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We measure value creation by activist investors via structural estimation of a model of the choice between passive investment and activism. Our estimates imply that average returns following activist intent announcements consist of 74.8 % expected value creation, or treatment, 13.4 % stock picking, and 11.8 % sample selection effects. Higher treatment values predict improvements in firm performance and lower proxy contest probabilities, whereas abnormal announcements returns do not, suggesting that our estimate identifies more effective activism campaigns. The evidence demonstrates the importance of using the joint distribution of investment strategies and announcement returns to recover the expected returns and costs of activism.

We model an investor's choice between filing Schedules 13D and 13G and use the model to estimate expected returns to activist and passive investing. Using the model, we decompose average Schedule 13D filing announcement returns into treatment (75.2%), stock picking (12.2%), and sample selection components (12.6%). The treatment component of Schedule 13D announcement returns predicts improvements in firm performance and a lower probability of a proxy contest, suggesting that our estimate of the treatment component identifies more effective activism campaigns. Counterfactual analysis shows that if all investors shared the private cost of activism, a large fraction of Schedule 13G filings would have been filed as Schedule 13D, resulting in substantial firm value gains.

We estimate the demand for private equity fund stakes in the secondary market using a broker's proprietary data on bids. We show that the demand response to aggregate liquidity shocks is negatively related to contemporaneous bids, and this relationship is stronger for funds that most likely are put for sale in times of low liquidity. We also show that the demand response to aggregate liquidity shocks is unrelated to future NAV-to-NAV returns and to future bidding behaviour. These results are consistent with the variation in discounts in private equity stakes being linked to the variation in liquidity provision in the secondary market for private equity.

We develop a search model of block trades that values the illiquidity of controlling stakes. The model considers several dimensions of illiquidity. First, following a liquidity shock, the controlling blockholder is forced to sell, possibly to a less efficient acquirer. Second, this sale may occur at a fire sale price. Third, absent a liquidity shock, a trade occurs only if a potential buyer arrives. Using a structural estimation approach and U.S. data on trades of controlling blocks of public corporations, we estimate the value of control, blockholders' marketability discount, and dispersed shareholders' illiquidity-spillover discount.

Theory has recently shown that corporate policies should depend on firms' exposure to short- and long-lived cash flow shocks and the correlation between these shocks. We provide granular estimates of these parameters for Compustat firms using a new filter that uses only cash flow data and the theoretical restrictions of a canonical cash flow model. As predicted by theory, we find that the estimated parameters are strongly related to corporate liquidity and financing choices, that firms with a higher estimated correlation between shocks implement riskier policies, and that the sign of this correlation determines the cash flow sensitivity of cash.

We argue that the prospect of an imperfect enforcement of debt contracts in default reduces shareholder-debtholder conflicts and induces leveraged firms to invest more and take on less risk as they approach financial distress. To test these predictions, we use a large panel of firms in 41 countries with heterogeneous debt enforcement characteristics. Consistent with our model, we find that the relation between debt enforcement and firms' investment and risk depends on the firm-specific probability of default. A differences-indifferences analysis of firms' investment and risk taking in response to bankruptcy reforms that make debt more renegotiable confirms the cross-country evidence. (C) 2016 Elsevier B.V. All rights reserved.

We use the 2007 asset-backed commercial paper (ABCP) crisis as a laboratory to study the determinants of debt runs. Our model features dilution risk: maturing short-term lenders demand higher yields in compensation for being diluted by future lenders, making runs more likely. The model explains the observed tenfold increase in yield spreads leading to runs and the positive relation between yield spreads and future runs. Results from structural estimation show that runs are very sensitive to leverage, asset values, and asset liquidity, but less sensitive to the degree of maturity mismatch, the strength of guarantees, and asset volatility.

Investment banks that develop new corporate securities systematically lead the new underwriting market despite being imitated early by equally competitive rivals. We study how innovators and imitators set underwriting fees in order to identify empirically the source of this advantage. Using data of innovative securities since 1985, we do find that innovators set systematically higher fees than imitators. This premium decreases as more issues occur, and faster for later generation products. Imitation is also quicker for later generations. This evidence supports the hypothesis that the innovator has superior skills in structuring any given issue of the new security.

This paper studies the impact of cash constraints on equilibrium winning probabilities in a patent race between an incumbent and an entrant. We develop a model where cash-constrained firms finance their R&D expenditures with an investor who cannot verify their effort. In equilibrium, the incumbent faces better prospects of winning the race the less cash-constrained he is and the more cash-constrained the entrant is. We use NBER evidence from pharmaceutical patents awarded between 1975 and 1999 in the US, patent citations, and COMPUSTAT and fit probabilistic regressions of the predicted equilibrium winning probabilities on measures of the incumbent's and potential entrants' financial wealth. The empirical findings support our theoretical predictions.

We study the determinants of private benefits of control in negotiated block transactions. We estimate the block pricing model in Burkart, Gromb and Panunzi (2000) explicitly accounting for both block premiums and block discounts in the data. The evidence suggests that the occurrence of a block premium or discount depends on the controlling block holder's ability to fight a potential tender offer for the target's stock. We find evidence of large private benefits of control and of associated deadweight losses, but also of value creation by controlling shareholders. Finally, we provide evidence consistent with Jensen's free cash flow hypothesis.

Investment banks imitate other bank's innovative corporate securities and compete with the innovator to underwrite new issues. This article uses data of all the corporate offerings of equity-linked and derivative securities in the Securities Data Company (SDC) to estimate the issuer's demand of underwriting services provided by investment banks across different varieties of securities. It finds that the demand for the innovator's variety is larger than the imitators'. This demand advantage decreases with time and faster for securities that appear later in a sequence of innovations. Imitation becomes less attractive later in the sequence as information from earlier deals spills-over to all banks. Copyright 2006, Oxford University Press.

Specifically, this paper analyzes how, in addition to the improvement in the performance of the firm and the quality of service, the privatization of the telecommunications industry in Peru led to price changes that had an impact on consumer welfare and that may be correlated with the negative public opinion of the privatization process.

We argue that the prospect of an imperfect enforcement of debt contracts in default reduces shareholder-debtholder conflicts and induces leveraged firms to invest more and take on less risk as they approach financial distress. To test these predictions, we use a large panel of firms in 41 countries with heterogeneous debt enforcement characteristics. Consistent with our model, we find that the relation between debt enforcement and firms' investment and risk depends on the firm-specific probability of default. A difference-in-differences analysis of firms' investment and risk taking in response to bankruptcy reforms that make debt more renegotiable confirms the cross-country evidence.

We use the 2007 asset-backed commercial paper (ABCP) crisis as a laboratory to study the determinants of debt runs. Our model features dilution risk: maturing short-term lenders demand higher yields in compensation for being diluted by future lenders, making runs more likely. The model explains the observed ten-fold increase in yield spreads leading to runs and the positive relation between yield spreads and future runs. Results from structural estimation show that runs are very sensitive to leverage, asset values, and asset liquidity, but less sensitive to the degree of maturity mismatch, the strength of guarantees, and asset volatility.

We develop a search model of block trades that values the illiquidity of controlling stakes. The model considers several dimensions of illiquidity. First, following a liquidity shock, the controlling blockholder is forced to sell, possibly to a less efficient acquirer. Second, this sale may occur at a fire sale price. Third, absent a liquidity shock, a trade occurs only if a potential buyer arrives. Using a structural estimation approach and U.S. data on trades of controlling blocks of public corporations, we estimate the value of control, the blockholders’ marketability discount and the dispersed shareholders' illiquidity-spillover discount.

This paper investigates empirically the illiquidity of majority blocks of shares in the context of a search model of block trades. The search model incorporates two aspects of illiquidity, or search frictions. First, upon a liquidity shock, the incumbent blockholders may be forced to sell to a less efficient buyer. Second, a block liquidity sale may occur at a fire sale price. We conduct a structural estimation of the model using data on majority block trades in the U.S. The structural estimation is particularly useful in this exercise as it allows us to evaluate the counterfactual price that would result absent liquidity shocks. Our results help shed light into the size of the marketability discount, the control discount and an illiquidity-spillover discount we identify, and on the determinants of aggregate liquidity.

We test whether equity risk reflects the shareholders' incentives to default strategically on the firm's debt obligations. We develop a model that relates shareholders' incentives to default strategically with the likelihood that debt renegotiations fail. We then use an international cross-section of stocks to exploit the exogenous variation of insolvency procedures across countries and test the model's predictions. Consistent with the model, we find that the equity beta increases with the degree of creditor protection. Moreover, the equity beta decreases with the costs of liquidation and shareholders' bargaining power, and the sensitivity of this relationship weakens as country's creditor protection toughens. These results are economically important, and robust to various specifications and estimation techniques.

When a controlling blockholder of a public corporation has a liquidity shock and is forced to sell, he or she may sell to a party that generates a lower security value. The possibility of a liquidity shock induces a 'marketability discount' on the price of shares owned by the blockholder relative to the price of the shares traded in the stock market. In addition, the possibility that the new blockholder generates a lower security value induces an 'illiquidity discount' on shares traded in the stock market relative to shares of otherwise similar stocks without a blockholder. We model the implications of liquidity shocks and estimate their effect on both the price of shares owned by the blockholder (i.e., the marketability discount) and the price of shares owned by the dispersed shareholders (i.e., the illiquidity discount). There is an obvious practical value of the project which is the ability to guide investors in pricing large blocks. Large blocks are especially hard to price because of the nature of the trades and their infrequency. Moreover, most of the contribution of the literature toward this goal has been via calibrated models, not via estimation. Because of the nature of majority block trades, these events represent a natural setting to study the impact of liquidity shocks. We thus expect to contribute to the literature on illiquidity in asset markets by estimating the determinants of liquidity shocks using information from block trades. In addition, understanding the costs associated with controlling shareholders is critical - even in markets like the US where dispersed shareholders tend to be dominant - if one is to advocate controlling shareholders as a substitute for weak corporate governance, in the US or elsewhere.

We study the determinants of private benefits of control in negotiated block transactions. We estimate the block pricing model in Burkart, Gromb, and Panunzi (2000) explicitly accounting for both block premia and block discounts in the data. The evidence suggests that the occurrence of a block premium or discount depends on the controlling block holder's ability to fight a potential tender offer for the target's stock. We find evidence of large private benefits of control and of associated deadweight losses, but also of value creation by controlling shareholders. Finally, we provide evidence consistent with Jensen's free cash flow hypothesis.

We study the determinants of private benefits of control using data on negotiated block transactions. We estimate structurally the block pricing model in Burkart, Gromb, and Panunzi (JF, 2000), acknowledging the significant presence of both block premia and block discounts in our sample. The evidence supports the BGP model, where the block is traded either at a premium or a discount depending on how competitive the block seller can be in opposing a potential tender offer for the target's stock. We find that private benefits represent 3% to 4% of the target firm's stock market value. Our estimation approach allows us to measure the efficiency with which private benefits are extracted: we find that on average, each $1 of private benefits costs shareholders $2 of equity value. Private benefits increase with the target's cash holdings and decrease with its short term debt. Moreover, the elasticities of private benefits to cash holdings and short term debt are consistently almost equal to each other (in absolute value), providing strong support for Jensen's free cash flow hypothesis. Further, the effect of cash on private benefits is stronger if the target's cash is higher than the acquirer's cash. Private benefits decrease with the target's size and increase with its past performance and proportion of intangible assets. Acquirer's overpay an average of 7% of the target's stock price relative to the BGP benchmark. We use our structural estimation to conduct a counterfactual policy evaluation of the Mandatory Bid Rule. Our results suggest that the Mandatory Bid Rule fails to add value to shareholders because it fails to prevent welfare decreasing transactions and deters welfare increasing transactions by forcing inefficient tender offers.

We study the determinants of private benefits of control in negotiated block transactions. We estimate the block pricing model in Burkart, Gromb, and Panunzi (2000) explicitly dealing with the existence of both block premia and block discounts in the data. We find evidence that the occurrence of block premia and block discounts depends on the controlling block holder's ability to fight a potential tender offer for the target's stock. Private benefits represent 3% of the target firm's stock market value. Private benefits increase with the target's cash holdings and decrease with its short term debt providing evidence in favor of Jensen's free cash flow hypothesis. A counterfactual policy evaluation of the Mandatory Bid Rule suggests that it fails to add value to shareholders because it fails to prevent welfare decreasing transactions and, by forcing inefficient tender offers, it deters welfare increasing transactions.

This paper uses the NBER Patents and Citations Data merged with COMPUSTAT to identify and measure the dependency of innovation success on cash holdings in a patent race environment where firms race to innovate first and their innovation efforts are correlated. A firm's cash holdings increase its probability of winning a race while its rivals' cash decrease it. The overall cash sensitivity of winning, which is shown to be informative of the tightness of financing constraints, increases through the mid 80s and the 90s. The results attribute the rise in sensitivity to the increased asymmetry between incumbent and entrant firms.

This paper measures the gains accrued to financing firms as new corporate products are created. Innovations in corporate products increase the choice set and make the underwriting market more competitive. The resulting gains are measured using estimates of a structural model of the choice between different varieties of innovative and standard securities across time. The estimation method handles two major challenges: that underwriting fees of non chosen varieties are unobservable, and that the observed ones are endogenous. I address these problems with a price-setting equation derived from the underwriter's profit maximization problem. The estimates show that innovation introduces large average gains of up to $4.66 million per financing firm. Underwriting markups fall as the choice set grows, from about 50% on average to 10%.

This paper studies the impact of financing constraints in patent races. We develop a model of optimal contracting where firms finance their R&D expenditures with an investor who cannot verify their effort. In equilibrium, firms are more likely to win the more cash and assets they hold prior to the race, and the less cash and assets their rivals hold prior to the race. Evidence from US pharmaceutical patents awarded between 1975 and 1999 supports our theoretical predictions.

We study product innovation and imitation in the market of corporate underwriting with a dynamic model where client switching costs and the bankers' expertise in deal structuring characterize the life cycle of a security. While the clientele loyalty allows positive rent extraction, the superior expertise can account for the documented market leadership of the innovator. As expertise on product structuring is acquired by imitators, the innovator's market share advantage decreases. Also, the speed of entry by imitators increases for later generation products. Our predictions are consistent with well documented evidence on the market share leadership of innovators. We also present new evidence from equity-linked and derivative corporate products that supports the dynamic predictions of our learning model.

We study product innovation and imitation in the market of corporate underwriting with a dynamic model where client switching costs and the bankers’ expertise in deal structuring characterize the life cycle of a security. While the clientele loyalty allows positive rent extraction, the superior expertise can account for the documented market leadership of the innovator. As expertise on product structuring is acquired by imitators, the innovator’s market share advantage decreases. Also, the speed of entry by imitators increases for later generation products. Our predictions are consistent with well documented evidence on the market share leadership of innovators. We also present new evidence from equity-linked and derivative corporate products that supports the dynamic predictions of our learning model.

We study product innovation and imitation in the market of corporate underwriting with a dynamic model where client switching costs and the bankers’ expertise in deal structuring characterize the life cycle of a security. While the clientele loyalty allows positive rent extraction, the superior expertise can account for the documented market leadership of the innovator. As expertise on product structuring is acquired by imitators, the innovator’s market share advantage decreases. Also, the speed of entry by imitators increases for later generation products. Our predictions are consistent with well documented evidence on the market share leadership of innovators. We also present new evidence from equity-linked and derivative corporate products that supports the dynamic predictions of our learning model.

Investment banks find it profitable to invest in the development of innovative derivative securities even without being able to preclude early competition from other investment banks using patents. To explain this, we assume that the developer can learn from the first issues of the innovative financial product and is able to become the expert issuer by the time imitation enters the market. We show how this becomes an informational first-mover advantage that turns innovators into the market leader. It is this advantage, and not the typical temporary monopoly position awarded to a patent holder, that provides the incentive to pay the development costs. In the aftermath, the innovator ends up with the largest share of the underwriting market and makes positive profits. Our model’s predictions are consistent with many stylized facts of financial innovations by investment banks.

Investment banks develop new securities permanently even when their competitors can imitate them almost immediately and at significantly smaller development costs. Using data of all the new issues of Equity Linked and Derivative Securities since 1985 compiled by SDC, and firm financial data from COMPUSTAT, I test if innovators have a demand advantage over the imitators when they compete to underwrite new issues using innovative corporate products. If the innovator has private information about the innovation, his own variety of the security may be better valued than the imitators' varieties by the issuers. I estimate the issuers' demand for the banker's underwriting service across different varieties of equity-linked securities. Using a nested-logit model of discrete choice I find that, ceteris paribus, the demand for innovators' varieties is larger than for imitators'. I also find that this demand advantage is decreasing in time, suggesting that imitators learn from observing deals made in the past by the innovator and by themselves. The initial innovator's advantage is larger for securities that appear later in a sequence of innovations but it diminishes faster.

Investment banks imitate other bank's innovative corporate securities with their own varieties, and compete with the innovator to underwrite new issues. This paper uses data of all the corporate offerings of Equity-Linked and Derivative Securities from the SDC records to estimate the issuer's demand of underwriting services provided by investment banks across different varieties of securities. The results show that, ceteris paribus, the demand for the innovator's variety is larger than for the imitators'. The estimated demand advantage is decreasing in time, and it decreases faster if the security appeared later in a sequence of innovations.

Investment Banks invest in R&D to design innovative securities even when imitation is possible, i.e., when innovations cannot be patented. We show how a financial institution can profit from the development of financial products even if they are unpatentable. For certain types of financial products innovating investment banks have an information advantage over imitators. This information advantage makes them better competitors and market leaders. The mere possibility of costless imitation drives innovators' profits down, but still keeps them positive. The absence of patents allows part of the surplus generated by the innovation to be allocated to investors. The extent of surplus sharing depends on the degree of asymmetry in the information owned by imitators and innovators and on the total number of innovators. The larger this asymmetry, the higher the innovator's profits and the lower the investor's surplus. With more than one innovator all the surplus goes to investors.

Investment banks develop their own innovative derivatives to underwrite corporate issues but they cannot preclude other banks from imitating them. However, during the process of underwriting an innovator can learn more than its imitators about the potential clients. Moving first puts him ahead in the learning process. Thus, he develops an information advantage and he can capture rents in equilibrium despite being imitated. In this context, innovation can arise without patent protection. Consistently with this hypothesis, case studies of recent innovations in derivatives reveal that innovators keep private some details of their deals to preserve the asymmetry of information.

Investment banks develop new securities permanently even when their competitors can imitate them almost immediately and at significantly smaller development costs. Using data of all the new issues of Equity Linked and Derivative Securities since 1985 compiled by SDC, and firm financial data from COMPUSTAT, I test if innovators have a demand advantage over the imitators when they compete to underwrite new issues using innovative corporate products. If the innovator has private information about the innovation, his own variety of the security may be better valued than the imitators’ varieties by the issuers. I estimate the issuers’ demand for the banker’s underwriting service across different varieties of equity-linked securities. Using a nested-logit model of discrete choice I find that, ceteris paribus, the demand for innovators’ varieties is larger than for imitators’. I also find that this demand advantage is decreasing in time, suggesting that imitators learn from observing deals made in the past by the innovator and by themselves. The initial innovator’s advantage is larger for securities that appear later in a sequence of innovations but it diminishes faster.

Investment Banks invest in R&D to design innovative securities even when imitation is possible, i.e., when innovations cannot be patented. We show how a financial institution can profit from the development of financial products even if they are unpatentable. For certain types of financial products innovating investment banks have an information advantage over imitators. This information advantage makes them better competitors and market leaders. The mere possibility of costless imitation drives innovators’ profits down, but still keeps them positive. The absence of patents allows part of the surplus generated by the innovation to be allocated to investors. The extent of surplus sharing depends on the degree of asymmetry in the information owned by imitators and innovators and on the total number of innovators. The larger this asymmetry, the higher the innovator’s profits and the lower the investor’s surplus. With more than one innovator all the surplus goes to investors.

Profitting from renewed interest in academia and international circles on the subject of poverty, this article pretends both to call the attention on the probable evolution of poverty in Latin America as well as to outline the principal conclusions relevant to antipoverty policy design developed in the Interinstitucional Profect on Critical Poverty in Latin America, of ECLAC. The author's basic aim is to contribute towards the realization that the present seriousness of the problem of poverty is not, as has often been held, a measure of the failure of years of dedication to its analysis, but rather an indicator of the inescapable need to continue devoting resources and efforts to its study and combat.​, Aprovechando el renovado interés en círculos académicos e internacionales sobre el tema de la pobreza, este artículo pretende tanto llamar la atención sobre la evolución probable de esta última en América Latina como reseñar las principales conclusiones en materia de políticas contra la pobreza a que se llegó en el Proyecto Interinstitucional de Pobreza Critica en América Latina, de la CEPAL. El objetivo básico del autor es contribuir a la toma de conciencia de que la gravedad del problema de la pobreza no es, como muchas veces se ha sostenido, una muestra del fracaso de años de dedicación a su análisis, sino más bien un indicador de la necesidad inescapable de seguir consagrando recursos y esfuerzos a su estudio y combate.