Abstract
In this chapter I investigate whether cycles in stock returns are related to temporary problems in corporate control. This approach broadens the perspective of my analysis. Properties of returns and fundamentals are related to the theory of management control. The main hypothesis is that firms which show cycles in their performance suffer from temporary problems of corporate control. I pursue this hypothesis by an analysis of accounting data. Jensen (1986) has related problems of corporate control to the available free cash flow. An abundance of free cash flow loosens management control and as a consequence management performance deteriorates. From this idea I derive hypotheses with respect to different accounting variables. This section presents hypotheses, the empirical results and a discussion. In an appendix I deliver a more complete analysis of the payout decision.
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References
Tremendous effort has been spent on the question how capital structure might be linked to problems of corporate control. Harris and Raviv (1991) and Shleifer and Vishny (1997) provide excellent surveys of this literature.
Anecdotal evidence for low value projects suggests “investments” for personal needs of the management at the cost of the company such as designer equipment, fancy cars, and company jets.
This perception of market structure has already been stated by Bain (1956). For a restatement of this argument in a two-stage game see Sutton (1991).
As compared to at-test the Wilcoxon rank sum test has the advantage that it is non parametric, i.e. it does not rely on a special distributional assumption. The methodology of the Wilcoxon rank sum test has been discussed in greater detail in the fourth chapter.
cf. For two recent applications of the Blinder-Oaxaca decomposition in labour economics compare Darity, Guilkey, and Winfrey (1995) and Fairlie (1999).
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© 2004 Springer-Verlag Berlin Heidelberg
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Külpmann, M. (2004). Reversals in Stock Returns and Temporary Problems of Corporate Control. In: Irrational Exuberance Reconsidered. Springer Finance. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-540-24765-4_9
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DOI: https://doi.org/10.1007/978-3-540-24765-4_9
Publisher Name: Springer, Berlin, Heidelberg
Print ISBN: 978-3-642-05726-7
Online ISBN: 978-3-540-24765-4
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