Announcement Period Abnormal Returns Research Articles

Cyberattacks, cash conversion cycle, and corporate performance

AbstractThis study examines the effect of working capital efficiency on the performance of firms that experience cyberattacks. We find robust evidence that an aggressive working capital policy improves the immediate and after‐market stock returns as well as the operating performance of firms that suffer an outside party or a malware hacker attack. Specifically, we document a negative relationship between announcement period abnormal returns and the industry‐adjusted cash conversion cycle, implying that investors react less favorably when breached firms have more conservative working capital policies. We also find a negative association between the cash cycle and long‐horizon buy‐and‐hold abnormal returns indicating that working capital efficacy has a protracted positive effect on stock performance after an attack. The cash conversion cycle is also negatively related to operating performance, as measured by industry‐adjusted market power, industry‐adjusted return on assets, and industry‐adjusted market‐to‐book ratio. In addition, we find that access to trade credit and the ability to delay payments made to suppliers (depicted via days’ payables outstanding) are the most important factors in helping breached firms mitigate the financial and operating costs of cyberattacks. Overall, our results are robust to endogeneity concerns and expand the literature on the firm‐level aspects of data breaches.

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.

The Methodology Matters: What Influences Market Reaction, and Post-Issue Returns in Seasoned Equity Offerings?

Using a large database of U.S. seasoned equity offering (SEO) announcements from 2010 to 2015, we examine the effects of several explanatory variables—firm specific, macroeconomic, fixed income, and stock market variables—on the announcement period abnormal stock returns and on the longer-run post-issue abnormal returns. We use five different statistical methods—multivariate linear regression, regression on a reduced model using principal components analysis, year-by-year regression on a reduced model using principal components analysis, random forest regression on the whole sample, and year-by-year random forest regression. In general, across the methods, we find that firm’s profitability in the recent past is an important explanatory factor in both short-term and long-term abnormal stock returns, but several other significant explanatory factors change based on the statistical method used. Therefore, the statistical method used affects the results reported.

Investor Perception, Market Reaction, and Post-Issue Performance in Bank Seasoned Equity Offerings

Using a large sample of bank seasoned equity offerings (SEO) from 2002 to 2017, we first documented detailed descriptive statistics, and showed that nonperforming assets ratio, our primary measure of bank asset quality, reached the highest value immediately after the 2008 economic crisis, which also corresponds to a higher number of SEOs around these years because banks needed to recapitalize. The capital ratio, which is required to be at least at a minimum level (relative to risk-weighted assets) for banks by regulation, also increased after the economic crisis, which may be due to a higher requirement for banks as well as banks’ desire to hold more capital. The SEO announcement period abnormal stock-returns reached the lowest number around the economic crisis, as did the longer-run 6-month, post-SEO cumulative abnormal returns and buy-and-hold abnormal returns. Examining the differences between banks, we found, in both univariate and multivariate regression results controlling for other variables, that the bank capital ratio as at the time of the SEO announcement is significantly and positively associated with announcement period abnormal returns, while nonperforming assets ratio of the bank as at the time of SEO announcements is not. However, the nonperforming assets ratio as at the time of the SEO announcements had a significantly negative association with post-SEO, 6-month longer-run abnormal stock returns, while the capital ratio did not have any significant association. The nonperforming assets ratio as at the time of SEO announcement was also significantly and negatively related to bank return on assets 6 months and 12 months after SEO, while the capital ratio was not. Thus, investors appear to perceive a well-ingrained, well-publicized regulatory norm—the capital ratio—as indicative of value creation as at the time of bank SEO announcements, while loan asset quality, which may be relatively more opaque, may determine post-SEO performance.

Is M&A Self-Dealing in the Context of Peer Benchmarking of CEO Pay?

We define two effects: (a) percentage difference between median CEO pay of compensation peers and their counterfactual peers (Peer pay effect, PPE), and (b) percentage difference between focal firm CEO pay and the median CEO pay of their compensation peers (CEO pay effect, CPE). We find a negative relation between M&A announcement period abnormal returns and pre-announcement PPE. The PPE (CPE) is lower (higher) in acquiring years relative to non-acquiring years. We show that the lower PPE is consistent with better governance and higher CPE is due to benchmarking against peers with higher median CEO pay and for completing acquisitions.

Market Misreaction? Leverage and Mergers and Acquisitions

Using a large database of U.S. mergers and acquisitions (M&As) announced from 2010 through 2017, we examine the effects of capital ratio (leverage) on the announcement period stock price reaction as well as on longer-term stock returns and performance, for banks, making comparisons with non-banks. We compare announcement period reactions (computed in different ways) for lower (lower than sample median) capitalized banks and non-banks with that for higher capitalized banks and non-banks. We confirm our results using multivariate analyses—after controlling for year and industry fixed effects—and we check the associations of capital ratio with announcement period abnormal returns, longer-term performance, as well as certain bank-specific and non-bank specific performance measures. For banks, we find that a lower capital ratio of acquirers at the time of the announcement of the M&A is significantly associated with negative announcement period abnormal returns. However, for these banks, the longer-run abnormal returns and performance are positive. The opposite is true for non-bank M&A announcements: higher equity ratios (lower leverage) of acquirers as at the time of the announcement is significantly associated with negative announcement period abnormal returns. Yet, for such non-banks, the longer-run abnormal returns and performance are positive. This shows that the market may misreact, on average, to both bank and non-bank M&A announcements based on the acquirer’s leverage at the time of the announcement.

Limits of arbitrage and mispricing: evidence from mergers and acquisitions

PurposeThis paper examines the extent to which noise demand and limits of arbitrage affect the pricing of acquirer stocks both at the announcement period and over the longer horizon.Design/methodology/approachAn event study approach was adopted to measure announcement-period cumulative abnormal returns. Long-horizon returns are measured using buy-and-hold abnormal returns (BHARs), calendar time portfolios (CTPRs), and subsequent earnings announcement period abnormal returns. Main methodologies include ordinary least squared (OLS) regressions, Logit regressions, and portfolio analysis.Findings(1) Acquirer stocks with high idiosyncratic volatility (the proxy for the security level characteristic most directly associated with limits to arbitrage) earn higher announcement-period abnormal returns. (2) The return pattern reverses over the subsequent longer horizon, resembling news-driven transitory mispricing. (3) The mispricing is greater when deal and firm characteristics exacerbate the limits of arbitrage, and it weakens over time. (4) Transactions by higher idiosyncratic volatility acquirers are more likely to fail.Originality/valueLimits of arbitrage theory have been tested mostly in information-free circumstances. The findings in this paper extend the supporting evidence for limits of arbitrage explaining mispricing beyond the boundaries of information-free circumstances.

CEO pay slice and acquisitions in Australia: the role of tournament incentives

PurposeThis paper investigates the influence of tournament incentives, measured by Chief Executive Officer (CEO) pay slice (CPS), on the acquisition decisions of Australian firms.Design/methodology/approachThis study applies ordinary least squares regression analyses to a sample of 1,429 acquisition observations announced by 986 unique Australian firms spanning the 2001–2015 period. Event study methodology was employed to capture the market reaction to acquisition announcements. Multinomial logit models, a two-stage least squares instrumental variable (IV) approach and propensity score matching (PSM) technique were performed for robustness and endogeneity correction purposes.FindingsThe results suggest that CPS has a positive and significant relationship with the announcement period abnormal return realised by acquirers, implying that executives are motivated to exert best efforts and support the CEO in making value-creating acquisitions. Further analyses reveal that management teams of high CPS firms demonstrate efficiencies in executing acquisitions. The positive relationship between the CPS and abnormal return is more pronounced in acquisitions of private targets, domestic targets and bidders with high-quality CEOs. These acquisitions make a significant contribution to the long-run performance of the firm, which provides support for the effort inducement hypothesis.Practical implicationsThe study's empirical evidence implies that the strong governance environment in Australia and a highly monitored acquisition market and compensation contracts motivates executives to exert their efforts to make value-enhancing acquisitions.Originality/valueThis paper appears to be the first investigation that makes a link between CPS in different components (i.e. short-term, long-term and total pay) as proxy for tournament incentives and the outcomes of both public and non-public acquisitions in the Australian setting.

The effect of managers on M&As

In this paper, we document diverse levels of managerial ability and firm performance in the cross section of acquiring firms. Acquirers with strong managerial ability realize higher announcement-period abnormal returns and experience better post-merger firm performance than their low-ability counterparts. Our results are robust to endogeneity concerns and show that the observed variation in acquirer abnormal returns is attributed to the heterogeneity of managerial ability fixed effects across acquirers. Managerial ability adds value to acquirers, especially in stock-financed acquisitions, implying that the method of payment is not driving the negative stock-financed valuation effect documented in previous literature. Moreover, we find that target firms with strongly ingrained growth potential and low levels of financial constraint and bankruptcy risk are highly favored by skilled acquiring managers.

Attention to Inattention: Evidence from Private Acquisitions

When a new blockholder (NewB) is expected to form in private firm acquisitions paid with stock, investors react strongly to the perceived certification and monitoring effects. The salience of a NewB, however, induces investor inattention to other information, opening doors for managerial opportunism. Financially weak acquirers pay attention to inattention and sneak in speculative deals. Our findings support these hypotheses. First, acquirers’ announcement-period abnormal returns are significantly associated with the presence of a NewB, but not with acquirers’ financial health that indicates managerial opportunism. Second, the NewB acquirers are financially weak. Finally, they underperform in the long run.

Socially responsible firms and mergers and acquisitions performance: Australian evidence

This paper extends our knowledge of acquisition decisions by examining whether a firm's corporate social responsibility (CSR) activities influence Merger and Acquisition (M&A) deal characteristics, target choice and acquisition performance. Our empirical results reveal several new insights. First, we find that targets with CSR activities are more likely to be acquired by CSR-oriented bidder firms. Second, we also examine the deal characteristics of CSR firms and find that they choose deal features such as cash payment, domestic targets, and single bids. Third, we show that socially responsible firms are more likely to pay a lower bid premium when they pay for acquisitions. Finally, we find that the announcement period abnormal return is positive and significant when CSR-oriented bidding firms announce an acquisition decision in the market. Overall, we show that CSR firms make acquisition decisions which align shareholders with other stakeholders of the firm. Our results are robust to a number of alternative proxies and sensitivity tests.

U.S. bank M&As in the post-Dodd–Frank Act era: Do they create value?

We analyze the impact of the Dodd–Frank Act on the shareholder wealth gains using a sample of 640 completed U.S. M&As announced between 1990 and 2014. Our results indicate a positive DFA effect on announcement period abnormal returns in small bank mergers. In fact, mergers with combined firm assets of less than $10 billion create more shareholder value after the DFA, than ever before. This positive announcement effect in small deals appears to be linked with merger-related compliance cost savings and profitability improvements. By examining long-run abnormal returns, we find that the documented DFA effect on small deals announcement abnormal returns does not disappear overtime. Finally, we do not find such effects for non-U.S. bank M&As over the same period.

The effect of corporate governance mechanisms on European Mergers and Acquisitions

PurposeThe purpose of this study is twofold: First, to assess the economic impact of Mergers and Acquisitions (M&As) on European acquiring firms from the beginning of the sixth merger wave onward. And second, to investigate the effect of CG mechanisms such as board size, voting rights and anti-takeover provisions (ATPs) on acquirers’ gains, along with a set of control variables.Design/methodology/approachFor the purpose of the study, the authors use a sample of 349 completed M&As across all business sectors between European firms from 01/01/2003 to 31/12/2017. Abnormal returns are estimated by applying an event study methodology, and the effects of CG mechanisms are assessed with univariate and multivariate cross-sectional regressions.FindingsThe authors present evidence that acquirers realize significant positive excess returns upon the announcement of M&As. The authors find past profitability to be a strong indicator of value creation, while most of the traditional firm-specific and deal variables fail to interpret the results. The authors’ analysis indicates that the examined CG measures have a significant effect on acquirer’s gains. More specifically, the authors find that boards in excess of eight directors are negatively related to announcement-period abnormal returns. In contrast, the wealth effects for acquiring firms are positively related to shareholders’ voting rights and/or to the number of ATPs. The estimated coefficients of all three CG mechanisms are statistically significant across alternative model specifications.Research limitations/implicationsA clear implication is that the existence of certain CG mechanisms leads to value-enhancing strategic decisions for European acquirers. In terms of policy direction, the authors’ findings assist practitioners and/or national and transnational institutions in perceiving the efficacy of certain CG practices.Practical implicationsThis study indicates that Corporate Governance Statements (CGSs) fail to provide adequate information to investors to understand in-depth the CG mechanisms that companies apply. Thus, the authors recommend that CGSs should provide not only narrative information but also information that may generate value for shareholders and other stakeholders as well. Such information should be qualitative and/or quantitative in nature and be made available to market participants to support their decision-making.Originality/valueTo the authors knowledge, this is the first study that investigates the effect of CG on the economic impact of M&As for European acquirers, using three widely examined CG mechanisms, namely, the board size, the voting rights and the ATPs. The authors’ empirical findings form the basis for further examination of the linkage between M&As and CG, with the intention of establishing the appropriate CG framework that will ensure shareholder wealth creation. This line of research could produce new insights in the field, allowing investors and policymakers to appreciate the benefits of effective CG.

Stock market reaction to credit rating changes: new evidence*

ABSTRACT This study shows how stock market reacts to rating change announcements where confounding effects of information spillover from related markets are absent. Contrary to existing literature, we find that the stock market reacts positively to a rating upgrade and no response to downgrade. Our analysis shows that pre-announcement cumulative abnormal returns can significantly predict announcement period abnormal return. Finally, we document a significant reduction in information asymmetry due to rating upgrade announcements affirming the recent policy initiatives.

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.

Socially Responsible Bidding Firms and Acquisitions Decisions: Australian Evidence

This paper extends our knowledge on acquisition decisions by examining whether a firm’s corporate social responsibility (CSR) activities influence the choice and Merger and Acquisition (M&A) performance. Our empirical results reveal several new insights. First, we find that targets with CSR activities are more likely to be acquired by CSR oriented bidder firms. This finding is consistent with the idea that managers of Australian firms that undertake CSR activities are also likely to acquire a target firm with CSR practices. We also investigate the acquisition decisions and performance of socially responsible bidding firms. We find that the announcement period abnormal return is positive and significant when CSR-oriented bidding firms announce an acquisition decision in the market. Consistently, we show that socially responsible firms are more likely to pay a lower bid premium when they pay for acquisitions. Finally, we show that CSR firms make investment decisions consistent with shareholders’ wealth maximization objectives suggesting that CSR-oriented firms are better aligned with the other stakeholders of the firm. Our results are robust to a number of alternative proxies and sensitivity tests.

The valuation effects of investor attention in stock-financed acquisitions

Limited investor attention allows overvalued companies to engage in stock-financed acquisitions of listed target firms without experiencing significant reductions in their existing valuations. Our robust findings show that overvalued stock-paying acquirers that are subject to limited investor attention do not experience significant announcement period wealth losses. However, the overvaluation of these acquirers is corrected in the post-announcement period. On the contrary, the overvalued acquirers that receive high investor attention and use stock as the payment method in their listed-target acquisitions experience negative announcement period abnormal returns. The widely documented evidence that stock-financed acquisitions are associated with significant announcement period wealth losses is primarily driven by deals in which the acquirers are subject to high investor attention.

Impact of SOX on the returns to targets and acquirers in corporate tender offers

We argue that, following the sweeping reforms introduced by the Sarbanes-Oxley Act (SOX), managers of bidding firms have become more strategic in choosing acquisition targets in inter-firm tender offers. Using a large sample of tender offers between 1996 and 2009, we report that the proportion of synergy-driven value-maximizing acquisitions increased following the passage of SOX. Targets experience lower pre-bid share price run-up, receive larger deal premiums, and have larger announcement period abnormal returns after SOX. Acquiring firm shareholders also experience significant wealth gains around the announcement in the post-SOX period. Employing industry and matched firm portfolios, we also document that both the operating performance and buy-and-hold abnormal returns over the three- and five-year post-acquisition period improved significantly after SOX. Overall, our evidence shows that SOX had a positive influence in the market for inter-firm tender offers.

Are Volatile Firms Better at Acquiring?

We hypothesize there is an increased noise demand for stocks of acquirers in response to acquisition announcements and that the demand is greater for acquirers with higher uncertainty in their equity valuation. Using idiosyncratic volatility to measure uncertainty, we find support for limits of arbitrage theories. Announcement period abnormal returns are higher for more uncertain acquirers, but the return pattern reverses over the longer term, resembling a transitory price bubble. The bubble is greater when deal and firm characteristics exacerbate the limits of arbitrage and it weakens over time. Also, transactions by more uncertain acquirers are more likely to fail.

Takeover Competition, Target's Organisational Form and the Market Reaction to Acquisition Announcements

We examine the influence of the takeover competition on the short-run market performance of acquirers of private and public targets. We use eight alternative measures to capture the takeover competition in order to provide robust results. The takeover competition has a significant positive association with the announcement period abnormal return earned by the acquirers of private targets while having no significant association with the market performance of the acquirers of public targets. When the sample was divided into two groups as large and small acquirers, it was found that the competition has a significant positive influence on abnormal return only when the large companies acquire private targets; the relationship turns out to be negative and significant when small companies acquire public targets. Additionally, competition induced bid attempts of strong governance companies are associated with positive abnormal return when they acquire private targets; weakly governed firms realise negative abnormal return as a result of the competition they face when they acquire public targets. The findings remain insensitive to a number of robustness tests.