Peevyhouse v. Garland Coal & Mining Co.

Transcription

1 Peevyhouse v. Garland Coal & Mining Co. Bargaining for Subjective Value: Lease term: 5 year lease for $L + the performance of certain restorative and remedial work. Total value of lease to Peevyhouse with restoration is: $T = $L - (V/r)(1-1/(1+r) 6 ) > 0 Where V = per year value (including subjective value) of restoration and remedial work promised (restoring land as a farm). Profits to Garland = (Coal Profits) $L $R > 0,

2 Peevyhouse v. Garland Coal & Mining Co. Damages: Cost of completion (R) versus diminution in value (D). Cost of restoration R = $29,000 Diminution in the Market Value of the Farm D = $300 R >> D Apply D (when R >> D). Plaintiffs sued for $25,000. Trial Damages $5,000 (more than total value of the farm after remedial work has been done). Reduced to $300 by SCT of OK.

3 Peevyhouse v. Garland Coal & Mining Co. What Ex-ante, if contract with restoration is anticipated not to be enforced under unreasonable economic waste rule, value of Lease to Peevyhouse family must be greater than loss of use of farm for 5 years - (V/r) < 0 if V/r large relative to $L + $D. Anticipation of rule will not result in similar contracts going forward. Increase explicit lease payment to $L* = $L + $R? (Indeed if the impact of the opinion is that [the plaintiff] must redraft its contracts to achieve the same economic results, the decision is not only wrong but conspicuously ineffectual Justice Harlan in Brulotte v. Thys) Efficient breach versus opportunism?

4 Market Prices as Information Information Markets (Intrade)

5 Stock Market Event Studies: Backdating April 16, 2007 The Wall Street Journal won the Pulitzer Prize for Public Service today for uncovering the unethical practices of business executives who had rewarded themselves millions of dollars by backdating stock options. The articles, by Charles Forelle, James Bandler and Mark Maremont, have led to the federal investigation of more than 130 companies, and at least 70 top executives have lost their jobs.

6 Stock Market Event Studies: Backdating Academic Event Studies by Lie, Heron & Lie: Backdating discerned from pattern of abnormal returns around executive option grants. Stock returns abnormally negative before executive option grants. Stock returns abnormally positive afterward.

7 Stock Market Event Studies: Backdating P(t<0) Forward dating option issued at t<0 to t=0 allows avoidance of out of the money option. Stock Price Backdating option issued at t>0 to t=0 yields in the money option with at the money tax and regulatory treatment P(t>0) P(t=0) Time

8 Stock Market Event Studies: Backdating Pattern weaker after 8/29/2002 (new SEC 2 day reporting regulation). Pattern disappears for option grants reported on the same day as the grant. Persists but smaller for those reported with lag within the 2 day period. Largest for grants where firm violated 2 day reporting requirement.

9 Stock Market Event Studies: Backdating

10 Event Studies and Antitrust Use of stock price data to test (examine) whether or not merger is anticompetitive. Theory: CAPM & Informationally Efficient Markets Under informationally efficient markets, we can identify pattern of abnormal returns to obtain market based evaluation of the merger and complaint. likely sources of gain from the merger. Data CRSP daily stock database Specification Simple linear regression

11 Testable Hypotheses Table 1 (From Eckbo and Weir, p 124) Abnormal Returns to the Merging Firms and Their Rivals as Predicted Under the Market Power and Economic Efficiency Hypothesis A. Probability Increasing Events: Merger Proposal or Prodefendant Decision Theory Predicting the Source of Merger Gains Market Power: Collusion, Cournot Model Predatory Pricing Model Economic Efficiency Synergy Information Abnormal Returns to Merging Firms Positive (Monopoly Rents) Positive (Monopoly Rents) Positive (Cost Savings) Positive (Ident. of Underval. Resources) Abnormal Returns to Rival Firms Positive (Monopoly Rents) Negative (Costs of Price War) Negative (Competitive Disadvantage) Zero or Positive (Underval. Resources) B. Probability Decreasing Events: Antitrust Complaint or Progovernment Decision Theory Predicting the Source of Merger Gains Market Power: Collusion, Cournot Model Predatory Pricing Model Economic Efficiency Synergy Information Abnormal Returns to Merging Firms Negative (Loss of Monopoly Rents) Negative (Loss of Monopoly Rents) Negative (Loss of Cost Savings) Zero Abnormal Returns to Rival Firms Negative (Loss of Monopoly Rents) Positive (Avioding Price War) Positive (Avoid Comp.Disadvantage) Zero

12 Office Superstore Stock Prices Y-Axis DATE RELATIVE TO ANNOUNCEMENT OMX SPLS ODP Looking at merging firms stock price reactions does not yield useful information -- you cannot differentiate between the Market Power and Economic Efficiency hypotheses. Economic Efficiency hypotheses. However, it cannot differentiate between Efficiency and Predation (the same issue the Court faced in Matsushita).

13 List of Events INDEX LIST OF EVENTS 1 BEGINNING OF ESTIMATION PERIOD 2 END OF ESTIMATION PERIOD 3 MERGER ANNOUNCEMENT DATE 4 OMX ANNOUNCES EXPANSION PLAN 5 FTC STAFF SEEKS MORE DATA 6 SPLS POSITIVE EARNINGS REPORT 7 FTC EXPRESSES CONCERNS 8 SPLS BEGINS ADV ERTISING CAMPAIGN 9 ODP EARNINGS FLAT 10 MEETING SCHEDULED AT FTC 11 SPLS EARNINGS POSITIVE 12 FTC VOTES 4-1 TO BLOCK MERGER 13 STORE SALES PACT REACHED WITH OMX 14 SPLS SHAREHOLDER MEETING POSPONED 15 OMX SIGNS AGREEMENT TO BUY 63 STORES 16 FTC STAFF SPLIT 17 FTC REJECTS PROPOSED SPINOFF 18 SPLS TO CONTEST FTC 19 FTC FILES SUIT 20 SPLS SAYS PI WOULD END MERGER 21 PI HEARING SCHEDULED 5/19 22 ACQUISITION COSTS LOWERS SPLS ENGS. 23 PI HEARING BEGINS 24 REPORT ON PI HEARING 25 PI HEARING ENDS 26 SPLS/ODP AMEND PACT TO ALLOW TERMINATION 27 SPLS/ODP SHAREHOLDERS CLEAR MERGER 28 JUDGE GRANTS PI TO FTC AFTER MARKETS CLOSE 29 FIRST TRADING DAY AFTER COURT DECISION 30 SPLS DROPS MERGER PLAN

14 Office Superstore Stock Prices Y-Axis DATE RELATIVE TO ANNOUNCEMENT OMX SPLS ODP (3) Office Max - Fell 62.5 cents on day of announcement (9/4/96). (12) Rose 25 Cents on Day FTC voted 4-1 to Block Merger (3/11/97). (13) Rose $1.75 on day agreement to purchase stores from mergered entity was reached ((3/13) (17) Fell $1.125 on day FTC rejected settlement, unchanged when District Court granted PI. Must look at price patterns in the large. Also must consider abnormal returns, not prices or returns

15 Theory & Empirical Estimation C apital Asset Pricing Model: Stocks are held in the market portfolio. Unsystematic risk is diversified away through the holding of many stocks Only systematic, or market risk is priced. The return of a stock is linear in Beta: r i = r f + (r m - r f ) = (Cov(r i, r m ))/Var(r m ) The Market Model The CAPM can be rewritten as r i = (1- )r f + r m Which can be estimated using the following market model r i = a + br m + where a equals (1- )r f, b equals, and is an error term.

16 Estimating the Market Model

17 OMX & S&P 500 OMX AND S&P500 DAYS -170 TO OMX RETURN ACTUAL S&P 500 RETURN

18 Abnormal Returns OFFICE MAX RETURNS DAY - 20 T OMX RETURNS DAY RELATIVE TO ANNOUNCEMENT ACTUAL PREDICTED

19 Office Max Abnormal Returns DAY - 20 T OMX RETURNS DAY RELATIVE TO ANNOUNCEMENT ABNORMAL RETURNS

20 OMX Cumulative Resdiuals The cumulative abnormal return sums the abnormal return over time. CR = eit DAY - 20 T OMX RETURNS DAY RELATIVE TO ANNOUNCEMENT OMX CR