The most efficient corporate governance structure will vary by firm depending on the costs and benefits of different governance mechanisms. For IPO firms, warrants might act as a substitute for other governance mechanisms ( Schultz, 1993). Alternatively, warrants might serve as a signal of high quality, and thus effectively governed, firms ( Chemmanur and Fulghieri, 1997), in which case they would act as a complement to other governance mechanisms. We test these competing hypotheses by examining a sample of unit IPO firms (firms issuing warrants with shares) matched to a comparable sample of shares-only firms and show that warrants act as a substitute for other governance mechanisms. The research is also of interest because it shows an interaction between the financing decisions of firms and their corporate governance that has not been documented previously.
Purpose
Periods of financial distress represent an episode during the firm’s life that requires an effective governance structure in the interests of shareholders. Changes in corporate governance structure are examined as firms approach and emerge from Chapter 11 bankruptcy. The purpose of this paper is to posit that firms alter their governance toward a more effective framework during restructuring, leading to emergence as a better performing firm.
Design/methodology/approach
The data set includes large firms that filed for bankruptcy between 1998 and 2013. Financial and governance characteristics prior to filing are compared to traits following emergence. The likelihood of emerging from bankruptcy is tested based on governance characteristics prior to filing and the change in these characteristics during bankruptcy.
Findings
The results show that firms use the bankruptcy process to significantly change their governance characteristics. These changes include smaller boards, greater board independence, unitary boards, the separation of the CEO and chairman positions, and changes in the ownership structure. Despite these changes, performance following emergence does not improve, and the changes in governance structure do not alter the likelihood that the firm will emerge.
Originality/value
This study, unlike previous studies, takes a broad look at governance characteristics for firms before and after bankruptcy. The findings imply that “better” governance, as defined in the literature, is not necessarily the pathway to better performance as many posit. The factors that influence the likelihood of emerging from bankruptcy and post-emergence performance require further study.
Many studies examine the relation between stock performance and CEO characteristics. We approach the topic in a different way, using the alphas generated by the Fama-French three-factor model as the dependent variable in a CEO characteristic model. We find several traits are significantly related to alpha. CEOs who are younger, own a larger fraction of firm equity and hold a graduate degree provide greater alphas. CEOs who are also the founder of the firm deliver larger alphas. Our results provide useful information for boards assessing the performance of CEOs and considering CEO succession.We are grateful to Neil Fargher and Steven Cahan (editors) and the anonymous referee for insightful comments and suggestions that improved the paper. We would also like to thank seminar participants at the University of Northern Iowa for their useful comments and suggestions. We thank Mick Balanda, Azam Firouzi, and Scott Taylor for their research assistance. We would also like to thank the UNI Provost Pre-Tenure Fellowship for financial assistance.
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