Announcement Period Abnormal Returns Research Articles

Returns to Acquirers of Listed and Unlisted Targets

We examine announcement period abnormal returns to acquirers of listed and unlisted targets in 17 Western European countries over the interval 1996-2001. Acquirers of listed targets earn an insignificant average abnormal return of -0.38%, while acquirers of unlisted targets earn a significant average abnormal return of 1.48%. This listing-related factor in acquirers' returns persists through time and across countries and remains after controlling for the method of payment for the target, the acquirer's size and Tobin's Q, pre-announcement leakage of information about the transaction, whether the acquisition created a blockholder in the acquirer's ownership structure, whether the acquisition was a cross-border deal, and other variables. The fundamental factors that give rise to this listing-related effect, which has also been documented in US acquisitions, remain elusive.

Hot Markets, Momentum and Investor Sentiment in UK Acquisitions

We examine the links between hot markets and momentum in explaining merger waves using a sample of 881 UK acquisitions from 1985 to 2000. We find evidence of short run positive abnormal returns (or merger momentum) in both hot and cold markets. We find evidence of long run reversal. The post acquisition abnormal returns are negative over three years for the whole sample. We also find an interesting pattern in the long run reversal. Mergers announced in hot markets have higher announcement period abnormal returns than mergers announced in cold markets consistent with momentum. Over a one year horizon there is a reversal in the abnormal returns consistent with investor sentiment: mergers announced in hot markets have lower negative returns than mergers announced in cold markets. Interestingly, the abnormal returns over three years show a further reversal and are higher for mergers announced in hot markets than for those announced in cold markets.

An Investigation of Poison Pill Securities, Long‐Term Debt, and the Wealth of Shareholders

Poison pill securities can be used to deter takeover activity by making the acquisition cost prohibitive or to increase bargaining power of target firms. Poison pills, which are also known as shareholder rights plans, are typically used in conjunction with other takeover defense mechanisms, such as anti‐takeover charter amendments or dual classes of stock. This study examines the role that debt plays as an anti‐takeover strategy in the presence of poison pills. The results show that, on average, capital markets have little reaction to poison pill announcements. A regression equation, however, shows that announcement period abnormal returns are positively related to leverage ratios. This paper provides empirical evidence that the capital structure of firms plays an important role in the perceived strength of poison pills.

Contingent Value Rights in Acquisitions: Theory and Empirical Evidence

A CVR is a commitment by an issuing firm to pay additional cash or securities to CVR-holders contingent on the issuer's share price falling below a pre-specified level. It has been offered together with cash or stock, or both (or with other securities) as a means of payment in a number of recent corporate restructurings such as takeovers, debt restructuring, lawsuit settlements, etc. Since a CVR provides a hedge against downside price risk of the issuing firm, many practitioners argue that a CVR is a way to guarantee a minimum value for the payment package. However, this argument raises the question that, if a firm only intends to guarantee the value of its payment, then why doesn't the firm pay with cash and why does it choose CVRs instead of (or in addition to) cash? In this paper, we develop a theoretical model to address this issue and related questions. We consider a firm making a payment to acquire an asset from outside investors and we assume that the firm has more information about its intrinsic value than outsiders. If the firm is of a higher intrinsic value, then it is concerned about mispricing of its equity in the capital market (in addition to the mispricing of its payment). In this setting, we show that, when the extent of asymmetric information is severe, a higher valued firm can reveal its type by offering CVRs with other securities, but not by offering cash payment. We then test the empirical implications of our model in the context of M&As by using a comprehensive sample of U.S. public acquisitions in which CVRs are used. We find that, when CVRs are offered in acquisitions, the announcement period abnormal stock return is significantly more positive than comparable stock deals that involve no CVRs. We also find that firms offering CVRs in their acquisitions face more severe asymmetric information problem than firms offering cash or firms offering stock with no CVRs. Both findings are consistent with the implications of our model.

Financing decisions and bidder gains

This paper analyzes the relation between bidder gains and the source of financing funds available. We document that after controlling for the form of payment, financing decisions during the year before a takeover play an important role in explaining the cross section of bidder gains. Bidder announcement period abnormal returns are positively and significantly related to the amount of ex ante equity financing. This relation is particularly strong for high q firms. We further report a negative and significant relation between bidder gains and free cash flow. This relation is particularly strong for firms classified as having poor investment opportunities. The amount of debt financing before a takeover announcement is not significantly related to bidder gains. Together, we take these findings as supportive of the pecking-order theory of financing and the free cash flow hypothesis.

Unsolicited Credit Ratings: Theory and Empirical Evidence

Unsolicited ratings are credit ratings of firms that have not requested rating evaluation and therefore do not pay fees. Accordingly, unsolicited ratings are issued solely by the discretion of rating agencies based on public information. Given the controversy surrounding unsolicited ratings raised by Japanese firms and some studies, we examine whether the market extracts any new information from unsolicited ratings. We find that unsolicited ratings typically are of speculative grade rather than investment grade; induce significant announcement period abnormal returns for downgrades; and 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 through solicited ratings while low-quality firms are revealed through unsolicited ratings.

Shares vs. Warrant-Share Units: Evidence from Seasoned Equity Offerings

We examine seasoned offerings of common stock and stock-warrant units to test predictions of recent theories of security issuance based on sequential financing and information signaling. We specify and test a simultaneous equations model involving the choice of shares versus stock-warrant units and announcement period abnormal return equations for shares and units. Consistent with theoretical predictions of the signaling hypothesis, we find that smaller issues made by young and risky firms are more likely to issue stock-warrant units in seasoned offerings. Also, consistent with the signaling hypothesis but not with the sequential financing hypothesis, firms with greater managerial ownership are more likely to issue units. We also find that firms that include warrants in their stock offerings experience a higher average abnormal return than if they had issued shares alone. We report further evidence consistent with the implications of the signaling hypothesis regarding underpricing, riskiness and insider ownership. Thus while sequential financing and signaling explanations find support in our tests, the signaling hypothesis arises as the more complete explanation for stock-warrant unit financing.

Discussion of Firm Valuation Effects of the Expatriation of U.S. Corporations to Tax-Haven Countries

INTRODUCTION Cloyd et al. (2003b) (hereafter CMW) investigate the following primary research question: Do firms experience a positive stock price reaction upon announcing they are moving their corporate headquarters from the United States to a tax haven? In these inversion transactions, if the present value of the expected tax savings exceeds the nontax costs, at least on average, then the inversion announcement should cause a positive market reaction. However, CMW point out that inverting may involve substantial nontax costs. The policy-based motivation is as follows. If corporate inversions are valued by the market and save the corporations money, then other firms will follow suit, and it is likely that the U.S. government will need to impose new tax rules to discourage inversions. However, if the inversions do not tend to save companies money, then their use will decline without government intervention. Using an event-study methodology on a sample of 20 inverting firms, CMW are unable to reject the null hypothesis that the inverting firms do not experience abnormal returns, against the alternative of positive abnormal returns. In fact, the firms experience negative announcement period abnormal returns, on average, although not significantly different from zero. This null result is surprising both because there appears to be large tax savings from the inversions and two other concurrent studies (Desai and Hines 2002; Seida and Wempe 2002b) do find some evidence of positive returns to corporate inversions. Overall, while the research question is relevant and interesting, it is difficult to reach solid conclusions from an event study with only 20 firms. The small sample size, perhaps, partially explains why the conclusions across the concurrent studies in this area differ. In addition, the relatively small number of firms undertaking voluntary corporate inversions— the entire population is only the 20 firms—is direct evidence that there may be hidden costs from inversions. The importance of CMW is the suggestion that it might be premature to conclude that there are large benefits to inverting.

The impact of the manager–shareholder conflict on acquiring bank returns

This paper examines whether shareholder value-maximizing corporate governance mechanisms assist in reducing the managerial incentive to enter value-destroying bank acquisitions. We find that diversifying bank acquisitions earn significantly negative announcement period abnormal returns (AR) for bidder banks whereas focusing acquisitions earn zero AR. We then find that corporate governance variables (such as CEO share and option ownership and a smaller board size) in the bidding bank are less effective in diversifying acquisitions than in focusing acquisitions. These results are robust to the inclusion of the usual control variables.

Share repurchases under the Commercial Law 212-2 in Japan: Market reaction and actual implementation

This paper investigates the share price performance surrounding share repurchase announcements under the Commercial Law 212-2 in Japan. It is found that there is a statistically significant abnormal return at the announcement about 5%. Further analyses indicate that the abnormal return at the announcement is positively related to announced repurchase percentage target; negatively related to firm size and prior returns before the repurchase decision is made. It is also found that the market initially underreacts to repurchase announcements, especially for value (low market-to-book (MTB) value ratio) stocks. There is some weak evidence that independent firms exhibit higher abnormal returns at repurchase announcements than keiretsu-affiliated firms. Overall, the evidence from Japanese repurchases is consistent with the signaling/undervaluation hypothesis advocated by Ikenberry et al. [J. Financ. Econ. 39 (1995) 181]. However, in contrast to the evidence found in the US where the announcement period abnormal returns are much higher for fixed-price tender offer than for open-market repurchases, I found the opposite evidence for those two types of repurchases in Japan. Empirical results reveal that Japanese repurchasing firms show significant market timing skills in executing open-market repurchases. They tend to repurchase higher percentage of their announced target when compared to US firms.

Corporate multinationalism, organizational learning, and market reaction to international joint ventures: Evidence from Taiwan

This study examines the importance of corporate multinationalism and organizational learning in explaining the wealth effects of international joint ventures announcements in Taiwan. The evidence indicates that firms announcing international joint ventures into countries with no prior operational activity experience significantly favorable market response. In contrast, prior experience in international joint ventures does not explain the cross-sectional difference of announcement period abnormal returns. These findings remain the same even after controlling other explanatory variables. The evidence supports the positive multinational network hypothesis, but is inconsistent with organizational learning hypothesis.

Gains to Bidder Firms Revisited: Domestic and Foreign Acquisitions in Canada

We present large sample evidence on the performance of domestic and U.S. (foreign) bid? der firms acquiring Canadian targets. Domestic bidders earn significantly positive average announcement period abnormal returns, while U.S. bidder returns are indistinguishable from zero. Measures of pre- and post-acquisition abnormal accounting performance are also consistent with a superior domestic bidder performance. Domestic bidder announce? ment returns are, on average, greatest for offers involving stock payment and for the bid? ders with the smallest equity size relative to the target. Neither direct foreign investment controls, horizontal product market relationships, nor acquisition propensities explain why domestic bidders outperform their U.S. competitors.

Seven Decades of Long Term Abnormal Return Persistence: The Case of Dividend Initiations and Resumptions

We analyze the one- to five-year post-announcement stock performance of firms that either initiate cash dividends or resume the payment of cash dividends after a hiatus in payments. Both the event-window and long-run abnormal stock returns are significantly positive, suggesting that the market initially underreacts to the typical firm's dividend announcement. This result also holds for subsets of the 1927 to 1998 time period, suggesting that the observed anomaly is persistent across time and is neither merely a result of data mining nor driven by an ephemeral phenomenon that is confined to a particular time period. Firms that have positive abnormal returns during the announcement period are shown to have the highest post-announcement abnormal returns. A naive investment strategy of establishing long and short positions on firms that experience positive and negative announcement period abnormal returns, respectively, produces persistent positive abnormal returns across the entire 1927-1998 sample period.

Gains to Bidder Firms Revisited: Domestic and Foreign Acquisitions in Canada

We present large-sample evidence on the performance of domestic and U.S.(foreign) bidder firms acquiring Canadian targets. Domestic bidders earn significantly positive average announcement-period abnormal returns, while U.S. bidder returns are indistinguishable from zero. Measures of pre- and post-acquisition abnormal accounting performance are also consistent with a superior domestic bidder performance. Domestic bidder announcement returns are on average greatest for offers involving stock-payment and for the bidders with the smallest equity size relative to the target. Neither direct foreign investment controls, horizontal product-market relationships, nor acquisition propensities explain why domestic bidders outperform their U.S. competitors.

Convertible notes: the debt versus equity classification problem

This paper tests the Kim (Journal of Financial and Quantitative Analysis, 25 (2) (1990) 229–243) `Informative Conversion Ratios' hypothesis. The Kim theory predicts that the conversion price of a convertible note issue will determine whether the issue is similar to debt or similar to equity. A convertible note with a low conversion price is similar to equity under the Kim theory whilst a convertible note with a high conversion price is similar to debt. Expected time to at-the-money was used throughout this paper as an adjusted conversion price. Observation of a strong positive relation between announcement period abnormal returns and expected time to at-the-money for a sample of Australian convertible note issue announcements supports the Kim theory.

Share Price Reaction To Security Offerings By Hospitality Firms

This study examines the share price reaction to security offering announcements by hospitality firms. Results indicate that a significant negative market reaction is triggered on average when firms announce new equity issues. However, no significant share price reaction occurs when firms announce new debt issues. Cross-sectional analyses of announcement period abnormal market returns indicate that the market's reaction to equity issuance announcements is more favorable or less unfavorable for larger firms. The impact of security offerings is important to investors, managers, creditors, and other stakeholders, as security offerings can have a significant impact on the value of the firm and on the firm's cost of capital.

The Information Content of Calls of Convertible Preferreds: The Evidence from Earnings Forecasts

This paper examines the impact of the announcement of convertible preferred calls on earnings forecasts by financial analysts. Our results show that in-the-money calls are associated with no change in either forecasted earnings or forecasted long-term earnings growth. In addition, we find that the abnormal return around the announcement of the call is uncorrected with changes in earnings or long-term growth rates. Similar results are obtained from the analysis of earnings changes around out-of-the-money calls. Out-of-the-money calls, however, are associated with marginally significant increases in forecasts of long-term growth, but these increases are not correlated with the announcement period abnormal returns. These results suggest that any information inherent in convertible preferred calls is not associated with future earnings. Therefore, they are more consistent with the Jensen free-cash-flow hypothesis than the Harris-Raviv signaling hypothesis.

Stock price effect of high-yield debt issues

This paper investigates the common stock price reaction at the announcement of the issuance of high-yield straight debt. The two-day announcement period abnormal returns are not different from zero for the 164 bond issues in the sample. No difference is found between announcement period abnormal returns of firms with bonds that default and firms with bonds that do not default. Results from statistical tests indicate that the announcement period abnormal returns are not explained by issuance year, bond-rate class, underwriter, issuance size, takeover activity or prior high-yield debt issuance experience. The findings are not consistent with the models by Miller and Rock (1985), Jensen (1986), Myers and Majluf (1984) and Krasker (1986). However, results indicate that existing stockholders are not harmed or helped by the issuance of the high-yield straight debt.

Signaling with Convertible Debt

We test whether the conversion price (ratio) is viewed by the stock market as a credible signal of the firm's future earnings prospects (Kim (1990)) and, subsequently, whether convertible debt serves as backdoor equity financing (Stein (1992)). Examining the conversion price in relation to current stock prices and a priori growth expectations produces an average expected time of less than 1.5 years for convertible bonds to be at-the-money. Thus, as Stein suggests, convertibles appear to be a method of drawing equity into a firm's capital structure. We also find that the size of the firm's announcement period abnormal returns is positively related to the expected time for the convertible to become at-the-money. Given these relationships, we conclude that convertible debt issue announcements, on average, send an equity-like signal to the market.

Firm Value and External Blockholdings

This paper examines the valuation consequences of external blockholdings. The stock market responses to announcement of block formations are positive, on average. Potential sources of gains to blockholders are identified, and the stock market responses are related cross-sectionally to firm-specific variables proxying for these sources and to blockholder-specific characteristics. The announcement period abnormal returns are explained by the potential for wealth transfer from bondholders, block size, and the identity of the blockholder. Changes in operating and performance variables following block formations provide weak evidence of hands-on monitoring by blockholders on an ongoing basis, suggesting that the observed value increases arise from expectations of future takeover gains and/or from limits on future opportunistic managerial behavior.