Hedge funds, insiders, and the decoupling of economic and voting ownership: Empty voting and hidden (morphable) ownership

Hu, Henry T. C.; Black, Bernard S.

doi:10.1016/j.jcorpfin.2007.02.004

Cited by 177 publications

(74 citation statements)

References 53 publications

Supporting

Mentioning

Contrasting

Unclassified

Order By: Relevance

“…Interestingly, Christoffersen et al (2005) document the existence of a market for corporate votes within the equity-loan market (see also Hu and Black, 2006, for other examples of markets for corporate votes). The equity-loan market is a market that facilitates, for a price, the borrowing of equity for short periods of time.…”

Section: Corporate Vote Buyingmentioning

confidence: 98%

“…Manne (1964), Clark (1979), and more recently Andre (1990), Hasen (2000) and Levmore (2000) presented informal arguments in favor of vote buying but they either ignored or otherwise dismissed the problem of looting or the possible existence of bad equilibria as discussed by Cole (2001) and others (see also the recent paper by Hu and Black, 2006). In 1985, in response to the brisk merger and acquisition activity of the early 1980s, a group of Wall Street professionals suggested decoupling shares and votes for short periods of time to facilitate vote buying transactions but did not submit a formal request to the Securities and Exchange Commission (Rent-A-Vote?…”

Section: Introductionmentioning

confidence: 99%

See 1 more Smart Citation

On the efficiency of vote buying when voters have common interests

Neeman

Orosel

2006

International Review of Law and Economics

View full text Add to dashboard Cite

We examine the conditions under which vote buying may promote efficiency in an environment where voters have identical preferences with respect to the behavior of their elected representatives (who are subject to both moral hazard and adverse selection). Our results suggest that permission of vote buying may prove beneficial in the market for corporate control and in some types of local political elections.Jel Classification numbers: D72, G32, G34, K22.

show abstract

Section: Corporate Vote Buyingmentioning

confidence: 98%

Section: Introductionmentioning

confidence: 99%

On the efficiency of vote buying when voters have common interests

Neeman

Orosel

2006

International Review of Law and Economics

View full text Add to dashboard Cite

show abstract

“…Stulz (2009) Another related literature deals with the decoupling of voting and cash- ‡ow rights in common equity through the judicious use of derivatives to hedge cash- ‡ow risk. Hu andBlack (2006, 2007) and Kahan and Rock (2007) argue that such decoupling can give rise to the opposite voting preferences from those of unhedged common equity holders and thus to ine¢ cient outcomes, such as voting for a merger which results in a decline in stock price of the acquirer and pro…ts those who have built up short positions on the …rm's stock. More recently Brav and Mathews (2009) have proposed a theory of decoupling in which the hedging of cash- ‡ow risk can facilitate trading and voting by an informed trader, but where it can also give rise to ine¢ cient voting when hedging is cheap.…”

mentioning

confidence: 99%

Credit Default Swaps and the Empty Creditor Problem

Bolton

Oehmke

2010

View full text Add to dashboard Cite

Commentators have raised concerns about the empty creditor problem that arises when a debtholder has obtained insurance against default but otherwise retains control rights in and outside bankruptcy. We analyze this problem from an ex-ante and ex-post perspective in a formal model of debt with limited commitment, by comparing contracting outcomes with and without credit default swaps (CDS). We show that CDS, and the empty creditors they give rise to, have important ex-ante commitment benefits: By strengthening creditors' bargaining power they raise the debtor's pledgeable income and help reduce the incidence of strategic default. However, we also show that lenders will over-insure in equilibrium, giving rise to an inefficiently high incidence of costly bankruptcy. We discuss a number of remedies that have been proposed to overcome the inefficiency resulting from excess insurance. One of the most signi…cant changes in the debtor-creditor relationship in the past few years has been the creation and subsequent exponential growth of the market for credit insurance, in particular credit default swaps (CDS). An important aspect of this development is that credit insurance with CDS does not just involve a risk transfer to the insurance seller. It also signi…cantly alters the debtor-creditor relation in the event of …nancial distress, as it partially or fully separates the creditor's control rights from his cash- ‡ow rights. Legal scholars (Hu and Black (2008a,b)) and …nancial analysts (e.g. Yavorsky (2009)) have raised concerns about the possible consequences of such a separation, arguing that CDS may create empty creditors-holders of debt and CDS-who no longer have an interest in the e¢ cient continuation of the debtor, and who may push the debtor into ine¢ cient bankruptcy or liquidation: Patrick Bolton"Even a creditor with zero, rather than negative, economic ownership may want to push a company into bankruptcy, because the bankruptcy …ling will trigger a contractual payo¤ on its credit default swap position.", Hu and Black (2008a), pp.19.We argue in this paper that while a creditor with a CDS contract may indeed be more reluctant to restructure debt of a distressed debtor, it does not necessarily follow that the presence of CDS will inevitably lead to an ine¢ cient outcome. In a situation where the debtor has limited ability to commit to repay his debt, a CDS strengthens the creditor's hand in ex-post debt renegotiation and thus may actually help increase the borrower's debt capacity. The relevant question is thus whether the presence of CDS leads to debt market outcomes in which creditors are excessively tough even after factoring in these ex-ante commitment bene…ts of CDS.In a CDS, the protection seller agrees to make a payment to the protection buyer in the event of a credit event on a prespeci…ed reference asset. In exchange for this promised payment, the protection seller receives a periodic premium payment from the buyer. The credit event may be the bankruptcy …ling of the debtor, non-payment of the d...

show abstract

“…Moreover, often the minorities vote on key managerial decisions such as mergers and acquisitions (Bethel et al, 2009). As a consequence, investors may acquire voting rights just to in ‡uence the outcome of M&A proposals (Hu and Black, 2007), because their preferences in voting give them some power, and the ability in a¤ecting board composition is proportional to the minorities protection rights ensured by the legal environment (Kim et al, 2007). Hubbard and Palia (1995) show that the acquisition of minority stakes increases the acquiror's pro…ts as soon as the managerial ownership is su¢ ciently high, otherwise the agency costs of equity would reduce the acquiror's private bene…ts of control.…”

Section: Introductionmentioning

confidence: 99%

Integration contracts and asset complementarity: Theory and evidence from US data

Giannatale

Passarelli

2018

International Journal of Industrial Organization

View full text Add to dashboard Cite

Firms sign an integration contract with the purpose of increasing their expected pro…ts from trade and competition with third parties. Gains depend on how the contract improves the partners' production function (e.g. better synergies, organization, etc.), and how it increases their power in the marketplace.We investigate three bilateral integration contracts under di¤erent ownership allocations over resources: M&A, Minority Stake purchase and Joint Venture. We study them theoretically with a cooperative game approach. We derive some pro…tability conditions that we test empirically on a sample of about 9000 US …rms. In order to estimate the link between ownership, asset complementarity and pro…ts over time, we propose a novel multiproduct and time-varying complementarity index. Empirical results fully support our theoretical predictions.

show abstract

Hedge funds, insiders, and the decoupling of economic and voting ownership: Empty voting and hidden (morphable) ownership

Cited by 177 publications

References 53 publications

On the efficiency of vote buying when voters have common interests

On the efficiency of vote buying when voters have common interests

Credit Default Swaps and the Empty Creditor Problem

Integration contracts and asset complementarity: Theory and evidence from US data

Contact Info

Product

Resources

About