Abstract I present evidence consistent with theories that small boards of directors are more effective, Using Tobin's Q as an approximation of market valuation, I find an inverse association between board size and firm value in a sample of 452 large U.S. industrial corporations between 1984 and 1991. The result is robust to numerous controls for company size, industry membership, inside stock ownership, growth opportunities, and alternative corporate governance structures. Companies with small boards also exhibit more favorable values for financial ratios, and provide stronger CEO performance incentives from compensation and the threat of dismissal.

We study whether CEO involvement in the selection of new directors influences the nature of appointments to the board. When the CEO serves on the nominating committee or no nominating committee exists, firms appoint fewer independent outside directors and more gray outsiders with conflicts of interest. Stock price reactions to independent director appointments are significantly lower when the CEO is involved in director selection. Our evidence may illuminate a mechanism used by CEOs to reduce pressure from active monitoring, and we find a recent trend of companies removing CEOs from involvement in director selection. A BOARD OF DIRECTORS SERVES AS THE PIVOTAL mechanism for monitoring the managers of a public corporation. Directors are voted into office by stockholders and have a fiduciary responsibility to protect stockholders ’ interests. Along with their legal duties of reviewing the corporation’s major plans and actions, directors are charged with selecting, compensating, evaluating, and, when appropriate, dismissing top managers.

We examine the role of strategic interaction in explaining the valuation effect of new product announcements and employ Sundaram, John, and John's (1996) Previous studies show that announcements of new product strategies are generally associated with a positive effect on shareholder value (Woolridge, 1988; Although these empirical studies on the wealth effect of new product strategies are insightful, they do not consider the impact of competitive interaction in an industry. 1 In this paper, we examine whether strategic interaction can also explain the wealth effects of new product announcements. New product introductions can create opportunities for differentiation and competitive

Abstract We develop a new rationale for the performance and value improvements of firms following corporate spin-offs. We consider a situation of a firm with multiple divisions, where incumbent management may have differing abilities for managing various divisions. Giving up control to a rival with better ability in managing the firm, while it benefits equity holders (including incumbent management) by increasing the firm's equity market value, also involves losing the incumbent's benefits from control. Due to this trade-off, the incumbent, while willing to relinquish control to extremely high ability rivals, may not wish to do so for rivals who have only moderately higher management ability relative to him. Spin-offs increase the chance of loss of control to potential rivals in two ways: First, it reduces the ability of the incumbent to use firm size strategically against the rival in a control contest (after the spin-off, the rival can invest to the full extent of his wealth in the equity of the firm more vulnerable to a takeover). Second, it increases the probability that passive investors will vote with the rival in a contest for control for at least one division (in a joint firm, the superior management ability of any rival with respect to one division may be neutralized by inferior ability with respect to another one). This increased chance of loss of control following a spin-off, in turn, motivates the incumbent to work harder (despite his disutility for effort) in equilibrium in an attempt to maintain control. Thus, the increase in equity market value of the firm upon spin-off announcements arises not only from market participants incorporating in their valuations the increased probability of a takeover by a more able rival for control, but also from their anticipating the increase in managerial efficiency arising from the disciplining effect of the spin-off on firm management. Our analysis predicts that, in addition to positive announcement effects, the equity of a sample of spunoff firms will also exhibit long-term positive abnormal returns under certain conditions. Our model also explains a wide variety of other recently documented empirical regularities, and provides hypotheses for further empirical work.

Recent papers have shown conditions under which vertical, mergers can result in anticompetitive foreclosure of unintegrated rivals. These models imply that a necessary but not sufficient condition for anticompetitive foreclosure is that unintegrated rivals are less profitable after a vertical merger. We test this hypothesis by examining the stock prices of unintegrated rivals at the time of a vertical merger announcement and at the time of a government antitrust complaint. We find no evidence to support the foreclosure hypothesis. *Vice President and Economist, Federal Reserve Bank of Boston, and

ABSTRACT This paper investigates the impacts on both the selling and acquiring firms in crossborder divestiture transactions between U.S. and Canadian firms. This research addresses questions regarding the degree of synergy resulting from these transactions and the extent to which Canadian and U.S. firms benefit from these sales. The empirical analysis in the paper examines 62 U.S. firms, which sold units to Canadian firms over the 1980-1995 interval, 32 Canadian firms that were acquirers in those transactions, and a subsample of 23 matched-pairs transactions. The methodology employed includes both percentage and dollar abnormal returns. We find gains to U.S. divestor/selling firms of similar magnitudes to those in prior studies of sell-offs by U.S. firms. The gains to Canadian acquirers are larger than those previously identified for buyers in domestic sell-offs. These gains are both economically material and statistically significant. However a wide range of outcomes is observed, particularly for sellers. JEL: F3

The purpose of this study is to investigate the relationship between the level of institutional ownership and the magnitude of the share price response to new equity issues by public utility firms. Previous studies of industrial firms argue that the presence of institutional investors reduces information asymmetry between the issuing firm and the market. Their results indicate that there is a direct relationship between the level of institutional ownership and the resulting magnitude of the share price response. We hypothesize that this relationship is not significant for public utility firms since the role of regulators supersedes that of institutional investors in reducing information asymmetries. Findings, based on a sample of 325 new equity issues by public utilities during 1977-1994, are consistent with our hypothesis. INTRODUCTION This paper investigates the impact that the level of institutional ownership has on the share price response to new issues of common stock by ...

Approval of the Graduate School of Social Sciences

We examine how shareholder activist campaigns affect the careers of directors of the targeted firms. Using a comprehensive sample of shareholder activism between 2004 and 2011, we find that directors are almost twice as likely to leave over a two-year period if the firm is the subject of a shareholder activist campaign. While it has been argued that proxy contests are an ineffective mechanism for replacing directors, as they rarely succeed in getting a majority of shareholder support, our results suggest that director turnover takes place following shareholder activism even without shareholder activists engaging in, let alone winning, proxy contests. Performance-sensitivity of director turnover is also higher in the presence of shareholder activism. We also find that director election results matter for director retention: directors are more likely to leave in the year following activism when they receive lower shareholder support. Contrary to consequences on the targeted firm’s board, we find no evidence that directors lose seats on other boards, a proxy for reputational consequences, as a result of shareholder activism.