University of Colorado-Boulder Leeds School of Business

FNCE 4826 Sanjai BhagatSeminar in Corporate Governance Office: KOBL S431Fall 2017KOBL 235M 5:00 pm – 7:45 pm

sanjai.bhagat@colorado.eduOffice Hours: T 1 pm – 3pm

I. Course Objective

Corporate governance consists of the set of corporate policies that ensures outside investors a fair return on their investment. The objective of the course is to provide the student with a state-of-the-art understanding of corporate governance as it relates to

Corporate control Corporate performance Board structure and effectiveness Executive and board compensation Entrepreneurship and private equity Corporate social responsibility

II. Course Materials and Prerequisite

Course materials consist of scholarly journal articles and working papers. These and lecture notes/overheads and class announcements can be accessed from my home-page:http://leeds-faculty.colorado.edu/bhagat

The recommended textbook for this course is Corporate Governance Matters by David Larcker and Brian Tayan, FT Press, 2011.

Articles from the Wall Street Journal will be used to motivate some of the class discussion.www.wsj.com/studentoffer www.wsj.com/quarter

  This is a Finance elective. FNCE 3010 is a prerequisite.

III. Course Outline and Readings

A. Introduction

Corporate Governance Matters Chapter 1. IntroductionAgencyTheoryApplication IntroductionCorporateGovernance

B. Corporate Control: Mergers and Takeovers

Corporate Governance Matters Chapter 11.

Andrade, M. Mitchell, and E. Stafford. "New Evidence and Perspectives on Mergers." Journal of Economic Perspectives (2001): 103-120. NewEvidenceMergers.ppt target-gain-goodfile.doc  

https://www.wsj.com/articles/BT-CO-20170807-712178 http://quotes.wsj.com/UTX

http://www.wsj.com/articles/investors-give-cold-shoulder-to-deals-1443463297

S. B. Moeller, F. P. Schlingemann, R. M. Stulz, “Firm Size and the Gains From Acquisitions,” Journal of Financial Economics 73, 2004, 201-228.

J. Harford, M. Humphery-Jenner, R. Powell. “The sources of value destruction in acquisitions by entrenched managers,” Journal of Financial Economics, Volume 106, November 2012, Pages 247–26.

S. Bhagat, M. Dong, D. Hirshleifer and R. Noah, "Do Tender Offers Create Value?" Journal of Financial Economics, 2005, V76 N1, 3-60. b-hirshleifer.ppt

U. Malmendier and G. Tate, “Who Makes Acquisitions? CEO Overconfidence and the Market’s Reaction,” Journal of Financial Economics 89, 20-43, 2008. CEO-Overconfidence.ppt

M. Zhao and K. Lehn, “CEO Turnover After Acquisitions: Do Bad Bidders Get Fired?” 2006, Journal of Finance 61, 1759-1812.

Spinoffs and Corporate Refocusing

P. G. Berger and E. Ofek, “Causes and Effects of Corporate Refocusing Programs,” Review of Financial Studies 12, 1999, 311-346. Spinoffs.ppt

S. Krishnaswami and V. Subramaniam, “Information asymmetry, Valuation, and the Corporate Spin-off Decision,” 1999, Journal of Financial Economics 53, 1999, 73-112.

C. Shareholder Voting and Activism

J.A. Brickley, R.C. Lease and C.W. Smith, Jr., "Ownership Structure and Voting on Antitakeover Amendments," Journal of Financial Economics 20, 1988, 267-292. Antitakeover.ppt

S. Bhagat and R.H. Jefferis, "Voting Power in the Proxy Process: The Case of Antitakeover Charter Amendments," Journal of Financial Economics 30, 1991, 193-226.

L. Bebchuk, A. Brav and W. Jiang, “The Long-Term Effects of Hedge Fund Activism,” Harvard University working paper, 2013.

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A. Brav, W. Jiang, F. Partnoy, and R. Thomas, “Hedge Fund Activism, Corporate Governance, and Firm Performance,” 2010, Duke University working paper.

Paul Gompers*, Steven N. Kaplan and Vladimir Mukharlyamov, “What Do Private Equity Firms Do?” 2014, Harvard University working paper.

Steven Davis, et al, “Private Equity, Jobs, and Productivity,” 2014, University of Chicago working paper.

Corporate Governance Matters Chapter 12.

https://www.wsj.com/articles/p-g-vs-nelson-peltz-a-battle-over-the-future-of-big-brands-1507485229?mod=djemCMOToday

https://www.wsj.com/articles/why-p-g-investors-should-want-nelson-peltz-on-the-board-1505486507

https://www.revitalizepg.com/wp-content/uploads/2017/09/Trian-PG-White-Paper-9.6.17.pdf

D. Corporate Board Structure

Corporate Governance Matters Chapters 3, 4, and 5.

Gompers, P. A., J. L. Ishii, and A. Metrick, 2003, Corporate governance and equity prices, Quarterly Journal of Economics 118(1), 107-155.

S. Bhagat and B. Black, “The Non-Correlation Between Board Independence and Long-Term Firm Performance” Journal of Corporation Law, 2002, Volume 27, Number 2. b-black.ppt

S. Bhagat and B. Bolton, “Corporate Governance and Firm Performance,” Journal of Corporate Finance 14, 257-273, 2008. Corporate Governance – Performance.ppt

S. Bhagat and B. Bolton "Director Ownership, Governance and Performance," Journal of Financial & Quantitative Analysis, 2013, Sox-GovernancePerformance.

S. Bhagat , B. Bolton, and R. Romano, “The Promise and Pitfalls of Corporate Governance Indices,” Columbia Law Review, v108 n8, pp 1803-1882, 2008

E. Management and Board Compensation

Corporate Governance Matters Chapter 8.

M.C. Jensen and K.J. Murphy, "Performance Pay and Top-Management Incentives," Journal of Political Economy 98, 1990, 225-264. http://leeds-faculty.colorado.edu/bhagat/jensen-murphy.ppt

B. J. Hall and J. B. Liebman, “Are CEOs Really Paid Like Bureaucrats?” 1998, Quarterly Journal of Economics 108, 653-691. Hall-Liebman.ppt

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S. Bhagat, Financial Crisis, Corporate Governance, and Bank Capital, Cambridge University Press, 2017. Financial Crisis, Corporate Governance, and Bank Capital

S. Bhagat and B. Bolton, “Bank Executive Compensation And Capital Requirements Reform” Journal of Corporate Finance, 2014. IBCompensation

S. Bhagat , B. Bolton, and R. Romano, “Getting Incentives Right: Is Deferred Bank Executive Compensation Sufficient?” Yale Journal on Regulation, 2014.

S. Bhagat, “Bank Capital and Executive Compensation Reform: Preventing the Next Financial Crisis” 2016. [Bank-Capital-Compensation-Reform]

F. Corporate Social Responsibility

Kitzmueller, Markus and Jay Shimshack. "Economic Perspectives On Corporate Social Responsibility," Journal of Economic Literature, 2012, v 50(1), 51-84.

Simons, Robert, “The Business of Business Schools: Restoring a Focus on Competing to Win,” Harvard Business School, Capitalism and Society: Vol. 8: Iss. 1 , Article 2., 2013.

Guenther, David et al, “Do Socially Responsible Firms Pay More Taxes?” Accounting Review, 2016.

Servaes, Henri and Tamayo, Ane, The Role of Social Capital in Corporations: A Review (March 15, 2017). Oxford Review of Economic Policy, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2933393

Henri Servaes, Ane Tamayo, (2013) The Impact of Corporate Social Responsibility on Firm Value: The Role of Customer Awareness. Management Science 59(5):1045-1061. https://doi.org/10.1287/mnsc.1120.1630http://pubsonline.informs.org/doi/pdf/10.1287/mnsc.1120.1630

Ruixue Guo, Hau L. Lee, Robert Swinney (September, 2016) Responsible Sourcing in Supply Chains. Management Science 62(9):2722-2744.http://dx.doi.org/10.1287/mnsc.2015.2256

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IV. Course Policies

Course Schedule

August 25 IntroductionSeptember 4 Labor Day September 11 Corporate Control September 18 Corporate Control Proposal dueSeptember 25 Corporate Control October 2 Corporate Board Structure October 9 Corporate Board Structure October 16 Management and Board Compensation Paper first-half dueOctober 23 Midterm ExamOctober 30 Management and Board CompensationNovember 6 Management and Board CompensationNovember 13 Governance and Venture FinancingNovember 20 Fall BreakNovember 27 Corporate Social ResponsibilityDecember 4 Bank governance Paper dueDecember 11 Student PitchesDecember 18 Final ExamGrading

The grade breakdown is as follows:Item Weight

A. Class participation and attendance 15%B. Term Paper (proposal, due: September 18) 5%C. Term Paper (first-half, due: October 16) 15%D. Term Paper (due: December 4) 15%E. Term Paper (elevator pitch) 10%F. Midterm Exam (October 23) 20%G. Final Exam (December 18, 3:00 pm – 4:00 pm, KOBL S341) 20%

A. Class participation is critical to the success of this course. Student questions and comments are expected and welcome. Attendance will be taken at random (unannounced). To receive credit for attendance, you are expected to be in class on time and stay for the entire duration of the class.Students are requested to place their name-cards in front of their desk at all times during class.

The class will be conducted in a professional manner: Students and the instructor are expected to be prepared for each class, and behave professionally in the class.

B. Proposals for the term paper are due on September 18, 2017, before the start of class. The proposal should answer the following two questions:

What will the paper be about? Why is this topic interesting and important?

You should also include a list of at least four academic papers or book chapters that you intend to read 5

as background for your paper. The proposal should be no more than a page.

C, D, E. The term paper (first-half) is due on October 16, 2017, before the start of class. The term paper (first-half) should be at least ten pages long double-spaced pages (twelve-point font, one-inch margin all-around), and include the following:

What is the paper about? Why is this interesting and important to study/read? A critical survey of the literature. Outline of the original analysis that would be of interest to somebody in the real world:

Chairman of Board, CEO, CFO, policy makers and their staffs, compensation consultants, investment bankers, or private equity investors.

References that includes at least four academic papers or book chapters.

The term paper is due on December 4, 2017.

E. Student elevator pitches: December 11, 2017. 8 minutes to 10 minutes elevator pitch should cover the following:Topic, and why this topic is of interest to somebody in the real world: Chairman of Board, CEO, CFO, policy makers and their staffs, compensation consultants, investment bankers, or institutional investors.• Your analysis. Your audience is mostly interested in your analysis!• Your conclusions.► 4 or 5 slides should be adequate. On a slide - Less is more!

The paper can be on any topic that will be covered in the course. The paper should include a critical survey of the literature and some original analysis that would be of interest to somebody in the real world: Chairman of Board, CEO, CFO, policy makers and their staffs, compensation consultants, investment bankers, or private equity investors. The paper (including exhibits) should be between 20 and 25, double-spaced pages (twelve-point font, one-inch margin all-around).

On your paper please note the following:On my honor, as a University of Colorado at Boulder student, I have neither given nor received unauthorized assistance on this paper.A Note on Academic Honesty & Plagiarism: The development of the Internet has provided students with historically unparalleled opportunities for conducting research swiftly and comprehensively. The availability of these materials does not, however, release the student from appropriately citing sources where appropriate; or applying standard rules associated with avoiding plagiarism. Please see http://www.colorado.edu/academics/honorcode

Grade distribution:http://leeds.colorado.edu/asset/undergraduate/gradingpolicy.pdf

Also, please review http://www.colorado.edu/policies/fac_relig.html,http://www.colorado.edu/policies/classbehavior.html,http://www.Colorado.EDU/disabilityservices,and http://www.colorado.edu/policies/discrimination.html.

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Guidance to Faculty Regarding Grade Distributions

In May 2011, the faculty of the Leeds School voted to establish the “grading guidelines” shared below. With this vote, the faculty returns to its preͲ2009 approach of grading guidelines.

These guidelines embody the faculty’s consensus about competition and fairness within, and across, classroom experiences at Leeds. In its discussions and preparations, the faculty relied heavily on norms and customs at topͲtier business schools throughout the U.S.

The following matrix provides guidance on grade distributions either at the course level or aggregated across multiple, simultaneous sections.

Course Level Maximum Average Course Grade Recommended Distribution 1000 and 2000 2.8 Not more than 15% AͲ or above

Not more than 65% B Ͳor above At least 35% C+ or below

3000 3.0 Not more than 25% AͲ or above Not more than 75% B Ͳor above At least 25% C+ or below

4000 3.2 Not more than 35% AͲ or above Not more than 85% B Ͳor above At least 15% C+ or below

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Guidelines for the Term Paper

Suggested order for the sections:

Cover Page

Paper Title, Student Names, Course, Date

Executive SummaryNo more than one page. The most important part of your paper! Briefly explain what the paper is about, why this is

an interesting and important topic, and your main findings/conclusions. Consider an entrepreneur, investment banker, investor, or venture capitalist as your primary reader of this page.

Introduction

What is the paper about?

Motivation: Why is this interesting and important to study/read?

Overview of the paper.

(Main Body)

Please consider using sub-sections to better organize your paper, and improve its readability.

Please check the transition between paragraphs.

(Footnotes on same page.)

Summary and Conclusions

Exhibits (Tables, Graphs, etc.)

Captions and legends in the exhibits should make them self-explanatory. Cite data sources.

References____________________________________________________________________

Check for grammar and spelling.

All arguments/assertions should be supported using:logical constructs, and/ortheoretical considerations (cite references), and/orprevious empirical evidence (cite references).

Paper should be revised by you at least four times over a period no less than a week.

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F. The exam will consist of essay-type questions, and will be closed-book, closed-notes, and in-class. The exam will be based on study questions that will be handed out during the semester.

Readings

You are advised to read the “critical portions” of the assigned readings for a particular class before that class. The critical portions of a reading include the abstract, introduction, summary/conclusions of the paper. You might wish to read the main body of the paper after we have discussed it in class.

V. Additional Readings (Particularly helpful if your term paper is on one of the following topics)

B. Corporate Control

Mergers and Takeovers

1. S. Bhagat, A. Shleifer, and R.W. Vishny, "Hostile Takeovers in the 1980s: The Return to Corporate Specialization," Brookings Papers on Economic Activity, 1990, 1-84. target-gain-goodfile.doc 

2. G. Andrade, M. Mitchell, and E. Stafford. "New Evidence and Perspectives on Mergers." Journal of Economic Perspectives (2001): 103-120. NewEvidenceMergers.ppt

3. Olivier Dessaint, Andrey Golubov, Paolo Volpin, Employment protection and takeovers, Journal of Financial Economics 125, 2017, 369-388. https://doi.org/10.1016/j.jfineco.2017.05.005

4. E.H. Kim and V. Singal, "Mergers and Market Power: Evidence from the Airline Industry," American Economic Review 83, 1993, 549-569.

5. Hosken, Daniel S. and Tenn, Steven, Horizontal Merger Analysis in Retail Markets (January 19, 2015). Available at SSRN: http://ssrn.com/abstract=2552548 or http://dx.doi.org/10.2139/ssrn.2552548

6. S. Bhagat, M. Dong, D. Hirshleifer and R. Noah, "Do Tender Offers Create Value?" Journal of Financial Economics, 2005, V76 N1, 3-60. b-hirshleifer.ppt

7. S. B. Moeller, F. P. Schlingemann, R. M. Stulz, “Firm Size and the Gains From Acquisitions,” Journal of Financial Economics 73, 2004, 201-228.

8. S.B. Moeller, F. P. Schlingemann, and R.M. Stulz, “Wealth Destruction on a Massive scale? A Study of Acquiring-Firm returns in the Recent Merger Wave, Journal of Finance 60, 2005, 757-782.

9. J. Harford, M. Humphery-Jenner, R. Powell. “The sources of value destruction in acquisitions by entrenched managers,” Journal of Financial Economics, Volume 106, November 2012, Pages 247–26.

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10. U. Malmendier and G. Tate, “Who Makes Acquisitions? CEO Overconfidence and the Market’s Reaction,” Journal of Financial Economics 89, 20-43, 2008.

11. M. Zhao and K. Lehn, “CEO Turnover After Acquisitions: Do Bad Bidders Get Fired?” 2006, Journal of Finance 61, 1759-1812.

12. S. Bhagat, S. Malhotra and P.C. Zhu, “Emerging country cross-border acquisitions: Characteristics, acquirer returns and cross-sectional determinants,” Emerging Markets Review, Volume 12, September 2011, Pages 250-27.

11. I. Erel, R.C. Liao, and M.S. Weisbach, “Determinants of Cross-Border Mergers and Acquisitions,” Journal of Finance 67, 2012, pages 1045–1082.

Spinoffs and Corporate Refocusing

1. B. E. Eckbo and K.S. Thorburn, Corporate Restructuring, Foundations and Trends in Finance, 2013.

2. P. G. Berger and E. Ofek, “Causes and Effects of Corporate Refocusing Programs,” Review of Financial Studies 12, 1999, 311-346. Spinoffs.ppt

3. L Daley, V. Mehrotra, and R. Sivakumar, “Corporate Focus and Value Creation: Evidence fron Spinoffs,” 1997, Journal of Financial Economics 45, 257-281.

4. S. Krishnaswami and V. Subramaniam, “Information asymmetry, Valuation, and the Corporate Spin-off Decision,” 1999, Journal of Financial Economics 53, 1999, 73-112.

5. S. Ahn and D.J. Denis, “Internal Capital Markets and Investment Policy: Evidence From Corporate Spinoffs,” Journal of Financial Economics 71, 2004, 489-516.

6. T.R. Burch and V. Nanda, “Divisional Diversity and the Conglomerate Discount: Evidence From Spinoffs,” Journal of Financial Economics 70, 2003, 69-98.

7. L. Cohen and D. Lou, “Complicated Firms,” Journal of Financial Economics 102, 2012, 383-400.

C. Shareholder Voting and Activism

1. J.A. Brickley, R.C. Lease and C.W. Smith, Jr., "Ownership Structure and Voting on Antitakeover Amendments," Journal of Financial Economics 20, 1988, 267-292. Antitakeover.ppt

2. S. Bhagat and R.H. Jefferis, "Voting Power in the Proxy Process: The Case of Antitakeover Charter Amendments," Journal of Financial Economics 30, 1991, 193-226.

3. M. Cain, S. McKeon, S. Solomon, Do takeover laws matter? Evidence from five decades of hostile takeovers, Journal of Financial Economics 124, Issue 3, June 2017, Pages 464-485. https://doi.org/10.1016/j.jfineco.2017.04.003

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4. D. DelGuercio and J. Hawkins, “The Motivation and Impact of Pension Fund Activism,” Journal of Financial Economics 52, 1999, 293-340.

5. L. Bebchuk, A. Brav and W. Jiang, “The Long-Term Effects of Hedge Fund Activism,” Harvard University working paper, 2013.

6. L.A. Bebchuk and E. Kamar, “Bundling and Entrenchment,” Harvard Law Review, May 2010.

7. A. Brav, W. Jiang, F. Partnoy, and R. Thomas, “Hedge Fund Activism” 2010, Duke University working paper.

8. S. Bhagat and R. Romano, “Empirical Studies of Corporate Law,” in Handbook of Law & Economics, 2007. CorporateLaw.ppt

D. Corporate Board Structure

1. S. Bhagat and B. Black, “The Non-Correlation Between Board Independence and Long-Term Firm Performance” Journal of Corporation Law, 2002, Volume 27, Number 2. b-black.ppt

2. S. Bhagat and R.H. Jefferis, The Econometrics of Corporate Governance Studies, 2002, MIT Press.

3. S. Bhagat and B. Bolton, “Corporate Governance and Firm Performance,” Journal of Corporate Finance 14, 257-273, 2008. Corporate Governance – Performance.ppt

4. S. Bhagat and B. Bolton "Director Ownership, Governance and Performance," Journal of Financial & Quantitative Analysis, 2013, Sox-GovernancePerformance.

5. S. Bhagat , B. Bolton, and R. Romano, “The Promise and Pitfalls of Corporate Governance Indices,” Columbia Law Review, v108 n8, pp 1803-1882, 2008

6. S. Bhagat, Financial Crisis, Corporate Governance, and Bank Capital, Cambridge University Press, 2017.

7. L. Fauver, M. Hung, A. Taboada, Board reforms and firm value: Worldwide evidence, Journal of Financial Economics 125, Issue 1, July 2017, Pages 120-142. https://doi.org/10.1016/j.jfineco.2017.04.010

E. Management and Board Compensation

S. Bhagat, Financial Crisis, Corporate Governance, and Bank Capital, Cambridge University Press, 2017. Financial Crisis, Corporate Governance, and Bank Capital

M.C. Jensen and K.J. Murphy, "Performance Pay and Top-Management Incentives," Journal of Political Economy 98, 1990, 225-264. http://leeds-faculty.colorado.edu/bhagat/jensen-murphy.ppt

B. J. Hall and J. B. Liebman, “Are CEOs Really Paid Like Bureaucrats?” 1998, Quarterly Journal of Economics 108, 653-691. Hall-Liebman.ppt

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C.S. Armstrong, D. F. Larcker, G. Ormazabal, and D. J. Taylor, “The Relation Between Equity Incentives and Misreporting: The Role of Risk-taking Incentives,” Journal of Financial Economics 109, 327-350, 2013.

Armstrong, C. S., A. Jagolinzer and D. Larcker, “Chief Executive Officer Equity Incentives and Accounting Irregularities”, Journal of Accounting Research 48, 225-271, 2010.

S. Bhagat and B. Bolton, “Bank Executive Compensation And Capital Requirements Reform” Journal of Corporate Finance, 2014. IBCompensation

S. Bhagat , B. Bolton, and R. Romano, “Getting Incentives Right: Is Deferred Bank Executive Compensation Sufficient?” Yale Journal on Regulation, 2014. ReformingExecComp

Anat R. Admati, Peter M. DeMarzo, Martin F. Hellwig, Paul C. Pfleiderer, “Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Expensive,” Stanford University working paper, September 2011.

B. Bennett, J. Bettis, R. Gopalan, T. Milbourn, Compensation goals and firm performance, Journal of Financial Economics 124, Issue 2, May 2017, Pages 307-330. https://doi.org/10.1016/j.jfineco.2017.01.010

F. Governance and Venture Financing

1. S.N. Kaplan and Per Stromberg. "Financial Contracting Theory Meets The Real World: An Empirical Analysis Of Venture Capital Contracts," Review of Economic Studies, 2003, v70(2,Apr), 281-315.

2. S. N. Kaplan, B. A. Sensoy, and P. Stromberg, “Should Investors Bet on the Jockey or the Horse? Evidence from the Evolution of Firms from Early Business Plans to Public Companies,” Journal of Finance 64, 2009, 75-115.

3. O. Bengtsson and B. A. Sensoy, “Changing the Nexus: The Evolution and Renegotiation of Venture Capital Contracts,” Ohio State University working paper, 2009.

4. O. Bengtsson and B. A. Sensoy, “Investor Abilities and Financial Contracting: Evidence from Venture Capital,” Ohio State University working paper, 2009.

5. O. Bengtsson and S.A.Ravid, “The Geography of Venture Capital Contracts,” Ohio State University working paper, 2009.

6. H. Chen, P. Gompers, A. Kovner, and J. Lerner, “Buy Local? The Geography of Successful Venture Capital Expansion,” Harvard University working paper, 2009.

7. Brian Broughmana and Jesse Fried, “Renegotiation of cash flow rights in the sale of VC-backed firms,” Journal of Financial Economics 95, Issue 3, March 2010, Pages 384-399.

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8. U. Ozmela, D. T. Robinson, T. E. Stuart, Strategic alliances, venture capital, and exit decisions in early stage high-tech firms, Journal of Financial Economics, Volume 107, March 2013, Pages 655–670

G. Corporate Social Responsibility

Kitzmueller, Markus and Jay Shimshack. "Economic Perspectives On Corporate Social Responsibility," Journal of Economic Literature, 2012, v 50(1), 51-84.

Simons, Robert, “The Business of Business Schools: Restoring a Focus on Competing to Win,” Harvard Business School, Capitalism and Society: Vol. 8: Iss. 1 , Article 2., 2013.

Guenther, David et al, “Do Socially Responsible Firms Pay More Taxes?” Accounting Review, 2016.Servaes, Henri and Tamayo, Ane, The Role of Social Capital in Corporations: A Review (March 15, 2017). Oxford Review of Economic Policy, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2933393

Henri Servaes, Ane Tamayo, (2013) The Impact of Corporate Social Responsibility on Firm Value: The Role of Customer Awareness. Management Science 59(5):1045-1061. https://doi.org/10.1287/mnsc.1120.1630http://pubsonline.informs.org/doi/pdf/10.1287/mnsc.1120.1630

Krunic, Mira, The Relationship between Corporate Social Responsibility and Firm Performance (April 24, 2017). Available at SSRN: https://ssrn.com/abstract=2957906 or http://dx.doi.org/10.2139/ssrn.2957906

Bajic, Stevan and Yurtoglu, B. Burcin, CSR, Market Value, and Profitability: International Evidence (September 2016). Available at SSRN: https://ssrn.com/abstract=2848099 or http://dx.doi.org/10.2139/ssrn.2848099

Ruixue Guo, Hau L. Lee, Robert Swinney (September, 2016) Responsible Sourcing in Supply Chains. Management Science 62(9):2722-2744.http://dx.doi.org/10.1287/mnsc.2015.2256

Dhaliwal, Dan S., Oliver Zhen Li, Albert Tsang and Yong George Yang. "Voluntary Nonfinancial Disclosure And The Cost Of Equity Capital: The Initiation Of Corporate Social Responsibility Reporting," Accounting Review, 2011, v86(1), 59-100.

Dravenstott, John and Natalie Chieffe. "Corporate Social Responsibility: Should I Invest For It Or Against It?," Journal of Investing, 2011, v20(3), 108-117.

El Ghoul, Sadok, Omrane Guedhami, Chuck C.Y. Kwok and Dev R. Mishra. "Does Corporate Social Responsibility Affect The Cost Of Capital?," Journal of Banking & Finance, 2011, v35(9), 2388-2406.

Goss, Allen and Gordon S. Roberts. "The Impact Of Corporate Social Responsibility On The Cost Of Bank Loans," Journal of Banking & Finance, 2011, v35(7), 1794-1810.

Becchetti, Leonardo and Rocco Ciciretti. " Corporate Social Responsibility And Stock Market Performance,” Applied Financial Economics, 2009, v19(16), 1283-1293

Jensen, Michael C., Putting Integrity into Finance: A Positive Approach, 2011, Harvard NOM Working Paper No. 06-06; Available at SSRN: http://ssrn.com/abstract=876312

J.M. Karpoff, D.S. Lee and G.S. Martin, “The Cost of Cooking the Books,” Journal of Financial and Quantitative Analysis, 43 (September 2008), 581-612.

J.M. Karpoff, D.S. Lee and G.S. Martin , The consequences to managers for financial misrepresentation,

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Journal of Financial Economics,Volume 88, Issue 2, May 2008, Pages 193-215

Glaeser, Edward L., The Governance of Not-for-Profit Firms (April 2002). Harvard Institute of Economic Research Paper No. 1954. Available at SSRN: http://ssrn.com/abstract=313203 or http://dx.doi.org/10.2139/ssrn.313203

H. Private Equity

1. S. N. Kaplan and P. Stromberg, “Leveraged Buyouts and Private Equity, NBER paper, 2008.http://www.privateequityatwork.com/

2. Steven J. Davis , John Haltiwanger , Ron S. Jarmin , Josh Lerner and Javier Miranda, “Private Equity and Employment,” US Census Bureau Center for Economic Studies Paper No. CES-WP-08-07R, 2014. Private Equity

3. Paul Gompers, Steven N. Kaplan and Vladimir Mukharlyamov, “What Do Private Equity Firms Do?” 2014, Harvard University working paper.

4. Paglia, John and Harjoto, Maretno Agus, The Effects of Private Equity and Venture Capital on Sales and Employment Growth in Small and Medium Sized Businesses (June 5, 2014). Journal of Banking and Finance, Vol. 47, pp. 177-197, 2014.

5. J. Haltiwanger, R. Jarmin, J. Miranda, “Who Creates Jobs?” Review of Economics and Statistics 95, May 2013, 347-361.

I. Financial Crisis

1. L. Zingales, “Does Finance Benefit Society?” Journal of Finance 70, 2015.

2. Yale University Symposium, “Future of Financial Regulation,” 2009.

3. K. French et al, The Squam Lake Report, 2010, Princeton University Press.

4. T. D. Nadaulda, S. M. Sherlund, The impact of securitization on the expansion of subprime credit, Journal of Financial Economics, Volume 107, Issue 2, February 2013, Pages 454–476

5. M. Carey, A. K Kashyap, R. Rajan, R. M. Stulz, Market institutions, financial market risks, and the financial crisis, Journal of Financial Economics 104, June 2012, Pages 421–424.

6. R. Duchin, O. Ozbas, B. A. Sensoy, Costly external finance, corporate investment, and the subprime mortgage credit crisis, Journal of Financial Economics 97, 418-435, 2010.

7. A.N. Berger and C. H. Bouwman, “How Does Capital Affect Bank Performance During Financial Crisis,” Journal of Financial Economics 109, 2013, 146-176.

8. S. Bhagat, B. Bolton, and J. Lu, “Size, Leverage, and Risk-taking of Financial Institutions,” Journal of

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Banking and Finance, 2015. http://www.sciencedirect.com/science/article/pii/S0378426615001867

9. Admati, Anat R., The Compelling Case for Stronger and More Effective Leverage Regulation in Banking (September 30, 2014). Journal of Legal Studies, Forthcoming; Stanford University Graduate School of Business Research Paper No. 3030. Available at SSRN: http://ssrn.com/abstract=2505199

10. Admati, Anat R. and DeMarzo, Peter M. and Hellwig, Martin F. and Pfleiderer, Paul C., Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Socially Expensive (October 22, 2013). Max Planck Institute for Research on Collective Goods 2013/23; Rock Center for Corporate Governance at Stanford University Working Paper No. 161; Stanford University Graduate School of Business Research Paper No. 13-7. Available at SSRN: http://ssrn.com/abstract=2349739 or http://dx.doi.org/10.2139/ssrn.2349739

11. A. Kashyap, J. Stein, and S. Hanson, An Analysis of the Impact of Substantially Heightened Capital Requirements on Large Financial Institutions, Harvard University paper, 2010.

12. T. Begley, A. Purnanandam, “Strategic Under-Reporting of Bank Risk,” University of Michigan paper, 2015.

13. S. Bhagat “Yes, Virginia, Austerity Works,” http://www.realclearmarkets.com/articles/2015/07/23/as_greece_proves_austerity_is_government_spending_101757.html

EuropeanCrisis

15

The case study should include stock market’s response to the ---, relationship between governance and the stock market’s response, relationship between governance and the --- circumstances, post---- operating performance, and response of financial analysts following the company to the ---.

Potential data sources:

a. Annual reports, proxy statements and 8-Ks can be helpful; these can be obtained from https://www.sec.gov/edgar/searchedgar/companysearch.html.

b. Bloomberg dataThe Bloomberg terminals in Room E-370 have a wealth of financial data. Some of this can be used for the original analysis part of your term paper. Having a competency with the Bloomberg terminal and related data makes you very attractive to future employers. Please go to http://burridgecenter.colorado.edu/html/indexlab.html

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Remind students to visit colorado.campuslabs.com/courseeval using a phone, tablet or computer. They will need to authenticate using their campus user ID.

Instructors and TAs must not be present in the classroom while students complete their FCQs.

The Final Exam (December 18, 3:00 pm – 4:00 pm, KOBL S341) will consist of two questions drawn from the following. It is expected that the answer to each question would take about 30 minutes.

1. Discuss the advantages and disadvantages of common stock residual claims. [IntroductionAgencyTheoryApplication]

2. Discuss the sources of conflict of interest between managers and shareholders. Discuss the mechanisms to control this conflict of interest. [IntroductionAgencyTheoryApplication]

3. (a) What does it mean to say that a market is efficient? (b) A certain investment advisor claims that the clients she has advised in the past have done “better than the market” because in the past five years the portfolio she had recommended beat the market by the following annual returns: 1.5%, 2.5%, 0.5%, -0.5%, -1.25%. Evaluate her claim. [CAPM-EMH.ppt]

4. a) Target shareholders generally receive substantial positive abnormal returns during takeovers. What are the hypothesized sources of these abnormal returns?  [target-gain.doc] [NewEvidenceMergers.ppt] b) What is the empirical evidence on returns to bidders in takeovers? Discuss potential problems in the traditional ways of measuring returns to bidders in takeovers. [b-hirshleifer.ppt] [NewEvidenceMergers.ppt]

5. (a) What are antitakeover amendments? (b) Why might antitakeover amendments be in shareholders’ interest? (c) Why might antitakeover amendments not be in shareholders’ interest? (d) What is the empirical evidence on when managers are more likely to propose antitakeover amendments? [Antitakeover.ppt]

6 (a) What are the long term effects of hedge fund activism? (b) Why might hedge fund activism be different than institutional investor activism? [Antitakeover.ppt] Bebchuk-Brav-Jiang (2013)

7. Recently academics (GIM, Bhagat and Bolton (2008)), and industry advisors to institutional investors (The Corporate Library) have suggested ways to measure corporate governance for companies. (a) Describe the three measures (GIM, Bhagat & Bolton, The Corporate Library) of corporate governance. (b) What are the pros and cons of these three measures of corporate governance?(c) What is the empirical evidence on the effectiveness of these three measures of corporate governance? [Corporate Governance-Performance.ppt]

17

8. Bebchuk, Cohen and Spamann (2010) study the compensation structure of the top executives in Bear Stearns and Lehman Brothers and conclude, “…given the structure of executives’ payoffs, the possibility that risk-taking decisions were influenced by incentives should not be dismissed but rather taken seriously.” Fahlenbrach and Stulz (2011) focus on the large losses experienced by CEOs of financial institutions via the declines in the value of their ownership in their company’s stock and stock option during the crisis and conclude, “Bank CEO incentives cannot be blamed for the credit crisis or for the performance of banks during that crisis.” (a) How might you differentiate between these two points of view? (b) What recommendations might you make regarding executive compensation of large financial institutions? Why?[Financial Crisis, Corporate Governance, and Bank Capital (2017); chapters 3, 4, and 6]

9. While the popular business media and academic research has written extensively about executive compensation, the literature on director compensation is thin.a. Why is it important to study director compensation?b. Please discuss the director compensation proposal and the caveats to this as in Bhagat (2017). [Financial Crisis, Corporate Governance, and Bank Capital (2017); chapter 7]

10. a. Why might big bank executive compensation reform and big bank capital structure be related?b. What recommendations might you make regarding the capital structure of big banks? Why?[Financial Crisis, Corporate Governance, and Bank Capital (2017); chapters 9 and 10]

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https://www.wsj.com/articles/ge-explores-exiting-from-the-railroad-business-1509031146?mod=djemalertNEWS

GE Explores Exiting From the Railroad BusinessUnder pressure to streamline, new CEO looks to shed century-old locomotive divisionBy 

Thomas Gryta and 

Dana CimillucaOct. 26, 2017 11:19 a.m. ET0   COMMENTS

General Electric Co. GE   -0.88%  is looking to exit from the railroad business, one of its oldest, as new

Chief Executive John Flannery looks to streamline the conglomerate.

The Boston-based company is exploring options for the GE Transportation division, according to people

familiar with the matter, as a major part of Mr. Flannery’s plans to divest more than $20 billion worth of

assets   in the next two years.

The company, the people said, is looking to partner, spin off or possibly sell the operations, which

primarily produce diesel-powered locomotives and railroad equipment. An outright sale could trigger a

big tax hit since GE has owned the business for a century, one person said.

Although GE is one of the world’s biggest makers of freight locomotives, the business is cyclical and

has been suffering lately from slack demand. In the first nine months of 2017, the unit’s revenue slipped

8% and profits fell 15%. The division accounted for $4.7 billion of GE’s total revenue of $123.7 billion

last year.

It isn’t clear what the transportation business may be worth or what other units GE is looking to jettison.

The down cycle for the rail industry is a key factor in determining the best way to exit it, the people said.

A GE spokeswoman declined to comment.

19

The company has many strong divisions, Mr. Flannery said Friday on a conference call, but also “a

number of other businesses which drain investment and management resources without the prospects for

a substantial reward.”

Write to Thomas Gryta at thomas.gryta@wsj.com and Dana Cimilluca at dana.cimilluca@wsj.com

20

https://www.wsj.com/articles/the-outlook-for-technology-m-a-1508811183

The Outlook for Technology M&APeggy Johnson and Jennifer Nason talk about past deals and the prospect for more deals

Top Women at Microsoft, JP Morgan Discuss Gender EqualityPeggy Johnson and Jennifer Nason talk about what companies can do to fight gender discrimination at work.Oct. 23, 2017 10:13 p.m. ET0   COMMENTS

Tech companies aren’t sticking to their bread and butter when it comes to acquisitions. In

2016, Microsoft Corp. MSFT   +0.59%   surprised the market with its $26 billion acquisition of LinkedIn.

And this year, Amazon.com Inc. AMZN   -0.11%   purchased Whole Foods for more than $13 billion.

Wall Street Journal Senior Editor Yun-Hee Kim talked about mergers and acquisitions and strategic

investments with Peggy Johnson, Microsoft’s executive vice president of business development, and

Jennifer Nason, global chairman, investment banking at J.P. Morgan Chase & Co.

Edited excerpts follow.

MS. KIM: What is the outlook for big acquisitions?

JOURNAL REPORT

Read more at WSJ Conferences

MS. NASON: I am bullish about 2018 for activity. Money is still virtually free. The equity market has

been very responsive to M&A. Prices are still high, so we’re seeing very high valuations. That is tough.

But increasingly companies are looking at assets and saying, “This is just strategic for me. I need to

make a move.”

MS. KIM: Peggy, one of your partnerships came as a surprise this year: the partnership with Amazon

on digital assistants. You have Cortana and Alexa working together.

MS. JOHNSON: They’re talking to each other.

MS. KIM: What was the logic behind that deal?

21

MS. JOHNSON: It started with a conversation that Jeff Bezos and Satya Nadella had at our CEO

Summit about how we’re really operating in different spaces. Jeff’s all about shopping, and that

experience. We’re all about productivity and that experience. I think there was a recognition that there

will be a multitude of personal agents, and could ours talk to each other?

When it was handed off to the engineering teams, then the hard work began. They figured out how you

can have a seamless experience between your two devices. I think you’ll see more of that going forward.

MS. KIM: Are you open to working with companies like Apple AAPL   +0.52%   and Google in the AI

space as well?

MS. JOHNSON: We are. We try not to look at everything through a competitive lens. Is there some

shared value that together we can build more for our joint customers? Rather than fighting over a piece

of the pie, can we grow the pie, is really our model.

When text messaging first came out, you could only text within your network, whatever operator you

had. It seems silly now, but once those walls came down, all sorts of applications and services were built

on top of that. It ended up being good for everybody.

MS. KIM: This partnership is an example of a potential expansion in the AI space?

MS. JOHNSON: Yes, AI is a big area for a lot of people right now. If we can take out some of the

friction in the development process, I think we’ll start to see some of the outcomes that we’ve all been

talking about and envisioning.

MS. KIM: Jennifer, a lot of rivals in tech are partnering and working on emerging technologies. Will

this be a trend?

In the Elevator With Microsoft’s Chief Deal MakerThe Wall Street Journal’s Joanna Stern ‘bumps into’ Peggy Johnson in the elevator at D.Live and asks about Microsoft's next big investments, Solitaire and women in technology.MS. NASON: It’s certainly more capital efficient. Sometimes you just can’t go out and buy everything.

M&A is hard, time-consuming, and it doesn’t always work. So some of these partnerships can be a good

way to have a bet in a certain area and see how it plays out.

MS. KIM: We’re seeing a lot of software companies going after hardware, and hardware companies

going after software. Jennifer, will that trend continue in the industry?22

MS. NASON: Yes, there are many examples. But the big hardware of the future is going to be the

autonomous vehicle, and the networks that are going to those vehicles, the software, all the technology,

the content.

MS. KIM: Which companies are in best position?

MS. NASON: I would never underestimate the big OEMs [original equipment manufacturers],

so Ford F   +1.50%   and General Motors . GM   +0.47%   We know there’s a lot going on there. Thousands

of companies are trying to raise private equity for elements of the autonomous vehicle.It’s a Deal

Merger, acquisition and buyout activity involving venture-backed information- technology companies headquartered in the U.S.

23

24

*2017 figures are for first three quarters of the yearSource: Dow Jones VentureSource

MS. KIM: What is Microsoft doing in this space?

MS. JOHNSON: We’re enabling that space. We’ve come out with our connected-vehicle platform,

which takes care of a lot of the plumbing, if you will, that the car needs to go through; the aggregation of

data from all of the different sensors, off-loading it, and analyzing it in the cloud. We’ve looked at a set

of tools that can enable OEMs in the space.

MS. KIM: What is Microsoft’s next big growth opportunity?

MS. JOHNSON: We have a big focus in AI. Just over a year ago we announced a reorganization.

We’ve had AI on our campus for about 25 years, so we’ve put a lot energy into that, and this

reorganization will help refocus even more.

MS. KIM: You are both rare female senior leaders in your industries. What can companies do to

promote more women into senior roles?

MS. NASON: Well, if they could just send an email out tomorrow, and promote a bunch of people.

(LAUGHTER) I hope Jamie Dimon is listening.

I’ve invested more time and effort in diversity committees and panels, and generally it’s women talking

to other women about how to fix it. I think that’s been a big tactical mistake on our part to talk to each

other, rather than to involve the men, and particularly the men who are typically in power at a lot of

these organizations.

MS. JOHNSON: I’m an electrical engineer, and when I first started out, there was nobody who looked

like me out there. I worked at Qualcomm , and I remember coming into meeting rooms, and I could

never get the floor. I could never get my opinion across. And I thought at one point, “I’m just going to

drop out.”

My manager at the time said, “Don’t do that. How can we fix things?” And I said, “Well, just throw me

the ball. I have something to say, but it’s hard to interject.” And he started doing that. That’s when my

career really took off. So I’ve tried to do that over and over, you know, going forward with any team or

group of people, make sure everybody is heard. It’s very important, whether you’re a quiet man, or a

quiet woman.

Write to reports@wsj.comAppeared in the October 24, 2017, print edition as 'The Outlook for Tech M&A.'

25

26

https://www.wsj.com/articles/efficient-markets-need-guys-like-me-1508454427

Efficient Markets Need Guys Like MeActivists and index funds are natural allies. There’s no conflict between short- and long-term value.

27

ILLUSTRATION: CHAD CROWEBy 

Paul SingerOct. 19, 2017 7:07 p.m. ET33   COMMENTS

The largest proxy battle in U.S. history ended last week in a near tie, leaving Procter & Gamble without

the clear support of its shareholders and activist shareholder Nelson Peltz without a board seat.

28

P&G’s three largest shareholders split their votes: Vanguard sided with P&G, while State Street and

BlackRock voted almost all their shares for Mr. Peltz. The stakes held by these giant index funds were

so large that had any of them voted differently it would have changed the outcome—either a clear

victory for Mr. Peltz or a clear mandate for P&G management.

This power dynamic illustrates the enormous influence that the three largest index-fund firms (together

with other passive institutional investors) have acquired over such contests—and helps explain an

intensifying debate over where their allegiances should lie. On one side is a small class of legal, banking

and public relations professionals who advise underperforming corporations. On the other are the

activist investors who seek to hold those corporations accountable.

There is a fair debate to be had about the appropriate balance of power between public corporations and

their shareholders. But the debate has been badly skewed by a false narrative. “Anti-activist” advisers

have attempted to drive a wedge between activist investors and index funds by suggesting that activists

are interested only in short-term gains at the expense of long-term value. This divisive framing is

objectively false and has done harm to the goal of generating sustainable returns for all investors.

For starters, all of a company’s shareholders are more aligned with each other than they are, say, with a

group paid to defend corporations from shareholder challenges. Index funds and activist investors share

the goal of generating returns for their investors, even if they go about it in different ways.

The primary idea behind passive index-fund investing is the efficient-market hypothesis: Markets are

said to be efficient because millions of informed investors continuously think about, research and

analyze companies, markets and securities. Thus, all possible information and insight is said to be

always contained in securities’ prices at all times.

But passive investing is reducing the percentage of active managers to the point where they may actually

become the minority in a few years. So who is going to do the work that theoretically creates efficient

markets?

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Activist investing provides one possible answer. Equity activism means using your voice and voting

rights to improve companies in ways that maximize value for all shareholders. Seen in that light, index

funds should consider activist investors to be natural allies.

Some index-fund firms have begun to focus on voting, governance and the potential benefits of

activism. They’ve deployed teams of smart, honest professionals to promote best practices across their

firms’ entire holdings. Certain aspects of corporate governance as a whole have improved—in some

cases meaningfully—thanks in part to these initiatives.

On a company-specific level, however, with thousands of companies to be evaluated, it is impossible for

these teams to do the kind of comprehensive financial and operational analysis required to identify

corporate situations in need of change.

Activist investors can play this critical role, so long as the governance teams at large passive investing

firms are willing and able to evaluate activists’ ideas on their merits. Unfortunately, as soon as an

activist shows up at an underperforming company with an idea for creating value, the company’s

advisers frequently seek to make the debate about time horizons. Index-fund firms are encouraged to

look with suspicion at any idea whose benefits would crystallize in the near term—regardless of whether

the idea represents the best possible alternative for shareholders in the long run as well.

The canard that activist shareholders promote short-term gains at the expense of long-term value has

been utterly demolished by academic research. Harvard’s Lucian Bebchukexamined more than 2,000

activist events spanning 13 years and found that these interventions resulted in a 6% rise in stock prices

on average and that targeted companies managed to hold on to these gains, above their benchmarks, over

a five-year period.

Besides being contradicted by the facts, the short-termism accusation makes no logical sense. My firm

has a 40-year track record. Our currency is our credibility. If our activism did not create long- and short-

term value, we would have a hard time persuading management, boards and other shareholders even to

listen to us, much less implement our ideas. Activists who push for solely “short-term” solutions are

themselves going to be “short-term” players.

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All shareholders would benefit from replacing this false distinction with a new framework for evaluating

activist proposals. Rather than “short term vs. long term,” how about “good ideas vs. bad ideas”?

Good ideas create better outcomes for shareholders. Far too often companies hide behind “long term” as

a way to justify prolonged underperformance. There are good ideas that create sustained improvements

and can be implemented quickly. Likewise, there are bad ideas that can take a long time to destroy

value.

The benefits of fixing a broken strategy, getting rid of a bad acquisition, redeploying an

underperforming asset, or replacing an ineffective management team or board may show up right away

in a company’s stock price, but that immediate result doesn’t diminish the long-term benefits.

America has a lot riding on the success of its public companies, as do index-fund firms themselves.

Important conversations about strategy, governance, capital allocation, corporate culture and leadership

are being stifled by the divisive, distracting and intellectually dishonest framing of “short-term vs. long-

term.” Instead of debating time horizons, index-fund firms and activists should work together to promote

the very best ideas for improving America’s businesses.

Mr. Singer is founder and co-CEO of Elliott Management Corp.

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https://www.wsj.com/articles/the-reason-investors-love-spinoffs-juicier-returns-1507681008

The Reason Investors Love Spinoffs: Juicier Returns

Spun-off companies tend to perform better than the broader market and—often—than their former parentPayPal’s share-price performance has bested that of eBay by more than 30 percentage points, including dividends, since the payment firm’s July 2015 spinoff. By 

Miriam Gottfried and 

Thomas GrytaOct. 10, 2017 8:16 p.m. ET13 COMMENTS

Among corporate executives, spinoffs of divisions have come in and out of favor over the years, but

with one group they have been a steady crowd-pleaser: investors.

Pfizer Inc. PFE -0.05% and Honeywell International Inc. HON -0.40% on Tuesday announced plans to

hive off major business units in an effort to sharpen the focus on their core operations.

The moves served as a reminder that even though such activity has slowed, handing businesses to

shareholders remains a popular tool as company executives, often besieged by activist investors, find it

harder to justify a vast sweep of businesses and pivot toward leaner and more focused operations.

Companies use spinoffs—the act of turning a unit into a separate, publicly traded company by issuing

newly created stock—to simplify their operations and shed unrelated businesses while avoiding tax bills

that sales of divisions often entail. For investors, the appeal of spinoffs lies in their long history of

outperforming the broader market, particularly in the years immediately following separation from a

corporate parent.

32

Including dividends, the S&P U.S. Spin-Off Index has outperformed the S&P 500 by nearly 190

percentage points over the past decade. The index is composed of companies with market capitalizations

of more than $1 billion that have been separated out within the previous four years. Companies leave the

index after that time has passed.

“These companies go from being redheaded stepchild of some conglomerate where they have to go and

beg for money to being able to allocate capital as they choose,” said Joe Cornell, founding principal of

research firm Spin-Off Advisors LLC.

33

Spun-off companies also tend to have management teams that are better incentivized, Mr. Cornell said.

Hedge-fund and mutual-fund managers would rather invest in a specific business than a collection of

businesses, and will assign a higher value to a stand-alone business, he said. Spinoffs can also help the

parent company be valued by investors at a higher multiple of earnings.

That helps explain why activists often push companies to break up or spin off one of their divisions.

Hedge fund Third Point pressured Honeywell to spin off its aerospace unit in April. On Tuesday, the

industrial heavyweight instead said it would cleave off about 20% of its revenue by spinning off its

business that makes thermostats for the home and a unit that focuses on automobile turbochargers.

Together, analysts estimate the businesses could be worth as much as $10 billion.

Honeywell Chief Executive Darius Adamczyk said in an interview Tuesday that taxes were a key

consideration in the decision to pursue the spinoffs. The company is open to acquisition offers for the

units, but any price would have to exceed its projection of the spinoff value, he said.

This year, Elliott Management Corp. pushed mining giant BHP PLC to spin off its U.S. oil-and-gas units

into a separate publicly traded company. BHP said in August it would seek to unload the unit.

RELATED

Pfizer Considers a Sale or Spinoff of Its Consumer Healthcare Business Honeywell to Spin Off Units Into Two Stand-Alone Companies From Philip Morris to Kraft Foods, a Look at Some of Corporate America’s Biggest

Spinoffs

Still, such activity has been depressed lately, in part as uncertainty over tax policy and other matters in

Washington has put a damper on overall deal numbers. After spinoff volume surged in 2014 and

2015, there have been just 10 such completed deals so far in 2017—on track for the lowest annual level

since Dealogic began tracking the data in 1995.

But investors’ eagerness for such moves hasn’t diminished, as the performance of some recent high-

profile spinoffs attests. In many cases, they have vastly outperformed the shares of their former parents.

PayPal Holdings Inc.’s share-price performance has bested that of eBay Inc. by more than 30 percentage

points, including dividends, since the payment firm’s July 2015 spinoff. Similarly, shares

34

of Zoetis Inc. have outperformed those of Pfizer by nearly 60 percentage points, including dividends,

since the maker of pet medications was spun out of the pharmaceutical giant in February 2013.

Pfizer now hopes to hand its shareholders another gift, announcing Tuesday it is exploring a sale or

spinoff of its consumer-healthcare business, home to well-known brands such as Advil and ChapStick.

Analysts estimate the business could be worth upward of $10 billion. Pfizer said the consumer unit’s

value could “be more fully realized outside the company.”

There are notable disappointments among recent spinoffs. Shares of HP Inc., which makes printers and

computers, have outperformed Hewlett Packard Enterprise , a provider of IT services, since the latter

was spun off in October 2015. The hope was that the spinoff would have room to grow without the

profitable, but declining, printer business to weigh it down. Shares of HP Enterprise have risen 56%,

including dividends, since then—versus a 68% gain for shares of HP.

Activist investor Jana Partners LLC pushed oil-and-gas services company Oil States International Inc. to

spin off Civeo Corp. , a lodging company for oil-field workers, just months before a downturn in energy

prices sent Civeo’s shares tumbling in late 2014.

Shares of News Corp , the owner of Wall Street Journal parent company Dow Jones, have

underperformed those of 21st Century Fox Inc. —the original parent company—since the two

companies split in June 2013.

There are also plenty of examples of companies with a wide scope of operations that continue to

prosper, like Amazon.com Inc. and Berkshire Hathaway Inc.

One group that benefits whether spinoff activity is ebbing or flowing, according to Mr. Cornell of Spin-

Off Advisors: the bankers that reap hefty fees from arranging deals.

“You get five years of unbundling, then there’s a lot of merger activity, and bankers start saying ‘hey

this asset would make a lot of sense for you.’ ”

—David Benoit 

contributed to this article.

Write to Miriam Gottfried at Miriam.Gottfried@wsj.com and Thomas Gryta at thomas.gryta@wsj.comAppeared in the October 11, 2017, print edition as 'Companies Chase Spinoff Bump.'

35

https://www.wsj.com/articles/honeywell-to-spin-off-units-into-two-stand-alone-companies-1507634203?mod=djemalertMARKETBy 

Thomas Gryta and 

Cara LombardoUpdated Oct. 10, 2017 12:32 p.m. ET3 COMMENTS

Honeywell International Inc. HON -0.18% plans to spin off its home and transportation businesses into

two new separate companies by the end of next year, a move that gained approval from activist investor

Third Point.

The moves are the first efforts to streamline the conglomerate under new Chief Executive Darius

Adamczyk, who took the reins in late March. He launched a months long portfolio review looking at all

aspects of the company, including whether it should remain whole. The effort received an extra push in

late April when Third Point asked Honeywell to spin off its aerospace unit, an idea it ultimately rejected.

The Morris Plains, N.J., company said Tuesday that the new homes and ADI Global Distribution

business, which will include residential thermostats and security and fire-protection products, would

generate annual revenue of $4.5 billion. The transportation business, a portion of the company’s current

aerospace unit that primarily serves the auto industry, would focus on turbocharger technologies and

generate annual revenue of $3 billion.

The entire company generated $39 billion of revenue last year.

In a call with analysts Tuesday, Mr. Adamczyk said Honeywell “will focus on fewer markets and

verticals,” shifting away from consumer and distribution segments. “My goal was to scrutinize and

assess each business unit to derive a portfolio best capable of maximizing shareholder value over the

long term,” he said.

Third Point said it was pleased with Honeywell’s review and narrowed focus. “We are supportive of

CEO Darius Adamczyk’s leadership and confident that his commitment to continuous portfolio

optimization will further improve shareholder value,” the activist investor said.

Honeywell had a string of success under previous CEO Dave Cote, who turned the company around and

boosted its market value fivefold during his 14-year tenure. His expansion through acquisitions

36

produced a conglomerate that makes everything from jet engines to thermostats to rubber boots. Mr.

Cote remains Honeywell’s chairman through April.

Mr. Adamczyk has stressed that the conglomerate structure has worked well for Honeywell, even as

companies are under pressure to focus on core competencies.

Also helping the resistance to breaking up the company: Honeywell shares are up 24% so far this year.

They were up less than 0.1% Tuesday at $143.73.

In retaining the aerospace business, the company highlighted the attraction of the sector in general and

the fact that it benefits from other Honeywell operations. It also brings a “significant proportion of U.S.-

based cash flows” for Honeywell, which has much of its cash overseas.

Nicholas Heymann, an analyst with William Blair & Co., said the remaining portfolio is “relatively

high-growth businesses with six key end-markets” that will use Honeywell’s customers to produce more

organic revenue. Deutsche Bank analyst John Inch said the moves put Honeywell on “an upward growth

trajectory from a smaller revenue base” and leave it with billions in capital to fund future expansion.

The company said it could spend up to $10 billion in overseas acquisitions in 2018, while using another

$5 billion for U.S. deals, share buybacks and debt repayment. If U.S. tax reform is passed, the company

expects it could use the entire $15 billion anywhere.

Honeywell on Tuesday raised the low end of its full year earnings per share guidance by 5 cents to a

range of $7.05 to $7.10. The company, which is scheduled to report its third-quarter financial results

Oct. 20, said it expects earnings of $1.75 a share on sales of $10.1 billion in its latest quarter, up 3%

from a year ago.

Honeywell expects the separations, which won’t require a shareholder vote, to be complete by the end of

2018 and be tax-free to its shareholders. The new homes business will have about 13,000 employees,

while the transportation business will have about 6,500.

37

Honeywell on Tuesday said Gary Michel will take over as president and CEO of its home and building

technologies strategic business group. Mr. Michel, who previously was a president at Ingersoll-

Rand PLC, will report to Mr. Adamczyk.

He replaces Terrence Hahn, who is moving to a leadership role to help prepare the homes and ADI

business to be spun off.

—David Benoit contributed to this article

Write to Thomas Gryta at thomas.gryta@wsj.com and Cara Lombardo at cara.lombardo@wsj.com

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