Announcement Abnormal Returns Research Articles

Industry tournament incentives and acquisition performance

This paper examines the effect of industry tournament incentives on acquisition performance. Using the pay gap between a firm's CEO and the highest-paid CEO in the same industry as the measure of industry tournament incentives, we find that deals led by CEOs with higher industry tournament incentives experience higher abnormal announcement returns. This positive relation between industry tournament incentives and acquisition returns is more pronounced when CEOs have greater mobility and probability of winning the tournament prize. Our findings highlight those tournament incentives induced by the external labor market play important roles in corporate acquisitions.

The Rise of Finfluencers: A Digital Transformation in Investment Advice

The primary aim of this study is to investigate the extent to which finfluencers can be considered experts who fulfill the critical role of information intermediaries contributing to the efficiency of financial markets. To assess this, we assembled a manually collected dataset consisting of recommendations made by finfluencers. We conducted an event study to analyze both short-term and long-term effects on stocks. The findings reveal that, on average, all stocks examined during the event window [-10, +10] days exhibit a noteworthy Cumulative Abnormal Announcement Return (CAAR). The outcome suggests that, in the short term, finfluencers may not be deemed as experts. In contrast, the long-term Buy-and-Hold Abnormal Returns (BHAR) were positive and also statistically significant. Considering these results and the frequent absence of financial licenses among finfluencers, along with their tendency to endorse risky investments, we endorse SEBI's action in issuing a consultation paper (dated 25th August 2023) to regulate unregistered finfluencers. These measures are aimed at safeguarding inexperienced investors from taking undue risks and ensuring the integrity of financial markets.

Family Ownership and Value of Takeover: Evidence from India

We examine how family-ownership influences takeover probability and takeover public announcement abnormal return of Indian publicly traded firms between 2003 and 2019. We find that family ownership has a significantly negative effect on target takeover probability at various levels of family ownership, viz. 20%, 40%, and 51%. Announcement period abnormal returns for target firms are positive at a lower level of family ownership of 20% and negative at a higher level of family ownership of 51%. These results are consistent with the agency cost explanation where family ownership reduces owner-manager agency conflict but exacerbates conflict between majority and minority shareholders. Our results hold for Heckman two-stage model.

Can the market identify prosperous activist engagements? Evidence from announcement and long-term buy-and-hold returns

We document a discrepancy between abnormal announcement returns (CAARs) and two-year buy-and-hold abnormal returns (BHARs) of activist engagements. Activist targets that earn the highest two-year BHARs yield, on average, only marginally higher CAARs than the other targets. This indicates that financial markets have difficulties to consistently distinguish between long-term top-performing engagements and other engagements at the announcement of an engagement. Even the best activists frequently suffer low or negative two-year BHARs. Long-term top-performing targets have significantly different firm characteristics than the other targets, which may help to increase the probability of selecting future top performing engagements. However, activists do not solely engage in such targets. We conclude that the long-term performance of target firms seems to be driven by a combination of target firm characteristics, investor skills, and potentially some luck, but provides only limited follow-on investment strategies for outside investors.

Do Equity Markets Care about Income Inequality? Evidence from Pay Ratio Disclosure

ABSTRACTWe examine equity markets’ reaction to the first‐time disclosure of the CEO‐worker pay ratio by U.S. public companies in 2018. We find that firms disclosing higher pay ratios experience significantly lower abnormal announcement returns. Firms whose shareholders are more inequality‐averse experience a more negative market response to high pay ratios. Furthermore, during 2018 more inequality‐averse investors rebalance their portfolios away from stocks with a high pay ratio relative to other investors. Our results suggest that equity markets are concerned about high within‐firm pay dispersion, and investors’ inequality aversion is a channel through which high pay ratios negatively affect firm value.

Post-Earning Announcement Drift and Value-Glamour Anomalies in NSE Listed Firms

Purpose of the article: Of the various market anomalies, the Value-Glamour anomaly and Post-Earnings Announcement Drifts (PEAD) have consistently attracted the attention of researchers. Prior studies have established that the reaction of value stocks and glamour stocks to the earnings announcement differs significantly and there is a close relationship between the PEAD and abnormal returns arising due to earning announcement surprises. We have studied the drift patterns of various value and glamour portfolios and tested whether the direction of the earnings announcement abnormal return is opposite to that of earnings surprise in the Indian market.Methodology: We use the statistics of 100 firms listed on the NSE for a sample period of 2014–2018. We use a set of 1130 observations analysed using the expectations formation approach around earnings and evaluate the post earnings announcement drift. We use the Earnings Response Coefficients to find the association between abnormal stock returns and earnings surprises.Scientific aim: The aim of this research is to improve the knowledge of market anomalies in developing markets such as India focusing on the impact of earnings announcement on growth and value stocks.Findings: We find that a negative association of abnormal stock returns with surprise in accounting earnings announcements. The stocks, which are overvalued or undervalued, are properly priced after the earnings announcements. Our results refute the earlier studies evidencing the strong support in favour of market inefficiency in the Indian context, particularly with respect to publicly available earnings information.Conclusions: The Indian stock market tends to be efficient with respect to earnings announcements and therefore does not produce excessive returns. However, a heterogeneity with respect to earnings announcement may exist among the category of stocks depending upon liquidity position. Superior returns cannot be derived by traders and investors on a consistent basis from value-glamour anomaly.

The value added by private equity in mergers and acquisitions by financial institutions

ABSTRACT We compare and contrast (i) mergers and acquisitions (M&As) by financial institutions (FIs) that had the involvement of one or more private equity firms (PE) with (ii) acquisitions with no private equity involvement. We find that the M&A announcement abnormal stock returns are higher for acquisitions with- than without private equity involvement. Likewise, the post-announcement long-term annual stock returns are higher for deals with PE involvement. These deals also produce higher operating performance, and their stocks exhibit less volatility in the months following the announcement after controlling for a host of confounding variables. Our results are robust to year fixed effects, industry (i.e. business line) effects, and self-selection bias.

Do Chinese managers listen to the media?: Evidence from mergers and acquisitions

This study investigates whether listed companies in China are sensitive to public media coverage when making investment decisions regarding mergers and acquisitions (M&As). We find that the likelihood of abandoning a proposed M&A transaction is positively associated with negative media coverage, and this association is stronger with lower announcement abnormal returns. Our analysis demonstrates that the negative information effect is amplified for glamour acquirers. We argue that negative media reactions drive the external feedback mechanism of M&A attempts and help guard against managerial hubris.

Deal characteristics and M&A performance: How do hospitality firms fare?

The global hospitality industry has experienced significant consolidation in the past several decades. While evidence in the general business literature suggests that the target firm shareholders gain instead of the acquiring firm shareholders, some studies in the hospitality industry have suggested that mergers and acquisitions (M&As) are also beneficial to acquiring firms. Using a comparative study design and a comprehensive sample over 41 years, we empirically examine whether M&As create more value in the hospitality industry than in other industries and whether certain deal characteristics may explain the potential performance differential. Overall, we find that M&As in the hospitality industry outperform M&As in non-hospitality sectors. When examining deal attributes, we find that relative size of target, cash method of payment, and an unlisted target are characteristics positively related to merger performance and help explain some of the performance differential. We contribute theoretically and empirically to the literature by demonstrating that industry and deal effects play an important role in M&A performance. • Mergers and acquisitions (M&As) in the hospitality industry outperform those in the non-hospitality industries. • Industry relatedness is insignificantly related to acquirer abnormal returns around the merger announcement. • Relative size, cash payment, and unlisted target are positively related to acquirer announcement abnormal returns. • Industry relatedness, relative size, and cash payment are higher in hospitality vs. non-hospitality acquisitions. • Unlisted target is not significantly different between hospitality and non-hospitality acquisitions.

EU Regulation and open market share repurchases: new evidence

ABSTRACT This paper re-examines the impact of the EU Market Abuse Directive (MAD) on the market reaction around share repurchase announcements. We use a unique hand-collected dataset of firms listed on the Athens Stock Exchange, and we find evidence that contrasts with previous conclusions for large European economies. The implementation of the MAD is followed by a significant increase in announcement abnormal returns, which is more pronounced in initial repurchase programs. Our results remain robust to a series of robustness tests. We attribute our findings to cross-country differences in institutional framework and pre-MAD existing national laws. Collectively, our results support the notion that EU directives do not have a uniform effect across Member States. Thus, the impact of such reforms should also be examined in individual capital market studies.

Comparing CEO Compensation Effects of Public and Private Acquisitions

We estimate the effect of acquisition performance and acquisition activity on CEO compensation for the full set of CEOs of large public U.S. corporations in the Execucomp database over the period 1992–2016. Most previous work has focused on publicly traded acquisition targets. We focus on the comparison between public and private targets, showing significant differences between the two. One primary finding, based on panel data regressions (using both fixed and random effects) is that the performance of private acquisitions, as measured by abnormal announcement returns, has a statistically significant positive effect of plausible economic magnitude on CEO compensation. Public acquisitions exhibit a smaller positive effect that is statistically insignificant. For both, acquisition activity (number of acquisitions) has a statistically significant positive effect on compensation. Our main results suggest that agency considerations are important for both public and private acquisitions but are more important for public acquisitions.

The effect of ESG on value creation from mergers and acquisitions. What changed during the COVID-19 pandemic?

Purpose The purpose of this study is to investigate the relationship between environmental, social and governance (ESG) performance and shareholder wealth in the context of mergers and acquisitions (M&As) before and during the coronavirus (COVID-19) pandemic. Design/methodology/approach This paper uses a sample of 889 completed M&As announced by US firms between 1 January 2018 and 31 July 2020. Announcement abnormal returns are estimated using an event study methodology and the relation of ESG performance to shareholder value creation is tested with univariate and multivariate cross-sectional regressions. Findings This study provides evidence for a significant negative value effect of ESG performance for the shareholders of acquiring firms during the entire sample period. The negative effect appears to be stronger, as the onset of the COVID-19 crisis. This suggests that, during the pandemic-driven economic turmoil, the costs of sustainability activities outweigh any possible gains, providing evidence in support of the overinvestment hypothesis. Research limitations/implications The results of the study have important implications for firms, investors and policymakers. Firms should be more cautious with regard to extensive investments in ESG activities, particularly during economic turmoil. For shareholders, the results suggest that ESG engagement is not a resilience factor in an exogenous shock such as the COVID-19 pandemic. In terms of policymaking, the sustainability disclosure framework should remain voluntary allowing firms to report material ESG-related issues. The main limitation of the study is related to data availability regarding ESG performance. Originality/value To the best of the knowledge, this is the first study that investigates the effect of ESG performance on shareholder value in the market for corporate control before and during the COVID-19 pandemic.

Social Networks and the Informational Role of Financial Advisory Firms Centrality in Mergers and Acquisitions

AbstractThis paper examines the role of the social network hierarchy of financial advisory firms in a mergers and acquisitions (M&As) framework. Financial advisors are information intermediaries who play an information extraction and information dissemination role. The more central the advisory firm is within the network of advisory firms, the greater their access to information flows. Our findings indicate that more central advisors are associated with higher acquirer announcement abnormal returns, higher abnormal combined returns and higher operating long‐run performance for the new entity. Central advisors also mitigate information asymmetries, resulting in lower premium paid by bidders. In return, more central advisory firms demand higher advisory fees, engage in higher M&A activity and are more likely to advise large acquirers and acquisitions of large and public deals. Our results are robust to endogeneity and self‐selection concerns.

Comparing CEO Compensation Effects of Public and Private Acquisitions

We estimate the effect of acquisition performance and acquisition activity on CEO compensation for the full set of CEOs of large public U.S. corporations in the Execucomp database over the period 1992-2016. Most previous work has focused on publicly traded acquisition targets. We focus on the comparison between public and private targets, showing significant differences between the two. One primary finding, based on panel data regressions (both fixed and random effects) is that the performance of private acquisitions, as measured by abnormal announcement returns, has a statistically significant positive effect of plausible economic magnitude on CEO compensation. Public acquisitions exhibit a smaller positive effect that is statistically insignificant. For both, acquisition activity (number of acquisitions) has a statistically significant effect on compensation. Furthermore, compensation is more sensitive to acquisition activity than to performance. Our results suggest that agency considerations are important for both public and private acquisitions but are more important for public acquisitions.

Central Hub M&A Advisors

Abstract We examine how an M&A advisor’s position in the network of investment banks affects its ability to create value for acquirers in takeover transactions. We show that acquirers enlisting the services of more centrally positioned M&A advisors enjoy higher announcement abnormal returns and pay lower takeover premiums. Consistent with the idea that central network positions convey an information advantage, we find that the effects are stronger for acquirers facing greater target information asymmetry and for M&A advisors depending more on networks for target-specific information. The information advantage primarily comes from network contacts that had previously assisted the targets in equity issuance. Centrally positioned advisors charge premium fees; network banks appear to enjoy a significant advantage in the competition for future co-advisory appointments.

Voluntary Disclosure with Uncertainty of Investors' Response: Evidence from M&A Conference Calls

We examine the voluntary disclosure theory’s prediction of heterogeneous stock market reaction to M&A conference calls attributable to the uncertainty of investors’ response. Using a series of quantile regressions, we find that the incidence of conference calls is associated with both extremely negative and extremely positive M&A announcement abnormal returns. We find that this heterogeneous stock market reaction occurs for both low and high levels of words/ forward-looking words. Furthermore, the heterogeneous stock market reaction is substantially weaker when M&A conference calls are held after the firms observe the initial market reaction to the M&A press release. These results are robust to a battery of robustness tests. Collectively, the findings support the uncertainty of investors’ response to voluntary disclosures that can be perceived by investors as very good or very bad news, as an important factor for examining the valuation implications of voluntary disclosures.

Dividend Announcements and Market Trends

This research primarily aims to study the impact of dividend announcements on the stock price of companies listed in the Indian stock market. Incidental to the study, it is necessary to understand whether the market trends have any role in affecting the changes in share prices due to dividend announcements. The companies listed on the stock market are diverse in terms of the industry, market capitalization, and performance. We analyze the S&P BSE 500 index stocks, which declare cash dividend every year without fail for ten years from 2008 – 17. Total 1755 sample was tested for dividend announcement and sample divided into large, medium, and small sample sizes based on the market capitalization of the stocks to test the market trend effect. Event methodology market model used to calculate the abnormal returns on the dividend announcement day. The present research study examined the impact of dividend announcements on stocks in the Indian stock market. The results observe in twenty four times based on market capitalization wise and market trend-wise dividend announcements. The results of the study are not the same for all dividend announcement observations. The study found positive abnormal returns on event day in most of the dividend announcement observations and it is similar to Litzenberger and Ramaswamy (1982), Asquith and Mullins Jr (1983), Grinblatt, Masulis and Titman (1984), Chen, Nieh, Da Chen, and Tang (2009) and many previous research results studied in major developed stock markets and emerging stock markets. Full sample, large-cap, and small-cap final dividend average abnormal returns are positively significant only in bull market trend (period 2) similar to Below and Johnson (1996) and other market trends final dividend announcement abnormal returns are positive in most of the observations, but returns are not significant. Average abnormal returns are sensitive to market trends, especially abnormal small-cap returns more vulnerable to market trends.

Time for gift giving: Abnormal share repurchase returns and uncertainty

We study share repurchase announcements for nine European countries between 2000 and 2017. In contrast to previous studies, we address the role of market uncertainty as a market-based determinant of positive average abnormal announcement returns, while including governance, liquidity risk and firm related control variables. Economic policy uncertainty and financial uncertainty, individually as well as jointly, positively affect abnormal returns. We suggest that this relation is due to a stronger signaling effect under increased uncertainty, as both information asymmetry and underpricing tend to increase. Also, a potential hedge against adverse market movements is more valuable. Optimal timing of repurchase announcements should therefore consider market uncertainty conditions.

Corporate managerial ability, earnings smoothing, and acquisitions

This paper examines whether high-ability managers’ earnings smoothing is motivated by the need to mitigate the adverse effects of heightened information asymmetry triggered by mergers and acquisitions (M&As) on managers’ reputation capital (job loss) and firm value. We document that acquirers led by high-ability managers engage in more pre-acquisition earnings smoothing and experience more significant announcement abnormal returns and operating performance in post-M&A periods than their low-ability counterparts. This result is consistent with the theory of managerial response to asymmetric information, amplified by M&As, where high-ability managers use earnings smoothing as a signaling device to ensure that the market quickly discovers their superior abilities, to increase acquirers’ future growth prospects and avoid the adverse effects of information asymmetry on managers’ job security and career prospects in a competitive executive labor market.

Corporate Managerial Ability, Earnings Smoothing, and Acquisitions

This paper examines whether high-ability managers’ earnings smoothing is motivated by the need to mitigate the adverse effects of heightened information asymmetry, triggered by mergers and acquisitions (M&As), on managers’ reputation capital (job loss) and firm value. We document that acquirers led by high-ability managers engage in more pre-acquisition earnings smoothing and experience more significant announcement abnormal returns and operating performance in post-M&A periods than their low-ability counterparts. This result is consistent with the theory of managerial response to asymmetric information amplified by M&As, where high-ability managers use earnings smoothing as a signaling device to ensure that the market quickly discovers their superior abilities, to increase acquirers’ future growth prospects and avoid the adverse effects of information asymmetry on managers’ job security and career prospects in a competitive executive labor market.