Long-run Abnormal Returns Research Articles

Dynamic risk adjustment in long-run event study tests

ABSTRACTThe existence of long-run abnormal returns after major corporate events has become a controversial subject of debate. We contribute new evidence by implementing a daily rolling prediction error (RPE) approach using popular asset pricing models to adjust for time-varying risk parameters in asset pricing models when estimating long-run abnormal returns. Using this simple approach, we find initial significant return responses in the month or two after SEOs and M&As but none thereafter. Robustness checks with different asset pricing models, corporate events, and subperiods corroborate our results. Also, simulation tests confirm the robustness of the RPE method to potential risk shifts. We conclude that, after dynamic risk adjustment, long-run abnormal returns do not occur after the major corporate actions under study.

Technological Acquisitions: The Impact of Innovation on Stock Performance

This paper investigates technological acquisitions and innovation’s impact on US acquiring firms’ stock performance between 2012 and 2016. Firms pursue technological acquisitions with the rationale of creating value, improving market share, and achieving economies of scale. Acquisitions have not always yielded the desired results. Overall, acquirers’ long-run abnormal returns tend to be negative. This study suggests that innovation positively impacts stock performance around the announcement date and one year after the acquisition. The 3-year post-acquisition analysis finds that technological acquisitions do not affect acquiring companies’ stock performance. A bump in the one-year post-acquisition performance dissipates over the three-year horizon.

The value of economic freedom in cross-border mergers

This study examines the impact of economic freedom in mergers and acquisitions (M&A) using a global sample of 6159 takeovers involving acquirers from 56 different countries and foreign targets from 130 countries. The results reveal that acquirers with an economic freedom advantage over their targets experience higher short-run and long-run abnormal returns after controlling for other important country and merger characteristics. At the same time, the level of economic freedom in the target country relative to the bidder country positively impacts target shareholders’ announcement wealth effects and merger premiums. The results are robust to various control variables, industry, year and country fixed effects, modifications to the target sample, and changes to the merger announcement window. These findings add to the institutional theory and suggest that differences in institutional quality, captured as economic freedom advantage, benefit bidders and targets in cross-border M&A.

Reassessing the Long-Run Abnormal Performance of Jordanian IPOs: An Event Study Approach

Abstract This paper examines and reviews the fundamental challenges that academicians face when using the event study methodology to assess the long-term consequences of financial events on the economy and to describe market reactions. Numerous studies have demonstrated that businesses can experience abnormal returns from 1 to 5 years after major financial events. Also, this paper investigates the long-run price performance of initial public offerings (IPOs) in Amman Stock Exchange (ASE). The sample period expands from 2018 to 2022. Various findings are obtained by employing several analytical methods. First, long-run price performance of IPOs is negative, and a strong evidence shows that the long-run performance is sensitive to the benchmark employed. To assess the long-term performance of IPOs, I used both cumulative abnormal returns (CAR) and buy-and-hold abnormal returns (BHAR) as aggregated models. I explained the methodology which is adopted in this study in detail for the event–time approach. However, I used the crucial values for the skewness-adjusted t-statistic to infer statistical tests. Even though BHAR provided weaker results, all methods indicated negative long-run abnormal returns for IPOs. Yet this performance varied when comparing the performance utilizing ASEI, Fama–French three-factor (FF3F), and matching firm (MF) as benchmarks.

The long-run abnormal returns and the subsequent SEO characteristics of profit-exempted IPO firms in Taiwan

<p>The deregulation of IPO requirements changes the industrial structure. Focusing on Taiwan’s unique profit-exempted IPO requirements, this study confirms that deregulation not only leads to IPO clustering, but also to a concentration in chemical and bio-pharmaceutical industry. The profit-exempted IPO issuers actively release optimistic information about future growth and take advantage of overvaluation to increase IPO revenue by misleading investors into mispricing the IPO. This results in poor long-run abnormal stock returns when stock price reverses after the IPO to correct the mispricing. In addition, some profit-exempted companies continue to use mispricing to raise equity capital and issue new shares after the IPO. For profit-exempted IPO companies, the characteristics of seasoned equity offerings within three years after IPO are significantly different from other companies. They are more likely to issue shares after IPO with shorter interval, larger size, and more frequent than non-profit exempted IPO firms. This study finds that the phenomenon of profit-exempted issuers raising capital is more consistent with the market timing theory.</p> <p> </p>

Firm Characteristics, Return Predictability, and Long-Run Abnormal Returns in Global Stock Markets

Firm Characteristics, Return Predictability, and Long-Run Abnormal Returns in Global Stock Markets

Policy uncertainty and seasoned equity offerings methods

Based on a sample of U.S. seasoned equity offering (SEO) during the period 2002–2017, we examine how the choice of equity issuance method changes in response to policy uncertainty. We find that firms subject to high policy uncertainty are less likely to use accelerated offerings rather than other types of traditional seasoned equity offerings. Our results are robust to alternative variable specifications, propensity score matching method, IV approach, and the inclusion of additional controls. Also, the effect of policy uncertainty on accelerated offering decision is weaker for firms with better information environment, earnings quality, and governance structures. Further, policy uncertainty increases the cost of funds and lowers long-run abnormal returns after SEOs for firms subject to high levels of policy uncertainty.

The Long-Run Impact of Information Security Breach Announcements on Investors’ Confidence: The Context of Efficient Market Hypothesis

Information and communication technologies (ICTs) are the cornerstone for sustainable development, but if they are not appropriately managed, they will impede progress towards the United Nations Global Sustainable Development Goals. Among undesirable impacts, emphasis must be put on the risk of information security (ISec) breaches, as they pose a potential threat to businesses there. Especially for publicly traded firms, they could create a long-lasting influence on their financial performance and, thus, stock investors’ confidence. Following the efficient market hypothesis’s footsteps, previous studies have examined only the short-run impact on investors’ confidence ensuing to ISec breach announcements. Therefore, this study investigates the long-run impact of ISec breach announcements on investors’ confidence. Based on a sample of 73 ISec breach announcements during 2011–2019, this paper examines the impact on investors’ confidence, as demonstrated by long-run abnormal returns and equity risk of those firms. Using a one-to-one matched sampling approach, each firm’s performance is analyzed with its control firm over eighteen months, starting six months before the announcement, through twelve months after the announcement. Firms experienced a significant negative abnormal return of 15% to 18% during the twelve months following the breach announcement. In comparison, equity risk increased by 11% within six months before and after an announcement. This study can help investors, managers, and researchers better understand a long-term relationship between ISec breaches and investor confidence in the context of efficient market hypothesis.

Further evidence on long-run abnormal returns after corporate events

This paper investigates abnormal standardized returns (ASRs) after major corporate events. Dutta, Knif, Kolari, and Pynnonen (2018) have shown that the ASR t-test has superior size and power compared to traditional test statistics. Based on this new test statistic compared to traditional test methods, we re-examine long-run abnormal returns after mergers and acquisitions, initial public offerings, seasoned equity offerings, dividend initiations, stock repurchases, stock splits, and reverse stock splits. While some recent studies report disappearing long-run event effects over time, our ASR tests in different subperiods from 1980 to 2015 detect significant long-run abnormal returns after these corporate actions. Graphical analyses of ASRs further support our statistical test results. We conclude that long-run abnormal returns persist after major corporate events.

On Disappearing Long-Run Abnormal Returns After Major Corporate Events

This paper investigates abnormal standardized returns (ASRs) after major corporate events. Dutta, Knif, Kolari, and Pynnonen (2018) have shown that the ASR t-test has superior size and power compared to traditional test statistics. Based on this new test statistic compared to traditional test methods, we re-examine long-run abnormal returns after mergers and acquisitions, initial public offerings, seasoned equity offerings, dividend initiations, stock repurchases, stock splits, and reverse stock splits. While some recent studies report disappearing long-run event effects over time, our ASR tests in different subperiods from 1980 to 2015 detect significant long-run abnormal returns after these corporate actions. Graphical analyses of ASRs further support our statistical test results. We conclude that long-run abnormal returns persist after major corporate events.

Corporate Divestiture Decisions and Long-Run Performance

We examine the post-divestiture long-run performance of two different choices of corporate divestiture, asset sell-offs versus equity carve-outs, and find that the choice of divestiture methods has important implications for the post-divestiture long-run performance. Our findings show that the post-divestiture long-run abnormal returns of sell-off parents are significantly higher than those of the carve-out parents. Furthermore, we find a positive relationship between the post-divestiture long-run returns and the diversification discount. The effect of the diversification discount is weaker for divesting parents with higher levels of R&D. Our results also provide evidence that a firm’s pre-divestiture number of segments, its unrelatedness to the divested unit, and its level of asymmetric information are positively related to the probability of choosing the asset sell-off method.

Dynamic Risk Adjustment in Long-Run Event Study Tests

This study applies a rolling estimation window approach to adjust for time-varying risk parameters in asset pricing models to compute long-run abnormal returns after major corporate events. Abnormal returns are defined as realized returns minus predicted returns on each day in a five-year, post-event period. A variety of asset pricing models are employed to compute out-of-sample predicted returns in different estimation windows for seasoned equity offerings (SEOs) and mergers and acquisitions (M&As). We find that, after an initial significant return response in the month or two after corporate announcements, abnormal returns thereafter disappear over a five-year, post-event period. Robustness checks corroborate our results: (1) with or without matched and random control samples, (2) for different asset pricing models including the CAPM market model, and (3) in robustness tests of share repurchases (SRs) as well as different subperiods. We conclude that, after dynamic risk adjustment, long-run abnormal returns are not evident after these major corporate actions.

Does idiosyncratic risk matter in IPO long-run performance?

This paper studies how firm-level idiosyncratic risk varies over time and affects both initial public offering (IPO) and matched non-IPO firms’ long-run performance. It revisits the traditional approach to compute the long-run performance by conditioning aftermarket performance on idiosyncratic risk with a generalized autoregressive conditional heteroskedasticity GARCH-M extension of the standard three-factor Fama and French (3FF) model. Our findings show a positive long-run relationship between idiosyncratic risk and expected returns for almost all IPOs and matched non-IPO firms. We find that, in general, IPOs do not underperform their peers when we adjust long-run abnormal returns for firm-level idiosyncratic risk. We also note that the idiosyncratic risk exposure depends on the IPO profile; it is more important for firms going public in hot-issue markets, undervalued IPOs and high idiosyncratic-risk issues. Thus, this paper suggests that a part of abnormal returns in specific IPOs long-run performance is derived from firm idiosyncratic risk.

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.

Managerial overconfidence and the buyback anomaly

Abstract While positive, long-run abnormal returns following share repurchase announcements are substantially lower when CEOs are overconfident. This effect is particularly strong for (i) difficult to value firms, such as small, young, non-dividend paying, distressed, and having negative earnings firms, (ii) firms with poor past stock return performance and high book-to-market ratio, indicators of possible overreaction to bad news, and (iii) financially constrained firms. Overall, these results are consistent with the mispricing hypothesis as a motive for repurchases and as an explanation for the buyback anomaly. Additionally, irrespective of the CEO’s level of confidence, abnormal returns are considerably larger for financially constrained firms, implying their managers require larger undervaluation due to the higher cost of capital.

Mergers & acquisitions and the acquirer-target cultural differences

We investigate the impacts of cultural environment on mergers and acquisitions (M&A) in the U.S. To measure the cultural environment of a firm, we use several variables of cultural dimension widely adopted in the literature, mainly the percentage of religious adherents and the percentage of Republican supporters in the county where the firm is headquartered. We compute alternative summary variables to proxy for the overall differences in cultural environment between firms. We find that the bigger cultural differences between two firms, the less likely that the firms will start an M&A negotiation. However, once an M&A negotiation has started, the cultural differences have a small positive impact on the negotiation success rate, a significantly positive impact on the immediate abnormal return of the target, and a small positive impact on the long-run abnormal return of the acquirer, but no negative impacts on other negotiation outcomes.

Presentation Slides for 'Limited Attention, Information Disclosure, and Financial Reporting'

This paper models firms' choices between alternative means of presenting information, and the effects of different presentations on market prices when investors have limited attention and processing power. In a market equilibrium with partially attentive investors, we examine the effects of alternative: levels of discretion in pro forma earnings disclosure, methods of accounting for employee option compensation, and degrees of aggregation in reporting. We derive empirical implications relating pro forma adjustments, option compensation, the growth, persistence, and informativeness of earnings, short-run managerial incentives, and other firm characteristics to stock price reactions, misvaluation, long-run abnormal returns, and corporate decisions. The paper is available at: http://ssrn.com/abstract=334940.

Driving the Presence of Investor Sentiment: The Role of Media Tone in IPOs

Using word frequency analysis, we define media bias as the number of positive in excess of negative news articles in the pre-IPO period and examine whether media bias can account for post-IPO market performance. We find robust evidence that media bias is positively related to IPO first-day returns while negatively related to long-run abnormal returns. We also find a negative relation between media bias and the rate of allocation among retail investors, indicating that positive media bias can bring more retail investors to the primary market. Further analysis suggest that media bias is positively associated with retail trading in the immediate aftermarket, post-IPO liquidity, analyst coverage, and institutional shareholdings, which implies that media bias can improve investor participation in the secondary market. Taken together, these findings are consistent with the view that media is an important channel through which sentiment drives retail demand for IPOs in the primary and secondary markets, causing post-IPO prices to deviate from fundamentals in the short run.

Winning by Losing: Evidence on the Long-run Effects of Mergers

We propose a novel approach to measuring returns to mergers. In a new data set of close bidding contests we use losers' post-merger performance to construct the counterfactual performance of winners had they not won the contest. Stock returns of winners and losers closely track each other over the 36 months before the merger, corroborating our approach to identification. Bidders are also very similar in terms of Tobins Q, profitability and other accounting measures. Over the three years after the merger, however, losers outperform winners by 24 percent. Commonly used methodologies such as announcement returns fail to identify acquirors' underperformance.

Equity Issuance of Health Care Firms After the 2007 Market Crash and the 2010 Affordable Care Act

We provide an empirical analysis of 195 initial public offerings (IPOs) and 547 seasoned equity offerings (SEOs) of health care firms that issued between 2008 and October 2016. This period represents eight years after the US financial crisis of late 2007 and also includes all equity issuances since the passage of the Affordable Care Act of late 2010. We compare and contrast our results with those of Brau and Holloway (2009) who study health care equity issuances from 1970-2008. We find that global health care issues in both the IPO and SEO markets are significantly over-represented in both the post-crash (2008-2010) and post-ACA years (2011-2016) vis-a-vis the overall equity markets. Consistent with prior studies, we show the existence of first-day underpricing in both IPOs and SEOs, along with poor long-run abnormal stock returns. We estimate cross-sectional multivariate regression models to explain the underpricing and long-run returns.