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Capital structure and outcome of proxy contest targets: An empirical study

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  • Ning Gao
  • Jason Everett Brooks
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    Abstract

    Purpose – The purpose of this paper is to investigate the influence of capital structure changes by target firms on the outcome and ex post performance of firms targeted by proxy contests. Design/methodology/approach – The influence is examined by using predictions of control-driven model developed by Harris and Raviv and signaling theory of debt in capital structure. Findings – The results are consistent with the predictions of both control-driven model and signaling theory. Significant differences are found between two groups of target firms – management victory targets and dissident victory targets. Specifically: management victory targets feature proxy contests that are accompanied by leverage increasing changes in target firms' capital structure; the same group also realizes better long-run stock performance compared to dissident victory targets; and the long-run abnormal stock performance of management victory targets is significantly positively related to the increases in leverage in the capital structure during proxy contest period. Originality/value – This paper is the first to directly address the relationship between leverage change and the outcome and long-run performance of proxy contest targets, thus confirming both the defensive and the signaling role of debt on firm's capital structure decision.

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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal Managerial Finance.

    Volume (Year): 36 (2010)
    Issue (Month): 4 (April)
    Pages: 294-321

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    Handle: RePEc:eme:mfipps:v:36:y:2010:i:4:p:294-321

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    Web page: http://www.emeraldinsight.com

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    Related research

    Keywords: Capital structure; Debts; Gearing; Stock returns; Take-overs;

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    2. Harris, Milton & Raviv, Artur, 1988. "Corporate control contests and capital structure," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 55-86, January.
    3. Mark L. Mitchell & Erik Stafford, 1997. "Managerial Decisions and Long-Term Stock Price Performance," CRSP working papers 453, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
    4. Harris, Milton & Raviv, Artur, 1990. " Capital Structure and the Informational Role of Debt," Journal of Finance, American Finance Association, vol. 45(2), pages 321-49, June.
    5. Jeffrey A. Wurgler & Malcolm P. Baker, 2001. "Market Timing and Capital Structure," Yale School of Management Working Papers ysm181, Yale School of Management.
    6. Bebchuk, Lucian A. & Cohen, Alma, 2005. "The costs of entrenched boards," Journal of Financial Economics, Elsevier, vol. 78(2), pages 409-433, November.
    7. Uma V. Sridharan & Marc R. Reinganum, 1995. "Determinants of the Choice of the Hostile Takeover Mechanism: An Empirical Analysis of Tender Offers and Proxy Contests," Financial Management, Financial Management Association, vol. 24(1), Spring.
    8. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    9. Bradley, Michael & Desai, Anand & Kim, E. Han, 1983. "The rationale behind interfirm tender offers : Information or synergy?," Journal of Financial Economics, Elsevier, vol. 11(1-4), pages 183-206, April.
    10. DeAngelo, Harry & DeAngelo, Linda, 1989. "Proxy contests and the governance of publicly held corporations," Journal of Financial Economics, Elsevier, vol. 23(1), pages 29-59, June.
    11. Loughran, Tim & Ritter, Jay R., 2000. "Uniformly least powerful tests of market efficiency," Journal of Financial Economics, Elsevier, vol. 55(3), pages 361-389, March.
    12. Dodd, Peter & Warner, Jerold B., 1983. "On corporate governance : A study of proxy contests," Journal of Financial Economics, Elsevier, vol. 11(1-4), pages 401-438, April.
    13. Elias Raad & Robert Ryan, 1995. "Capital Structure and Ownership Distribution of Tender Offer Targets: An Empirical Study," Financial Management, Financial Management Association, vol. 24(1), Spring.
    14. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    15. Thomas, Randall S. & Martin, Kenneth J., 1994. "The impact of rights plans on proxy contests: Reevaluating Moran v. Household International," International Review of Law and Economics, Elsevier, vol. 14(3), pages 327-339, September.
    16. Loughran, Tim & Ritter, Jay R, 1995. " The New Issues Puzzle," Journal of Finance, American Finance Association, vol. 50(1), pages 23-51, March.
    17. Lisa F. Borstadt & Thomas J. Zwirlein, 1992. "The Efficient Monitoring Role of Proxy Contests: An Empirical Analysis of Post-Contest Control Changes and Firm Performance," Financial Management, Financial Management Association, vol. 21(3), Fall.
    18. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    19. Ikenberry, David & Lakonishok, Josef, 1993. "Corporate Governance through the Proxy Contest: Evidence and Implications," The Journal of Business, University of Chicago Press, vol. 66(3), pages 405-35, July.
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