Announcement Period Abnormal Returns Research Articles

Premiums, announcement returns and desperation in high tech mergers: A growth options analysis

We examine the announcements of high tech mergers using a relatively new proxy for growth options we call “growth to book.” We find this adds significantly to help explain the premiums paid and announcement period abnormal returns when acquiring tech targets. Higher synergies are expected by managers and investors when targets have low growth options and acquirers have high growth options, resulting in higher premiums paid and either less negative or more positive abnormal returns. However, we find significant variation in the results by the relative size of the target and when low growth to book (GTB) firms acquire. While high GTB acquirers tend to pay more in premiums, low GTB acquirers can pay higher premiums and receive some of the most negative returns at announcement. We find evidence some acquisitions are motivated by desperation as these acquirers have the lowest GTB and do a disproportionate number of the relatively largest deals, receiving the worst abnormal returns at announcement.

What Drives the Declining Wealth Effect of Subsequent Share Repurchase Announcements?

Recent academic studies document that open market share repurchase announcement period returns are much lower than those reported in early studies. This study finds that the lower announcement returns are attributed to repeat announcements that dominate the sample in the recent period. The announcement period return of the initial repurchase program launched by a repeat repurchasing firm on average is positive. However, the more this firm repeats its repurchase announcement, the lower its announcement period abnormal returns. Further tests reveal that firms with negative past repurchase announcement returns are more likely to repeat their repurchase programs, which result in lower announcement returns. Our results are consistent with overconfident managers drive the lower repurchase announcement returns.

Cash holdings and the bargaining power of R&D-intensive targets

Prior literature suggests that R&D-intensive firms hold large amounts of cash due to financing constraints. This paper examines whether such firms could also use cash holdings as a strategic bargaining tool in M&A transactions. Using a large sample of takeover bids announced between 1980 and 2012, we demonstrate that cash holdings positively impact R&D-intensive targets’ takeover premiums and announcement-period abnormal returns. These effects disappear in non-R&D-intensive firms. Controlling for various endogeneity and financing concerns, we also find that R&D-intensive firms build up cash holdings in anticipation of becoming a takeover target. Further analysis indicates that in R&D-intensive firms, such cash holdings are valued highly by the market. Taken together, our findings shed new light on the strategic bargaining role of corporate cash holdings in the outcomes of acquisitions targeting R&D-intensive firms.

Information content of directors' trading around acquisitions

This paper investigates the patterns of directors' trades and returns around takeover announcements. We find that the pre-announcement net value (the difference between buy value and sell value) of directors' trading is positively related to acquirers' announcement period abnormal returns. This relation is stronger for private target acquisitions and for stock-financed acquisitions, when the information asymmetry between directors and outside investors is more pronounced. However, this relation does not hold for better governed and highly monitored acquirers. Our findings indicate opportunistic trading by directors prior to takeovers and highlight a significant role that corporate governance mechanism plays in restraining these opportunistic behaviors.

Information Content of Directorss Trading Around Acquisition

This paper investigates the patterns of directors’ trades and returns around takeover announcements. We find that the pre-announcement net value (the difference between buy value and sell value) of directors’ trading is positively related to acquirers’ announcement period abnormal returns. This relation is stronger for private targets acquisitions and for stock-financed acquisitions, when the information asymmetry between directors and outside investors is more pronounced. However, this relation does not hold for better governed and highly monitored acquirers. Our findings indicate opportunistic trading by directors prior to takeovers and highlight a significant role that corporate governance mechanism plays in restraining these opportunistic behaviors.

The Sovereign Wealth Fund Discount: Evidence from Public Equity Investments

We document that announcement-period abnormal returns of sovereign wealth fund (SWF) equity investments in publicly traded firms are positive but lower than those of comparable private investments. Further, SWF investment targets suffer from declining return on assets and sales growth over the following three years. Our results are robust to controls for target and deal characteristics and are not driven by SWF target selection criteria. Larger discounts are associated with SWFs taking seats on boards of directors and with SWFs under strict government control acquiring greater stakes, supporting the hypothesis that political influence negatively affects firm value and performance

Announcements of Voluntary Corporate Selloffs: A Comparative Country Analysis of their Impact on Shareholder Wealth

This study examines the effects of announcements of acquisition of assets on shareholder wealth of buyers over the period January 2000 to December 2002 in the U.K. Significant positivem announcement period abnormal returns for ‘fit’ acquisitions of divested assets that disclosed the “sources of funds” are documented. Multivariate regression analysis shows that announcement period abnormal returns are significantly related to pre-announcement period abnormal returns, relative size of the acquisitions and disclosure of sources of funds. Overall, there is little or no support for the asset fit hypothesis. However, there is strong support for “Fund Source Disclosure”, “Fund Source Pecking-Order” and “Relative Size of Acquisition” Hypotheses.

What happens when a stock is added to the Nasdaq-100 index? What doesn’t happen?

Purpose – Prior research on additions to the S & P 500 and the smaller MidCap 400 and SmallCap 600 indexes reach different conclusions regarding the key variables that explain the cross-section of announcement period abnormal returns. Most notable in this regard is that liquidity measures, long thought to be of importance, do not appear to explain abnormal returns of the S & P 500 when other factors are controlled for. By contrast, they do appear to matter for additions to the smaller stock indexes. To explore this difference, the purpose of this paper is to analyze the abnormal returns upon announcement that a stock will be added to the Nasdaq-100 Index in a cross-sectional manner, controlling for several possible alternative factors. Design/methodology/approach – This paper analyzes abnormal returns upon announcement that a stock will be added to the Nasdaq-100 Index. The authors consider several possible sources of the positive price effects in a multivariate setting that controls simultaneously for measures of liquidity, arbitrage risk, operating performance and investor interest and awareness. The authors then analyze both trading volume and the bid-ask spreads. The authors finally examine analyst and investor interest, focussing on changes in analyst coverage. Findings – The authors find that only liquidity variables are significant, but that factors representing feedback effects on the firm’s operations and level of managerial effort are not. The authors find that the average bid/ask spreads of stocks added to the Nasdaq-100 index are lower after the addition. The authors also find that the number of analysts following a stock increases significantly after addition, verifying increased analyst interest. Both forms of evidence are consistent with the hypothesis that the additions are associated with enhanced liquidity for the stocks. Originality/value – The authors conclude that what does happen to a Nasdaq stock when it is announced that it will be added to the Nasdaq-100 Index is that more analysts are drawn to it, and its market liquidity is enhanced. The authors conclude that what does not happen is that there is no evidence of significant effects of enhanced managerial effort or operating performance associated with the inclusion. This difference is noteworthy because it suggests that a certification effect of additions to the S & P indexes associated with S & P’s selection process are unique to it and do not apply to the Nasdaq-100 Index additions based on market cap alone. The results provide indirect evidence on the existence and significance of the certification effect associated with additions to the S & P indexes.

Market conditions, governance and the information content of insider trades

We examine the information content of Form-4 filings following extreme market downturns in the pre and post-Sarbanes–Oxley-Act (SOX) periods. We find that the announcement period abnormal returns under extreme market conditions are larger and this effect is stronger in the more tighter disclosure rules in the post-SOX period. Insider rank, corporate governance and proxies for information asymmetry are significantly related to the abnormal returns around the filing date. Overall, our results show that the more timely filing requirement introduced by SOX has been particularly beneficial for investors in firms with higher levels of information asymmetry, poor governance and during market downturns.

The wealth effects of accelerated stock repurchases

Purpose – The wealth effect of accelerated stock repurchase (ASR) documented by previous studies is not as large as the authors would have expected. The authors believe that there are potentially important sampling problems in the previous studies, which make the results less reliable. Identifying a number of factors that can possibly affect the announcement-period returns, the purpose of this paper is to reexamine the wealth effect of ASRs. Design/methodology/approach – The paper identifies a number of factors that can possibly affect the announcement-period returns to ASRs which include: whether an ASR announcement in the press is the initiation date or the completion date of the ASR; the size of the ASR program; whether an ASR is part of an open market repurchase (OMR) program; the frequency of ASR announcements by a firm; whether other corporate news is announced simultaneously with an ASR. The paper partitions the ASR sample into three groups, and then examines the wealth effect of these groups. Findings – The empirical results show that the market reacts differently to the announcement of ASR in these three groups. The three-day announcement-period CAR (t=−1, +1) is 3.59 percent for the high-wealth-effect group, 2.01 percent for the medium-wealth-effect group, and 1.48 percent for the low-wealth-effect group. The paper also identifies the size of the ASR program, whether the ASR is announced simultaneously with an OMR or not, and the frequency of ASR announcements are the most important determinants of the announcement-period abnormal returns. Originality/value – These findings suggest that the weaker wealth effects of ASRs that have been documented in previous studies are due to sampling related issues.

Technology transactions, announcement effect, and reversal: Dissecting an anomaly

Abstract We examine the short term stock price performance of firms that acquire or sell technology rights. We find significant positive announcement-period abnormal returns to the acquirers and sellers. However, the price increases reverse during the subsequent twenty trading days. These quick fortune reversals cannot be attributed to methodology; they prevail in the late 1970s through the 2000s, in bear and bull stock markets, and in both high and low technology industries. Upon splitting the sample into two subsamples comprised each of stocks with either pre-announcement price run-up or decline; we find that the abnormal return reversal is confined to the latter subsample. Stocks that witness price run-up prior to the announcement do not reverse to original prices but lose the momentum right after the announcement-period. We believe this is caused by the combination effect of the momentum prior to-and the impact of the announcement.

Bank Debt, Flexibility, and the Use of Proceeds from Asset Sales

In the theory of financial intermediation, bank debt is often characterized as being more readily renegotiable than public debt. Banks are also conjectured to gain valuable non-public information through closer monitoring. Given these features, bank debt can theoretically be more flexible than public debt and can lead to better investment/liquidation decisions. We investigate this possibility using a sample of firms facing the important decision of whether to reinvest the proceeds from asset sales or whether to distribute the proceeds to debtholders. While higher levels of leverage are associated with an increased probability of distributing proceeds to creditors, this relationship is significantly muted for bank debt as opposed to public debt. This finding is consistent with the conjecture that bank debt provides enhanced flexibility when compared to public debt. Further we find that asset sale announcement period abnormal stock returns are increasing in firms’ use of bank debt, but not public debt. This suggests that market participants believe that banking relationships are leading to better decision making for this particular type of investment/liquidation decision. We find no significantly different effects of bank vs. public debt on the initial decision to undertake an asset sale in the first place. Thus, in the context of asset sales, the main observable difference arises in the use of proceeds decision, rather than the initial asset sale decision.

The Sovereign Wealth Fund Discount: Evidence from Public Equity Investments

Using a sample of 1,018 Sovereign Wealth Fund (SWF) equity investments in publicly traded firms and a control sample of 5,975 transactions by private-sector financial institutions over 1980-2012, we find that announcement-period abnormal returns of SWF investments are positive, but lower than those of comparable private-sector investments by approximately 2.67 percentage points. We do not find evidence of long-term stock price performance of SWF investment targets differing from that of private-sector investment targets. We do find, however, significant differences among SWFs which are only partially captured by the short-term market reaction: firms acquired by passive funds tend to underperform over the following three years, while positive abnormal returns are associated with actively monitoring SWFs. We conclude that SWFs’ corporate governance role tends to affect the value of the firm.

Managerial flexibility and the wealth effect of new product introductions

This paper examines whether investors recognize the value of managerial flexibilities, as proxied by real options, in their valuation of new product introductions. We define a firm’s real options portfolio as the difference between the firm’s market value and its assets in place. A firm’s strategic flexibilities are modeled as the ratio of its real option portfolio to its book value. Using a sample of new product introductions from 1998–2007, we find our real options measure is positively related to announcement period abnormal returns. This result holds after we control for other variables known to be correlated with the announcement effect in previous studies. Our result is robust to alternative measures of real options based on analysts’ earnings expectations and whether a firm has one or multiple segments. In summary, our results suggest that a firm’s perceived strategic and operating flexibilities are an important factor in the valuation of new products.

Family firms and high technology Mergers & Acquisitions

We examine whether family firms undertake value creating high technology M&A. We also examine whether level of ownership, diversification, agency issues and CEO type matter. Our sample consists of high-technology M&A undertaken by Canadian firms over the period 1997–2006. Canada offers a setting with many family firms and the use of control enhancing mechanisms such as dual class shares and pyramid structures. We find a positive relationship between family ownership and announcement period abnormal returns. This relationship, however, starts to decrease at higher levels of ownership but remains overall positive. We also show that the agency conflict between shareholders and professional managers has a detrimental impact on announcement period abnormal returns whereas the conflict between controlling and minority shareholders via control enhancing mechanisms does not. Finally, we document that founder CEO undertake better high tech M&A than descendant or hired CEO.

How Do Stock Markets in the US and Europe Price Efficiency Gains from Bank M&As?

This paper examines whether the stock markets price changes in operating efficiency as a result of bank mergers and if the premiums paid by the acquiring banks also reflect these changes. The sample covers mergers and acquisitions consummated in the US and Europe during the period of 1997 to 2003. Changes in cost and profit efficiency are calculated using the non-parametric Data Envelopment Analysis (DEA) method 1 year prior and 3 years following the merger announcement. Evidence suggests a significant relation between the announcement-period abnormal returns and the post-merger profit efficiency changes. Results also indicate that bank managers are likely to pay a higher premium for those M&A transactions that can bring about greater efficiency gains, particularly on the profit side. Further, although acquirer shareholders in the US and Europe appear to react differently to the announcement of a bank merger, our results for target shareholders suggest that regional differences might be less important than the degree of capital market development in explaining wealth effects.

Do Investors Understand ‘Operational Engineering’ before Management Buyouts?

During the year prior to management buyout (MBOs) announcements, target firms exhibit abnormally high discretionary expenses in selling, general and administration, abnormally low discretionary accruals, and realize losses from asset sales. Higher discretionary expenses and losses from asset sales are associated with lower pre-MBO abnormal stock returns, especially for firms with higher insider ownership, less board and institutional monitoring, and higher information asymmetry. They are also associated with better post-MBO operating performance. None of these activities affects the likelihood of MBO deal completion, announcement period abnormal returns, or offer premium. These target firms do not show such abnormal activities in other years before the MBOs or after the MBOs. Our results suggest that outside investors and the market do not fully understand the earnings-reducing activities before MBOs.

Returns Over the Life-Cycles of Open Market Repurchase Programs

We construct a large sample of announcements that firms have authorized, suspended, resumed, or completed open market repurchase (OMR) programs. Starting or continuing repurchases is associated with positive average announcement period abnormal returns. Stopping repurchases, either by suspending uncompleted programs or by not immediately following completed programs with new programs, is associated with negative average announcement period abnormal returns. We find that excess returns are not significantly different from zero over the periods between initial authorizations and program completions, i.e., the life-cycles of the OMRs; however, consistent with prior literature, we find excess returns are positive and significant over standard long-run event windows. We then document that the excess returns over standard long-run windows are substantially attributable to positive and significant announcement returns to repurchase authorizations and takeover attempts that occur after the completions of the OMR programs. We confirm that these results generalize to the entire population of OMR programs. Further analysis suggests that the positive post-OMR abnormal returns documented in prior literature are a product of misspecification of the model for expected returns that, once corrected, no longer yields evidence of excess returns. Thus, we conclude that the positive long-run excess returns in prior literature do not represent evidence of market inefficiency.

Information Content of Unsolicited Credit Ratings: Evidence from Japanese Firms*

AbstractUnsolicited ratings are credit ratings of firms that have not requested rating evaluation and, therefore, do not pay fees. Accordingly, unsolicited ratings are issued solely at the discretion of rating agencies based on public information. Given the controversy surrounding unsolicited ratings raised in some published studies as well as by Japanese firms, we examine whether the market extracts any new information from unsolicited ratings. We find that unsolicited ratings are typically of speculative grade rather than investment grade, they induce significant announcement period abnormal returns for downgrades, and they have greater impact for speculative‐grade ratings than investment‐grade ratings. Keiretsu affiliation of Japanese firms does not mitigate the negative market reaction to unsolicited rating downgrades. Our results suggest that high‐quality firms signal their type through solicited ratings while low‐quality firms are revealed through unsolicited ratings.

Investors Understanding of the ‘Financial and Operational Engineering’ Before Management Buyouts and Post-MBO Performance

During the year prior to management buyout (MBOs) announcements, target managers seem to lower earnings through opportunistic ‘financial and operational engineering’ activities, i.e., abnormally low discretionary accruals, abnormally high discretionary expenses (mainly R&D and advertising expenses), and realizing losses from asset sales. The latter two are real activities and are associated with lower pre-MBO abnormal stock returns, mainly for firms with higher insider ownership, less institutional monitoring, and greater information asymmetry, whereas discretionary accruals are not. The real activities also seem to improve post-MBO operating performance. None of these earnings-reducing activities affects deal completion likelihood, announcement period abnormal returns, or offer premiums for MBOs. Managers do not seem to influence earnings in other years around the MBOs. Our results suggest that these ‘financial and operational engineering’ activities permit target managers to acquire targets “on the cheap” and to earn higher post-MBO investment returns through wealth transfers from pre-MBO shareholders to post-MBO owners instead of value creation.