David A. Becher

Drexel University, Philadelphia, Pennsylvania, United States

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Publications (26)1.77 Total impact

  • David A. Becher, Jennifer L. Juergens, Jack Vogel
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    ABSTRACT: This paper examines the mechanisms by which CEOs are incentivized and their impact on merger decisions. We argue that CEO ownership and option holdings are not interchangeable and have differing effects on the choice to undertake a merger, merger structure, and ultimately deal performance. Results suggest that CEO ownership aligns incentives; CEOs with higher levels of ownership are less likely to undertake mergers, but when they do, the merger structure and post-merger performance indicate they take on higher quality deals. CEOs with higher option holdings, however, are more likely to enter into deals which have inferior deal characteristics and subsequently lower performance. These results suggest that CEO ownership and option holdings are not substitutes when it comes to incentivizing CEOs, at least around mergers, and may add to the debate on how to best compensate CEOs.
    SSRN Electronic Journal 05/2013;
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    ABSTRACT: This paper presents evidence that stock analysts influence the likelihood that a merger is completed through their recommendations. We find that deals are more likely to be completed if analysts provide favorable post-announcement recommendations on the acquirer and unfavorable recommendations on the target, and that the market overreacts to post-announcement recommendations. Our results are consistent with recommendations moving the market’s perception of the value of the securities being swapped in a merger and suggest that analyst opinions affect real outcomes. We also document some evidence that analysts affiliated with an investment bank advising a merger party bias their opinions to increase the likelihood of merger completion.
    06/2012;
  • Thomas W. Bates, David A. Becher
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    ABSTRACT: We investigate management’s motives for rejecting initial takeover bids, and identify the wealth effects of this decision for target shareholders. Contested initial bids are negatively correlated with the relative quality of initial offer premiums and uncorrelated with the presence of target classified boards. The likelihood of higher follow-on offers is decreasing in initial offer quality, but higher when targets have a classified board and when target CEO’s have a greater proportion of their personal wealth tied to the close of a transaction. Positive long-run returns to the shareholders of firms that do not ultimately close a transaction suggest that target managers, on average, realize significant performance gains in the absence of a change-in-control event. Our evidence on forced CEO turnover indicates that CEOs who err in failing to close high quality offers realize significant personal costs. Overall, our results provide support for a price improvement motive in contested takeover bids.
    06/2012;
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    ABSTRACT: Our work provides refined tests of the existence and source of merger gains in a neglected industry: utilities. While excluded from traditional analyses, utilities offer fertile ground for a detailed analysis of the traditional theories of synergy, collusion, hubris and anticipation. The analysis of utilities provides methodological advantages and is important for public policy reasons. We find that utility mergers create wealth for the combined bidder and target. These positive wealth effects are consistent with both the synergy hypothesis and the collusion hypothesis. To distinguish between the hypotheses, we study the stock price returns to industry rivals across several dimensions specifically related to collusion: deregulation, horizontal mergers, geography, and withdrawn deals. We also examine the impact of mergers on consumer prices. The results are consistent with synergy and inconsistent with collusion. Analysis of industry rivals that subsequently become targets also rejects the collusion hypothesis and is consistent with the anticipation hypothesis.
    Journal of Financial and Quantitative Analysis 10/2010; · 1.77 Impact Factor
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    David A. Becher, Melissa B. Frye
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    ABSTRACT: We examine whether firms utilize governance systems and increased monitoring mechanisms when information asymmetry and managerial discretion are limited. Given that such monitoring is costly, we expect regulated firms to use less monitoring if regulation substitutes for governance. Using data from initial public offerings, we document that regulated firms have greater proportions of monitoring directors and larger boards as well as use similar amounts of equity-based compensation as non-regulated firms. Further, regulated and unregulated firms are analogous in terms of observed trade-offs between traditional monitoring mechanisms and insider ownership. Finally, regulated firms appear to decrease monitoring following a period of deregulation. These findings support the hypothesis that regulation and governance are complements and are consistent with the notion that regulators pressure firms to adopt effective monitoring structures.
    Journal of Banking & Finance. 08/2010;
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    ABSTRACT: Recent studies find that merger advisors, in particular acquirer advisors, often face conflicts of interest and present biased opinions about an underlying deal. It is not clear, however, how shareholders react to these opinions. Using a sample of mergers announced from 2000 to 2006, we examine whether target and acquirer advisors' opinions (valuation of target equity, long-term earnings forecast, and affiliated analyst recommendations) impact acquirer shareholders votes on mergers. Our results show that target advisor opinions, but not those of acquirer advisors, significantly impact shareholder voting. Further, if a deal receives higher shareholder support, the merger advisor is more likely to be retained in future deals. We conclude that shareholders are able to discern the potential bias in the opinions of merger advisors and follow the advice of the less-biased target advisors. Our study provides important evidence for the ongoing debate about regulatory reform governing investment banking transactions.
    08/2010;
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    ABSTRACT: We identify how the structure and type of fees paid to advisors in mergers and acquisitions generates conflicts of interest. A significant percentage of fees paid to advisors are fixed and contingent upon deal completion, thereby creating incentives for advisors and analysts to undertake actions to ensure merger completion rather than shareholder wealth maximization. We find that pre-merger analyst recommendations are related to the type of fee that advisors receive and, following the merger announcement, analysts revise their opinions on acquirers and targets in response to these fees. Further, we document that acquirer optimism and target pessimism, coupled with the fees generated by the advisory relationship, are positively related to merger completion. Our results suggest that analysts face a new conflict of interest in mergers and acquisitions, one which is aimed at deal completion as opposed to enhancing shareholder returns.
    12/2009;
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    David Becher, David Reeb
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    ABSTRACT: We explore how shareholders and creditors value board monitoring and stability. The standard view is that equity holders seek a powerful board because they face severe agency conflicts with managers. Our model demonstrates that board power could be especially important to creditors because monitoring reduces managerial incentives to search for risky new projects. In contrast, shareholders may prefer a weak board because it allows greater managerial discretion and improves incentives to undertake risky projects. We show how powerful boards can be a commitment device that shareholders use to assure creditors that the firm will not engage in risk-shifting behavior. We then empirically test predictions of our model using a hand collected sample of S&P MidCap firms. Board power is positively related to firm leverage and debt maturity, with creditors being concerned with both board monitoring and stability. We also find that board power is negatively associated with firm growth, which is consistent with the notion that shareholders may be reluctant to develop a powerful board. Further tests imply that board power is associated with lower firm-specific risks. Decomposing corporate debt into public and private issues, we find that board power is especially important to bondholders (public debt). Finally, we demonstrate that the relation between board power and shareholder value depends on the potential for shareholder-bondholder conflicts. In sum, there is robust empirical support for our central argument that board power is an important mechanism in reducing shareholder-debtholder conflicts.
    04/2009;
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    David A. Becher
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    ABSTRACT: This paper examines the anticipated components of bidder returns by focusing on the banking industry around the passage of interstate deregulation (Riegle Neal Act of 1994). Overall, firms that became bidders after Riegle Neal have large significant positive returns during its passage. Moreover, these positive wealth effects are significantly larger than the effects at the merger announcement. These results suggest that bidder returns are anticipated and focusing only on narrow event windows underestimates gains to bidders. Finally, the positive bidder returns appear to provide evidence against both the entrenchment and hubris hypotheses. Additional tests provide evidence to suggest that mergers are motivated by synergy rather than disciplinary motives.
    Journal of Corporate Finance. 02/2009; 15(1):85-98.
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    ABSTRACT: We investigate the effects ABS downgrades have on their parents/sponsors, and whether rating agencies downgrade deals independently of the parents' performance. In an ABS transaction, the underlying collateral is moved off-balance sheet, in accordance with the "true sale" assumption of FASB140. Therefore, an ABS downgrade should (a) have no impact on the parent and (b) have no relation to the parent's performance. However, we show that investors treat the deal as an integral part of the parent, given the significantly negative market reaction to the downgrade announcement. Moreover, the market's disciplinary role is also manifested through significant delays in the post downgrade ABS issuance activity for sponsors of downgraded deals. We also show that investors can distinguish "good" securitizers from "bad" ones as there are no such delays for securitizers of non-downgraded ABS deals. Hence in light of the recent economic crisis, proposals for effective regulation should incorporate ABS downgrades as market signals within the supervisory process. Finally, we provide evidence that for some deals, rating agencies consider the parent's financial position, and just like investors, treat the deal as an integral part of the parent.. All remaining errors are our own.
    01/2009;
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    ABSTRACT: We examine whether board characteristics can explain why a value decreasing fairness opinion (FO) is purchased by an acquiring firm and whether these characteristics alter the market's reaction to the use of a FO. We find that larger, more independent boards are more likely to obtain a FO as are boards with more directors facing reelection pressure. Boards with busy directors are less likely to use a FO. These results suggest that the board's motivation and incentives are important in explaining the use of a FO. In addition, we find that board characteristics both moderate and exacerbate the market's reaction to the use of a FO. When a FO is used by a busy board, the market reacts more negatively to the merger announcement. In contrast, board independence and the average service years for directors seem to moderate the market's reaction to the FO. Our empirical evidence supports a sophisticated market reaction, where the market recognizes the board's motivation when assessing the effect of the FO.
    10/2008;
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    ABSTRACT: We study the utility industry from 1980 to 2004 to discern the time series impact of industry shocks and their relation to mergers as modeled by Gort (1969) and Jensen (1993). Our sample period permits tests of the effect of utility deregulation in 1992 and related industry shocks on the rate of merger activity and the level and sources of the wealth changes from 384 utility mergers. We find the rate, size, geographic scope and operational focus of utility mergers all increase after deregulation and utility mergers create wealth for the combined firm. The announcement returns to the rivals of the merging firms decline between the pre- and post-deregulation periods and are larger for rivals that are future takeover targets. Announcement returns to rivals in the same geographic region as the target and bidder are no larger than returns to rivals not in the same region. In addition, the returns to rivals at the announcement of withdrawn deals are significantly positive. We also examine the relation of merger activity to electric utility pricing. Contrary to collusive or anti-consumer effects of mergers, we find that prices are significantly negatively related to industry concentration or merger activity. We interpret this evidence to be consistent with the synergy and anticipation hypotheses and inconsistent with the hypotheses that utility mergers are an outcome of bidder hubris or that mergers prompted by deregulation have enabled greater collusion in the utility industry.
    03/2008;
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    ABSTRACT: We explore the linkage between stock return predictability and the monetary sector by examining alternative proxies for monetary policy. Using two complementary methods, we document that failure to condition on the Fed's broad policy stance causes a substantial understatement in the ability of monetary policy measures to predict returns. Industry analyses suggest that cross-industry return differences are also linked to changes in monetary conditions, as monetary policy has the strongest (weakest) relation with returns for cyclical (defensive) industries. Overall, we find that monetary conditions have a prominent and systematic relation with future stock returns, even in the presence of business conditions. (c) 2008 The Southern Finance Association and the Southwestern Finance Association.
    Journal of Financial Research 01/2008; 31(4):357-379.
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    ABSTRACT: This paper considers the relation between board classification, takeover activity, and transaction outcomes for a panel of firms between 1990 and 2002. Target board classification does not change the likelihood that a firm, once targeted, is ultimately acquired. Moreover, shareholders of targets with a classified board realize bid returns that are equivalent to those of targets with a single class of directors, but receive a higher proportion of total bid surplus. Board classification does reduce the likelihood of receiving a takeover bid, however, the economic effect of bid deterrence on the value of the firm is quite small. Overall, the evidence is inconsistent with the conventional wisdom that board classification is an anti-takeover device that facilitates managerial entrenchment.
    Journal of Financial Economics. 09/2007;
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    David A Becher, Jennifer L Juergens
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    ABSTRACT: This paper investigates the relation between investment analyst recommendations and merger completion. Unlike the new issues market, we argue analysts' incentives are skewed to issue recommendations that ensure merger completion rather than maximize the overall deal value. Using a comprehensive sample of completed and withdrawn mergers, we observe the direction and affiliation of recommendations significantly impact the probability of merger completion. These effects are magnified for stock mergers where analysts can directly affect the acquisition currency. In the case of withdrawn deals, recommendations are related to which party is likely to terminate a merger. Overall, our results suggest analyst recommendations are linked to merger outcomes, though those recommendations appear biased to secure deal completion.
    05/2007;
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    ABSTRACT: All diversified firms are not created equal. Size matters when it comes to the functioning of corporate internal capital markets and the value of corporate diversification. The "diversification discount" is largely driven by mid-sized conglomerates with annual revenues of $20 to $400 million. Mid-sized conglomerates experience an average discount of 18% and significantly cross-subsidize their business units. By comparison, small and large conglomerates suffer lesser discounts of 5% and 3%, respectively. I argue that these differences in excess value are due to agency issues originating from managerial discretion over free cash flow and a lack of external oversight. I find that a high level of coincident free cash flow and corporate investment disrupts the efficient operation of corporate internal capital markets and leads to lower excess values. The free cash flow problem is concentrated in mid-sized and large conglomerates, which produce substantially higher levels of free cash flow than small firms. Diversified firms that increase their disclosure or commit to pay out excess cash flow to shareholders can substantially mitigate these negative effects. Unlike large conglomerates, mid-sized conglomerates opt to not pay out free cash flow nor do they have substantial analyst coverage to monitor their investment activities and these factors alone can explain their relatively lower excess values. JEL classification: G31, G32, G34 to the seminar participants at Drexel University for their helpful comments and suggestions. All errors and omissions are my own.
    02/2007;
  • David A. Becher, Terry L. Campbell II
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    ABSTRACT: By investigating the extent to which both CEO and non-CEO target directors bargain in their own interests during negotiations between merging banks, we document a strong inverse relation between merger premium and target director retention. Controlling for endogeneity, this relation holds for independent outside directors at both the individual and firm level while other governance mechanisms of targets and acquirers fail to diminish this finding. Moreover, it is director retention that influences merger terms and not the case that merger terms influence director retention. Finally, we find no evidence CEOs directly influence merger premiums. Overall, our results suggest that independent outside target directors exercise their bargaining power with the acquirer in a manner counter to the interests of their shareholders during merger negotiations.
    03/2006;
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    ABSTRACT: There is an extensive existing literature on the cost efficiency of banking institutions that estimates cost inefficiencies of the order of 15 to 30%. The persistence of such staggering inefficiencies is surprising given the competitive nature of the industry. Using a novel estimation framework that complements traditional cost function estimation with a revenue analysis, we find that much of what the prior literature classified as inefficiency is actually productive expenditure. This expenditure effectively increases the quality of the banking institution’s products and results in higher revenues. True “waste” is much lower, and averages only 9-12% of mean costs. By using broader measures of bank output we document that much of the unobserved product quality reflects omitted output. Our estimates of bank inefficiency are robust to the inclusion of these broader measures of bank output, while the inefficiency estimates that are based on the existing approaches are not robust. This robustness of our approach to variations in output definition forms a test of its internal validity, since our approach is designed to account for productive expenditures that are not directly attributed to observed output.
    Proceedings. 02/2006;
  • Morris Knapp, Alan Gart, David Becher
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    ABSTRACT: This paper examines the results of material mergers between bank holding companies (BHCs). Merged BHCs experience post-merger profitability below the industry average. The market reaction to the merger announcements is significantly negative. The most important causes of the poor post-merger performance are credit quality and the inadequate generation of fee income. Asset mix and capitalization also play a major part. The controllability of these items demonstrates the management challenge associated with a material merger. Copyright 2005 by the Eastern Finance Association.
    Financial Review 02/2005; 40(4):549-574.
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    ABSTRACT: Although deregulation leads to changes in the duties of boards of directors, little is known about changes in their incentives. U.S. banking deregulation and associated changes during the 1990s lends itself to a natural experiment. These industry shocks forced bank directors to face expanded opportunities, increased competition, and an expanding market for corporate control. While bank directors received significantly less equity-based compensation throughout most of the 1990s, by 1999, their use of such compensation is indistinguishable from a matched sample of industrial firms. Our results suggest firms respond to deregulation by improving internal monitoring through aligning directors' and shareholders' incentives.
    The Journal of Business. 02/2005; 78(5):1753-1778.

Publication Stats

250 Citations
1.77 Total Impact Points

Institutions

  • 2005–2013
    • Drexel University
      • Department of Finance
      Philadelphia, Pennsylvania, United States
  • 2009
    • Temple University
      • Fox School of Business and Management
      Philadelphia, PA, United States
    • University of Texas at Austin
      Austin, Texas, United States
  • 2008
    • University of Central Florida
      • College of Business Administration
      Orlando, FL, United States
  • 2000
    • Northern Illinois University
      • Department of Finance
      DeKalb, IL, United States