Research Interests: corporate finance, corporate governance, mergers and acquisitions
Ph.D. in Finance, Stanford University, 2011
M.A in Financial Economics, Hebrew University, 2006
B.Sc in Computer Science and Economics, Hebrew University, 2004
Abstract: We study shareholder voting in a model in which trading affects the composition of the shareholder base. In this model, trading and voting are complementary, which gives rise to self-fulfilling expectations about proposal acceptance. We show three main results. First, increasing liquidity and trading opportunities may reduce prices and welfare, because it allows shareholders with more extreme preferences to accumulate large positions and impose their views on more moderate shareholders through voting. Second, prices and welfare can move in opposite directions, which suggests that the former is an invalid proxy for the latter. Third, delegation of the decision to a board of directors may strictly improve shareholder value. However, the optimal board is generally biased, should not be representative of current shareholders, and may not always garner voting support from the majority of shareholders.
Abstract: We develop a model under which the allocation of control rights between shareholders and managers ("governance structure") is irrelevant to firm value. In our model, governance structures affect managers' incentive to invest, as strong governance tightens managerial freedom and weak governance loosens it. Given their respective managerial freedom, multiple firms buy resources for their business activities in a competitive market. Managers differ in their integrity, and given their type, can preserve value, create value, or destroy value and consume private benefits. Shareholders deduce from decisions made by managers whether a manager should be retained or fired. The model shows that independent governance choices of individual firms are interrelated through the feedback from resources markets. In a competitive equilibrium, which is socially efficient, the universe of firms splits between strong and weak governance firms, with all of them having the same value. No firm can affect its value by changing from weak to strong governance or vice versa; the governance structure is irrelevant. The irrelevance result has important implications for the study of corporate governance. First, it illuminates the need for empirical studies to specify the conditions under which strong governance is assumed to consistently be better than weak governance. To this end, our analysis highlights the relaxed assumptions that break the irrelevance result. Second, since shareholders with market power violate the irrelevance conditions, the model provides insights into the consequences of common ownership. It shows that, by pushing more public firms toward strong governance, institutional investors with common ownership create a monopsony power, with negative consequences to the labor market, the inputs market, the investment level in the economy, and the number of firms traded on public markets.
Doron Levit and Anton Tsoy (Working), One-Size-Fits-All: Voting Recommendations by Proxy Advisory Firms.
Abstract: Proxy advisory firms are commonly criticized for issuing one-size-fits-all voting recommendations, having severe conflicts of interests, and lacking transparency. To inform the policy debates on the proxy advisory market, we analyze a model that explicitly accounts for these features. In equilibrium, one-size-fits-all recommendations emerge as a means to increase the proxy advisor's influence by concealing his conflict of interest. Importantly, one-size-fits-all recommendations can be informative and beneficial to investors even when proposals have differential effects on firms. Based on this result, we derive three main implications. First, greater transparency reduces the incidence of one-size-fits-all recommendations, but may also harm investors by diminishing proxy advisor's incentives to collect information. Second, policies that limit the regulatory benefit from outsourcing voting decisions to proxy advisors increase the prevalence of one-size-fits-all recommendations, potentially reduce their informativeness, and thereby harm investors. Finally, the rise of common ownership among institutional investors contributes to the prevalence of one-size-fits-all recommendations.
Abstract: Do freeze-out mergers mitigate the free rider problem of corporate takeovers? We study this question in a tender offer model with finitely many shareholders. Under a freeze-out merger, shareholders expect to receive the original offer price whether or not they tender their shares. We show that the ability to freeze-out minority shareholders increases the raider's expected profit, and this profit is higher when the ownership requirement the acquirer has to meet in order to complete a freeze-out merger is lower. Furthermore, the raider's expected profit decreases as the firm becomes more widely held. However, in the limit, for any ownership requirement that is more stringent than simple majority, the raider's expected profit converges to zero. In this sense, freeze-out mergers do not provide a solution to the free rider problem.
Doron Levit, Erik Gilje, Todd A. Gormley (2018), Who’s Paying Attention? Measuring Common Ownership and Its Impact on Managerial Incentives, Journal of Financial Economics, Forthcoming.
Abstract: We derive a measure that captures the extent to which common ownership shifts managers’ incentives to internalize externalities. A key feature of the measure is that it allows for the possibility that not all investors are attentive to whether a manager’s actions benefit the investor’s overall portfolio. Empirically, we show that potential drivers of common ownership, including mergers in the asset management industry, and under certain circumstances even indexing, could in fact diminish managerial motives to internalize externalities. Our findings illustrate the importance of accounting for investor inattention when analyzing whether the growth of common ownership affects managerial incentives.
Abstract: This paper studies the advisory role of the board of directors in takeovers. I develop a model in which the takeover premium and the ability of the target board to resist the takeover are endogenous. The analysis relates the influence of the board on target shareholders and the reaction of the market to its recommendations to various characteristics of the acquirer and the target. I also show that the expected target shareholder value can decrease with the expertise of the board and it is maximized when the board is biased against the takeover. Generally, uninformative and ignored recommendations are not necessarily evidence that the target board has no influence on the outcome of the takeover. Perhaps surprisingly, under the optimal board structure, target shareholders ignore the recommendations of the board, which are never informative in equilibrium.
Doron Levit and Nadya Malenko (2016), The Labor Market for Directors and Externalities in Corporate Governance, Journal of Finance, 71(2), pp. 775-808.
Abstract: This paper examines how the labor market for directors and directors' reputational concerns affect corporate governance. We develop a model in which directors can influence corporate governance of their firms, and corporate governance, among other things, affects firms' demand for new directors. Whether the labor market rewards directors for having a reputation of being shareholder-friendly or management-friendly is endogenous and depends on the aggregate level of corporate governance. We show that directors' desire to be invited to other boards creates strategic complementarity of corporate governance decisions across firms. Directors' reputational concerns amplify the corporate governance system in the sense that strong systems become stronger and weak systems become weaker. We derive implications for director appointments, multiple directorships, transparency of the corporate governance system, and board size.
Abstract: We identify a commitment problem that prevents bidders from unseating resisting and entrenched incumbent directors of target companies through proxy fights. We discuss potential remedies and argue that activist investors are more resilient to this commitment problem and can mitigate the resulting inefficiencies by putting such companies into play. This result holds even if bidders and activists have similar expertise and can use similar techniques to challenge the incumbents, and it is consistent with the evidence that most proxy fights are launched by activists, not by bidders. Building on this insight, we study the implications of activist interventions on the M&A market.
Abstract: Information and control rights are central aspects of leadership, management, and corporate governance. This paper studies a principal-agent model that features both communication and intervention as alternative means to exert influence. The main result shows that a principal's power to intervene in an agent's decision limits the ability of the principal to effectively communicate her private information. The perverse effect of intervention on communication can harm the principal, especially when the cost of intervention is low or the underlying agency problem is severe. These novel results are applied to managerial leadership, corporate boards, private equity, and shareholder activism.
Abstract: Conventional wisdom is that diversification weakens governance by spreading an investor too thinly. We show that, when an investor owns multiple firms ("common ownership"), governance through both voice and exit can strengthen -- even if the firms are in unrelated industries. Under common ownership, an informed investor has flexibility over which assets to retain and which to sell. She sells low-quality firms first, thereby increasing price informativeness. In a voice model, the investor's incentives to monitor are stronger since "cutting-and-running" is less profitable. In an exit model, the manager's incentives to work are stronger since the price impact of investor selling is greater.
The course focuses on financial tools, techniques, and best practices used in buyouts (financial buyers) and acquisitions (strategic buyers). While it will touch upon various strategic, organizational, and general management issues, the main lens for studying these transactions will be a financial one. It will explore how different buyers approach the process of finding, evaluating, and analyzing opportunities in the corporate-control market; how they structure deals and how deal structure affects both value creation and value division; how they add value after transaction completion; and how they realize their ultimate objectives (such as enhanced market position or a profitable exit). The course is divided into two broad modules. The first module covers mergers and acquisitions, and the second one studies buyouts by private equity partnerships. During the spring semester this course cannot be taken pass/fail.
The focus of this course is on buying (or acquiring controlling stakes in) firms. The main topics to be covered are mergers and friendly acquisitions, hostile takeovers and buyouts. Using case studies, the course surveys the drivers of success in the transactions. While issues regarding motive and strategy will be discussed, financial theory would be the main lens used to view these control acquiring transactions. This will allow students to (1) evaluate transactions through valuation approaches and (2) structure deals employing financial innovation as a response to legal framework and economic frictions. This course should be of interest to students interested in pursuing careers as private equity investors, advisors in investment banking and corporate managers that deal with these issues. This course assumes familiarity with valuation analysis. During the spring semester students are not permitted to take this course pass fail.
This course covers Advanced theory and empirical investigations; financial desisions of the firm, dividends, capital structure, mergers, and takeovers.