Darius Palia

Bio: Darius Palia is an academic researcher from Rutgers University. The author has contributed to research in topics: Corporate governance & Shareholder. The author has an hindex of 32, co-authored 79 publications receiving 6971 citations. Previous affiliations of Darius Palia include Columbia University & National Bureau of Economic Research.

The Endogeneity of Managerial Compensation in Firm Valuation: A Solution

Abstract: Much of the empirical literature that has examined the functional relationship between firm value and managerial ownership levels assumes that managerial ownership levels are exogenous and are the only component of managerial compensation related to firm performance. This assumption is contrary to the theoretical and empirical literature wherein managerial compensation is endogenously determined and includes both shares and options. Using instruments for managerial compensation and panel data to control for unobservable heterogeneity in the firm’s contracting environment, we estimate a system of simultaneous equations. We find that firms are in equilibrium when they endogenously set their chief executive officer’s compensation. The separation of ownership and control, first described by Berle and Means (1932), suggests that managers (who have private information and control over a corporation) can indulge in non-shareholder wealth-maximizing activities because shareholders are too diffuse to monitor them. More recently, Jensen and Meckling (1976) suggest that managers be given more of an ownership stake in the firm in order to ameliorate this principal-agent problem between shareholders and managers. Higher ownership in the firm helps align managerial interests with shareholder interests and reduces unobservable perquisite consumption by managers. Using an adverse selection model, Leland and Pyle (1977) argue that managers keep a high ownership stake in the firm to signal to the public markets that they have projects of high quality. Their model also proposes a positive relationship between managerial ownership and firm value. Recently a number of studies suggest managerial entrenchment at higher levels of managerial ownership 1 [Stulz (1988), Morck,

A Re-Examination of the Conglomerate Merger Wave in the 1960s: An Internal Capital Markets View

Abstract: One possible explanation that bidding firms earned positive abnormal returns in diversifying acquisitions in the 1960s is that internal capital markets were expected to overcome the information deficiencies of the less developed capital markets. Examining 392 bidder firms during the 1960s, we find the highest bidder returns when financially unconstrained' buyers acquire constrained' targets. This result holds while controlling for merger terms and for different proxies used to classify firms facing costly external financing. We also find that bidders generally retain target management, suggesting that management may have provided company-specific operational information, while the bidder provided capital-budgeting expertise.

A Reexamination of the Conglomerate Merger Wave in the 1960s: An Internal Capital Markets View

Abstract: One possible explanation for bidding firms earning positive abnormal returns in diversifying acquisitions in the 1960s is that internal capital markets were expected to overcome the information deficiencies of the less-developed capital markets. Examining 392 bidder firms during the 1960s, we find the highest bidder returns when financially “unconstrained” buyers acquire “constrained” targets. This result holds while controlling for merger terms and for different proxies used to classify firms facing costly external financing. We also find that bidders generally retain target management, suggesting that management may have provided companyspecific operational information, while the bidder provided capital-budgeting expertise.

Regression Diagnostics: Identifying Influential Data and Sources of Collinearity

Abstract: 1. Introduction and Overview. 2. Detecting Influential Observations and Outliers. 3. Detecting and Assessing Collinearity. 4. Applications and Remedies. 5. Research Issues and Directions for Extensions. Bibliography. Author Index. Subject Index.

Founding-Family Ownership and Firm Performance: Evidence from the S&P 500

Abstract: We investigate the relation between founding-family ownership and firm performance. We find that family ownership is both prevalent and substantial; families are present in one-third of the S&P 500 and account for 18 percent of outstanding equity. Contrary to our conjecture, we find family firms perform better than nonfamily firms. Additional analysis reveals that the relation between family holdings and firm performance is nonlinear and that when family members serve as CEO, performance is better than with outside CEOs. Overall, our results are inconsistent with the hypothesis that minority shareholders are adversely affected by family ownership, suggesting that family ownership is an effective organizational structure. FOUNDING-FAMILYOWNERSHIPAND CONTROL in public U.S. firms is commonly perceived as a less efficient, or at the very least, a less profitable ownership structure than dispersed ownership. Fama and Jensen (1983) note that combining ownership and control allows concentrated shareholders to exchange profits for private rents. Demsetz (1983) argues that such owners may choose nonpecuniary consumption and thereby draw scarce resources away from profitable projects. Shleifer and Vishny (1997) observe that the large premiums associated with superiorvoting shares or control rights provide evidence that controlling shareholders seek to extract private benefits from the firm. More generally, firms with large, undiversified owners such as founding families may forgo maximum profits because they are unable to separate their financial preferences with those of outside owners.1 Families also often limit executive management positions to family

How Do Family Ownership, Control, and Management Affect Firm Value?

Abstract: Using proxy data on all Fortune 500 firms during 1994-2000, we establish that, in order to understand whether and when family firms are more or less valuable than nonfamily firms, one must distinguish among three fundamental elements in the definition of family firms: ownership, control, and management. Specifically, we find that family ownership creates value only when the founder serves as the CEO of the family firm or as its Chairman with a hired CEO. Control mechanisms including dual share classes, pyramids, and voting agreements reduce the founder's premium. When descendants serve as CEOs, firm value is destroyed. Our findings further suggest that the classic owner-manager conflict in nonfamily firms is more costly than the conflict between family and nonfamily shareholders in founder-CEO firms. However, the conflict between family and nonfamily shareholders in descendant-CEO firms is more costly than the owner-manager conflict in nonfamily firms.