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. She investigates whether firms' subsequent financing decisions are affected by the outcomes of previous financing decisions, and finds that firms' financing decisions do lead to different choices of securities. There will be equilibrium contracts that investors would reject for some small firm but will accept for an otherwise identical large firm (that is, a firm with identical projects). The set of the equilibrium financial contracts also differs in different stages of the firm's lifecycle: some contracts never sustainable for a small firm become sustainable for large firms. In addition to their own rights, holders of subsequent security issues may rely on the firm's existing investors to enforce their claims. Fluck suggests that there is a lifecycle pattern of financing in which firms will issue outside equity, short-term debt, or convertible debt first and then either use their retained earnings, issue l onger-term debt, or issue outside equity to satisfy subsequent financing needs.

The observation that liquidations are concentrated in recessions has long been the subject of controversy. One view holds that liquidations are beneficial in that they result in increased restructuring. Another view holds that liquidations are privately inefficient and essentially wasteful. Examining gross job flows and financial and labor market rents, Caballero and Hammour find that, cumulatively, recessions result in reduced restructuring. This is likely to be socially costly, considering the inefficiencies on both the creation and destruction margins.

Using a large sample of plant-level data for 1974-92, Maksimovic and Phillips analyze the market for firms, divisions, and plants of manufacturing firms; they find an active market for corporate assets, with over 7 percent of plants changing ownership through mergers, acquisitions, and asset sales during expansion years in the economy. Partial firm sales account for more than half of these transactions. The probability of asset sales and whole-firm transactions is related to firm organization and ex ante efficiency of buyers and sellers. The timing of sales and the pattern of efficiency gains suggest that the transactions that occur, especially through asset sales of plants and divisions, tend to improve the allocation of resources and are consistent with a simple neoclassical model of profit maximizing by firms. The decision to participate in the market for corporate assets and the subsequent gains realized from transactions are affected both by firm productivity and firm organization.

Himmelberg and Hubbard argue that the supply of highly skilled CEOs capable of running large, complex corporations is relatively inelastic, so shocks to aggregate demand for CEOs simultaneously raise firm value and the marginal value of CEO services to the firm. In equilibrium, such shocks bid up the value of their compensation packages. This phenomenon makes it appear as if some firms are violating relative performance evaluation (RPE). Using Standard and Poor's Execucomp data for a large panel of U.S. firms, the authors show that the empirical "failure" of RPE is systematically restricted to the CEOs of certain types of firms. The behavior of these firms in the bottom quartile of the size distribution is more in accordance with the predictions of agency theory. The authors see this as evidence that the supply of CEOs sufficiently skilled to manage such firms is relatively elastic.