We study whether CEO involvement in the selection of new directors influences the nature of appointments to the board. When the CEO serves on the nominating committee or no nominating committee exists, firms appoint fewer independent outside directors and more gray outsiders with conflicts of interest. Stock price reactions to independent director appointments are significantly lower when the CEO is involved in director selection. Our evidence may illuminate a mechanism used by CEOs to reduce pressure from active monitoring, and we find a recent trend of companies removing CEOs from involvement in director selection. A BOARD OF DIRECTORS SERVES AS THE PIVOTAL mechanism for monitoring the managers of a public corporation. Directors are voted into office by stockholders and have a fiduciary responsibility to protect stockholders ’ interests. Along with their legal duties of reviewing the corporation’s major plans and actions, directors are charged with selecting, compensating, evaluating, and, when appropriate, dismissing top managers.

This paper provides new evidence of how macroeconomic conditions affect capital structure choice. We model firms ’ target capital structures as a function of macroeconomic conditions and firm-specific variables. We split our sample based on a measure of financial constraints. We find that target leverage is counter-cyclical for the relativelyunconstrained sample, but pro-cyclical for the relativelyconstrained sample. The choice of what type of security to issue/repurchase is significantly related to deviations from the target capital structure, particularly for the constrained sample. Macroeconomic conditions are significant for issue choice for unconstrained firms but less so for constrained firms. Our results support the hypothesis that unconstrained firms are able to time their issue choice to periods when macroeconomic conditions are favorable, while constrained firms take what they can get.

The literature on conditional event-study methods criticizes standard event-study procedures as being misspecified if events are voluntary and investors are rational. We argue, however, that standard procedures (1) lead to statistically valid inferences, under conditions described in this article; and (2) are often a superior means of inference, even when event-study data are generated exactly as per a class of rational expectations specifications introduced by the conditional methods literature. Our results provide an equilibrium justification for traditional eventstudy methods, and we suggest how these simple procedures may be combined with conditional methods to improve statistical power in event studies. I am grateful to Stephen Brown, my dissertation chairman, for stimulating my interest in the topic, his guidance, and numerous valuable suggestions. Thanks are also due to Franklin Allen (the executive editor), Yakov Amihud,

This paper examines the ability of the risk-shifting hypothesis and the backdoor equity hypothesis to explain firms ’ decisions to issue convertible debt. Using a security choice model that incorporates pre-offer issue, issuer, and macroeconomic information, we document significant variation in the market reaction to new convertible debt issues depending on whether investors expect the motivation for issuance to be asset substitution or asymmetric information. Our results suggest that both motives explain the use and design of convertible debt. Some firms issue convertible debt instead of straight debt to mitigate the costs of bondholder/stockholder agency conflicts. Other issuers use convertible debt instead of common equity to reduce the costs of adverse selection. Thus, in contrast to standard securities like straight debt or common equity, which solve some financing problems but exacerbate others, hybrid securities such as convertible debt are seen as providing a more flexible funding choice that can solve conflicting financing problems. Financial economists study the security issue decision to understand more fully why firms choose to issue a particular security and how investors in financial markets react to that choice. The research documents several results about investor reaction to the announcement of

We investigate the motivations and the returns to the firms and investors using Private Investments in Public Equities (PIPE) financing, an increasingly common form of equity-based financing. From 1995-2000, 1,466 firms raised more than $29 billion through 2,626 PIPE issues. We find that PIPE issuers are poorly performing firms, urgently in need of cash that, as a consequence, are without access to traditional forms of financing. The contract terms and embedded options in PIPEs allow investors to alter their exposure to post-issue movements in the value of the issuer’s equity. As a result, the returns earned by investors substantially exceed those of shareholders. Hence PIPEs provide incentives for investors to make investments in firms with substantial operating uncertainties, enabling companies barred from traditional capital markets to obtain much needed financing.

This paper provides new evidence of how macroeconomic conditions affect capital structure choice. We model firms' target capital structures as a function of macroeconomic conditions and firm-specific variables. We split our sample based on a measure of financial constraints. We find that target leverage is counter-cyclical for the relatively unconstrained sample, but pro-cyclical for the relatively constrained sample. The choice of what type of security to issue/repurchase is significantly related to deviations from the target capital structure, particularly for the constrained sample. Macroeconomic conditions are significant for issue choice for unconstrained firms but less so for constrained firms. Our results support the hypothesis that unconstrained firms are able to time their issue choice to periods when macroeconomic conditions are favorable, while constrained firms take what they can get. JEL Classification: G32, G1 Keywords: Capital Structure; Business Cycles; Financial Constraints Specifically, Choe, Masulis, and Nanda (1993) document that aggregate seasoned primary equity issues are pro-cyclical and debt issues are counter-cyclical. Korajczyk, Lucas, and McDonald (1990) document that aggregate equity issues are positively related with equity market performance. Gertler and Gilchrist (1993) document that aggregate net debt issues (public and private) increases for large firms but remains flat for small firms following recessions associated with a monetary contraction. Gertler and Gilchrist (1994) document that aggregate net shortterm debt is more stable over the business cycle for small firms.

This paper examines the effect on the firm’s banking cost of the issue of debt securities. We argue over the existence of a positive relationship between the issue of market debt and the reduction of firm’s banking cost. This idea relies on three main arguments: i) Banks can delegate to investors the supervision task, a feature that makes bank supervision less costly. ii) The issue of public debt increases firms ’ bargaining power in front of the banks, as the former can get funds through non-bank financing ch annels. iii) Banks with no prior information on the issuing firm may interpret the issue of debt securities as a positive signal of firm’s quality. Additionally, we argue that the previous effects are less important for non-first issues and are sensible to the maturity of the bond issued. We empirically test these and other related theoretical results making use of a database of Spanish non-financial firms during the 1993-1998 period. We find empirical support for our theoretical contentions.

Bobbie Sue Richardson, for technical and financial assistance in obtaining the data on PIPEs.

Abstract. This paper develops a simple signaling model whereby high valuation firm uses levels of investment, debt and dividends to convey information to the market regarding its valuation. Conditions are determined under which investment, debt and dividends are employed in a separating Nash equilibrium. Unlike many other signaling models where the source of asymmetric information concerns only the mean of the firms ’ cash flow, our model allows for two sources of asymmetric information: the mean and the variance of the cash flow. This paper finds that the choice of signals depends on the relative importance of these two sources of informational asymmetry. For example, we show that high valued firms signal their values by decreasing their debt if the source of asymmetric information is mainly driven by the variance of the cash flows. This latter result differs from the debt signaling models found in the literature. The findings of this paper are consistent with extensive empirical evidence. Key words: capital structure, signaling model JEL Classification: D82, G32 1.