Corporate Finance.

Members and guests of the NBER's Program on Corporate Finance met in Cambridge on April 20. Program Director Raghuram G. Rajan chose the following papers for discussion:

Raymond Fisman, Columbia University, and R. Glenn Hubbard, NBER and Columbia University, "Endowments, Governance, and the Nonprofit Form"

Tobias J. Moskowitz and Annette Vissing-Jorgensen, University of Chicago, "The Private Equity Premium Puzzle"

Julie Wulf, University of Pennsylvania, "Do CEO's of Target Firms Trade Power for Premium? Evidence From 'Mergers of Equals'"

Alberto Bisin, New York University, and Anriano A. Rampini, Northwestern University, "Exclusive Contracts and the Institution of Bankruptcy"

Andrei Shleifer, NBER and Harvard University, and Robert W. Vishny, NBER and University of Chicago, "Stock Market Driven Acquisitions"

Owen A. Lamont, NBER and University of Chicago, and Christopher Polk, Northwestern University, "Does Diversification Destroy Value? Evidence from Industry Shocks"

Mark J. Roe, Harvard University, "The Quality of Corporate Law Argument and its Limits"

Simon Johnson, NBER and MIT, and Todd Mitton, Brigham Young University, "Who Gains from Capital Controls? Evidence from Malaysia"

Nicola Cetorelli, Federal Reserve Bank of Chicago, "Does Bank Concentration Lead to Concentration in Industrial Sectors?"

In for-profit enterprises, shareholders are the residual bearers of risk. By contrast, because nonprofits have no residual claimants, something else must absorb financial shocks to the organization. Nonprofit managers often describe the endowment, or fund balance, as serving this function. In this paper, Fisman and Hubbard examine the role of the endowment as a precautionary savings device for nonprofit organizations. They find very strong evidence in support of the role of the endowment in allowing for smoothing of program expenditures. However, providing managers with a large discretionary fund raises significant concerns regarding the governance of the organization. The authors are also concerned with free cash flow in for-profit enterprises when shareholders do not carefully monitor the behavior of managers, and about the possibility of expropriation of discretionary funds by nonprofit managers. Taking advantage of differences in nonprofit oversight across states in the United States, the authors show th at organizations in poor governance states, relative to strong governance states: have managerial compensation that is more highly...