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HANDBOOK OF CORPORATE FINANCE: EMPIRICAL CORPORATE FINANCE VOLUME 1 HANDBOOKS IN FINANCE SeriesEditor WILLIAM T. ZIEMBA AdvisoryEditors KENNETH J. ARROW GEORGE C. CONSTANTINIDES HARRY M. MARKOWITZ ROBERT C. MERTON STEWART C. MYERS PAUL A. SAMUELSON WILLIAM F. SHARPE Amsterdam•Boston•Heidelberg•London•NewYork•Oxford Paris•SanDiego•SanFrancisco•Singapore•Sydney•Tokyo North-HollandisanimprintofElsevier HANDBOOK OF CORPORATE FINANCE EMPIRICAL CORPORATE FINANCE VOLUME 1 Editedby B. ESPEN ECKBO TuckSchoolofBusiness DartmouthCollege Hanover,NewHampshire,U.S.A. Amsterdam•Boston•Heidelberg•London•NewYork•Oxford Paris•SanDiego•SanFrancisco•Singapore•Sydney•Tokyo North-HollandisanimprintofElsevier North-HollandisanimprintofElsevier Radarweg29,POBox211,1000AEAmsterdam,TheNetherlands TheBoulevard,LangfordLane,Kidlington,OxfordOX51GB,UK Firstedition2007 Copyright©2007ElsevierB.V.Allrightsreserved Nopartofthispublicationmaybereproduced,storedinaretrievalsystemortransmittedinanyformorbyanymeans electronic,mechanical,photocopying,recordingorotherwisewithoutthepriorwrittenpermissionofthepublisher Permissions may be sought directly from Elsevier’s Science & Technology Rights Department in Oxford, UK: phone (+44)(0)1865843830;fax(+44)(0)1865853333;email:[email protected] requestonlinebyvisitingtheElsevierwebsiteathttp://elsevier.com/locate/permissions,andselectingObtainingpermission touseElseviermaterial Notice Noresponsibilityisassumedbythepublisherforanyinjuryand/ordamagetopersonsorpropertyasamatterofproducts liability,negligenceorotherwise,orfromanyuseoroperationofanymethods,products,instructionsorideascontainedin thematerialherein.Becauseofrapidadvancesinthemedicalsciences,inparticular,independentverificationofdiagnoses anddrugdosagesshouldbemade LibraryofCongressCataloging-in-PublicationData AcatalogrecordforthisbookisavailablefromtheLibraryofCongress BritishLibraryCataloguinginPublicationData AcataloguerecordforthisbookisavailablefromtheBritishLibrary ISBN-13:978-0-444-50898-0 ISBN-10:0-444-50898-8 ISSN:1873-1503 ForinformationonallNorth-Hollandpublications visitourwebsiteatbooks.elsevier.com PrintedandboundinTheNetherlands 07 08 09 10 11 10 9 8 7 6 5 4 3 2 1 INTRODUCTIONTOTHESERIES AdvisoryEditors: Kenneth J. Arrow, Stanford University, George C. Constantinides, University of Chicago, Harry M. Markowitz, University of California, San Diego, Robert C. Mer- ton,HarvardUniversity,StewartC.Myers,MassachusettsInstituteofTechnology,Paul A.Samuelson,MassachusettsInstituteofTechnology,andWilliamF.Sharpe,Stanford University. The Handbooks in Finance are intended to be a definitive source for comprehensive andaccessibleinformationinthefieldoffinance.Eachindividualvolumeintheseries presents an accurate self-contained survey of a sub-field of finance, suitable for use by finance and economics professors and lecturers, professional researchers, graduate studentsandasateachingsupplement.Thegoalistohaveabroadgroupofoutstanding volumesinvariousareasoffinance. WilliamT.Ziemba UniversityofBritishColumbia Publisher’sNote ForacompleteoverviewoftheHandbooksinFinanceSeries,pleaserefertothelisting attheendofthisvolume. v This page intentionally left blank CONTENTSOFTHEHANDBOOK VOLUME1 IntroductiontotheSeries Preface:EmpiricalCorporateFinance PART1: ECONOMETRICISSUESANDMETHODOLOGICALTRENDS Chapter1 EconometricsofEventStudies S.P.KOTHARIandJEROLDB.WARNER Chapter2 Self-SelectionModelsinCorporateFinance KAILIandNAGPURNANANDR.PRABHALA Chapter3 AuctionsinCorporateFinance SUDIPTODASGUPTAandROBERTG.HANSEN Chapter4 BehavioralCorporateFinance MALCOLMBAKER,RICHARDS.RUBACKandJEFFREYWURGLER PART2: BANKING,PUBLICOFFERINGS,ANDPRIVATESOURCESOFCAPITAL Chapter5 BanksinCapitalMarkets STEVENDRUCKERandMANJUPURI Chapter6 SecurityOfferings B.ESPENECKBO,RONALDW.MASULISandØYVINDNORLI Chapter7 IPOUnderpricing ALEXANDERLJUNGQVIST Chapter8 ConglomerateFirmsandInternalCapitalMarkets VOJISLAVMAKSIMOVICandGORDONPHILLIPS vii viii ContentsoftheHandbook Chapter9 VentureCapital PAULGOMPERS VOLUME2 Preface:EmpiricalCorporateFinance PART3: DIVIDENDS,CAPITALSTRUCTURE,ANDFINANCIALDISTRESS Chapter10 PayoutPolicy AVNERKALAYandMICHAELLEMMON Chapter11 TaxesandCorporateFinance JOHNR.GRAHAM Chapter12 TradeoffandPeckingOrderTheoriesofDebt MURRAYZ.FRANKandVIDHANK.GOYAL Chapter13 CapitalStructureandCorporateStrategy CHRISPARSONSandSHERIDANTITMAN Chapter14 BankruptcyandtheResolutionofFinancialDistress EDITHS.HOTCHKISS,KOSEJOHN,ROBERTM.MOORADIANandKARINS.THORBURN PART4: TAKEOVERS,RESTRUCTURINGS,ANDMANAGERIALINCENTIVES Chapter15 CorporateTakeovers SANDRABETTON,B.ESPENECKBOandKARINS.THORBURN Chapter16 CorporateRestructurings B.ESPENECKBOandKARINS.THORBURN Chapter17 ExecutiveCompensationandIncentives RAJESHK.AGGARWAL Chapter18 ManagingCorporateRisk CLIFFORDW.SMITH,Jr. PREFACE:EMPIRICALCORPORATEFINANCE JudgingbythesheernumberofpapersreviewedinthisHandbook,theempiricalanaly- sis of firms’ financing and investment decisions—empirical corporate finance—has become a dominant field in financial economics. The growing interest in everything “corporate”isfueledbyahealthycombinationoffundamentaltheoreticaldevelopments and recent widespread access to large transactional data bases. A less scientific—but neverthelessimportant—sourceofinspirationisagrowingawarenessoftheimportant social implications of corporate behavior and governance. This Handbook takes stock of the main empirical findings to date across the entire spectrum of corporate finance issues,rangingfromeconometricmethodology,toraisingcapitalandcapitalstructure choice, and to managerial incentives and corporate investment behavior. The surveys are written by leading empirical researchers that remain active in their respective ar- easofinterest.Withfewexceptions,thewritingstylemakesthechaptersaccessibleto industry practitioners. For doctoral students and seasoned academics, the surveys of- fer dense roadmaps into the empirical research landscape and provide suggestions for futurework. Part1(Volume1):EconometricIssuesandMethodologicalTrends Theempiricalcorporatefinanceliteratureisprogressingthroughacombinationoflarge- sample data descriptions, informal hypothesis testing, as well as structural tests of theory. Researchers are employing a wide spectrum of econometric techniques, insti- tutionalsettings,andmarketstructuresinordertodistillthecentralmessageinthedata. Part1ofVolume1beginsbyreviewingeconometricissuessurroundingeventstudies, and proceeds to explain the econometrics of self-selection. It then explains and illus- trates methodological issues associated with the growing use of auction theory, and it endswithadiscussionofkeyelementsofthecorporatefinanceevidencefromabehav- ioralperspective. In Chapter 1, “Econometrics of event studies”, S.P. Kothari and Jerold Warner re- viewthepoweroftheevent-studymethod;themostsuccessfulempiricaltechniqueto dateforisolatingthepriceimpactoftheinformationcontentofcorporateactions.The usefulnessofeventstudiesarisesfromthefactthatthemagnitudeofabnormalperfor- manceatthetimeofaneventprovidesameasureofthe(unanticipated)impactofthis typeofeventonthewealthofthefirms’claimholders.Thus,eventstudiesfocusingon announcementeffectsovershorthorizonsaroundaneventprovideevidencerelevantfor understandingcorporatepolicydecisions.Long-horizoneventstudiesalsoserveanim- portantpurposeincapitalmarketresearchasawayofexaminingmarketefficiency.The ix