Long-run Abnormal Returns Research Articles

The Timing and Source of Long-Run Returns Following Repurchases

This paper investigates the timing and source of anomalous positive long-run abnormal returns following repurchase authorizations. Returns between program authorization and completion announcements are indistinguishable from 0. Abnormal returns occur onlyaftercompletion announcements. Long-run returns are largely attributable to announcement returns at subsequent authorizations and takeover attempts; that is, anomalous post-authorization returns are not persistent drifts but rather step functions. These findings have important implications for prior papers examining this most persistent and widespread anomaly. Further, our results serve to refocus the search for a rational explanation for the anomaly on subsequent repurchase announcements and takeover bids.

Aftermarket Performance of Health Care and Biopharmaceutical IPOs: Evidence From ASEAN Countries.

We examine the evidence from the long-run abnormal returns using data for 76 health care and biopharmaceutical initial public offerings (IPOs) listed in a 29-year period between 1986 and 2014 in the Association of Southeast Asian Nations (ASEAN) countries such as Indonesia, Malaysia, Singapore, Thailand, the Philippines, Vietnam, Myanmar, and Laos. Based on the event-time approach, the 3-year stock returns of the IPOs are investigated using cumulative abnormal return (CAR) and buy-and-hold abnormal return (BHAR). As a robustness check, the calendar-time approach, related to the market model as well as Fama-French and Carhart models, was applied for verifying long-run abnormal returns. We found evidence that the health care IPOs overperform in the long-run, irrespective of the alternative benchmarks and methods. In addition, when we divide our sample into 5 groups by listing countries, our results show that the health care stock prices of the Singaporean firms behaved differently from those of most of the other firms in ASEAN. The Singaporean IPOs are characterized by a worse post-offering performance, whereas the IPOs of Malaysian and Thai health care companies performed better in the long-run.

Analyzing Long-run Performance of Select Initial Public Offerings Using Monthly Returns: Evidence from India

The anomalies in respect to initial public offering (IPO) performance in literature have stimulated multitude of research works in explaining critical issues, such as under-pricing during short-run and underperformance phenomena in the long run as is observed globally. This study endeavours to look into the long-run performance of select Indian IPOs using monthly returns following event study methodologies. Besides parametric tests, it has also applied wealth relative as a measure of performance of those IPOs. The article documents positive long-run average abnormal returns for Indian IPOs, unlike other countries. However, statistically we fail to reject the null hypothesis of zero abnormal return and therefore conclude existence of no significant long-run underperformance or over-performance in the Indian IPO stocks. In exploring the possible factors which may have bearing in determining the longrun performance of the IPOs, it is observed that book-to-market value (BMV) ratio, age of the IPO firm and aftermarket corporate measures, such as bonus issue and stock split, have significant predictive power in explaining the long-run performance.

Leveraged buybacks

Debt-financed share buybacks generate positive short-term and long-run abnormal stock returns. Leveraged buyback firms have more debt capacity, higher marginal tax rate, lower excess cash and lower growth prospects ex ante, increase leverage and reduce investments more sharply ex post than cash-financed buyback firms. Firms that are over-levered ex-ante are associated with lower returns and real investments following leveraged buybacks. The lower announcement returns of over-levered firms are concentrated on firms with weaker corporate governance. The evidence is consistent with leveraged buybacks enabling firms to optimize their leverage, on average benefiting shareholders. The benefits decrease with a firm's leverage ex ante.

Have the anomalies following share buybacks disappeared?

AbstractAlthough several empirical studies report significant positive long-run abnormal stock returns following share buybacks, a recent event study paper claims that such anomalies have disappeared in the most recent decade and this disappearance of abnormal performance is not sensitive to the methods used. The present paper makes an attempt to investigate this claim using 63 Indian share buybacks which took place between July 2008 and June 2012. We consider the application of several event study methods and our findings are a bit mixed. We conclude that the long-run anomalies following stock repurchases in India are still sensitive to the employed methodologies.

Does Institutional Ownership Promote the Transformation of Underperforming Firms?

We focus on firms that chronically underperform and evaluate ways that institutional investors can facilitate asset redeployment. Increases in institutional holdings are associated with subsequent acquisition and decreases are associated with subsequent failure. For surviving underperformers, holdings and changes are associated with improved performance, but long-run abnormal returns remain negative and Q remains low. This association between holdings and performance is not causal. Rather, it is explained by “flight to quality” combined with persistence of financial performance, including persistence of abnormal returns for underperformers. The evidence casts doubt on interpretations in previous findings of positive relationships between holdings and performance.

Improved calendar time approach for measuring long-run anomalies

Although a large number of recent studies employ the buy-and-hold abnormal return (BHAR) methodology and the calendar time portfolio approach to investigate the long-run anomalies, each of the methods is a subject to criticisms. In this paper, we show that a recently introduced calendar time methodology, known as Standardized Calendar Time Approach (SCTA),, controls well for heteroscedasticity problem which occurs in calendar time methodology due to varying portfolio compositions. In addition, we document that SCTA has higher power than the BHAR methodology and the Fama–French three-factor model while detecting the long-run abnormal stock returns. Moreover, when investigating the long-term performance of Canadian initial public offerings, we report that the market period (i.e. the hot and cold period markets) does not have any significant impact on calendar time abnormal returns based on SCTA.

On Long-Run Stock Returns after Corporate Events

This paper revisits the controversial question of whether long-run abnormal returns are associated with major corporate events. Our analyses investigate initial public offerings (IPOs), seasoned equity offerings (SEOs), mergers and acquisitions (M&As), and dividend initiations. In an attempt to resolve ambiguous empirical evidence with respect to these events, we conduct a variety of tests for abnormal long-run performance, including buy-and-hold returns (BHARs), different calendar time approaches, and a recent standardized test. Empirical tests for these different methods consistently detect significant long-run abnormal returns for all four corporate events. We conclude that long-run abnormal returns exist with respect to these major corporate actions.

Takeover vulnerability and the credibility of signaling: The case of open-market share repurchases

Abstract There is debate in the literature focuses on whether open market repurchases can be taken as a signal of stock undervaluation. This research argues that takeover pressures before a repurchase announcement can be a credible signal of undervaluation. The empirical results indicate that repurchasing firms with a higher probability of takeover experience greater announcement effects, improvements in operating performance and long-run abnormal return, positive forecast revisions by financial analysts, and enhanced agreement between management and shareholders. These findings suggest that takeover probability and open-market share repurchases appear to constitute a double-signal for conveying stock undervaluation to the market.

Bonus-Driven Repurchases

AbstractUsing a large hand-collected database of chief executive officer (CEO) bonus structures, we find that when a CEO’s bonus is directly tied to earnings per share (EPS), his company is more likely to conduct a buyback. This effect is especially pronounced when a company’s EPS is right below the threshold for a bonus award. Share repurchasing increases the probability the CEO receives a bonus and the magnitude of that bonus, but only when bonus pay is EPS based. Bonus-driven repurchasing firms do not exhibit positive long-run abnormal returns.

Stock Price Dynamic When Growth Options Converted into Assets in Place: Evidence from Private Placements in Taiwan

Using a sample of 418 private placements by firms on the Taiwan stock markets, we examine their announcement returns and post-issue performance. Placements are classified into three categories: recapitalization, investment, and general purpose. We find that issuers of private placements tend to be poorly operated and financially constrained. We also document a positive market reaction to all of three categories of placements. Placements in the recapitalization category do not have long-run abnormal returns, suggesting that the benefit from relieving financial constraints is offset by the decrease in expected return when growth options are converted into assets in place. Placements in the investment category are associated with better long-run performance, suggesting that issuers with specific plans to increase investment in capital expenditures or in R&D have profitable investment opportunities. Finally, we find that placements in the general purpose category underperform, suggesting that issuers without specific investment plans tend to opportunistically time the market.

Test Specifications, Correct Modeling, and Sensitivity of Long-Run Abnormal Returns in Hedge Fund Target Firms

Following the literature on test-specifications, correct-modeling, and detectability of long-run stock performance in event study framework, this study tests the performance of monthly stock returns of 589 firms targeted by 112 hedge funds over the period of January 2000 to December 2013. For an estimation window of (-12, 36) months, it addresses two fundamental questions; first, whether active targets (13D) outperform the passive targets (13G) in recent financial crisis; and second, whether long-horizon abnormal returns still pronounce when corrected for biases and test-specifications. To investigate these concerns, a number of methodologies including cumulative abnormal returns, buy-and-hold abnormal returns, and calendar -- time portfolio approach using various matching criteria are applied. Our initial findings suggest that 13D firms perform relatively better than 13G firms, however, underperform the PE targets. Moreover, when matching criteria are well-defined, then estimates appear generally significant with the improved power of the tests.

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

Using word frequency analysis to define whether news articles are positive or negative, we measure media bias as the number of positive in excess of negative news articles in the pre-IPO period and empirically examine how media bias affects post-IPO market performance. Consistent with our hypothesis that media bias drives retail demand for IPOs, leading to a temporary deviation from fundamentals in post-IPO prices, we find robust evidence that media bias is positively related to IPO first-day returns while negatively related to long-run abnormal returns, even after controlling for the number of news articles. Further analysis reveals a negative relation between media bias and the rate of allocation among retail investors, and a positive relation between media bias and retail trading in the immediate aftermarket, indicating that media bias brings more retail investors both to the primary market and to the secondary market. Taken together, these findings suggest that media tone can influence post-IPO prices through the presence of investor sentiment around the IPO event.

Are Ethical Investments Good?

Our study considers whether ethical investments are also good investments. In contrast with previous studies, we utilize long-run event study methodology to examine abnormal returns associated with firms being included in, and dropped from, the MSCI KLD400 Social Index (MSCI KLD400). We find that there are positive and statistically significant long-run abnormal returns for firms being included in the MSCI KLD400. These abnormal returns are associated with higher shareholdings by institutional investors (who are subject to higher public scrutiny), higher analyst coverage and higher growth opportunities.

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, such as the percentage of religious adherents and the percentage of Republican supporters in the county where the firm is headquartered. We compute several alternative summary variables to proxy for the 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 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 such as the negotiation success rate.

Executive compensation and the corporate spin-off decision

We investigate the effect of CEO equity incentives on corporate spin-off decisions and find that CEOs with stronger equity incentives are, ceteris paribus, more likely to engage in corporate spin-offs (after correcting for potential endogeneity concerns). In addition to confirming previous findings that spin-offs are followed by positive announcement and long-run abnormal stock returns, we show that the level of the CEO's incentives matters. In particular, we find that while low incentive firms have a stronger announcement effect, high incentive firms experience better long run stock performance following spin-offs. This is consistent with the disciplining effect of spin-offs since low incentive firms are also found to have more independent boards. While a stronger board may be more influential on key corporate decisions (e.g., spin-offs), better incentive alignment leads to superior long run performance. Our results thus suggest that while stronger corporate governance may serve as a substitute mechanism for managerial equity incentives in the short run, they are in fact complementary in the long run.

Employee satisfaction and long-run shareholder returns

This study empirically tests whether there are differences in the employee satisfaction premium among people- and possession-processing service firms, information-processing service firms, and goods-producing firms. The employee satisfaction premium is measured using the long-run abnormal returns of firms with high employee satisfaction ratings, adjusted for industry and size effects. Results show that the employee satisfaction premium is higher for information-processing services than for people- and possession-processing services. There is no significant difference between people- and possession-processing service firms and goods-producing firms. This finding suggests that employee satisfaction may create higher value for shareholders when it is realised through information-processing services rather than people- and possession-processing services.

Are ethical investments good?

Our study considers whether ethical investments are also good investments. In contrast with previous studies, we utilize long-run event study methodology to examine abnormal returns associated with firms being included in, and dropped from, the MSCI KLD400 Social Index (MSCI KLD400). We find that there are positive and statistically significant long-run abnormal returns for firms being included in the MSCI KLD400. These abnormal returns are associated with higher shareholdings by institutional investors (who are subject to higher public scrutiny), higher analyst coverage and higher growth opportunities.

Limited attention, share repurchases, and takeover risk

We hypothesize that announcing open market share repurchases (OMRs) to counter negative valuation shocks reveals repurchasing firms’ lost growth opportunities or underperforming assets to potential bidders, making them more likely to become takeover targets. This also leads their investors to face higher takeover risk, a systematic risk associated with economic fundamentals that drive takeover waves, as proposed by Cremers et al. (2009). Indeed, we find that repurchasing firms tend to face higher takeover probability in the first few years following their OMR announcements, and that the increase in takeover risk can largely explain their post-announcement long-run abnormal returns documented in the literature. The increase in takeover risk is larger for smaller firms, firms with poorer pre-announcement stock performance, and those attracting more attention of market participants. Our results suggest that OMRs, which are used by many firms to counter undervaluation, could make the firms more sensitive to takeover waves and raise their cost of equity capital.

Investor Horizon and CEO Horizon Incentives

ABSTRACT: We examine the relation between shareholder investment horizon and chief executive officer (CEO) horizon incentives derived from compensation contracts. We find that influential incumbent shareholders provide managers with short-horizon incentives to maximize current firm value when these shareholders plan to sell their stock. Specifically, we use the initial public offering (IPO) setting in which venture capitalists (VCs) represent short-horizon, controlling investors with strong selling incentives after the IPO. We predict and find that VCs' short-term incentives influence CEO's annual horizon incentives following the IPO. At the same time, institutional monitoring limits the influence of VCs on annual, short-horizon incentives. To preempt this disciplining by market participants, VCs grant equity prior to the IPO that correspond with their short-horizons and result in shorter portfolio horizon incentives for the CEO after the IPO. We also document a positive relation between long-run abnormal stock returns and horizon incentives, consistent with horizon incentives influencing management actions. Data Availability: All data are publicly available from the sources indicated in the paper.