Board overconfidence in mergers and acquisitions
2023, Twardawski, Torsten, Kind, Axel
Past research has shown that CEOs become overconfident through biased self-attribution in previous M&A transactions, which negatively affects subsequent M&A deals. However, M&A decisions are de jure and de facto not only influenced by a single person, the CEO, but by a group of individuals, namely the board of directors. In this study, we investigate whether and to what extent the overconfidence of board directors affects key acquisition outcomes. Building on the overconfidence literature, we argue that board directors become overconfident through biased self-attribution in recent M&A deals and hypothesize that their overconfidence leads to poorer subsequent M&A outcomes. By studying investor reactions and premiums paid for a broad set of public acquisitions carried out by large U.S. companies, we find strong support for our predictions.
The Value of Say on Pay
2019, Kind, Axel, Poltera, Marco, Zaia, Johannes
This paper measures the influence of "say on pay" (SoP) - mandatory shareholder votes on top-management compensation - on the market value of corporate voting rights. By exploiting the staggered introduction of SoP regulations across ten major European economies, we show by difference-in-differences (DiD) regressions that the value of voting rights at annual shareholder meetings - extracted from prices of liquid options - has increased for firms with excessive CEO pay, while it has decreased for other companies. Surprisingly, shareholders tend to value advisory SoP votes but not the stricter binding votes. Thus, the option to signal dissent with current compensation via SoP votes is not per se valuable and can actually translate into net costs for shareholders. Finally, the effect of mandatory SoP on voting values is concentrated on the year of introduction and fades out over time. Placebo regressions support the accuracy of our DiD research design.
2018, Kind, Axel, Volonté, Christophe
We study the influence of locally-rooted directors, i.e., board members with personal ties to a company’s geographic location, on firm performance. Locally-rooted directors may be elected for two contrasting reasons. First, they may provide important local know-how and business relations that can prove beneficial to a company. Second, they may be elected solely because of social ties with company insiders, such as fellow board directors, top executives, or large shareholders. In the latter case, locally-rooted directors may lack both relevant experience, business skills, and independence. We use the directors’ alma mater as a proxy for local roots. Almost 30% of all directors in our sample are locally-rooted. The empirical analysis indicates that locally-rooted directors are negatively related with Tobin’s Q, which suggests that they are chosen due to their social ties with insiders rather than because they add local business know-how. However, the negative relationship with Tobin’s Q is not present in domestically-oriented companies, i.e., firms without material foreign sales, and firms in regulated industries. Thus, the results do not rule out that, in some cases, the presence locally-rooted directors may be optimal.
The Swiss Pension System
2022, Kind, Axel
Located in the heart of Western Europe, Switzerland is a comparatively small, market-oriented, innovative, and successful open economy. Its pension system comprises three pillars: (i) a mandatory, unfunded, state-run, and highly redistributive public pillar with (near) universal coverage (AHV), (ii) a mandatory, funded, and privately run occupational pillar (BV), and (iii) a voluntary pillar based on personal savings that benefit from a preferential tax treatment. The three pillars are designed to provide satisfactory financial support for Swiss residents of retirement age (currently 65 years for men and 64 years for women). AHV pensions are mainly financed by income-dependent contributions from current AHV members and their employers, a part of revenues from VAT, and tax-financed transfers from the Federal State. With a minimum monthly (full) pension of 1,195 Swiss francs (ca. US$ 1,288), AHV replacement ratios exceed 100% for low-income consumers and decrease with income. Thus, AHV pensions target (but not always achieve) the financial coverage of basic needs. BV pensions are designed to allow old-age consumers to afford the living standards they had before retirement. In particular, taken together, AHV pensions and BV pensions offer replacement ratios above 60% for consumers with an annual income of up to approximately 100,000 Swiss francs. For additional needs, Swiss consumers must rely on tax-deductible private savings (and not tax-deductible free savings) in Pillar 3, for which an array of bank, insurance, and (recently) even FinTech solutions are available. The Swiss pension system allows for moderate flexibility in the first two pillars in terms of the timing of retirement (anticipation or postponement), the type of pension benefits (monthly annuities, lump-sum payments, or a combination of both for the BV pension) and rather high flexibility in the third pillar. Given the steady increases in life expectancy and the persisting low-interest-rate environment, the need for reforms in the first two pillars is largely acknowledged. Such reforms may include (a combination of) the following elements: (i) increases in the default for retirement age, (ii) additional sources of financing for AHV, (iii) higher contribution rates, (iv) an earlier mandatory contribution age, and (v) lower conversion ratios in BV. As several attempts to reform the system have not passed the scrutiny of popular voting in optional referenda, the exact shape of the reform will be the result of intense political negotiations that are still to come.
National and International Banking Heterogeneity
2018, Kind, Axel
The costs of the Global Financial Crisis in terms of lost GDP growth have been higher in Europe than in the US. This is likely due to the outbreak of the European Sovereign Debt Crisis. To countervail its negative effects, the EU has made considerable efforts to initiate the European Banking Union with its ideal of a level playing field among credit institutions. In spite of these harmonization efforts, the level of heterogeneity of banks across member states in terms of their average performance, capital adequacy, and asset quality remains high. Banks in the Southern and Eastern European periphery are found to be less profitable and riskier than their counterparts in other regions of the EU. Given that such differences can be traced back, at least partially, to country-specific factors – economic, legal, and institutional conditions – applying the same prudential rules to all EU banks may fail to comply with the level-playing-field paradigm and actually distort the competition among European banks. The European banking sector is characterized by a rich variety of governance.
The determinants of banks' AT1 CoCo spreads
2022, Kind, Axel, Oster, Philippe, Peter, Franziska J.
We conduct a comprehensive pricing study of additional tier 1 (AT1) contingent convertible (CoCo) bonds issued by Eurozone banks. By accounting for an extensive set of pricing determinants related to the regulatory framework, the security design and key market variables, we show that the regulatory concept of the maximum distributable amount (MDA) introduced in 2016 has a significant and economically meaningful impact on CoCo spreads. Furthermore, we examine whether the market stress induced by the COVID-19 pandemic influences the determinants of CoCo spreads. Our results show that the pricing factors remain stable throughout tranquil and volatile periods.
The Ex Ante Effect of Creditor Rights on Corporate Financial and Investment Policy
2018, Canipek, Aras, Kind, Axel, Wende, Sabine
We examine the ex ante effect of an exogenous reduction in secured creditor rights on corporate financial and investment policy. We find that firms increase corporate leverage using both the reduced distress costs of secured debt and the positive externalities the lower secured creditor rights transfer to the borrowing costs of unsecured credit. Further, firms discard investments that reduce the risk of uncovering distress costs but are, however, less profitable. Our results suggest that firms eliminate unproductive protection mechanisms previously set in place to contract around costly bankruptcy legislations. This interpretation is confirmed by higher levels of risk and profitability. After establishing the average effect, we also show that the financing and investment response is highly dependent on the firm types which attract heterogeneous intensities in the positive (reduced distress costs) and negative (increased secured borrowing costs) effects of the weakened secured creditor rights. This result suggests that a uniform bankruptcy infrastructure that balances positive and negative effects of secured creditor rights is unsuited to be the optimal solution. Our finding rather points to a menu of bankruptcy procedures in which a debtor- and creditor-friendly code co-exist and thus allows different types of firms to contract for preferred procedures.