Posts Tagged ‘Ulrike Malmendier’

Revaluation of Targets after Merger Bids

Posted by Ulrike M. Malmendier, University of California, Berkeley, on Friday November 9, 2012 at 10:09 am
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Editor’s Note: Ulrike Malmendier is a Professor of Economics at the University of California, Berkeley.

Mergers are among the largest and most disruptive events in a corporation’s lifetime. The proper assessment of their value implications has been of foremost interest to policy-makers and academic researchers alike. Much of the research on mergers and acquisitions aims to assess which transactions create, or destroy, how much shareholder value, including a recent debate about “massive wealth destruction” through mergers (Moeller et al. (2005)).

Empirically, the measurement of the causal effect of mergers is challenging. The standard approach in the literature is to use stock-market reactions to merger announcements and to interpret the combined change in target and acquirer values as the expected total value created. This approach builds on a number of assumptions, including the assumptions that markets are efficient, that mergers are unanticipated and unlikely to fail, and that merger bids reveal little about the stand-alone values of the merging entities. Various studies document a small positive combined announcement return of targets and bidders, and interpret this finding as evidence in favor of value creation.

In our recent NBER working paper, Cash Is King — Revaluation after Merger Bids, my co-authors (Marcus Opp of UC Berkeley and Farzad Saidi of New York University) and I argue that a large portion of the announcement effect reflects target revaluation rather than value created through mergers, and that this portion varies with the type of payment: Targets of cash offers are revalued by +15%, but there is no revaluation of stock targets. We also find significant negative revaluation effects for stock bidders, but no effect for cash bidders. Our results imply that the widespread use of announcement effects significantly distorts the assessment of mergers.

…continue reading: Revaluation of Targets after Merger Bids

The Effect of Managerial Traits on Corporate Financial Policies

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday April 25, 2011 at 9:26 am
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Editor’s Note: The following post comes to us from Ulrike Malmendier of the Economics Department at the University of California, Berkeley, Geoffrey Tate of the Finance Department at UCLA, and Jon Yan of Stanford University.

In our forthcoming Journal of Finance paper, Overconfidence and Early-life Experiences: The Effect of Managerial Traits on Corporate Financial Policies, we provide evidence that managers’ beliefs and early-life experiences significantly affect financial policies, above and beyond traditional market-, industry-, and firm-level determinants of capital structure. We begin by using personal portfolio choices of CEOs to measure their beliefs about the future performance of their own companies. We focus on CEOs who persistently exercise their executive stock options late relative to a rational diversification benchmark. We consider several interpretations of such behavior — including positive inside information — and show that it is most consistent with CEO overconfidence. We also verify our measure of revealed beliefs by confirming that such CEOs are disproportionately characterized by the business press as “confident” or “optimistic,” rather than “reliable,” “cautious,” “practical,” “conservative,” “frugal,” or “steady.”

…continue reading: The Effect of Managerial Traits on Corporate Financial Policies

Superstar CEOs

Posted by Jim Naughton, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday March 27, 2009 at 4:05 pm
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Editor’s Note: This post comes from Ulrike Malmendier of the University of California, Berkeley and Geoffrey A. Tate of the University of California, Los Angeles.

Compensation, status, and press coverage of managers in the U.S. follow a highly skewed distribution: a small number of ‘superstars’ enjoy the bulk of the rewards. However, the “tournament” for CEO status and public attention is not designed by shareholders as an incentive device, but is largely conducted by the media. As a result, the value consequences of superstar status are unclear. While increased media exposure may boost profitability, it could also shift power towards the CEO and induce perquisite consumption. In our paper, Superstar CEOs, which was recently accepted for publication in the Quarterly Journal of Economics, we analyze the ex-post value consequences of the managerial superstar system.

We use several empirical methods to identify a credible counterfactual for the winning CEOs. As our main identification strategy, we construct a nearest neighbor matching estimator. We estimate a logit regression to identify observable firm and CEO characteristics that predict CEO awards. We then match each award winner to the non-winning CEO who, at the time of the award, had the closest predicted probability of winning. Lastly, we verify that award winners and the control sample are indistinguishable along most observable dimensions, including firm and CEO characteristics not explicitly included in the match procedure. We exploit shifts in CEO status due to CEO awards conferred by major national media organizations. We link award-induced changes in status to corporate performance and CEO decision-making, using matched non-winning CEOs as a benchmark.

We find that firms with award-winning CEOs subsequently underperform, both in terms of stock and operating performance. At the same time, CEO compensation increases, CEOs spend more time on activities outside the company like writing books and sitting on outside boards, and they are more likely to engage in earnings management. The ex-post effects are strongest in firms with poor corporate governance, compared to a matched sample of non-winners with no ex ante differences in governance. Our findings suggest that the superstar system has negative ex-post value consequences for shareholders. The net effect of the superstar system, after accounting for ex-ante incentives created by the tournament for status, is hard to assess. However, the ex post value destruction we measure is large and it appears to be avoidable. Firms with strong shareholder rights do not experience a decline in performance when their CEOs win awards, suggesting that it is optimal to increase monitoring after CEOs win awards.

The full paper is available for download here.

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