At the Chair of Empirical Corporate Finance, we address classic topics in corporate finance such as payout policy and capital structure, but also examine issues at the intersection between finance and corporate governance. In our research, we analyze the impact of different types of owners — such as families and private equity investors — on corporate policy, the relation between governance regulation and firm value, and a broad range of questions around the dividend policy of exchange listed firms. Our findings are of interest to the academic community and practitioners and are applied in teaching at WHU’s various programs.
Covering topics on corporate finance, corporate governance, and more –
Research and publications at the leading edge.
Mapping the Corporate Governance Scholarship: Current State and Future Directions
We conduct a comprehensive analysis of all scholarly publications in the field of corporate governance (CG) since the Enron scandal of 2001. Using bibliometric methods, we identify prominent themes that have served as the foundation of CG research, prominent topics in the field along with their temporal developments, and recent trends in CG research. In addition, we identify the authors and journals that have had the biggest impact in the field.
We document that the number of annual publications in CG has increased by a factor of eight since the early 2000s, with research articles being published in a wide variety of general interest journals, as well as in outlets specialized in the field of CG. We identify six research themes as the foundation of CG research: the theoretical foundations of CG, ownership, CG mechanisms and firm outcomes, disclosures, the board of directors, and family firms. We further find 19 major bibliographic keyword clusters that have been explored by researchers in the past 20 years. Research on corporate social responsibility (CSR) and sustainability, governance mechanisms, control mechanisms and disclosures, board diversity, CG in family firms, and CG in the Chinese context are the most dynamic areas of research in recent years.
We systematically analyze the literature on CG and outline theoretical foundations, structuring academic contributions by keyword clusters. Links between keyword clusters as well as the most dynamic research areas are identified. The analysis provides guidance for researchers regarding suitable outlets for the different thematic clusters and helps as a basis to identify research opportunities.
We document growing research interest in the field of CSR and sustainability. The growing body of literature in these areas can inform CG and CSR policies in the future. Our comprehensive bibliographic analysis provides an overview of CG research themes across research disciplines and streams of the literature.
Measuring Changes in Credit Risk: The Case of CDS event Studies.
This paper examines the size and power of test statistics designed to detect abnormal changes in credit risk as measured by credit default swap (CDS) spreads. We follow a simulation approach to examine the statistical properties of normal and abnormal CDS spread changes and assess the performance of normal return models and test statistics. Using daily CDS data, we find parametric test statistics to be generally inferior to non-parametric tests, with the rank test performing best. A CDS factor model based on factors identified in the empirical literature is generally well specified and more powerful in detecting abnormal performance than some of the classical normal return models. Finally, we examine abnormal CDS announcement spread changes around issuer's rating downgrades to demonstrate the effect of different CDS spread change measures and normal return models on event study results.
Takeover Protection and Firm Value.
We examine firm value consequences of anti-takeover regulation, exploiting the staggered announcement and implementation of an anti-takeover regulation in the U.K. We show that, on average, takeover protection increases firm value. This effect is partly driven by innovative firms expanding their R&D activities. However, the anti-takeover regulation also increases the value of less productive firms. Anti-takeover regulation could thus constrain highly productive firms from taking over low-productivity firms. Our results imply that, while takeover protection may stimulate innovation, it can distort the allocation of funds by preventing market share from moving from less efficient to more efficient firms.
Open Market Share Repurchases in Germany: A Conditional Event Study Approach.
We analyze the decision to announce an open market share repurchase and the share price reaction to the announcement. We use a conditional estimation approach, which takes into account that the repurchase decision is made rationally and that, consequently, there is a potential selection bias. This approach requires a ‘non‐event sample’ of firms that could reasonably be expected to announce a repurchase but did not. The specific institutional rules for share repurchases in Germany allow us to construct such a sample. We find that a conditional approach yields results that are qualitatively comparable but differ in detail from those obtained using a non‐conditional approach. We confirm earlier findings of negative share price performance prior to the repurchase announcement and positive and significant announcement day abnormal returns. The results of our probit models are consistent with the free cash flow hypothesis and provide at least partial support for the rent extraction, signalling, and capital structure hypothesis. The results of the cross‐sectional regressions provide support for the signalling hypothesis once we control for selection bias.
Dividend Policy, corporate control and the tax status of the controlling shareholder.
This paper studies the impact of the concentration of control, the type of controlling shareholder and the dividend tax preference of the controlling shareholder on dividend policy for a panel of 220 German firms over 1984–2005. In line with the agency model, we find a negative relation between family control and dividend payouts at low and high levels of control. We also find evidence of reduced speed of adjustment of dividends at intermediate levels of family control. We further document that corporate control is associated with higher dividend payouts if an industrial or commercial corporation is the majority shareholder of the company. Finally, the results do not provide evidence that the tax preference of the largest shareholder matters for dividend payout decisions.
Do what you did four quarters ago: Trends and implications of quarterly dividends.
By analyzing the inter-temporal structure of quarterly dividends, we show that as more firms announce dividend increases exactly every four quarters, dividend policy has become more persistent and more predictable. Recently, nearly 60% of all dividend increases have been announced in four-quarter cycles. Valuation, earnings stability, and size are positively related to the propensity to adopt four-quarter cycles. More importantly, we provide evidence that this structure is incorporated into market participants' expectations about future dividend announcements. These findings may provide an explanation for two phenomena described in the literature: the declining information content of dividends and the higher degree of dividend smoothing.
The Lintner Model revisited: Dividends versus total payouts.
We analyze how the introduction of repurchases in 1998 affected the payout policy of German firms. To this end, we estimate Lintner (1956) partial adjustment models for both dividends and total payouts. We also analyze the implications for payout of changes in both permanent and transitory earnings. Our results are inconsistent with the hypothesis that dividends and repurchases are perfect substitutes. We also find that repurchases have not taken over the role of special dividends. Our results support the flexibility hypothesis that predicts that (regular) dividends are used to disburse permanent, and more flexible payout methods (special dividends and repurchases) transitory, earnings.
Should I Stay or Should I Go? Former CEOs as Monitors.
In the German two-tiered system of corporate governance, it is not uncommon for chief executive officers (CEOs) to become the chairman of the supervisory board of the same firm upon retirement. This practice has been the subject of controversial debate because of potential conflicts of interest. As a member of the supervisory board, the former CEO must monitor his successor and former colleagues and is involved in setting their pay. We analyze a panel covering 150 listed firms over a 10-year period. Consistent with a leniency bias, we find evidence that firms in which a former CEO serves on the supervisory board pay their executives more. We further find weak evidence that the compensation of the members of the supervisory board is also higher. Short-run event study results indicate that the announcement of the transition of a retiring CEO to the supervisory board is considered good news. Thus, despite the increases in executive compensation we document, CEO transitions are not a cause of concern for shareholders.
Do Markets Anticipate Capital Structure Decisions? - Feedback Effects in Equity Liquidity.
We analyze the impact of expected (targeted) capital structure decisions on information asymmetries. We measure information asymmetry from equity liquidity through the use of an information asymmetry index that is based on six measures that capture trading activity, trading costs, and the price impact of order flow. Modeling the joint determination of leverage and liquidity, the data indicate that expected increases in leverage (target leverage changes) decrease the information asymmetry index. This is consistent with the signaling hypothesis of Ross (1977), and is equivalent to increases in equity liquidity.
Underwriter Reputation and the Quality of Certification: Evidence from High-Yield Bonds.
This paper provides primary evidence of whether certification via reputable underwriters is beneficial to investors in the corporate bond market. We focus on the high-yield bond market in which certification of issuer quality is most valuable to investors owing to low liquidity and issuing firms’ high opacity and default risk. We find bonds underwritten by the most reputable underwriters to be associated with significantly higher downgrade and default risk. Investors seem to be aware of this relation, as we further find the private information conveyed via the issuer-reputable underwriter match to have a significantly positive effect on at-issue yield spreads. Our results are consistent with the market-power hypothesis, and contradict the traditional certification hypothesis and underlying reputation mechanism.
Is Busy Really Busy? Board Governance Revisited.
We investigate the relationship between firm governance and the board's position in the social network of directors. Using a sample of 133 German firms over the four‐year period from 2003 to 2006, we find that firms with intensely connected supervisory boards are (1) associated with lower firm performance, and (2) pay their executives significantly more. We interpret these results as evidence of poor monitoring in firms with directors who are more embedded in the social network. In both cases, simple measures for busy directors that were used by other studies in the past fail to show any significant pattern. The findings suggest that the quality and structural position of additional board seats may play a bigger role than simply the number of board appointments.
The Information Content of Dividend Surprises: Evidence from Germany.
This paper reconsiders the issue of share price reactions to dividend announcements. We use the difference between the actual dividend and the analyst consensus forecast as obtained from I/B/E/S as a proxy for the surprise in the dividend announcement. Using data from Germany, we find significant share price reactions after dividend announcements. We use panel methods to analyze the determinants of the share price reactions and find evidence in favour of the cash flow signaling hypothesis and dividend clientele effects. We further find that the price reaction to dividend surprises is related to the ownership structure of the firm. The results do not support the free cash flow hypothesis. An additional result of our analysis is that dividend changes are not an appropriate measure to capture the information content of dividend announcements.
Family Ownership, Financing Constraints, and Investment Decisions.
This paper provides an empirical answer to the question of how the unique incentives of founding families influence investment decisions. Contrary to theoretical considerations, the results indicate that family firms are not more susceptible to external financing constraints. When compared to companies of similar size and dividend payout ratio, the investment outlays of family firms are consistently less sensitive to internal cash flows. Family businesses are more responsive to their investment opportunities and seem to invest irrespective of cash flow availability. The findings suggest that founding family ownership is associated with lower agency costs and can help to diminish information asymmetries with external suppliers of finance.
Wealth Effects of Private Equity Investments in the German Stock Market.
This paper investigates the wealth effects of private equity (PE) investor purchases of shares in German quoted companies. It is the first study to analyze these effects for the German market which is particularly interesting due to its distinct characteristics with regard to the ownership structure of publicly listed companies and the protection of minority shareholders. We find that PE investors generate positive wealth effects for target shareholders of 5.90% around the event day (t = -1 to t = 0). In addition, we find that the wealth effects of PE investor involvement in Germany are positively related to the target's tax liabilities and degree of undervaluation and negatively related to the target's leverage and the shareholding of the second largest ownership block. The latter effect can be interpreted as a supplementary monitoring effect of the management or a monitoring effect of the largest shareholder through which private benefits of control are reduced.
Dividend Policy of German Firms - A Panel Data Analysis of Partial Adjustment Models.
German firms pay out a lower proportion of their cash flows, but a higher proportion of their published profits than UK and US firms. We estimate partial adjustment models and report two major findings. First, German firms base their dividend decisions on cash flows rather than published earnings as (i) published earnings do not correctly reflect performance because German firms retain parts of their earnings to build up legal reserves, (ii) German accounting is conservative, (iii) published earnings are subject to more smoothing than cash flows. Second, to the opposite of UK and US firms, German firms have more flexible dividend policies as they are willing to cut the dividend when profitability is only temporarily down.
Large Shareholders and Firm Performance - An Empirical Examination of Founding-Family Ownership.
Using panel data on 275 German exchange-listed companies I examine the relationship between founding-family ownership and firm performance. By separating the family effect from general blockholder effects, the paper shows that family firms are not only more profitable than widely-held firms but also outperform companies with other types of blockholders. However, the performance of family businesses is only better in firms in which the founding-family is still active either on the executive or the supervisory board. These findings suggest that family ownership is related to superior firm performance only under certain conditions. If families are just large shareholders without board representation, the performance of their companies is not distinguishable from other firms. In addition, the results indicate that other blockholders either affect firm performance adversely or have no detectable influence on performance measures.
Setting a Fox to Keep the Geese - Does the Comply-or-Explain Principle Work?.
The German Corporate Governance Code works according to the comply-or-explain principle. One of its recommendations was to publish the remuneration of the members of the executive board on an individual basis. We examine the characteristics of the firms that complied with the code requirement. Our results indicate that firms that paid higher average remunerations to their management board members were less likely to comply, whereas firms with higher Tobin's Qwere more likely to comply. We also document a non-monotonic relation between ownership concentration and the probability of compliance that is consistent with standard corporate governance arguments.
Due to the fact that the number of firms complying with the disclosure requirement was low, a new law was passed that mandates disclosure unless the shareholders' meeting (with a 75% majority) decides otherwise. We find that this “loophole” in the new legislation is exploited by smaller firms, firms with comparatively high levels of executive remuneration, and firms with concentrated ownership. We discuss the implications of our results for the effectiveness of the comply-or-explain regulation.
Shareholder Wealth Gains Through Better Corporate Governance - The Case of European LBO-Transactions.
We examine shareholder wealth effects in a heterogeneous sample of 115 European leveraged going private transactions from 1997 to 2005. Average abnormal returns as reaction to the LBO announcement amount to 24.20%. In cross-sectional regressions, we find that these value gains can largely be attributed to differences in corporate governance: on a macro level, abnormal returns for pre-LBO shareholders are larger in countries with a poor protection of minority shareholders. On a firm level, companies with a high pre-LBO free float and comparatively weak monitoring by shareholders tend to show high abnormal returns. Furthermore, companies that are undervalued with respect to an industry peer-group exhibit higher announcement returns, indicating that agency conflicts and/or market inefficiencies can serve as an explanation.
Underwriter Reputation & Certification in the High Yield Bond Market", in: M. Fridson und K. Sterling (eds.), "High Yield Future Tense: Cracking the Code of Speculative Debt".
Restructuring in Family Firms: A Tale of the Two Crises.
Auswirkungen guter Corporate Governance und Compliance auf den Unternehmenswert.
Buyouts Around the World, in: D. Cuming (Hrsg.), "The Oxford Handbook of Private Equity".
Corporate Governance Systems, in: H. Kent Baker und R. Anderson (Hrsg.), "Corporate Governance: A Synthesis of Theory, Research, and Practice".
Trends in Dividends, in: H. Kent Baker (Hrsg.), "Dividends and Dividend Policy".
Private-Equity-Investitionen in börsennotierten Unternehmen in Deutschland.
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Dr. Ali Özdakak
Dissertation: Empirical Essays on Initial Public Offerings and Mergers & Acquisitions
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WHU – Otto Beisheim School of Management
Chair of Behavioral Finance