Announcement Returns Research Articles

Beyond the street EPS surprise – when ‘other surprises’ matter in explaining earnings announcement returns

This study examines when accounting surprises other than the street EPS surprise, i.e. ‘other surprises’, are useful to investors. First, ‘other surprises’ are incrementally important when companies use earnings management to beat the analyst consensus EPS forecasts and when earnings quality is low. Second, ‘other surprises’ are useful in interpreting quarterly results for (i) growth stocks, (ii) stocks with high institutional ownership (particularly by active institutions and blockholders), and (iii) in interpreting the quality of the street EPS surprise. Third, the street EPS surprise shows no association with earnings announcement returns controlling for ‘other surprises.’ This result reflects that some ‘other surprises’, such as the net income surprise, are better predictors of future earnings surprises than the street EPS surprise.

Analyst recommendations, acquirer’s valuation, and M&A performance: evidence from China

ABSTRACT This study investigates the effects of premerger analyst recommendations on mergers and acquisitions (M&A) announcement returns. We find that M&A announcement returns decrease with premerger analysts’ favourable recommendations (PAFR). Furthermore, we find that increasing acquirers’ valuations in the preannouncement period is a possible channel that allows PAFR to reduce M&A announcement returns. We explore three alternative explanations including, ‘analyst information role’, ‘analyst pressure’ and ‘informed trading’ explanations for our main nexus, and our findings are still robust. In an additional analysis, we find that this negative relationship is more pronounced among acquirers with (a) high information uncertainty (b), low media criticism, and (c) high investor attention. Moreover, we identify three sources of conflicts of interest in analyst recommendations: M&A relations, controlling shareholder share pledging, and stock ownership composition. Our research enriches the impact of analysts’ recommendations on M&A outcomes and provides new empirical evidence of analysts’ strengthening of overvaluation.

Can existing corporate finance theories explain security offerings during the COVID-19 pandemic?

We document substantial increases in corporate security offerings during the COVID pandemic. While the increase in seasoned equity offerings (SEOs) can be attributed to shifts in macroeconomic conditions, increases in convertible and straight bond offerings cannot be explained by standard security choice determinants. We furthermore find that COVID-period SEO announcements are often contaminated with Research and Development (R&D)-related news, with the SEO proceeds more likely to be hoarded as cash. Overall, COVID-period SEOs align with market timing behavior, but the increase in COVID-period convertibles and straight bonds cannot be reconciled with pre-pandemic corporate financing rationales or government interventions. We furthermore demonstrate that the COVID pandemic differs substantially from the Global Financial Crisis (GFC) in terms of security offering choices and announcement returns.

Is Social Capital Valuable? Evidence from Mergers and Acquisitions

We examine the impact of social capital on mergers and acquisitions using novel county-level social capital data from the Social Capital Project. We show that acquirers located in a high social capital county experience larger announcement returns. The effect is more pronounced when the agency problem in the acquirers is more severe. We find evidence that the acquirer’s social capital is associated with higher transaction synergies, better stock and operating performance, and shorter deal duration. Overall, the results support the shareholder value maximization view that social capital mitigates opportunistic and self-serving decisions by acquirer managers, leading to acquisitions that benefit acquirer shareholders in the short and long-term.

Client restatement announcement, audit office human capital investment, and audit quality improvements

This paper examines audit offices’ human capital investment in response to client restatement announcements and the resulting effects on audit quality and audit office client base. We find that audit offices attempt to acquire human capital and talent by posting more audit-related job positions just after a client announces a restatement. The increase in job postings follows restatements with more negative announcement returns and restatements of annual financial statements, and is concentrated among more senior and experienced positions. Importantly, the increased job postings are not driven by replacement hiring due to individual auditor departures and reflect more auditors joining the office. These human capital investments reduce future client misstatements and losses in client portfolios, indicating improvements in actual and perceived audit quality. Audit offices are also more likely to replace audit managing partners and prevent the signing partners of the misstated financial statements from signing new audit reports after restatement announcements.

SPACs and the COVID-19 pandemic: Evidence from Korea

We examine how the COVID-19 pandemic affected the mergers of special purpose acquisition companies (SPACs) in Korea, where SPACs—since their introduction in 2010—have played a significant role in private company public listings. After the COVID-19 outbreak, SPACs were less likely to merge, but for those which chose to do so, merger announcement returns were on average higher, particularly for those that waited to merge until after the stock market recovered its pre-pandemic value. We also find evidence that SPAC holding period returns from the SPAC’s initial public offering to merger consummation (or liquidation, in the case of SPACs that failed to complete a merger) were on average higher after the outbreak. Overall, our results suggest that, despite their limited lifespan and agency issues, SPACs may operate more efficiently and perform better during periods of economic downturn.

The price of firm-level information uncertainty

Firm-level uncertainty is difficult to measure in nature. We construct a new measure of firm-level information uncertainty based on uncertainty premium implied by earnings announcement returns. This new measure fundamentally differs from other firm-level uncertainty measures. We find that high-uncertainty firms outperform low-uncertainty firms by 9.59 % per annum on a risk-adjusted basis. Furthermore, this return predictability persists for up to five quarters. Our uncertainty measure and its return predictability are primarily driven by the idiosyncratic component. Overall, our results support the existence of an uncertainty premium and cast doubt on the hedgeability of uncertainty.

Voluntary disclosures by activist investors: the role of activist expectations*

Activist investors in a firm often voluntarily release information about their governance intentions to the public. Voluntary disclosure theory suggests that an activist investor will disclose when she expects other investors to respond positively and support her in upcoming corporate control contests. We find that activists’ disclosures are accompanied by positive abnormal returns, reductions in bid-ask spreads, and increases in future earnings relative to similar targets without voluntary activist disclosures. Disclosures by activists who demand a board seat (the most common demand) have the highest announcement returns, and disclosers also win proxy contests and directorships more frequently than non-disclosers. These findings suggest that the activist’s beliefs about investor response in both pricing and voting are an important driver of her disclosure choice.

Pricing media sentiment: Evidence from global mergers and acquisitions

In this study, we examine the association between bidders' media sentiment and the acquisition performance of 5196 domestic mergers and acquisitions across 40 countries from 2000 to 2018. Our results show a causal and positive relationship between media sentiment and the bidders' announcement returns. This supports the investor attention theory, suggesting that investors perceive bidders' media sentiment as informative and value-relevant. Using a dozen major terrorist attacks worldwide as exogenous shocks to business news, we establish a more credible causal link from media sentiment to market reactions. Our results are more pronounced for firms in a higher information asymmetry environment. Additionally, our study finds that higher levels of voice and accountability within a country mitigate the positive impact of media sentiment on bidder returns. We conduct additional robustness tests to further validate these findings and to address possible endogeneity concerns.

Analysis of Investor Reactions to The Right Issue at The IDX Before and During Covid-19

The COVID-19 pandemic has resulted in fluctuations in movement stock prices, and greatly influenced economic conditions as well as reactions of investors regarding the rights issue policy which will influence buying and selling interest shares. The rights issue is an event where information is published as an announcement that can be used to see market reactions. This research was conducted to analyze investor reactions to the Rights Issue announcement. Using 50 samples of companies that carried out rights issues during 2017 - 2020. The inquiry about was carried out utilizing the occasion consider strategy with an advertising show approach. The ordinariness test is the Kolmogorov – Smirnov test. The statistical test used in this research is the difference between two means tests (Wilcoxon Signed Rank Test). The comes about of this inquiry appears that there's a noteworthy contrast in excess returns within the period sometime recently and after the declaration of the rights issue, be that as it may, this inquiry appears that there's no distinction in stock liquidity sometime recently and after the declaration of the rights issue. there's no distinction between the bid-ask spread sometime recently and after the declaration of the rights issue, both sometime recently and amid the widespread COVID-19 implies that the declaration of the rights issue cannot be utilized as a reference choice in an exertion to extend the liquidity of the company offers within the long-term brief, this can be since the declaration of the rights issue isn't sufficient contains data that can impact venture choices.

Signaling through timing of stock splits

We develop a dynamic structural model of stock splits, in which managers signal their private information through the timing of the split decisions. Our approach is consistent with the empirical evidence which shows that the majority of stock splits have a 2:1 ratio of old-to-new shares, but are announced at various pre-split price levels. Moreover, it explains why split announcement returns are decreasing with the pre-split price. In addition, by matching the model to the data, we estimate the nominal share price preferences of investors and decompose the split announcement return into the value of new information and the signaling cost.

The value of information risk: is there an acquisition discount for less readable financial disclosures?

ABSTRACT The readability of financial disclosures plays a crucial role in how firms effectively communicate value-relevant information to the market. This study investigates the association between readability and firm valuation within the context of takeovers. We find that target firms with less readable annual reports receive lower bids and earn lower announcement returns. Our findings suggest that both acquirers and the market discount opaque targets, especially in inter-industry acquisitions, where adverse selection is more severe compared to intra-industry deals.

Dispersion in news sentiment and M&As outcomes

We suggest that dispersion in news sentiment, representing the dispersion in informative M&A performance forecasts, effectively captures M&A information uncertainty, disseminates information about transaction risks, and enhances investors’ ability to discern high-risk acquisition attempts. We find that consistent with the information uncertainty perspective, dispersion in news sentiment is associated with higher change in the acquirer's information uncertainty, lower M&A announcement return, and lower M&A completion probability. Examining the underlying channel, we show that media reduces information asymmetry between managers and investors and managers listen to the market due to the loss of reputational capital. Our findings are robust to additional analysis, endogeneity test, and robustness check. Overall, we argue that media can function as an alternative channel for corporate governance through dispersion in news sentiment.

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.

Cash, crisis, and capers: The UK's cashbox policy during COVID-19

This study investigates the market impact of the “Cashbox” policy introduced in the UK during the COVID-19 pandemic, which eased shareholder approval norms for equity issuances. Using manually collected data, we find that Cashbox issue announcements yield abnormal returns 4–6 % higher than other issuances, indicating that investors prioritise liquidity over agency concerns during the pandemic. Notably, this effect is more pronounced in firms facing greater financial constraints or exhibiting superior corporate governance. Our study sheds light on the impact of crisis-driven policy changes on financial markets, providing important and timely implications for policymakers and investors on the trade-off between rapid capital access and governance standards in times of significant social crises.

The acquisition motive of newly credit rated firms

A large body of research documents an increased acquisition activity among credit rated firms. We examine whether firms seek an initial credit rating to conduct large scale acquisitions, and whether this acquisition activity is driven by empire building or value creation motives. First, we find that acquisitions are a credible motive for seeking a credit rating, initially rated firms are associated with 13.05pp greater acquisition likelihood and these transactions are more likely to be settled by cash. Second, to recoup the costs of becoming rated, firms conduct large-scale high-quality acquisitions associated with 1.52pp higher acquirer announcement returns, where the higher cumulative abnormal returns are concentrated among firms obtaining a speculative grade initial rating. Third, following the initial rating year, acquisition activity dampens to pre-rating levels. In sum our findings lend support to the notion that previously financial constrained firms enter the bond markets to complement bank financing when conducting large value enhancing acquisitions.

Cross-border acquisitions: The case of SPACs

We examine one aspect of special purpose acquisition companies (SPACs) in the U.S. market, namely their focus on foreign targets. Using a sample of 1737 SPAC IPO filings and 537 SPAC mergers with targets from 28 countries between 2003 and 2022, we study both the geographic preference revealed in SPACs' IPO filings and the geographic location of target firms in the subsequent acquisitions. Our results show that 69% of SPACs with a declared foreign focus are subsequently successful in acquiring a foreign target. However, they take longer time to identify and complete mergers compared to those with a domestic focus. When a merger is announced, SPACs with U.S. targets exhibit significantly higher announcement returns compared to those with foreign targets, with an even more pronounced difference when targets are from China or other emerging markets. Post merger, all SPACs exhibit poor market-adjusted returns. SPACs with Chinese targets suffer the worst one-year post-merger stock performance, whereas those with targets from other emerging markets perform considerably better than the rest of their peers. Further examination suggests that country-level factors, such as investor protection and accounting standards, are significant determinants in post-merger market performance of SPACs engaged in cross-border acquisitions.

Target Firm Advertising and Firm Value

Consistent with hypotheses underlying firm advertising, we find that targets with pretakeover advertising obtain higher premiums, whereas their acquirers earn lower announcement returns. These economically significant effects suggest that through advertising, targets increase their profile and negotiating power. Further, targets that advertise are more likely to initiate their takeovers, attract multiple bidders, receive enhanced bids, capture more merger rents, and even in failed acquisitions, experience a 1% permanent revaluation. The latter result differentiates between information asymmetry and behavioral explanations for the target advertising. Overall, the results support the hypothesis that management advertises to transmit information to investors and potential acquirers. This paper was accepted by Victoria Ivashina, finance. Funding: A. L. Tran acknowledges financial support from the Mergers and Acquisitions Research Centre at Bayes Business School. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2022.01534 .

Delaware Reincorporation and the Double-Exit Puzzle: Evidence from Post-Initial Public Offering Acquisitions

Initial public offerings and mergers and acquisitions represent important opportunities for investors to exit and harvest their entrepreneurial success. Some firms are acquired shortly after their initial public offerings. This exit strategy is known as a double exit. In addition, issuing firms may choose to reincorporate in Delaware during their IPOs. In this study, we use hand-collected data from 1993 to 2020 to investigate whether and to what extent Delaware reincorporation may affect the M&As in the post-IPO stage. We use a Cox proportional hazard model to test the relation between Delaware reincorporation and the likelihood of being acquired for our sample IPOs. Recognizing that Delaware reincorporation is not a random decision, we adopt a Heckman switching regression method to estimate the relation between Delaware reincorporation and takeover premiums and announcement returns. We report that IPO firms choosing to reincorporate in Delaware experience a higher likelihood of being acquired compared to those IPO firms choosing to remain incorporated in their home states. We further document that IPO firms choosing to reincorporate in Delaware receive lower premiums in acquisitions, and experience lower abnormal returns on announcements.

The dynamics of informed trading around corporate bankruptcies

We investigate the dynamics of informed trading both before and after corporate bankruptcy announcements using high frequency data. Our findings reveal that pre-announcement informed selling attenuates subsequent announcement returns, with this effect being weaker for firms receiving extensive pre-announcement media coverage or adverse news sentiment. We also find that post-announcement informed trading can serve as a predictor of subsequent bankruptcy outcomes. Overall, results are consistent with there being material information leakage, warranting policy efforts to better safeguard less informed investors.