Abnormal Operating Performance Research Articles

Does annual report readability influence the design of SEOs?

Motivated by the rapid growth in non-quantitative corporate disclosure and seasoned equity offerings (SEOs) in the U.S., we take a fresh look at the decision-making process behind accelerated offerings in SEOs, with a specific emphasis on the readability of annual reports within 10-K filings. In particular, our study explores whether readability of annual reports affects the choice of SEOs methods. Using a hand-collected sample of 3143 instances of seasoned equity issues between 2002 and 2021, we show a significantly positive relation between readability scores and accelerated offerings. These results hold across various robustness tests. We further reveal a negative relationship between abnormal operating performance and long-term stock performance following the announcements of SEOs, demonstrating that: firstly, SEOs provide valuable insights into future earnings; and secondly, these insights have a lasting impact on stock performance. Overall, our evidence strongly highlights the substantial influence of annual report readability on the design of SEOs, emphasizing the critical importance of conveying financial information concisely and effectively to the market.

CEO perquisite compensation and M&A performance

This paper offers empirical evidence of the role that CEO perquisite compensations (perks) play in a firm’s M&A activities. Using hand-collected panel-data on CEO perks from S&P 500 firms between 2006 and 2014, we find that the M&A deals undertaken by CEOs with high levels of perquisite receive significantly worse market reactions around the announcement period. Further, these deals experience lower post-acquisition abnormal operating and stock performance compared to the deals conducted by CEOs with low levels of perquisite. Firms whose CEOs received greater perquisite also exhibit severe crash risk. Our results are consistent with the widely held negative sentiment toward perquisite compensation.

The Dark Side of Executive Compensation Duration: Evidence from Mergers and Acquisitions

AbstractWe find that contrary to popular belief, CEOs with long compensation duration do not make better long-term investment decisions. Using a comprehensive pay duration measure, we find that acquisitions conducted by CEOs with long compensation duration receive more negative announcement returns, and experience significantly worse post-acquisition abnormal operating and stock performance, compared with deals conducted by CEOs with short compensation duration. The negative correlation between compensation duration and mergers and acquisitions (M&A) performance is driven by long-term time-vesting plans, not by performance-vesting plans. The results suggest that extending CEO pay horizons without implementing performance requirements is insufficient to improve managerial long-term investment decisions.

Abnormal operating performance in IPOs: Does public float matter?

Using a unique dataset of privately held firms and companies that went public on the European and Asian stock exchanges between 2007 and 2011, we find that on average, newly listed firms experience negative abnormal operating performance in the years after the IPO. Furthermore, we document a nonlinear relation (inverted Ushaped) between public float and post-IPO abnormal operating performance. We interpret this quadratic relation as evidence that for each level of public float, factors that facilitate the convergence of interest between insiders and outsiders (namely, monitoring effects) and entrenchment factors (namely, agency problems) are both at work. Specifically, we suggest that at low levels of public float, increasing the float intensifies agency problems less than it increases monitoring effects. However, at a high level of public float, the situation is inverted, and increasing public float intensifies agency problems much more than it facilitates the convergence of interest between insiders and outsiders.

Testing Operating Performance of Chinese Listed Firms before and after Cross-border M&As: The Role of Entrepreneurial Orientation

t a time when China encourages its firms to go overseas, especially to countries and regions involved in its “Belt and Road Initiative”, and sets up a favorable domestic environment for innovation and entrepreneurship, this paper is a first trial looking along both the two dimensions to test whether Chinese firms' operating performance changes after cross-border merger and acquisition (CBM&A) activities, using entrepreneurial orientation (EO) as a moderating factor. The paper combines data from Chinese listed firms’ annual reports, Chinese stock market financial statements database and the Zephyr database from 2001 to 2015 to examine how acquirers’ operating performance changes after CBM&A activities using EO as a moderating factor. In order to test whether the results are affected by the stock market, this paper also defines abnormal return on equity (ROE) to detect abnormal operating performance. After these, the paper divides the sample into separate industry groups to see whether results will change. The results obtained for the whole sample show that the performance of Chinese listed firms is fluctuant after CBM&As within the sample years. It increases one year after the acquisition but drops two years later and then follows an increasing trend again. The moderating factor of EO is not significant for the sample as a whole. However, after dividing the sample into separate industry groups, it becomes clear that different industries have their own characteristics. EO helps Chinese listed firms to adjust to the post-acquisition situation and even to improve their performance to some extent in the metal mining industry and the business services industry. When ROE is substituted with abnormal ROE, the results do not change much.

Analysis of Abnormal Operating Performance Between Family Owned Firms and State Owned Firms in Indonesia and Malaysia

Purpose: This study examines the financial performance of family owned firms and state owned firms listed in Bursa Malaysia and the Indonesia Stock Exchange.Design/Methodology/Approach: This study employed abnormal operating performance to measure firm performance over a 15 year period from 1992 to 2007.Findings: This study shows that the state owned firms outperformed the family owned firms in Indonesia and Malaysia. Hence, the family owned firms need to strategize on how to increase its competitive advantage in order to compete with the state owned firms especially if they are competing in similar industry. Based on abnormal operating performance result, for each type of ownership which have model that have influenced by changing in their internal company or changing within their industry, they need to consider all factors that can impact their performance.Practical Implications: This study may assists the family owned and government involvement in company and their performance.Originality/Value: This study contributes to the existing literature by providing a new data set on family and government owned companies in both countries.

Managing EPS and signaling undervaluation as a motivation for repurchases

PurposeAccelerated share repurchases (ASRs) represent an important recent innovation in repurchase methods. Although executives often mention signaling undervaluation as a motivation for ASRs, managing earnings per share (EPS) has been argued as a key alternative motivation in the financial press. This paper aims to investigate whether ASRs are driven by managerial opportunism (i.e. managing EPS) or managerial optimism (i.e. signaling undervaluation) and whether stock market participants see through these motives.Design/methodology/approachThe sample consists of 293 ASRs conducted between 2004 and 2011. Firms suspected of using ASRs to manage EPS (EPS-suspect firms) were identified by examining actual reported EPS, as-if EPS (i.e. EPS that would have been reported in the absence of an ASR), and analysts’ consensus EPS forecasts. A logistic regression of EPS-suspect versus non-EPS-suspect ASR transactions was performed. Analysts’ reactions to ASR announcements and investors’ reactions to post-ASR earnings announcements were examined. Changes in post-ASR operating performance were also analyzed.FindingsTwenty-nine per cent of ASR firms (EPS-suspect firms) would have missed the consensus EPS forecasts had they not implemented the repurchase. Managerial incentives – securing bonuses and maintaining reputation by avoiding EPS misses – appear to lie behind this opportunistic use of ASRs. Upward revision observed in analysts’ EPS forecasts upon the announcement of ASRs is short-lived, indirectly facilitating firms’ use of ASRs to meet or beat consensus forecasts. Investors, however, are not fooled by managers’ use of ASRs as an earnings management device. Unlike EPS-suspect firms, non-EPS-suspect firms exhibit positive abnormal operating performance during the post-ASR period, suggesting that these firms use ASRs as a signaling device rather than as an earnings management device.Practical implicationsASRs can be used by managers to signal better future performance to investors. However, managers who intend to do so should carefully consider the timing of an ASR. Initiating an ASR when the company is facing the risk of missing analysts’ EPS forecasts may be interpreted as the ASR being motivated by EPS management concerns rather than signaling, diminishing the credibility of a positive signal intended to be conveyed through the ASR. Further, when considering payout policy and executive compensation decisions, corporate boards need to be cognizant of managers’ incentives for undertaking ASRs. The use of ASRs opportunistically to boost EPS is prevalent, and this action is followed by poor performance.Originality/valueA number of novel results are documented using tests that are methodologically distinct from those used in related previous research. Notably, this is the first study to distinguish between EPS-suspect and non-EPS-suspect ASR firms and examine the determinants as well as consequences of using ASRs as an earnings management versus signaling device. One out of every four ASR firms are EPS-suspects. Analysts react to ASR announcements by only temporarily increasing their short-term EPS forecasts. Investors see through managers’ use of ASRs as an earnings management device. While ASRs are prone to managerial opportunism, a large number of firms use ASRs to communicate favorable information about their future operating performance to investors.

New product strategies and firm performance: CEO optimism

We examine the role of CEO optimism in explaining firm performance associated with new product introductions. New product introducing firms with high levels of CEO optimism experience better announcement-period abnormal returns and long-term stock performance than introducers with moderate or low levels of CEO optimism. Changes in abnormal operating performance following new product announcements are also more favorable for firms with high-optimism CEOs than for firms with moderate-optimism or low-optimism CEOs. The results hold after controlling for other potential explanatory factors and accounting for endogeneity. The evidence highlights the importance of CEO optimism in assessing the valuation effect of corporate product strategies.

Effective Activism Sponsor Identity in Environmental and Social Proposal Filing

This paper studies effective shareholder activism by analyzing sponsor identity of environmental and social (ES) proposals over the period 1997 to 2015. When the proposal is sponsored by sustainable responsible funds (SRIs) or pension funds, the probability of success and the percentage of vote in favor at the annual general meeting (AGM) are higher than sponsored by other parties, after controlling for the proposal issue type. SRIs and pension funds also obtain significant positive abnormal return on the date of proposal filing. The successful proposals sponsored by these parties generate higher long-term abnormal return and operating performance than other successful proposals. The findings suggest that more effective activism concerning ES issues can be achieved by strategically choosing the sponsor with more expertise and past experience, such as SRIs or pension funds. The findings also support the view that effective ES activism brings value to the target and the optimistic view of the activism is reflected in the share price.

How sukuk shapes firm performance

AbstractWith the large expansion of Islamic finance in the recent years, sukuk, which are the Sharia‐compliant substitute to conventional bonds, are now becoming more prominent. The aim of this study was to examine the impact of sukuk issuance on firm performance. To do so, we analyse how stock market performance and operating performance (OP) are influenced by issuance of sukuk and bonds on a sample of Malaysian listed companies. We consider the short‐term and medium‐term stock market reaction through the computation of cumulative abnormal returns and buy‐and‐hold abnormal returns. We investigate the impact on OP by performing regressions and by calculating abnormal operating performance (AOP) so that we can compare how issuance affects similar firms. We find that sukuk issuance generates a negative stock market reaction both in the short term and in the medium term. We also find evidence that issuing sukuk hampers OP. The analysis of AOP shows that sukuk issuers have better performance than their matched bond issuers, but that sukuk contributes to reduce the gap in performance over time. Overall, our results support the view that sukuk issuance hampers stock market performance, but that it is not attributable to a signalling effect on the bad financial situation of the issuer. We interpret our findings as evidence of adverse selection taking place on the financed projects and agency problems stemming from the specific sukuk structuring with stock market investors more reluctant to invest in sukuk issuers.

R&D Spillover and Predictable Returns*

We show that firms’ R&D activities can predict the stock returns of their industry peers. When an industry experiences substantial R&D growth driven by the activities of a small group of firms, industry peers experience positive abnormal returns and abnormal operating performance despite having no aggressive R&D growth. Exogenous industry shocks to demand or productivity do not explain these results. Further, abnormal returns are concentrated in peer firms that receive low investor attention.

Do Special Dividends Convey Information?

This study examines the impact of special dividend announcements in a partial imputation tax environment in the UK. We find that the market reaction is positive. The price reaction is negatively related with growth opportunities and positively related with pre-announcement cash flow and size of the special dividend. Abnormal future operating performance is positively related with growth opportunities for the year ended after the announcement and the year after, and is positively related with the size of the special dividend for the year ended after the announcement and insignificantly related thereafter. Overall, our findings support the conclusion that in a partial imputation tax environment, managers use special dividends both to signal future performance for firms with high growth opportunities and to reduce agency costs for firms with low growth opportunities.

The Impact of Securities Class Actions on Firm Governance and Operating Performance

Prior research has found securities class actions result in management making improvements within the firm, which helps to reduce agency problems. However, little evidence exists as to whether these changes are beneficial to the firm. We examine the effect securities class actions have on management’s decisions and operating performance. Consistent with prior research we find that managers take corrective actions post filing. In a clear addition to the literature, we find that operating performance declined in the two years leading up to the filing of a securities class action and that there is no evidence that the filing adversely affects performance. Indeed, the findings suggest securities class actions may act as a turning point for the performance of a firm. Finally, we analyze the relationship between the corrective actions taken and abnormal operating performance in order to determine how effective securities class actions are at inducing improvements within the firm. We find that firms that increase leverage post filing, experience subsequent increases in their operating performance. These results suggest that securities class actions do not damage operating performance and instead result in performance enhancing improvements. Our study, therefore, adds support to the use of securities class actions as a disciplinary mechanism.

Institutional Shareholder Investment Horizons and Seasoned Equity Offerings

Firms with more short‐term institutional shareholders experience significantly more negative abnormal returns at the announcement of seasoned equity offerings. This effect is strong for primary offerings (only firms receive proceeds), but is not present for secondary offerings (firms do not receive any proceeds). Furthermore, a shorter institutional shareholder investment horizon predicts poorer postissue abnormal operating performance and the negative effect of a shorter shareholder horizon is mitigated by higher managerial ownership. My results are consistent with the argument that long‐term shareholders more carefully monitor managerial activities and prevent misuse of the cash flow provided by equity issues.

Managerial Optimism Versus Opportunism as a Motivation for Repurchases: The Case of Accelerated Share Repurchases

Accelerated share repurchases (ASRs) represent an important recent innovation in repurchase methods. While corporate managers and investment bankers often cite signaling undervaluation as a motivation for ASRs, the financial press highlights managing earnings per share (EPS) as an alternative motivation. I find that 29 percent of ASR firms (“EPS-suspect” firms) would have missed the consensus EPS forecasts had they not implemented the repurchase. Managerial incentives — securing bonuses and maintaining reputation by avoiding EPS misses — appear to lie behind this opportunistic use of ASRs. Upward revision observed in analysts’ EPS forecasts upon the announcement of ASRs is short-lived, indirectly facilitating firms’ use of ASRs to meet or beat consensus forecasts. Unlike EPS-suspect firms, non-EPS-suspect firms exhibit positive abnormal operating performance during the post-ASR period, suggesting that these firms use ASRs as a signaling device rather than as an earnings management device. I also find evidence that investors see through both motives. Evidence also suggests that, despite being prone to managerial opportunism, ASRs have an edge over regular open market repurchases with respect to sending a more credible signal of undervaluation to investors.

R&D Spillover and Predictable Returns

We show that firms’ R&D activities can predict the stock returns of their industry peers. When an industry experiences substantial R&D growth driven by the activities of a small group of firms, industry peers experience positive abnormal returns and abnormal operating performance despite having no aggressive R&D growth. Exogenous industry shocks to demand or productivity do not explain these results. Further, abnormal returns are concentrated in peer firms that receive low investor attention.

Buyback behavior of initial public offering firms

We examine the motives behind the share repurchase decisions of initial public offering (IPO) firms by studying the stock and operating performance after the IPO date. We find that IPO firms that announce repurchases within 3years of IPO dates exhibit poorer long-run abnormal operating performance than other IPO firms. These IPO firms also experience poorer stock return performance and downward analyst forecast revisions. Moreover, these firms show intensive insider selling transactions after the IPO date. These results for IPO announcing repurchase firms are consistent with the misleading hypothesis, which suggests that these IPO firms mislead investors by announcing repurchases as false signals.

Financial constraints and share repurchases

We examine how the financial constraints of repurchasing firms affect their post-buyback performance. By every constraint measure we use, a set of constrained firms repurchase. They display significantly poorer post-buyback abnormal return and operating performance than unconstrained firms. Financial constraints are more important in explaining the performance of share buybacks for firms with high actual repurchase ratios. Constrained firms, especially those with high actual repurchase ratios, experience a significantly greater increase in post-buyback distress risk than unconstrained firms. Managerial hubris could explain why constrained firms buy back shares even if the buybacks do not improve shareholder wealth.

Cross-Business Information Technology Integration and Acquirer Value Creation in Corporate Mergers and Acquisitions

This study develops and tests the idea that the cross-business information technology integration (CBITI) capability of an acquirer creates significant value for shareholders of the acquirer in mergers and acquisitions (M&A). In M&A, integrating the IT systems and IT management processes of acquirer and target could generate benefits such as (a) the consolidation of IT resources and the reduction of overall IT costs of the combined firm, (b) the development of an IT-based coordination mechanism and the realization of cross-firm business synergies, (c) the minimization of potential disruptions to business operations, and (d) greater ability to comply with relevant laws and regulations and the reduction of regulatory compliance costs. We test these ideas in a sample of 141 acquisitions conducted by 86 Fortune 1000 firms. In the short run, acquirers that have high levels of CBITI capabilities receive positive and significant cumulative abnormal returns to their M&A announcements. Announcement period returns indicate that the capital markets value CBITI similarly in same-industry and different-industry acquisitions. In the long run, acquirers with high levels of CBITI capabilities obtain significantly higher abnormal operating performance. They create significantly greater value in complementary acquisitions from different industries than in related acquisitions from the same industry. The findings have important implications for M&A research and practice.

The Long‐Term Performance and Failure Risk of Firms Cited in the US SEC's Accounting and Auditing Enforcement Releases

Abstract: We investigate 239 firms cited in the SEC's Accounting and Auditing Enforcement Releases (AAERs). We document significantly negative abnormal operating performance (measured using both cash‐flow‐based and earnings‐based metrics) in the second and third years following AAERs. We also detect significantly negative abnormal stock returns in up to three years following AAERs. We further find that AAER firms are more likely to fail in the post‐AAER period. Taken together, our findings suggest that the negative implications of an AAER citation resulting from egregious financial reporting violations can be long lasting and influence various facets of firm performance and survivability.