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Almost all North American callable corporate bonds carry a make-whole call option. We trace the evolution of the US make-whole callable bond to the Canada-call that predates it by over eight years. This cross-country spillover of financial innovation continued at a slow pace. Six years after the US market initial adoption of make-whole bonds, AT&T introduced it to Europe. More than 10 years later, large European firms started issuing this financial instrument. The benefits and optimal exercise of the make-whole call provision are described. We provide a simple analysis that indicates the possibility for the optimal exercise of the make-whole call even when traditional analysis suggests a negative NPV of calling and refinancing the bond. Given the possibility of optimal exercise even when the make-whole call is seemingly out-of-the-money, we demonstrate how the effect of incentive alignment between stockholders and bondholders lowers the issuer’s cost of including a make-whole call provision below the issuer’s expected benefit of having the option to utilize such provision.

We fi nd that IPO underpricing is positively related to post-IPO growth in sales and EBITDA, but is not signifi cantly related to growth in earnings. Our evidence suggests that accrual reversals or earnings management may cause this inconsistency. We interpret the growth rates of sales and EBITDA as measures of fi rm quality, and conclude that our evidence supports the notion that IPO fi rms with greater underpricing are of better quality. Our tests on analysts’ earnings forecast errors show that analysts are less positively biased in their earnings forecasts for IPO fi rms that have greater underpricing. In this paper we examine the relation between initial public offering (IPO) underpricing and postIPO growth rates of accounting performance variables. Previous research on IPOs suggests that IPO underpricing is related to the quality of the IPO fi rms (Allen and Faulhaber, 1989, Welch, 1989, Grinblatt and Hwang, 1989, and Rock, 1986). If we use growth rates of accounting performance variables (such as earnings) as measures of fi rm quality, then this suggestion implies a positive relation between IPO underpricing and growth rates. Our hypothesis is that IPO fi rms with greater underpricing should have higher post-IPO growth rates of accounting performance variables. However, rather than just concentrate on growth in earnings, we also include growth in EBITDA and growth in sales. Relative to earnings, these latter variables are more diffi cult for managers to manipulate. Thus, to reduce the possible contamination of our analysis by earnings management strategies, we consider the growth rates of earnings, EBITDA, and sales, and how they relate to IPO underpricing. Consistent with our hypothesis, we fi nd that underpricing is positively related to growth in sales and EBITDA in the fi ve years following an IPO. These results suggest that the IPOs with greater underpricing have higher quality. We also fi nd that IPO growth rates in earnings are much lower than the growth rates in sales and EBITDA. Further tests show that this inconsistency is likely caused by earnings management at the time of the IPO, which infl ates earnings initially and thus reduces earnings growth rates in subsequent years. This result suggests that earnings growth rates may not be accurate measures of IPO fi rm quality compared to sales and EBITDA growth rates. We fi nd that the fi rms with greater underpricing experience larger decreases in accruals after the fi rst year. This fi nding implies that earnings management may also reduce the correlation between IPO underpricing and earnings growth rates. We examine the accuracy of analysts’ earnings forecasts to determine how analysts react to the relation between IPO growth rates and IPO underpricing. If analysts are misled by earnings We thank Mark Huson, participants at the 2005 Northern Finance Association Conference, and, in particular, Bill Christie (the Editor) and an anonymous referee for helpful comments and suggestions. The authors gratefully acknowledge the contribution of Thompson Financial for providing earnings forecast data, available through I/B/E/S (Institutional Brokers Estimate System).

This paper investigates the effect of personal-tax progressivity on management performance and agency costs by examining measures of corporate operating efficiency. We study a sample of US-based manufacturing and service firms and variations in a cross-state tax policy. Using matched-pair testing and regression analysis, we find evidence consistent with the hypothesis that increased personal-tax progressivity negatively impacts management productivity and is manifested in reduced firm efficiency. We control for several other factors that the literature suggests is relevant to firm operating efficiency and find that our results are robust

This research uses accounting information to supplement abnormal returns evidence in order to gauge the performance of greenmailed firms. Our results support the management entrenchment hypothesis; target firm earnings are poor relative to industry in the years surrounding the greenmail event, and earnings do not significantly improve as would be expected under the shareholders' interest hypothesis. This result holds after adjusting for greenmail premia net of tax effects. Evidence on investment spending suggests firms that pay greenmail differ substantially from their industries, but in a negative direction. In contrast, the industry‐adjusted earnings of non‐greenmail repurchasing firms are significantly greater than the earnings of greenmailed firms. Together, these results are consistent with the contention that greenmailed firms are not managed in shareholders' interests; they underperform their industry, the poor operating results are not attributable to higher investment outlays associated with a long‐term strategic focus, and performance does not improve. This is consistent with observed negative abnormal returns being attributable to both a lost takeover premium and a lost opportunity for improved corporate performance.

From 1989 through 1993, the United Shareholders Association (USA) published its Shareholder 1000 report, which ranked 1000 firms on several dimensions of corporate performance, including shareholder rights and management compensation. We examine two measures reported by the USA of the alignment between managers’ and shareholders’ interests: a shareholder rights score and a management compensation rating. The associations between these measures and measures of operating performance and investment levels are analyzed. We find evidence that the USA shareholder rights and management compensation scores are significantly and positively associated with measures of operating performance and investment spending. Further tests indicate that USA management compensation scores proxy for aspects of corporate behavior that have significant valuation implications not reflected in financial statements.

We investigate the behavior of stock market indices across 33 countries around political election dates during the sample period 1974–1995. We find a positive abnormal return during the two-week period prior to the election week. The positive reaction of the stock market to elections is shown to be a function of a country’s degree of political, economic and press freedom, and a function of the election timing and the success of the incumbent in being re-elected. In particular, we find strong positive abnormal returns leading up to the elections (i) in less free countries won by the opposition, and (ii) called early and lost by the incumbent government. These results are consistent with the uncertain information hypothesis (UIH) of Brown et al. (Brown, K.C., Harlow, W.V., Tinic, S.M., 1988. Journal of Financial Economics 22, 355–385) and the model of election behavior of Harrington (Harrington, J.E., 1993. The American Economic Review 83, 27–42).

EVA may result in underinvestment problems and suboptimal strategies used to boost near-term performance at the expense of the future. To solve these problems, a new measure, CFMAC, is developed. This paper describes the types of problems associated with the EVA Financial Management System that includes use of the EVA measure and compensation schemes touted by EVA proponents. A new annual measure, cash flow minus amortized capital (CFMAC) is developed to address the problems inherent to EVA.

In this paper we examine the relationship between IPO analyst forecasts and two key IPO characteristics: retention and underpricing. We find that analysts predict higher long-term growth rates for IPOs with higher retention and/or higher underpricing. Analysts revise their growth forecasts downward further for IPOs with higher underpricing. However, the annual earnings forecasts are less over-optimistic for these IPOs. Retention is positively related to actual growth in sales. Underpricing is positively related to actual growth rate in sales and EBITDA but not significantly related to actual growth in earnings.

Countries in which billionaire heirs' wealth is large relative to G.D.P. grow more slowly, show signs of more political rent-seeking, and spend less on innovation than do other countries at similar levels of development. In contrast, countries in which self-made entrepreneur billionaire wealth is large relative to G.D.P. grow more rapidly and show fewer signs of rent seeking. We argue that this is consistent with wealthy entrenched families' having objectives other than creating public shareholder value. Also, the control pyramids through which they are entrenched give wealthy families preferential access to capital and enhanced lobbying power. Entrenched families also have vested interest in preserving the value of existing capital. To investigate these arguments, we use firm-level Canadian data. Heir-controlled Canadian firms show low industry-adjusted financial performance, labor capital ratios, and R&D spending relative to other firms the same ages and sizes. We argue that concentrated, inherited corporate control impedes growth, and dub this the Canadian disease.' Further research is needed to determine the international incidence of this condition. Finally, heir-controlled Canadian firms' share prices fell relative to those of comparable firms on the news that the Canada-U.S. free trade agreement would be ratified. A key provision of that treaty is capital market openness. Under the treaty, heir-controlled Canadian firms' labor capital ratios rose, while the incidence of heir-control fell. We suggest that openness, especially of capital markets, may mitigate the ill effects of concentrated inherited control. If so, capital market openness matters for reasons not captured by standard international trade and finance models.

Countries in which billionaire heirs' wealth is large relative to G.D.P. grow more slowly, show signs of more political rent-seeking, and spend less on innovation than do other countries at similar levels of development. In contrast, countries in which self-made entrepreneur billionaire wealth is large relative to G.D.P. grow more rapidly and show fewer signs of rent seeking. We argue that this is consistent with wealthy entrenched families' having objectives other than creating public shareholder value. Also, the control pyramids through which they are entrenched give wealthy families preferential access to capital and enhanced lobbying power. Entrenched families also have vested interest in preserving the value of existing capital. To investigate these arguments, we use firm-level Canadian data. Heir-controlled Canadian firms show low industry-adjusted financial performance, labor capital ratios, and R&D spending relative to other firms the same ages and sizes. We argue that concentrated, inherited corporate control impedes growth, and dub this the Canadian disease.' Further research is needed to determine the international incidence of this condition. Finally, heir-controlled Canadian firms' share prices fell relative to those of comparable firms on the news that the Canada-U.S. free trade agreement would be ratified. A key provision of that treaty is capital market openness. Under the treaty, heir-controlled Canadian firms' labor capital ratios rose, while the incidence of heir-control fell. We suggest that openness, especially of capital markets, may mitigate the ill effects of concentrated inherited control. If so, capital market openness matters for reasons not captured by standard international trade and finance models.

Externalities, natural monopolies, public goods and information asymmetries can render competitive outcomes suboptimal. State-owned enterprises, as in Canada, or regulation, as in the U.S., are alternative solutions. Regulated firms must be restrained from following market signals. State-owned enterprises would appear to be a more complete solution, as they can ignore market signals. In doing this, state-owned enterprises presumably sacrifice profits, since the competitive outcomes they are avoiding are, by definition, profit maximizing. Thus, state-owned enterprises' profits should be below the pre-tax profits of comparable privately run firms. We find that Canadian state-owned firms have much higher profit rates than comparable private U.S. firms. This seems inconsistent with state ownership correcting market failures, but consistent with a mercantilist view that governments use state owned enterprises to extract rents from consumers.

A contingent claims approach to capital budgeting may be preferable to traditional methods where uncertainty and managers' strategic reactions to changing conditions are important. As an example of such a case, we solve the classical problem of the duration of an investment in forestry resources (i.e., when to cut down the trees) in the general case of stochastic output prices and stochastic natural growth rate and timber inventories. A contingent claims approach is used to value the forestry resources as a function of: (1) stochastic prices and inventories, and (2) an asymmetric, optimal production policy that incorporates the option to halt timber production temporarily.