intra-day returns and find that the value loss occurred just after the SEC’s announcement on October 4. We find similar results on July 22, 2011, when the D.C. Circuit ruled in favor of the Business Roundtable. These findings are consistent with the view that financial markets placed a positive value on shareholder access, as implemented in the SEC’s 2010 Rule.

We use an important legal event to examine the effect of managerial fiduciary duties on equity‐debt conflicts. A 1991 legal ruling changed corporate directors’ fiduciary duties in Delaware firms, limiting managers’ incentives to take actions favoring equity over debt for distressed firms. After this, affected firms responded by increasing equity issues and investment and by reducing risk. The ruling was also followed by an increase in leverage, reduced reliance on covenants, and higher values. Fiduciary duties appear to affect equity‐bond holder conflicts in a way that is economically important, has impact on ex ante capital structure choices, and affects welfare. JEL: G32, G33, L2

ABSTRACT. When corporate payout is taxed, internal equity (retained earnings) is cheaper than external equity (share issues). If there are no perfect substitutes for equity finance, payout taxes may therefore have an effect on the investment of firms. High taxes will favor investment by firms who can finance internally. Using an international panel with many changes in payout taxes, we show that this prediction holds well. Payout taxes have a large impact on the dynamics of corporate investment and growth. Investment is “locked in” in profitable firms when payout is heavily taxed. Thus, apart from any level effects, payout taxes change the allocation of capital. JEL No. G30, G31, H25.

Theory predicts that there is a close link between bank credit supply and the evolution of the business cycle. Yet fluctuations in bank-loan supply have been hard to quantify in the time series. While loan issuance falls in recessions, it is not clear if this is due to demand or supply. We address this question by studying firms' substitution between bank debt and non-bank debt (public bonds) using firm-level data. Any firm that raises new debt must have a positive demand for external funds. Conditional on issuance of new debt, we interpret firm's switching from loans to bonds as a contraction in bank credit supply. We find strong evidence of substitution from loans to bonds at times characterized by tight lending standards, high levels of non-performing loans and loan allowances, low bank share prices, and tight monetary policy. The bank-to-bond substitution can only be measured for firms with access to bond markets. However, we show that this substitution behavior has strong predictive power for bank borrowing and investments by small, out-of-sample firms. We consider and reject several alternative explanations of our findings.

Reaching for yield—the propensity to buy riskier assets in order to achieve higher yields—is believed to be an important factor contributing to the credit cycle. This paper analyses this phenomenon in the corporate bond market. Specifically, we show evidence for reaching for yield among insurance companies, the largest institutional holders of corporate bonds. Insurance companies have capital requirements tied to the credit ratings of their investments. Conditional on ratings, insurance portfolios are systematically biased toward higher yield, higher CDS bonds. This behavior appears to be related to the business cycle, being most pronounced during economic expansions. It is also more pronounced for the insurance firms for which regulatory capital requirements are more binding. The results hold both at issuance and for trading in the secondary market and are robust to a series of bond and issuer controls, including issuer fixed effects as well as liquidity and duration. Comparison of the ex-post performance of bonds acquired by insurance companies does not show outperformance but higher volatility of realized returns.