Corporate finance.

• Author: Vishny, Robert W.

The NBER's Program in Corporate Finance was established in fall 1991, and grew out of the eartier financial markets and monetary economics program. Traditionally, corporate finance is defined as "the study of the investment, financing, and dividend decisions of firms." To that traditional list of topics, I would add "most financial or contractual issues relating to the firm, including internal organization, ownership structure, and corporate governance." Corporate finance is institutionally oriented, with research often driven by issues of current importance. Most of the NBER's research on corporate finance consists of empirical studies on firm-level data motivated by relevant, applied theory.

Recent work by NBER economists has centered on a variety of topics. Since the program is barely three years old, the origins of much of this research predate its formal start. This is especially true of the extensive research on corporate restructuring, but it is also true of some of the research on bankruptcy and financial distress, and the research on banks and the role of credit. One new area beginning to attract attention is the cross-country comparison of corporate governance and financing practices.

Corporate Restructuring

NBER researchers began to study corporate restructuring in earnest in the late 1980s in the midst of a huge wave of mergers, acquisitions, and leveraged management buyouts. The total value of U.S. assets changing hands in the 1980s was approximately $1.3 trillion, with 143 of the 1980 Fortune 500 becoming acquired by 1989. This wave of activity sparked much public controversy. At issue were: the large number of hostile takeovers; the perception that employees and communities were being hurt; the heavy use of debt in many transactions and the fear that basic R and D was being sacrificed; and the large profits made by corporate raiders and corporate managements.

NBER researchers have conducted extensive studies on the causes and consequences of these mergers and acquisitions. One important question addressed is: Has all of this restructuring activity made the U.S. economy any more efficient or competitive? While the evidence is far from definitive, the studies suggest that there is cause for optimism. Steven N. Kaplan finds strong evidence of improvements in operating profit in a sample of 1980s leveraged buyouts.(1) Various NBER researchers have documented the role of the 1980s bustup takeovers in moving firms away from the ill-fated diversification of the 1960s toward greater specialization.(2) Arguably, this favorable reconfiguration of the economy has been made possible by the more lenient antitrust policy followed in the United States since 1982.

Before jumping to the conclusion that the average merger entails huge synergies, however, it is important to note that many acquisitions appear to be motivated by the welfare of bidding management, rather than by the desire to increase shareholder wealth. Randall Morck, Andrei Shleifer, and I show that over 50 percent of acquisitions in...