Long-term Stock Performance Research Articles

Do Privatization IPOs Outperform in the Long-Run?

This paper investigates the long-run stock returns of privatization initial public offering (IPO) firms using a sample of 241 privatization IPOs from 42 countries during the period 1981-2003. We compare one-, three-, and five-year holding period returns of privatization IPOs to those of the domestic stock market indices and to those of size and size-and-book-to-market equity ratio (BM)-matched firms from the same countries. Consistent with previous studies, we find that privatization IPOs significantly outperform their domestic stock markets in the long-run. However, they show less consistent abnormal long-term stock performance relative to their size- or size-and-BM-matched benchmark firms. These results confirm the problems inherent in estimating long-run abnormal returns. Additionally, the market values privatization IPOs without much systematic bias after the IPO, in contrast to private companies' IPOs. This is consistent with privatization IPOs having less information asymmetry than private IPOs

Capital Structure and Security Issuance Under Heterogeneous Beliefs

Using a sample of debt and seasoned equity issues from 1980-2004 and different proxies of investor optimism and the dispersion in investor beliefs, we empirically analyze, for the first time in the literature, the effect of heterogeneous beliefs among outside investors on the capital structure and security issuance choices made by a firm. The paper consists of three parts: In the first part of the paper, we study how heterogeneous beliefs affect a firm's choice between equity and debt for raising external financing; in the second part of the paper, we study the effect of heterogeneous beliefs on the price impact of a security issue on the firm's equity; and in the third part of the paper, we study the effect of heterogeneous beliefs on the long-term stock performance of equity and debt issuers. Our empirical results can be summarized as follows. First, the probability of a firm issuing equity rather than debt is increasing in both the average level of optimism of outside investors and the dispersion in outsider beliefs. Second, the price impact on the firm's equity is negative for an equity issue and zero for a debt issue; further, the price impact of an equity issue is decreasing (more negative) as the dispersion in outsider beliefs is greater. Finally, while the long-term stock returns to both equity and debt issuers is negative, the stock returns to equity issuers is significantly more negative than that of debt issuers. Further, the more optimistic outsiders are on average about a firm's prospects at the time of an equity issue and the more dispersed their beliefs, the more negative the long-term stock returns to the firm. Overall, our results indicate the importance of heterogeneity in investor beliefs as a determinant of the financing decision of a firm.

Information Uncertainty and Acquirer Wealth Losses

A large body of literature demonstrates that acquisitions are on average value-destroying for the acquirer. We investigate whether the change in the acquirer’s information uncertainty contributes to acquirer wealth losses. Information uncertainty affects the discount rate (the cost of capital), which in turn influences stock price. Our results indicate that acquisitions lead to increases in information uncertainty, as proxied by analysts’ earnings forecast dispersion. We also find that the change in information uncertainty is negatively related to acquirer long-term stock performance, after controlling for the acquirer’s fundamentals. Taken together, the evidence is consistent with the conclusion that increases in information uncertainty resulting from acquisitions contribute to acquirer post-acquisition wealth losses.

Hedge Funds vs. Private Equity Funds as Shareholder Activists - Differences in Value Creation

This paper analyzes market reactions triggered by announcements that hedge funds and private equity investors purchase large blocks of voting rights. We argue that changes in share-holder's wealth are related to the opportunity, possibility and motivation of being an active blockholder, who successfully reduce agency problems. The investigation is based on a unique data set of German public listed companies and relates their short-term and long-term stock performance to several corporate and market variables. We find positive abnormal returns triggered by an announcement that an active shareholder acquired at least 5% of a company's voting rights. Interestingly, variables proxying for agency costs explain the market reaction for our private equity sample, only. Ownership characteristics provide only poor evidence for explaining the market reaction within our hedge fund sample; although they are important for the private equity sample. Considering the long-term market performance, we observe considerably negative benchmark adjusted buy-and-hold returns for both samples. However, our results indicate a misinterpretation by the capital market regarding a hedge fund's motivations and activities.

Why are Recommendations Optimistic? Evidence from Analysts’ Coverage Initiations

We examine the long-term stock performance of analyst recommendations and the properties of accompanied earnings forecasts for initiations and non-initiations to evaluate the reporting, selection, and processing explanations for analyst optimism. We find that Strong Buy and, to a lesser degree, Buy initiation recommendations under-perform their non-initiation counterparts after controlling for analyst, brokerage and firm characteristics associated with the initiation decision and expected long-term stock returns. Yet, earnings forecasts accompanying Strong Buy and Buy initiation recommendations are less optimistic and more accurate than those accompanying non-initiation recommendations. Our findings suggest that conflicts of interest (i.e., the reporting explanation) are the dominant source for favorable recommendations.

Long-term stock performance following extraordinary and special cash dividends

Using essentially all declared extraordinary and special cash dividends between 1926 and 2001 which are not preceded or followed by the same for a period of three years, we find no robust post-declaration long-term abnormal stock returns, even in sub-samples defined by the special dividend yield, the bang-for-the-buck, the declaration-period abnormal return, the sub-sampling period or the stock market condition at declaration. Only event firms in the smallest CRSP market capitalization quintile display significant positive abnormal returns during the first-year following the declaration. However, these latter are not robust across sub-sampling periods. Overall, there is no compelling evidence that investors under- or over-react to extraordinary or special cash dividends.

IPO anomalies and innovation capital

Innovation capital are typically expensed and/or unrecognized as assets under current generally accepted accounting principles. This results in accounting-related information asymmetry. This paper examines the association of innovation capital (as measured here by the proxies of R&D expenditures and granted patents) and initial public offerings (IPO) anomalies. These anomalies include initial IPO underpricing, duration of honeymoon (a distinct feature of the Taiwanese IPO environment), and long-term performance. The theoretical model underlying this research is a signaling model. The results indicate that more innovative firms are more likely to be underpriced, and have longer honeymoon periods than less innovative firms. Further, the more innovative firms have positive and growing long-term market-adjusted returns. This stands in contrast to the declining long-term stock performance of initial public offering firms that is evidenced in the literature. We conclude that pre-IPO research and development expenditures disclosed in the IPO prospectus, official monthly reports of newly developed patents released to the public, and the frequency of patent citations significantly signal both underpricing and future market performance of IPO firms in Taiwan.

Effects of stock mispricing and regulatory capital constraints on bank lending

From long-term performance of bank holding company shares, this paper infers the effect of possible stock undervaluation on bank lending between 1989 and 1993, when many banks were constrained by risk-weighted capital requirements. Investment in high-risk assets, including loans, is found to have been negatively related to long-term stock performance. The negative relationship between lending and future stock performance, however, was as strong among well-capitalized banks unconstrained by capital requirements as that among low-capital banks constrained by capital requirements. Based on these findings, stock mispricing resulting from asymmetric information between managers and outside investors does not appear to have significantly contributed to the credit crunch in the early 1990s. The negative relationship should be stronger among low-capital banks if high costs of equity and tightened capital requirements were the main reasons why banks reduced lending.

An Integrated Analysis of the Association between Accrual Disclosure and the Abnormal Accrual Anomaly

We analyze whether the nondisclosure of accrual information at earnings announcements might contribute to the abnormal accrual anomaly. Prior studies draw inferences about the pricing of (abnormal) accruals at earnings announcements and around the filing dates through analyses of the long-term stock performance of high and low (abnormal) accrual firms. In this study, we take a more integrated approach by directly analyzing the pricing of abnormal accruals around the earnings announcement, around the SEC filing, and over the year subsequent to the SEC filing, conditional on whether a firm discloses accrual information at the earnings announcement. We find no evidence of accrual mispricing for firms that disclose accrual information at the earnings announcement. For these firms, the market is able to differentiate the discretionary from the nondiscretionary components of the earnings surprise. In contrast, as expected, the market fails to distinguish between the discretionary and the nondiscretionary components of the earnings surprise for firms that do not disclose accrual information at the earnings announcement. These firms experience a stock price correction around the filing date. However, the correction is only partial, resulting in a post-filing drift.

Long-term stock performance after open-market repurchases in Korea

This study examines the long-term performance of the stock of firms that announce open-market repurchases in Korea. We find essentially no evidence of long-term abnormal performance. Thus, our results provide strong support for the efficient market hypothesis with regard to open-market repurchases in Korea. A factor that may be contributing to this finding is that Korean firms must complete announced repurchases within 3 months. Hence, our sample, since it is relatively free of potentially confounding effects of ongoing repurchase activity, provides a cleaner test of the efficient market hypothesis than the samples in existing studies.

An analysis of the share price and accounting performance of rights offerings in China

This study examines both the short- and long-term share price and accounting performance of Chinese rights issues. Employing data from 432 rights offerings issued between 1994 and 1999, the study documents a statistically significant positive abnormal stock return of 4.8% on the ex-date. Over the long run, rights issuing firms significantly outperform control portfolios of firms matched on the basis of size, the book-to-market ratio, and both size and the book-to-market ratio. Similar to the case of U.S. experience, investors in China appear to underreact to the initial announcements of new equity offerings, but in the opposite direction. Interestingly, although firms issuing rights generally underperform their non-issuing peers in important operating performance metrics such as return on assets, their growth rates of sales and capital expenditures far outstrip non-issuers. Finally, the findings document that changes in the long-term stock performance of rights issuing firms are positively correlated with changes in post issue accounting performance.

Use of the Proceeds and Long-term Performance of French SEO Firms

This paper examines the long-term stock performance of French SEO with rights by looking at the intended use of the proceeds. Firms that raise equity for pure capital structure motives are separated from the ones that use the SEO proceeds to finance specific investment projects. Issuers in the first category are concerned about preserving their financial flexibility and they are expected to evolve in a capital structure irrelevancy framework. On the other hand, issuers in the second category are more inclined to be sensitive to adverse selection problems or agency conflicts and thus, they should be more exposed to under-reaction on the long-run. According to a matching firm methodology, ‘Financing New Investment’ issuers underperform their benchmark at a rate of 4% to 8% per year over a 36-month horizon while ‘Capital Structure’ issuers do not show any abnormal performance. These results are robust according to alternative Beta pricing models. In addition, managers of both issuer's types time the SEO after a period of positive abnormal performance in order to sell overpriced securities. However, only the ‘Financing New Investment’ sample experiences a performance reversal; the abnormal returns decreasing gradually from the issue on, to become significantly negative 24 months after the event.

An Examination of Board Stability and the Long-Term Performance of Initial Public Offerings

We study the long-term stockperformance of initial public offerings (IPOs). We examine howpast performance affects the board of directors 'stability and how changes in boards affect subsequent performance. We introduce a dynamic, scale invariant stability metric to measure such changes. Our results indicate that among IPO firms, those with poorer initial performance experience greater board instability and that greater board stability is associated with improvement in subsequent performance. These results indicate that board members leave poorly performing firms, rather than shareholders replacing ineffective boards. Retaining boards that experience initial good performance is associated with continued success. In this paper, we study IPO board stability and stock performance and explore two questions. Do IPO boards change in response to the firm's poor performance? How do changes in the board affect the firm's subsequent performance? When a firm goes public, both the ownership structure and the management structure of the firm change. Although prior to the initial public offering (IPO) the board of directors often owns a controlling stake in the firm, this stake may be drastically reduced after the completion of the IPO. Such changes lead to increased agency costs and the accompanying need for monitoring (see Jensen and Meckling, 1976; Leland and Pyle, 1977). Significant changes in the board of directors after the IPO may be necessary to ensure that the wealth of the new shareholders is maximized. We present evidence indicating that poor performance leads to board changes (greater instability), while better performance leads to board retention (greater stability). We also find that greater board stability is associated with improvement in subsequent performance among poorly performing firms. This result implies that when the boards of poorly performing firms are unstable, either shareholders are too hasty in making changes to the board or board members jump ship in an effort to protect their reputation capital. IPO boards provide a unique opportunity to examine board stability and the effectiveness of board changes. This opportunity arises not only because of the ownership and managerial changes that occur in young firms, but also because of the documented average severe longterm underperformance of initial public offerings. Although a clear explanation of the long run underperformance of IPOs has eluded financial researchers, examining changes in board stability may unearth new information about this underperformance phenomenon. This paper examines how IPO performance relates to changes in the board. We also examine the impact of changes in boards on subsequent performance. Subsequent improvement in performance following board changes may provide further evidence that the underperformance is firm specific, rather than

Focusing Versus Diversifying Bank Mergers: Analysis of Market Reaction and Long-Term Performance

This paper explores the paradox of bank mergers: on average, bank mergers do not create value yet they continue to occur. Using cross-sectional analysis to examine 56 bank mergers between 1991 and 1995, I test several facets of focus and diversification. The study finds that upon announcement the market rewards the mergers of partners that focus their activities and geography. Long-term efficiency, however, is enhanced when the merger involves a relatively inefficient acquirer and payment is not made solely with cash. Long-term stock performance is further enhanced when the surviving firm does not engage in cross-subsidization. The study suggests market participants correctly realize that focusing mergers create value, but investors may need to rethink the facets of focus they value.

Use of the Proceeds and Long-term Performance of French SEO Firms

This paper examines the long-term stock performance of French SEO with rights by looking at the intended use of the proceeds. Firms that raise equity for pure capital structure motives are separated from the ones that use the SEO proceeds to finance specific investment projects. Issuers in the first category are concerned about preserving their financial flexibility and they are expected to evolve in a capital structure irrelevancy framework. On the other hand, issuers in the second category are more inclined to be sensitive to adverse selection problems or agency conflicts and thus, they should be more exposed to under-reaction on the long-run. According to a matching firm methodology, 'Financing New Investment' issuers underperform their benchmark at a rate of 4% to 8% per year over a 36-month horizon while 'Capital Structure' issuers do not show any abnormal performance. These results are robust according to alternative Beta pricing models. In addition, managers of both issuer's types time the SEO after a period of positive abnormal performance in order to sell overpriced securities. However, only the 'Financing New Investment' sample experiences a performance reversal; the abnormal returns decreasing gradually from the issue on, to become significantly negative 24 months after the event.

Long-term valuation effects of stock splits

This study attempts to determine if stock splits affect the long-term stock performance of forms, and to explain cross-sectional variation in this performance proxy among firms. The consequences of both higher percentage transaction cost following a stock split and an investor overreaction hypothesis are expected to render negative effects on stock values. The consequences of any earnings and dividend signaling accompanying splits are expected to have a positive impact on stock values. The results of the analysis suggest that the cumulative abnormal returns (CARs) are positive and statistically significant through the eleventh month after a stock split. The CARs then decrease nearly monotonically through the thirty-sixth month after the split (CAR=−8.23%). This indicates that initially the signaling effects dominate, but later the consequences of investors' downward revisions of previous expectations and the increase in percentage transaction cost dominate. The cross-sectional results indicate that firms with higher earnings-growth rates exhibit higher CARs, and firms with higher share prices just before the split exhibit lower CRRs.