Posts Tagged ‘Stock returns’

Shareholder Returns of Hostile Takeover Targets

Posted by Sabastian V. Niles, Wachtell, Lipton, Rosen & Katz, on Friday October 24, 2014 at 9:00 am
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Editor’s Note: Sabastian V. Niles is counsel in the Corporate Department at Wachtell, Lipton, Rosen & Katz, where he focuses on rapid response shareholder activism, takeover defense and corporate governance. This post is based on a Wachtell Lipton firm memorandum by Mr. Niles and Eric S. Robinson.

This morning [October 22, 2014], Institutional Shareholder Services (ISS) issued a note to clients entitled “The IRR of ‘No’.” The note argues that shareholders of companies that have resisted hostile takeover bids all the way through a proxy fight at a shareholder meeting have incurred “profoundly negative” returns following those shareholder meetings, compared to alternative investments. ISS identified seven cases in the last five years where bidders have pursued a combined takeover bid and proxy fight through a target shareholder meeting, and measured the mean and median total shareholder returns from the dates of the contested shareholder meeting through October 20, 2014, compared to target shareholders having sold at the closing price the day before the contested meeting and reinvesting in the S&P 500 index or a peer group.

A close look at the ISS report shows that it has at least two critical methodological and analytical flaws that completely undermine its conclusions:

…continue reading: Shareholder Returns of Hostile Takeover Targets

Measuring Price Impact with Investors’ Forward-Looking Information

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday September 16, 2014 at 9:09 am
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Editor’s Note: The following post comes to us from Aaron Dolgoff and Tiago Duarte-Silva, both of Charles River Associates. The views expressed here do not necessarily reflect those of Charles River Associates.

The recent Supreme Court decision in Halliburton brought renewed interest to price impact and event studies. Aside from identification and analysis of the news itself, the event study has three basis steps: (i) Estimate a statistical model (or “market model”) of how the stock price would be expected to change in absence of such news (“predicted price changes”), (ii) Calculate stock price changes in excess of the predicted price changes (“excess price change”), and (iii) Evaluate the statistical significance of the excess price change to distinguish material news from noise, or normal variations in stock prices.

…continue reading: Measuring Price Impact with Investors’ Forward-Looking Information

CEO Ownership, Stock Market Performance, and Managerial Discretion

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday June 2, 2014 at 12:12 pm
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Editor’s Note: The following post comes to us from Ulf von Lilienfeld-Toal of the Department of Finance at the Stockholm School of Economics and Stefan Ruenzi, Professor of Finance at the University of Mannheim.

In our paper, CEO Ownership, Stock Market Performance, and Managerial Discretion, forthcoming in the Journal of Finance, we examine the relationship between CEO ownership and stock market performance. We show that investing in firms in which the CEO owns a substantial fraction of shares (for example more than 10% of outstanding shares) leads to large abnormal returns. A strategy based on public information about managerial ownership delivers annual abnormal returns (annual alphas in a Fama-French portfolio setting) of 4 to 10%. These results are stronger for firms in which the impact of the CEO can expected to be large, that is, in firms in which the CEO has a lot of discretion.

…continue reading: CEO Ownership, Stock Market Performance, and Managerial Discretion

The Statistical Significance of Excess Dollar Returns

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday May 14, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Tiago Duarte-Silva and Maria Tripolski-Kimel, both of Charles River Associates.

The literature on event studies has long established the properties of excess returns and tests of their statistical significance. However, it is useful in certain settings to examine excess dollar returns. For example, mergers and acquisitions often require the examination of dollar returns to assess the impact on the wealth of securities’ holders. Other examples include the analysis of managerial skill on actively managed funds, of the magnitude of price manipulation, or of the impact of disclosure events on prices in securities litigation.

…continue reading: The Statistical Significance of Excess Dollar Returns

Distracted Directors

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday February 5, 2014 at 9:12 am
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Editor’s Note: The following post comes to us from Antonio Falato, Economist at Federal Reserve Board; Dalida Kadyrzhanova of the Department of Finance at the University of Maryland; and Ugur Lel of the Department of Finance at Virginia Tech.

In our paper, Distracted Directors: Does Board Busyness Hurt Shareholder Value?, which was recently accepted for publication in the Journal of Financial Economics, we examine the impact of independent director busyness on firm value in a setting that addresses a key challenge that the board of directors is an endogenously determined institution. A large number of publicly-traded firms in the U.S. have recently limited the number of multiple directorships held by their board members. For example, a recent survey shows that 74 percent of S&P 500 firms impose restrictions on the number of corporate directorships held by their independent directors, up from 27 percent in 2006, and the Institutional Shareholder Services recommends restrictions on the number of multiple directorships. Although such shareholder initiatives are consistent with standard theoretical considerations (e.g., Holmstrom and Milgrom, 1992), the empirical evidence on whether director busyness has any effect on the firm is thus far mixed. While several studies find that busy directors are associated with lower firm valuations and less effective monitoring (e.g., Fich and Shivdasani, 2006; Core, Holthausen and Larcker, 1999) others either do not, or provide mixed evidence (e.g., Ferris, Jagannathan and Pritchard, 2003; Field, Lowry, and Mkrtchyan, 2013).

…continue reading: Distracted Directors

Informed Trading through the Accounts of Children

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday July 18, 2013 at 9:11 am
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Editor’s Note: The following post comes to us from Henk Berkman, Professor of Finance at the University of Auckland; Paul Koch, Professor of Finance at the University of Kansas; and Joakim Westerholm of the Finance Discipline at the University of Sydney.

In our paper, Informed Trading through the Accounts of Children, forthcoming in the Journal of Finance, we introduce a novel measure of the probability of information-based trading in a stock, namely, BABYPIN, the proportion of total trading through the accounts of underaged investors. We begin by empirically validating this measure by showing that underaged accountholders are extremely successful at picking stocks, especially when they trade just before large price changes, major earnings announcements, and takeover announcements. We next show that BABYPIN is priced in the cross section of stock returns, consistent with Easley and O’Hara (2004).

There are two reasons to expect a high proportion of informed trading through underaged investor accounts. First, guardians who open accounts and trade on behalf of young children are likely to be above-average investors. We expect these individuals to have more wealth (to bestow on offspring) and to be more successful at investing, possibly due to superior cognitive skills or comparative advantages in obtaining value-relevant information. These attributes, combined with a basic parental instinct to share the benefits of any information advantage with one’s offspring, could lead to a disproportionate number of underaged accounts that bear the fruits of informed trading.

…continue reading: Informed Trading through the Accounts of Children

Communicating Private Information to the Equity Market before a Dividend Cut

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Saturday July 13, 2013 at 8:56 am
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Editor’s Note: The following post comes to us from Thomas Chemmanur, Professor of Finance at Boston College, and Xuan Tian of the Department of Finance at Indiana University.

How should firms communicate with the capital market in advance of corporate events? If firm insiders receive some private information that their firm may perform poorly in the near future, should they inform investors about this adverse information as soon as possible, or should they wait to release this information? Further, is the manner of communication by firms related to their performance in the short or the long run?

A concrete example of the above situation is that of a firm contemplating a dividend cut in the future. Firm insiders may have received some private information about a potential decline in future earnings, or that the current level of dividends is unsustainable for some other reasons (e.g., a change in the competitive environment requiring it to retain more cash within the firm). Under these circumstances, should insiders release a statement to the market that they are reviewing the firm’s dividend policy, and indicating that there is a possibility of a dividend cut (in other words, “prepare” the market)? Or should they wait till they in fact decide to cut their firm’s dividends before making any announcement?

While there have been several theoretical as well as empirical analyses of dividend signaling (see, e.g., Bhattacharya (1979), John and Williams (1985), and Miller and Rock (1985) for theoretical models), unfortunately, there has been no systematic empirical analysis so far in the literature that provides guidance to decision makers regarding the right way to communicate adverse private information to the equity market. The objective of this paper is to fill this gap in the literature by providing the first empirical analysis of a firm’s choice between preparing and not preparing the market before a dividend cut and the consequences of market preparation.

…continue reading: Communicating Private Information to the Equity Market before a Dividend Cut

How Do Investors Interpret Announcements of Earnings Delays?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday May 13, 2013 at 9:17 am
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Editor’s Note: The following post comes to us from Tiago Duarte-Silva of Charles River Associates, Huijing Fu of the Shanghai Advanced Institute of Finance, Christopher Noe of MIT Sloan School of Management, and K. Ramesh, Professor of Accounting at Rice University.

Companies that fail to file a 10-K or 10-Q on time are required by SEC Rule 12b-25 to file a Form NT (NT for non-timely), which provides a narrative explanation for the late filing. No analogous rule exists for earnings announcements, which often precede 10-K or 10-Q filings. For companies that are unable to report earnings by their expected date, therefore, managers face a decision – to keep silent or announce the delay. The SEC has also manifested interest in earnings delays: it recently announced a quantitative model that is expected to supply potential leads to its Division of Enforcement and lists earnings delays as a signal of earnings management.

In our paper, How Do Investors Interpret Announcements of Earnings Delays?, which was recently accepted for publication in the Journal of Applied Corporate Finance, we show that announcements of a delay in the reporting of earnings produce an average one-day abnormal stock return of approximately -6%. So, although announcements of a delay in the reporting of earnings are infrequent, they tend to be associated with a considerable reduction in firm value. In addition, delays precipitated by accounting issues or lacking an explanation result in more negative market reactions than delays related to business events, implementation of new accounting standards, or non-business reasons such as bad weather.

…continue reading: How Do Investors Interpret Announcements of Earnings Delays?

Do Investors Understand ‘Operational Engineering’ before Management Buyouts?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday May 10, 2013 at 9:50 am
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Editor’s Note: The following post comes to us from Xi Li of the Department of Accounting at Hong Kong University of Science and Technology, Jun Qian of the Department of Finance at Boston College, and Julie Lei Zhu of the School of Management at Boston University.

In our paper, Do Investors Understand ‘Operational Engineering’ before Management Buyouts?, which was recently made publicly available on SSRN, we use a sample of management buyouts (MBOs) from 1985-2005 and a matched subsample of post-MBO firms to examine three questions. First, we examine whether firms undertake different types of activities to lower earnings before MBOs. Second, to see whether outside investors and the market understand such ‘operational engineering’ activities, we study the impact of these activities on target firms’ stock returns and MBO deal characteristics including deal premium and likelihood of deal completion. Third, we examine the relation between pre-MBO earnings-reducing activities and the post-MBO operating performance.

With the Great Recession of 2007-2009 exposing deficiencies of the world’s most advanced financial markets, leveraged buyouts (LBOs) have ‘reemerged’ as a solution to the many challenges facing corporate sectors. Unlike publicly listed firms, LBO firms are characterized by concentrated ownership, active monitoring and high leverage. A growing strand of literature shows that LBO firms can create value through ‘financial, operational and governance engineering’ (Kaplan and Stromberg, 2009). In fact, Jensen (1989) argues that LBOs should replace publicly held corporations as the dominant corporate organizational form.

…continue reading: Do Investors Understand ‘Operational Engineering’ before Management Buyouts?

Corporate Campaign Contributions and Abnormal Stock Returns after Presidential Elections

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday December 26, 2012 at 9:44 am
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Editor’s Note: The following post comes to us from Jürgen Huber, Professor of Finance at the University of Innsbruck, Austria, and Michael Kirchler, Associate Professor of Finance at the University of Innsbruck, Austria and visiting professor at the University of Gothenburg, Sweden.

A hard-fought campaign is over and President Obama has been reelected. Should shareholders take notice? In brief, yes. In the paper, Corporate campaign contributions and abnormal stock returns after presidential elections, forthcoming in Public Choice, we explore the stock market performance of top corporate contributors after the elections that brought Bill Clinton and George W. Bush, respectively, to power. In both cases, the top contributors strongly outperformed the market.

We focus on campaign contributions by corporations before a presidential election and their stock market performance afterwards. From a rent-seeking perspective, companies can have an incentive to spend money for presidential candidates. And, as presidential hopefuls need to raise large sums, campaign contributions by companies and business associations are usually a welcome source of funds. After the 2010 Supreme Court ruling in Citizens United against FEC, which grants companies the same free speech rights (and thus spending in the political process) as those accorded to individuals, corporate campaign contributions are likely to become even more important in the future.

…continue reading: Corporate Campaign Contributions and Abnormal Stock Returns after Presidential Elections

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