In this paper, we explore the link between asset sales end debt capacity. Asset sales are a cormon way far firms to raise saab, and so present an alternative to security issues for firms near financial distress. We argue that liquid assets --those tba c con be resold at attractive terms --are good candidates for debt finance because financial distress for fis with such assets relatively inexpensive. We apply this logic to explain variocion in debt capacity across industries and over the bosiness cycle, as well as to the rise in g.5. corporate leverage in the 1980s.

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact

No abstract

The Stock Market and Investment: I s t he Market a Sideshow? RECENT EVENTS and research findings increasingly suggest that the stock market is not driven solely by news about fundamentals. There seem to be good theoretical as well as empirical reasons to believe that investor sentiment, also referred to as fads and fashions, affects stock prices. By investor sentiment we mean beliefs held by some investors that cannot be rationally justified. Such investors are sometimes referred to as noise traders. To affect prices, these less-than-rational beliefs have to be correlated across noise traders, otherwise trades based on mistaken judgments would cancel out. When investor sentiment affects the demand of enough investors, security prices diverge from fundamental values. The debates over market efficiency, exciting as they are, would not be important if the stock market did not affect real economic activity. If the stock market were a sideshow, market inefficiencies would merely redistribute wealth between smart investors and noise traders. But if the stock market influences real economic activity, then the investor sentiment that affects stock prices could also indirectly affect real activity.

We examine performance and management characteristics of Fortune 500 firms experiencing one of three types of control change: internally pricipitated management turnover, hostile takeover, and friendly takeover. We find that firms experiencing internally precipitated management turnover perform poorly relative to other firms in their industries, but are not concentrated in poorly performing industries. In contrast, targets of hostile takeovers are concentrated in troubled industries. There is also weaker evidence that hostile takeover targets underperform their industry peers. We interpret this evidence as consistent with the idea that the board of directors is capable of firing managers whose leadership leads to poor performance relative to industry, but that an external challenge in the form of a hostile takeover is often required when th. whole industry is in decline.The evidence also indicates that firms run by a me.ber of the founding family are less likely to experience either internally precipitated top management turnover or a hostili takeover. On the other hand, firms whose top management team is dominated by a single, relatively young top executive, while lacking in internal discipline, are more likely to experience a hostile takeover.

No abstract

No abstract

Adjustment by Manufacturing Firms THE ECONOMIC DOMINANCE of the state sector makes its behavior and response crucial to the course of reform in the economies of Central and Eastern Europe. This paper examines the special case of Poland in the three years following the "big bang" of January 1, 1990. The big bang-a program of radical reform to create the legal, institutional, and economic basis for a market economy-was instrumental in changing relative prices, introducing foreign competition, and signaling that tight monetary and fiscal policies would be pursued. However, changes in the ownership and governance of state manufacturing companies have lagged behind. This delay in privatizing has raised concerns because the state sector has played a central role in Poland. In 1990, the first year of Poland's reform program, state manufacturing accounted for some 30 percent of Brian Pinto was the senior economist in the World Bank Resident Mission in Poland when this study was done. Anna Krajewska and Bohdan Wyznikiewicz provided valuable help and suggestions, while Robert Sierhej did a superb job on research assistance. We thank Olivier Blanchard, Ian Hume, Mario Nuti, Raaj Sah, Stan Wellisz, and Sweder van Wijnbergen for useful comments. We acknowledge the encouragement of Greg Ingram and financial support from the World Bank. The views expressed here do not necessarily reflect those of the World Bank Group or affiliated institutions. 213 214 Brookings Papers on Economic Activity, 1:1993 GDP, 19 percent of employment, 85 percent of exports, and 60 percent of fiscal revenues. Unless rapidly privatized, many analysts argued, state manufacturing firms would not respond to the new economic environment, would decapitalize companies by paying out surpluses as wages, and would then use their bargaining power to negotiate a bailout with the government. The resulting fiscal burden would thus sabotage macroeconomic stability. This paper presents evidence that state-owned enterprises (SOEs) have been much more responsive than these fears implied. This finding suggests that hard budgets and import competition-essential ingredients of Poland's reform package-can exert adjustment pressures even when changes in ownership and governance lag behind. Two points are worth stressing along with this finding. First, credible and sustained enforcement of hard budgets and competition is difficult politically. ' Pressures occur constantly to reintroduce soft loans and protection. Second, the finding does not mean that hard budgets and competition are substitutes for changes in governance. Both, presumably, are necessary. But at least in Poland's case, the prospect of changes in governance has provided the needed incentives even before such changes have occurred. Thus far, privatization has been the most successful in services and in retail trade (although even here the change consists of leasing state shops to private operators). Privatization of manufacturing has been slow and contentious, with the mass privatization program (MPP) aimed at t...