Abstract We study transactions in which sellers fear being underpaid because their outside option is better known to the buyer. We rationalize various observed contracts as solutions to such smart buyer problems. Key to these solutions is granting the seller upside participation. In contrast, the lemons problem calls for granting the buyer downside protection. But, in either case, the seller (buyer) receives a convex (concave) claim. Thus, contracts usually associated with the lemons problem, such as debt or cash-equity offers, can be equally well manifestations of the smart buyer problem, although the two information asymmetries have opposite cross-sectional implications. Received December 23, 2014; accepted May 23, 2016 by Editor Uday Rajan.
Recent work in the corporate governance literature stresses the need to provide boards of directors (BoDs) with explicit incentives to safeguard shareholder welfare (Bebchuk, Fried, and Walker 2002; Bebchuk and Fried 2004). Jensen (1993) observes that “encouraging outside board members to hold substantial equity interests would provide better incentives.” In a similar spirit, the National Association of Corporate Directors (National Association of Corporate Directors 1995) proposed that “boards should pay directors solely in the form of stock and cash — with equity representing a substantial portion of the total up to 100 percent.” Indeed, equity-based BoD compensation has been on the rise in recent years (Bhagat and Black 2002; Conference Board 2006; Pearl Meyer & Partners 2007).1 The underlying premise is that equity awards help align BoD incentives with shareholder interests and enhance long-term firm value (Byrne 1996; Gabrielle 2001). However, to the extent that directors hold both vested and unvested (restricted) equity-based instruments, their actions are likely influenced by a combination of short-term and long-term incentives. The literature has focused mainly on the beneficial long-term incentive effects of equity awards. However, the effects of accompanying short-term incentives are not clear. Are they non–value adding, or do they in fact affect BoD behavior in a way that benefits shareholders? We address these questions in this paper. In particular, our purpose is to jointly examine the short-term and long-term incentive effects of equity-based BoD compensation on the BoD’s corporate governance (contracting and monitoring) and advisory (consulting) roles.2 The boards’ corporate governance role has been examined extensively.3 However, directors are typically individuals with considerable management experience and expertise and serve as a natural resource for top management in making crucial strategic and operational decisions.4,5 In fact, surveys have indicated that most directors view advising as their primary role (Mace 1972; Demb and Neubauer 1992; Adams 2009). Nevertheless, the BoD’s advisory role has received relatively little attention in the literature. Adams and Ferreira (2007), for example, examine the BoD’s monitoring and advisory role and show that a less independent BoD is sometimes optimal because it is less likely to monitor management, which, in turn, induces management to share information with the BoD, and receive better advice leading to greater investment efficiency.6 If this advisory role is indeed value-enhancing for shareholders, it cannot be ignored when examining the short-term and long-term incentive effects of BoD compensation. We use a simple agency model in which the BoD performs three roles: contracting, monitoring and consulting. The BoD contracts with the manager to supply some productive input that results in firm output. A performance evaluation system that produces an informative signal about firm output, and consequently about managerial effort, is used to contract with the manager. By monitoring, the BoD improves the precision of this information signal. By serving as a consultant, the BoD makes the manager more productive, that in turn means higher expected firm output. The BoD and the manager’s inputs are unobservable and personally costly.7 We assume that board members are themselves rational and self-serving, and must be motivated to provide consulting and monitoring inputs. Consequently, there are two agency problems in our model. The first is between the BoD and the manager, and the second is between the BoD and the shareholders. Both the agency problems arise because the BoD and manager’s respective inputs are unobservable and personally costly. In this respect, our paper adds to the growing literature that models shareholder-manager conflict as arising from a two-tier agency relationship. In our context, a single-tier model that examines shareholder-manager agency conflict stemming from the separation of ownership and control does not permit a role for the BoD. Therefore, by examining a multi-tier agency relationship our paper helps us better understand organizations (Bolton and Scharfstein 1998). In related work, Kumar and Sivaramakrishnan (2008) examine the BoD’s corporate governance role using a double agency model. They focus on the impact of the lack of BoD independence from management on corporate governance, and characterize optimal equity awards to the BoD to create the right BoD incentives. Harris and Raviv (2008) present a model where control of the board can be given to either insiders (the non-independent board) or outsiders (the independent board) — both insiders and outsiders have private payoff-related information. They show that it is sometimes beneficial to give board control to insiders in order to better exploit their information. We begin our analysis by examining a benchmark setting in which the BoD’s inputs are commonly observable. In this benchmark case, it suffices to compensate the BoD for the personal cost of providing consulting and monitoring inputs. When the BoD’s inputs are not observable, explicit BoD incentives become necessary. We show that long-term incentives (i.e., incentives tied to firm output) make the BoD explicitly care about the firm’s output and thereby motivate the BoD to play an active consulting role. Thus, compensating the BoD with restricted stock awards (equity) motivates the BoD to supply consulting input. However, we identify conditions under which long-term incentives alone do not suffice in motivating the BoD’s monitoring input. The is that the BoD’s monitoring input improves the of the performance evaluation system used to managerial and has on firm output. The BoD, does not have incentive to supply monitoring input. the need for short-term incentives. We show that incentives tied to the short-term used to are in this because they provide incentives for the BoD to in We are not of work that has the role of short-term BoD incentives in this short-term BoD a that the manager can these in for private the BoD or We address this by a setting where the manager can the firm’s short-term and show in the use of short-term induces the BoD to monitoring In our results that both long-term and short-term incentives are to that the BoD both corporate governance and consulting equity awards are in the with to equity awards are in motivating In we are to of BoD compensation to BoD The paper as In we the model. In we the BoD’s consulting and monitoring inputs. In we the effects of providing short-term long-term incentives to the BoD. In we the where the manager can firm We provide a and some in where is the of is the manager’s is the manager’s productive effort, and is the cost of productive to the manager. 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Therefore, the manager cannot be a that a of this output. the manager to be on an and short-term which we by by a performance system in performance can of two where We can of as a short-term of the output. we assume that the manager does not have the to this we this The that the manager cannot be a contract on the long-term output some the manager’s contract can be on long-term the optimal compensation contract would be a of is a of there is that in short-term performance play a role in managerial is literature on managerial or that can be to the to short-term and Bebchuk and (1993) show that focus on short-term performance in model this by the manager’s that a contract on short-term performance is of our model is that the BoD’s consulting and monitoring inputs are unobservable to the manager, as is the manager’s to the BoD. Both the BoD and the manager must be motivated to supply their respective inputs. in the the BoD is with restricted and We assume that restricted equity awards have a that the firm’s output or value observable. Thus, the value of restricted equity awards on the of of compensation we use the restricted equity awards to to BoD compensation on the firm’s output of compensation for of the the value of equity awards on the firm’s short-term which is by awards be as a short-term incentive when there are on as a we use the equity awards to to BoD compensation on The manager’s compensation is on short-term performance — the of the performance the contract to the by the BoD. The BoD’s on the can be on both short-term and long-term and We use to the contract to the BoD by the shareholders. 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Thus, consulting the role of monitoring in our model. the consulting has an on the of with to the manager’s productive input. 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We begin our analysis by examining a where the BoD’s monitoring and consulting inputs are commonly and the manager productive input (the manager’s productive input is not setting a benchmark which we the benefits from providing short-term and long-term incentives to the BoD when the BoD’s inputs are not observable. In this benchmark explicit incentives are to motivate the BoD to provide these it suffices to compensate the BoD for the of these inputs. Thus, the that the BoD monitoring input the from monitoring — expected compensation cost — the BoD’s cost of the the BoD consulting input they a If consulting has a on the manager’s performance the consulting input from the BoD the from and expected managerial compensation the BoD’s cost of consulting. If on the consulting has a the consulting input from the BoD the from the in expected managerial compensation and the BoD’s cost of consulting. 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The BoD has to be explicitly for the cost of monitoring, in to the cost of to supply monitoring and consulting inputs in contract the that are more likely when the BoD monitoring input. monitoring is that the firm must provide incentive for the BoD to supply monitoring input in and which are the two that become more likely when the BoD monitoring input — by monitoring improves the precision of about by the that is when the firm’s long-term performance is that the BoD optimal of the cost of monitoring to the cost of consulting is a of both short-term and long-term Thus, the BoD’s compensation to both short-term and long-term and is to that the BoD consulting and monitoring inputs in We this in the does not a BoD contract on long-term performance that the BoD monitoring input. 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In this we examine the effects of short-term and long-term incentives on the corporate governance (contracting and monitoring) and management advisory (consulting) of the BoD using a two-tier agency primary is that long-term incentives not suffice and that short-term BoD incentives can play a role in shareholder as restricted equity provide the BoD with the incentive to supply consulting by not motivate the BoD to monitor when monitoring is personally to the BoD. 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Since the foundation of New China,the reform and development of financial management system of state-owned enterprises falls into three periods.The first period,from 1949 to1978,China implemented planned economy system,in which the finance of enterprises actually was the extension of national finance,while the state controlled over the income and expenditure,and was responsible for the losses and and enterprises barely had autonomy in management.The second period can be devided into two parts.From the end of 1978 to 1984,China was dominated by planned economy and supplemented by market adjustment,the financial management system of enterprises began the initial reform of decentralizing power and allowing profits retained within enterprises;from 1984 to 1993,China began to carry out planned market-oriented economy system and separate government functions from enterprise management,the financial management system entered into the period that the state expanded enterprises' power and allowed more profits retained within enterprises,and took partial responsibility for the losses and profits.The third period,from the 3th plenary session of the 14th CPC Central Committee in 1993 till now,China has established the socialist market economy system,basically set up the modern enterprise system and modern financial management system that state-owned enterprises self-management in finance and full responsibility for their own losses and profits.
This empirical study found that there is a significant impact between several corporate internal governance mechanisms,such as equity balance,the proportion of independent directors and the transparency of information and the cost of equity financing for listed companies in China,while for state-owned listed companies,the separation of chairman and CEO and board size are significant factors.Because of the awakening of self-protection of investors,more attention began to be paid to restrict the behavior of large shareholders through the shareholder governance mechanisms;Meanwhile,investors tend to use the means of decentralization,taking into account the actual situation in China.
This paper studies the relationship between R&D decentralization and financial performance. It examines also the impact of this decentralization on earnings management. To specify what does matter in the decentralization of the R&D we try to examine the relationship between centralization or decentralization of the R&D and the firm’s performance on one hand and the earnings management as measured by discretionary accruals on the other hand. We use two internal finance indexes (internal cash flows, internal market capital) and two mechanism of governance (stock-options, institutional investors) to explain the determinants of the R&D’s strategy.Using a sample of 160 U.S. Multinational companies (MNCs) between 2001 and 2006 our results show that MNCs decentralize their R&D for dual goal to improve firm’s profitability or performance and to help manager to manage earnings in their own interest. Moreover, despite the fact that R&D decentralization has a positive impact on performance, institutional shareholders and performance-based compensation encourage managers to decentralize their R&D in order to spur their opportunistic behavior.
The finance control pattern of the parent-subsidiary enterprise is the continual dynamical equilibrium which between the centralization and the decentralization. In this dynamic process, the essence is financial authority of the control mechanism which is fundamental match the financial non-authority of the control mechanism developing and replacing the authority control mechanism because of the bureaucratic Structure. We can understand the question about dilemma of the finance control pattern through studying the development of the finance control mechanism of the parent-subsidiary enterprise.
We provide evidence on organizational structure and performance at bank holding companies (BHC's). First, we show that a BHC's member banks benefit from access to internal capital markets. Second, we ask if these benefits are best realized within loosely structured, decentralized organizations or more consolidated, centralized firms. We find that BHC's with many subsidiaries are less profitable and have lower q ratios than similar BHC's with fewer subsidiaries. However, because we study multi‐unit firms in a single industry, our results suggest that the diversification discount reported in the corporate finance literature reflects not only industry diversification, but also organizational structure.
In this paper, we study the relationship between institutional ownership and capital structure. Based on the principle of minimizing financing cost, this paper firstly constructs a dynamic optimizing model of capital structure from the angle of institutional ownership. Then, it uses panel data of 539 China listed companies of manufacturing industry from 2005 to 2007 to make regression of fixed effects model. The results indicate that the percentage of institutional stock holdings has positive relation with capital structure, and the decentralized degree of institutional ownership is negatively related to capital structure. The robustness check agrees with these results. Finally, this paper points that developing institutional investors is one way to solve the current low debt ratio of China listed companies.
Local finance system is the core of local systems and the democratization of local systems is the condition and guarantee of the democratization of local finance system.Therefore,the paper introduces concretely democratic issues of local finance both under decentralization system and centralization system in foreign countries.It places emphasis on the problems of local finance under centralization system and puts forward concrete measures about the democratization reform of local finance in China.
Debt financing is an important aspect of capital structure.The paper studies how China's reform of decentralization and government intervention affect the debt financing of state-owned enterprises through the method of combining normative research and empirical research with the help of China's listed company data.The empirical results show that the reform of decentralization at the provincial level is positively related to bank credit and government has more effect on bank credit.On the base the difference of the debt financing,additional evidence finds that when the reform of decentralization is at the provincial level,government has more effect on long-term loans than short-term loans.The results show that reform of decentralization affects the debt financing of State-Owned Enterprise,and the local government has strong incentives and power to compel commercial banks to provide state-owned enterprises with favorable bank credit.
This research is concerned with how bank lending relationship affects small and medium-sized enterprise financing. We particularly focus on the effect of this contractual feature on their specific asymmetric information problems. We contribute in several ways to the fields of corporate finance and financial intermediation. First, we find evidence that firms which work with more likely to provide lending relationship banks, decentralised ones, use less trade credit, social and fiscal debt and leasing. They appear to access more easily to bank credit. Second, we note that small and mediumsized enterprises choose their main bank for their ability to deal with the kind of information they can provide. Firms with hard information prefer to borrow to centralized banks and firms with soft information prefer to borrow to decentralized ones. Those which can't work with a bank of good type are more credit constrained. Third, we show that bank lending relationship improve collateral efficiency in credit contracts. It allows banks to offer separating equilibrium based on two dimension contracts: interest rate and collateral level. The information transfer during the relationship prevents agency costs associated with collateral. So good project holders can credibly signal themselves giving more collateral to obtain lower interest rate. By doing this, banks limit credit rationing in this context
Thorsten Beck, Asli Demirgüç‐Kunt, María Soledad Martínez Pería
Using data from a survey of 91 banks in \n 45 countries, the authors characterize bank financing to \n small and medium enterprises (SMEs) around the world. They \n find that banks perceive the SME segment to be highly \n profitable, but perceive macroeconomic instability in \n developing countries and competition in developed countries \n as the main obstacles. To serve SMEs banks have set up \n dedicated departments and decentralized the sale of products \n to the branches. However, loan approval, risk management, \n and loan recovery functions remain centralized. Compared \n with large firms, banks are less exposed to small \n enterprises, charge them higher interest rates and fees, and \n experience more non-performing loans from lending to them. \n Although there are some differences in SMEs financing across \n government, private, and foreign-owned banks - with the \n latter being more likely to engage in arms-length lending - \n the most significant differences are found between banks in \n developed and developing countries. Banks in developing \n countries tend to be less exposed to SMEs, provide a lower \n share of investment loans, and charge higher fees and \n interest rates. Overall, the evidence suggests that the \n lending environment is more important than firm size or bank \n ownership type in shaping bank financing to SMEs.
Financial-right and property right are closely related but they two should belong to two different levels. Financial governance right is the right-balancing relationship between financing agents in the process of financial right segmentation from the level of corporate governance.And financial control is established on the basis of the incomplete contract theory,but financial control has several different meanings because of the importance of ,the distinction between narrow and broad senses of decision-making power,and the power implementation process etc. Financial-right configuration follows the basic principles of contribution and risk-taking and is the centralized and decentralized symmetrical arrangement of residual claim and residual control under the co-restriction of knowledge cost and agency cost.
In financing process,the multinational company faced a lot of risks,especially,the political risk.So we need consider politi-cal risk brought by domestic political system like local companies and the difference between policies from different countries due to its own particularity.We can make reasonable subjective judgment to political risk by the predicator's knowledge and experience to take precautionary and decentralized strategy to decrease financing risk.
Enterprise group is a corporation union lead and set up by means of group company assorts with and unifies production management and financial policy of member enterprises in group.Enterprise group should manage group finance by layered and decentralization way,according to statute specification and hierarchical authorization of organization.Group company is on the basis of group statute and authorization,which not only is an administrative level of group finance,but also is parent company of main member enterprises in group.This determines that group company plays a unique core management part in enterprise group finance.
We consider the regulation of national firms in a common market. Regulators can influence the production of national firms but they incur in a positive cost of public funds. First, we show that market integration is welfare improving if and only if the efficiency gains compensate for the negative public finance effect (related to business stealing). We also show that supranational competition can have very different consequences on the rent seeking behaviour of firms, depending on cost correlation and ex-ante technological risk. Finally, we characterize the global optimum and show how it can be sustained in a decentralized bargaining solution.
With the recent years' development, institutional investors have played a more important role in corporate governance and operational decisions of China listed companies. However, the empirical research on the influence of institutional ownership on capital structure is rare. Based on the principle of minimizing financing cost, this paper constructs a dynamic optimizing model of capital structure from the angle of institutional ownership. We also use panel data of 568 China listed companies of manufacturing industry from 2002 to 2004 to make regression of fixed effects model. The evidences indicate that the percentage of institutional stockholdings has positive relation with capital structure, which means the debt ratio increases when the percentage of institutional stockholdings increases. We also find that the decentralized degree of institutional ownership is negatively related to capital structure, that is, a more decentralized degree of institutional ownership causes a lower debt ratio.