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CFGT-6: M&A and Product Markets
Selling Innovation in Bankruptcy
1Yale University; 2Duke University; 3Queen's University
This paper studies the asset reallocation decision of bankrupt firms in a novel setting of selling innovation, using a comprehensive dataset of patent transactions in bankrupt firms from 1980 to 2015. We first document systematic evidence on the pervasive phenomenon of selling innovation in bankruptcy. We then show that the decision of selling innovation is significantly determined by trading frictions associated with a patent - that is, in order to avoid costly asset illiquidity, bankrupt firms sell innovations that are more redeployable by other firms and can be traded in more liquid markets. The effect is stronger during industry distress and when there is a lack of access to finance in bankruptcy. We also provide evidence using hand collected data on the auctions of innovation in bankruptcy. Our findings suggest that the ex post cost of trading frictions in reallocating capital affects the asset reallocation decision ex ante.
Why Are Underperforming Firms Rarely Acquired?
1University of Illinois at Urbana-Champaign; 2Indiana University
Abstract Only 4.5% US firms in the bottom performance quintile are taken over annually, and the association between a firm's performance and its subsequent takeover exposure is close to zero. These observations cast doubts on the effectiveness of the takeover market to reallocate resources towards more efficient users and better management. In this paper, we revisit this problem by estimating a dynamic model in which takeovers are pursued either to enhance firm performance or to create control benefit for managers . Our estimates suggest that the takeover market is overall efficient with most value-enhancing mergers consummated quickly. Managers' entrenchment blocks less than 10% of the profitable deals. Meanwhile, an efficient takeover market triggers an ongoing selection effect so that underperforming firms with more entrenched managers survive longer. Even if this selection effect is small each period, it accumulates over time and is amplified as the economy evolves. As a result, underperforming firms become overrepresented by managers with high control benefit, leading to the weak takeover-performance sensitivity in data.
Portfolio Diversification, Market Power, and the Theory of the Firm
IESE Business School
This paper develops a model of firm behavior in the context of oligopoly and portfolio diversification by shareholders. Competition for shareholder votes among potential managers seeking corporate office leads to internalization and aggregation of shareholder objectives, including shareholdings in other firms, and the fact that shareholders are consumers and workers of the firms. When all shareholders hold market portfolios, firms that are formally separate behave as a single firm. I introduce new indices that capture the internalization effects from consumer/worker control, and discuss implications for antitrust, stakeholder theory, and the boundaries of the firm.
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Conference: EFA 2017
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