Leverage and Corporate Performance: Evidence from Unsuccessful Takeovers
Assem Safieddine and Sheridan Titman
Journal of Finance 54, 547-580, 1999

The prominent finding in this study is that firms, which successfully resisted takeover attempts, have increased their debt ratios significantly. Furthermore, firms that increase their leverage ratio the most also reduce capital expenditure, sell assets, reduce employment, increase focus and realise cash flows and share prices that outperform their benchmarks. These results suggest that managers use the high leverage to help firms remain independent not because it entrenches them but because it commits the managers to make the improvements that would otherwise be made by corporate raiders.


Banks, Ownership Structure, and Firm Value in Japan
Randall Morck, Masao Nakamura and Anil Shivdasani
Journal of Business 73, 539-567, 2000

Banks in Japan typically hold substantial stakes in non-financial firms as creditors, which encourage them to undertake more monitoring of managers. Although this prevents managers from abusing their power, it encourages them to take actions that benefit the creditors and harm the shareholders. This would reduce the value of shareholders unless the interests of the creditors (in this case, the banks) are aligned with them via equity holdings. Consistent with this, the study finds, for a sample of 373 manufacturing firms, that banks with substantial equity holdings have higher firm value as measured by q ratios.


Asset Liquidity, Debt Covenants, and Managerial Discretion in Financial Distress: the Collapse of L.A. Gear
Harry DeAngelo, Linda DeAngelo and Karen H. Wruck
Journal of Financial Economics 64, 3-34, 2002

It is typically assumed that the servicing of debt obligations commits the managers to improve the operations of the firms. However, this study shows that such disciplinary roles can be undercut by the firms’ highly liquid asset structures. This is because managers can easily convert these assets into cash to satisfy the interest repayment obligations without actually improving firms’ operations. To mitigate the dangers of high liquid asset structure, several contractual features are devised and are now commonly observed in debt contracts. Hence the authors have utilised asset structure to explain (1) the importance of accounting based covenants, (2) why the covenants normally constraint earnings instead of cash flows, (3) why cash balances are not equivalent to negative debt and (4) why debt maturity matters.