Corporate Finance Program Meeting
The NBER's Program on Corporate Finance, directed by Raghuram Rajan, NBER and University of Chicago, met in Chicago on November 19. David S. Scharfstein, NBER and MIT, organized this program:
Lucian A. Bebchuk, NBER and Harvard University, "A Rent- Protection Theory of Corporate Ownership and Control" (NBER Working Paper No. 7203)
Discussant: Denis Gromb, MIT Rafael La Porta, Florencio Lopezde-Silanes, and Andrei Shleifer, NBER and Harvard University; and Robert W. Vishny, NBER and University of Chicago, "Investor Protection and Corporate Valuation" (NBER Working Paper No. 7403)
Discussant: Luigi Zingales, NBER and University of Chicago Zsuzsanna Fluck, New York University, "Capital Structure Decisions in Small and Large Firms: A Lifecycle Theory of Financing"
Discussant: Douglas W. Diamond, NBER and University of Chicago Ricardo J. Caballero, NBER and MIT, and Mohamad L Hammour, Delta, "The Cost of Recessions Revisited: A Reverse-Liquidationist View" (NBER Working Paper No. 7355)
Discussant: Adriano Rampini, Northwestern University Vojislav Maksimovic and Gordon Phillips, University of Maryland, "The Market for Corporate Assets: Who Engages in Mergers and Asset Sales and Are There Efficiency Gains?"
Discussant: Judith A. Chevalier, NBER and University of Chicago Charles P. Himmelberg, Columbia University, and R. Glenn Hubbard, NBER and Columbia University, "Incentive Pay and the Market for CEOs: Theoretical and Empirical Determinants of Pay-for- Performance Sensitivities"
Discussant: Marianne Bertrand, NBER and Princeton University
Bebchuk develops a theory of the structure of corporate ownership, and in particular of the choice between concentrated and dispersed ownership of corporate shares and votes. He studies the decision of the initial owner of a company going public on whether to maintain a lock on corporate control, and he analyzes how this decision is influenced by the expected size of the private benefits of control. When these benefits are large and thus control is valuable, dispersed ownership would not constitute a stable equilibrium; there would be a reversion to concentrated ownership as a result of the acquisition of a control block by a rival or (defensively) by the incumbent. Thus, the initial owner would not choose such a structure to begin with but will maintain a lock on control and consequently on the rent of private benefits associated with it. Such a lock on control might be established using schemes that separate cash flow rights and voting rights, for example. Rent-protection considerations also can explain why initial owners taking a company public might make control partially contestable, as many U.S. companies often do, by adopting anti-takeover arrangements. Bebchuk's theory can explain the existing patterns of corporate ownership both cross-nationally and within particular parameters.
La Porta, Lopez-de-Silanes, Shleifer, and Vishny present a model of the effects on the valuation of firms of legal protection of minority shareholders and of cash flow ownership by a controlling shareholder. They then test this model using a sample of 371 large firms from 27 wealthy economies, Consistent with the model, they find evidence of higher valuation of firms in countries with better protection of minority shareholders. There is also some evidence that higher cash flow ownership by controlling shareholders benefits corporate valuation.
Fluck asks why firms choose very different capital structures in different stages of their lifecycles. …