Do Long- Term Shareholders Benefit From Corporate Acquisitions? This article has benefited from the comments of seminar participants at the University of Illinois, the University of Iowa, and the 1. Western Finance Association meeting. We thank Utpal Bhattacharya, James Cotter, Eugene Fama, Joetta Forsyth, Thomas George, Todd Houge, Sarah Peck, Raghavendra Rau, and Jay Ritter for useful comments, Ren. Yao- Min Chiang and Todd Houge provided valuable assistance with data collection. Shareholder value is a business term, sometimes phrased as shareholder value maximization or as the shareholder value model, which implies that the ultimate measure. Mergers and Acquisitions in India. Do the shareholders benefit from M&As? Cross-border Acquisitions, Corporate Governance and Bidders’ Gains. Has long precluded shareholders in such companies from directly intervening. Do Weak Shareholders Benefit Stakeholders? Synergies or overpayment in European corporate M&A. Synergies or overpayment in European. Do long-term shareholders benefit from corporate. International Journal of. What Good Are Shareholders? The path forward for corporate executives and shareholders appears blocked. Executives complain, with justification, that meddling and second- guessing from shareholders are making it ever harder for them to do their jobs effectively. Shareholders complain, with justification, of executives who pocket staggering paychecks while delivering mediocre results. Boards are stuck in the middle. The shift, although it had political and economic causes, was also enabled by the rise of a philosophy of shareholder dominance that grew out of academic research on the motivations and behavior of corporate managers. According to that philosophy, shareholders are the center of the corporate universe; managers and boards must orbit around them. Do long-term shareholders benefit. Corporate reality, though, has proved stubbornly uncooperative. In legal terms, shareholders don. In law and practice, they don. And although many top managers pledge fealty to shareholders, their actions and their pay packages often bespeak other loyalties. This gap between rhetoric and reality. If only corporations really did put shareholders first, the reasoning goes, capitalism would function much better. This argument has great appeal, but it is hard to square with the facts. Our current muddle, remember, comes after many years during which shareholders gained power yet were repeatedly frustrated with the results. Perhaps expecting them to govern and discipline corporations is doomed to disappointment. Or perhaps there are ways in which shareholders can be effective and helpful. What are their incentives? What are they good at? The body of research and discussion on these questions is growing. Money. The most straightforward job of the shareholder is to provide funds. In practice, however, it isn. Corporations do need capital to invest in growth, but they don. Net issuance of corporate equity in the U. S. That negative number would be much bigger if we left out financial institutions and their desperate fundraising in 2. Factor in dividend payments, and we find a multi- trillion- dollar transfer of cash from U. S. Established corporations tend to finance investments out of retained earnings or borrowed money. Many do need capital from equity investors. They are often the young, growing companies we all want to see more of. Without shareholders who are willing to take risks that a bank or a bondholder would not, these companies might remain stuck in low gear or never even get moving. The investors who provide this cash are usually granted clout commensurate with their contribution. Venture capitalists and angel investors get board seats and sometimes veto power over management decisions and appointments. Investors who step up in times of trouble are often favored over others and given a say in strategic decisions. Corporate governance disputes tend not to occur in such situations: Management effectively answers to the shareholders who provided much- needed capital. The funding role in a typical publicly traded corporation is filled less by shareholders than by the stock market as a whole. The market provides liquidity. Having shares that can easily be bought and sold, with prices that all can see, reassures lenders and business partners. It allows early investors and employees to sell company shares and exercise options. It gives investors who come forward when cash is sorely needed a way to realize gains on their investments later. It greases the wheels of capitalism. In one study, Eugene Fama and Kenneth French found that from 1. From 1. 97. 3 to 1. What drove the increase? More stock- financed mergers and more employee stock options and other stock- based compensation. All- stock mergers tend to destroy value. Many corporations have overused stock options as a means of paying employees. And more generally, market liquidity appears to have diminishing returns. To provide adequate liquidity, an asset market needs lots of fickle short- term speculators. A market composed solely of buy- and- hold investors wouldn. But a market composed mostly of short- termers presents its own problems. And short- termers have been taking over the stock market. In the 1. 95. 0s the average holding period for an equity traded on the New York Stock Exchange was about seven years. Similar trends can be seen in other markets around the world. In a more recent development, high- frequency traders whose holding periods can sometimes be measured in milliseconds now account for as much as 7. NYSE. This shift to the short term has three causes: First, regulators in many nations have pushed successfully for lower transaction costs. Second, advances in technology, in the form of financial engineering as well as computing and communications hardware and software, have enabled many new forms of trading. Third, the individual investors who once dominated stock markets have been pushed aside by professionals. Now institutions hold approximately 5. Add in institutional owners from overseas (foreign ownership of U. S. For the biggest corporations, the percentage is even higher. Increasing institutional ownership has combined with other forces to transform the equity market landscape. Brokerage commissions have been lowered for everyone, but lowered most for institutional investors. Institutions also have the resources to take advantage of cutting- edge financial, computing, and communications technologies. And although individuals can pursue long- term strategies that ignore fashion and day- to- day market fluctuations, institutions that are managing other people. Of course, some volatility is good. It gives people a reason to trade, thus keeping markets liquid. But past a certain point, volatility kills liquidity. Think of the financial crisis of 2. Or the Flash Crash of 2. Overall, as documented by the Bank of England. Haldane, stock market volatility in the U. S. But there are indications that certain companies. Initial public offerings have been on a downward trend for decades in the United States, interrupted only briefly by the internet stock mania of the late 1. The accounting firm Grant Thornton has argued in a series of research papers that more- frequent trading and superlow transaction costs are partly responsible, because brokers no longer make enough on commissions to justify research on young companies. Yet modern securities regulation has been developed within a paradigm in which there is no such thing as too much liquidity, too much trading, or too much volatility. Lowering transaction costs is seen as an unalloyed good. The tax code is different: In most countries short- term trading is subject to higher capital gains tax rates than long- term investing. But the impact of this tax preference is lessened by the fact that in the U. S., many of the biggest investors (pension funds, foundations, endowments) are exempt from income taxes. In the wake of the Flash Crash, the U. S. Securities and Exchange Commission is considering new circuit breakers and trading stops to be used in the event of sudden market volatility. That marks at least a modest change in direction, but it. Market frictions have their uses. There is such a thing as too much liquidity. One much- discussed policy proposal is a small tax on all financial transactions, variously called the Tobin tax and the Robin Hood tax. The issues with such a tax go well beyond the purview of this article, but the possibility that it would decrease liquidity should not be seen as a slam- dunk argument against it. Information. The stock market is one of the world. Since the 1. 96. 0s, finance scholars have been documenting its remarkable ability to sniff out and assess information about companies. Event studies show that market prices react to news with staggering quickness. Also, while public stock markets are often assailed for short- termism and impatience, there is ample statistical evidence that stock prices. And stock markets have never been anywhere close to infallible in their assessment of companies. If they were, rational investors and speculators would have no incentive to expend resources and intelligence trying to dig up information and outsmart the market. Financial markets need imperfection. So how well do stock market prices reflect underlying corporate fundamentals? Sometimes they get pure misinformation: In a study described in the January. Citrin found that companies whose stock prices dropped sharply upon the naming of a new CEO subsequently outperformed. Also, comparative stock price movements (how Coca- Cola performs relative to Pepsi, for example) are usually more informative than absolute price movements, for which macroeconomic factors and market psychology tend to rule the day. Financial markets, the late economist Paul Samuelson said, are microefficient and macroinefficient. When shareholders are widely dispersed, how can they keep managers in check? Only by selling shares or casting votes. This helps explain why executives complain about the short- term focus of the stock market even as finance scholars find evidence that markets still look deep into the future. Using the right statistical tools, you can separate useful, rational signals from the market. But if you look at what your company. Human nature dictates that we give more attention to simple recent signals than to complex long- run trends. They can also just talk to them. In many instances well- informed investors. But such behavior is not really encouraged in the current market environment. Regulation Fair Disclosure, adopted by the SEC in 2. The goal was to level the informational playing field for investors, which seems admirable enough. But some of the results have been troubling. One study, by Armando R. Gorton, and Leonardo Madureira, found that in the wake of Reg FD, small companies and complex companies have struggled to attract analysts. By forcing all communications into the public sphere, Reg FD may have made it harder to communicate nuance and complexity.
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