Long-term Stock Price Performance Research Articles

Private Placement, Investor Sentiment, and Stock Price Anomaly

The private placement of A-shares gained momentum with the release of the Administrative Measures for Securities Issuance of Listed Companies in 2006. This led to enhanced research on the impact of private placement on stock prices. In 2012, the Chinese government relaxed the requirements for directed issuance of listed companies, resulting in a surge of directed issuance since then. This study uses a sample of listed companies that conducted private placements in the A-share market between 2013 and 2021, to analyze the impact of investor sentiment on stock price differences after private placements from the perspective of short and long-term excess returns. This study constructs the non-main investor sentiment of individual stocks using high-frequency tick data of individual stocks and explores the relationship between this stock price anomaly and investor sentiment using multiple regression analysis. The results show a positive short-term announcement effect of A-share private placements, with the excess return rate occurring mainly before the plan announcement date. The stock price difference from the plan announcement date to ten trading days thereafter has a significantly negative relationship with the excess return rate. Furthermore, investor sentiment in private placements may negatively affect long-term stock performance. This study suggests that this phenomenon is caused by higher investor sentiment pushing stock prices upward in the short term, causing them to deviate from fundamentals, creating mispricing, and then driving them back to fundamentals, with information disclosure. After controlling for the severity of information disclosure, the effect of investor sentiment on long-term stock price performance becomes insignificant.

How did the Sarbanes\u2013Oxley Act affect managerial incentives? Evidence from corporate acquisitions

We examine the impact of incentive compensation on the riskiness of acquisition decisions before and after the passage of the Sarbanes–Oxley Act (SOX). Before SOX, equity-based compensation was positively related to changes in risk around acquisition decisions, but this relationship weakened after the introduction of SOX. The drop in post-SOX acquisition-related risk stems from how managers respond to compensation-based incentives in the new regulatory environment. We show that executive stock options and pay-risk sensitivity drive post-SOX managerial responsiveness to risk-taking incentives. We also document a post-SOX value-enhancing effect on long-term stock-price performance and total factor productivity through these same incentive compensation mechanisms. The results are robust to selection bias, simultaneity, measurements of risk, and the definition of incentive compensation.

China quality award and the market value of the firm

Quality has always been an important factor affecting the competitive advantages and financial performance of firms. Some research has examined the impacts of Malcolm Baldrige Award and European Quality Award announcements on the market value of winners. However, the effect of the China Quality Award on firm market value has rarely been studied and has not been fully elucidated. On the basis of 85 China Quality Award announcements, this study explores whether winners show significant abnormal stock returns on the award announcement day using an event study. Some firm characteristics, such as ownership type, industry type, registered address, first time winning the award or not, and whether related firms won the awards are further considered. A market adjustment model is also adopted to re-estimate the short-term market reaction to test the robustness of our findings. It is found that China Quality Award winners do not show a significant market reaction for the full sample in the short term. However, the China Quality Award has brought significantly positive benefits to firms located in eastern China, first-time winners, and firms winning the award themselves. The long-term stock price performance is significantly positive. The findings may expand the research on the relationship between quality awards and firm market value in various institutional contexts.

Performance Assessment of Firms Following Sustainalytics ESG Principles

The authors explore whether firms rated highly by Sustainalytics based on ESG criteria are rewarded with superior long-term stock price performance. They find that firms with the highest ESG ratings statistically outperform the S&P 500 index, although not on a risk-adjusted basis. Firms with higher governance and social scores also statistically outperform those firms with corresponding lower scores. Firms with better (worse) governance scores produce statistically significant positive (negative) alpha values. Firms less likely to adhere to strong governance principles are penalized in the market, while firms more likely following strong social and environmental principles are negatively assessed. Improved governance scores and to a lesser extent improved social scores produce statistically significant positive alpha values whereas negative changes in environmental scores are positively received by the market. Overall, investors are not hurt by following an ESG philosophy with the market rewarding firms for good governance, penalizing those with strong environmental records, and meeting with ambivalence those with strong social records.

Does institutional reform improve the impact of investment bank reputation on the long-term stock performance of initial public offerings?

This study examines the impact of investment bank (IB) reputation on the long-term stock price performance of Chinese initial public offerings (IPOs) over the period 1993 to 2010. For comparison purposes, the whole sample period is separated into two sub-periods by the 2001 IPO allocation system reform: the quota system period from January 1st, 1993 to April 22nd, 2001 (hereafter, the pre-reform period) and the approval system period from April 23rd, 2001 to December 31st, 2010 (hereafter, the post-reform period). Using two time-varying proxies for IB reputation, we find no impact of IB reputation on the three-year buy-and-hold abnormal returns (BHARs) during the pre-reform period, but a significantly positive impact during the post-reform period. Our results are robust to various alternative methodological approaches in controlling for the problem of endogeneity and the cross-sectional correlations in abnormal returns.

The Impact of Investor Heterogeneity in Beliefs on Share Repurchase

In this paper, we propose a new share repurchasing model to show the impact of the heterogeneity of investor beliefs on share repurchase. We first provide a comprehensive survey on the literature of share repurchases which has not been considered by previous studies, to the best of our knowledge. We review both the theoretical model structures and the major empirical results including various measures of divergence of opinion developed in the literature. Our new repurchasing model uses actual share repurchases to show that investors’ divergence of opinion on the firm value matters in a manager’s share repurchase decision. The long-term stock price performance is consistent with our model predictions.

Motives and consequences of IPOs in cold periods

• We model the factors that could motivate firms to go public in a cold. • We compare the long-term performance of hot and cold period IPOS. • We find the firms go public in cold periods when their future earnings are likely to decline. • We find the cold period IPO firms are more likely to have managed their earnings. • We find that cold period IPO firms underperform hot period IPO firms in the long run. We analyze the motives and long-term stock price performance of firms that pursue IPOs in cold IPO periods. We find that firms are more likely to engage in an IPO during a cold period when their earnings are relatively high and are expected to decline in the future. We also find that IPO firms during a cold period are more likely to have managed their earnings prior to the IPO. Furthermore, we find that cold IPO firms experience significantly weaker stock price performance than hot IPO firms, and results are robust to different criteria for defining hot and cold IPO periods, different measures of stock price performance, and different investment holding periods. We find that investment opportunities, the backing of a venture capitalist, and an increase in earnings in the year of the IPO lead to significantly higher long term stock price performance of IPO firms. Our multivariate models confirm the adverse cold IPO period effect on stock price performance even after controlling for the IPO motives and the firm's earnings performance. Our results also hold within the post-Sarbanes-Oxley (SOX) era.

The Sovereign Wealth Fund Discount: Evidence from Public Equity Investments

Using a sample of 1,018 Sovereign Wealth Fund (SWF) equity investments in publicly traded firms and a control sample of 5,975 transactions by private-sector financial institutions over 1980-2012, we find that announcement-period abnormal returns of SWF investments are positive, but lower than those of comparable private-sector investments by approximately 2.67 percentage points. We do not find evidence of long-term stock price performance of SWF investment targets differing from that of private-sector investment targets. We do find, however, significant differences among SWFs which are only partially captured by the short-term market reaction: firms acquired by passive funds tend to underperform over the following three years, while positive abnormal returns are associated with actively monitoring SWFs. We conclude that SWFs’ corporate governance role tends to affect the value of the firm.

The impact of enterprise systems on corporate performance

This research studied the effect of investments in enterprise resource planning (ERP), supply chain management (SCM) systems on a firm’s long-term stock price performance and profitability measures such as return on assets and return on sales. The results are based on a sample of 558 announcements of ERP implementations, 420 SCM implementations. Our analysis of the financial benefits of these implementations gives mixed results. In the case of ERP systems, we observed some evidence of improvements in profitability but not in stock returns. The results for improvements in profitability are stronger in the case of ERP systems. On average, adopters of SCM system have positive stock returns, as well as improvements in profitability. Although our results are not uniformly positive across the different enterprise systems (ES), they are encouraging, despite the high implementation costs. This should make less help to concerns that some have expressed about the viability of ES, given the highly publicized implementation problems at some firms. Key words: Enterprise resource planning (ERP) and supply chain management (SCM).

Misdeeds Matter: Long-Term Stock Price Performance after the Filing of Class-Action Lawsuits

Consistent with theory, this study of shareholder litigation found a broad transformation in company characteristics and risk exposures and generally negative short- and long-term performance effects that differed substantially between two types of allegations. The findings have important implications for both regulator and institutional investor monitoring and decision-making strategies.

How accounting fraud has changed merger valuation

The accounting fraud of Enron and other firms prompted acquirers to be more diligent before investing in companies. The fraud also led to the creation of the Sarbanes–Oxley Act (SOX), which contains provisions that require more due diligence for firms that pursue mergers. We document significant changes in the behaviour and valuation of mergers since SOX. Acquirers rely more heavily on financial and legal advisors, while targets rely more heavily on financial advisors. The total premium (which includes the target's stock price run up) that acquirers pay for targets is significantly lower since SOX. The long-term stock price performance following mergers is more favourable (or less unfavourable) since SOX, regardless of the horizon used to measure long-term stock price performance. Whether the more conservative pursuit of targets by acquirers is voluntary or forced by SOX provisions, acquirer decision making has improved since the accounting fraud.

Are Shareholder Proposals an Important Corporate Governance Device? Evidence from US and UK Shareholder Proposals

In the past decade, as a result of many interrelated changes in the economic environment, the role and the pressures on the corporate governance of firms have been significantly transformed in the US and the UK. To test the magnitude of this changed environment, we study one aspect of corporate governance, historically viewed as not very important, proposals by small investors. We construct comprehensive samples of US and UK shareholder proposals for the period 2000-2006 and examine where shareholder proposals occur, and the relationship between shareholder proposals and firm performance. We suggest shareholder proposals, which originate outside the internal firm governance, provide a “natural experiment” on the impact of shareholder actions on firms. The more recent data and the comparison of US and UK proposals allow us to update earlier research from earlier periods. We find that, despite perceived negligible power to force change, US shareholder proposals are associated with more significant firm changes than UK proposals, although the UK proposals have greater legal power to effect changes. US shareholder proposals are followed by significant changes in CEO turnover, board structure and long-term stock price performance, unlike what researchers found in pre 2000 data. We suggest that our results complement other studies showing that shareholder influence has increased in recent years, especially in the US.

Earnings Quality and Ownership Structure: The Role of Private Equity Sponsors

ABSTRACT: This study explores how firms' ownership structures affect their earnings quality and long-term performance. Focusing on a unique sample of private firms for which there is financial data available in the years before and after their initial public offering (IPO), I differentiate between those that have private equity sponsorship (PE-backed firms) and those that do not (non-PE-backed firms). The findings indicate that PE-backed firms generally have higher earnings quality than those that do not have PE sponsorship, engage less in earnings management, and report more conservatively both before and after the IPO. Further, PE-backed firms that are majority-owned by PE sponsors exhibit superior long-term stock price performance after they go public. These results stem from the professional ownership, tighter monitoring, and reputational considerations exhibited by PE sponsors.

The Performance of Leveraged Buyout-Backed Initial Public Offerings in the UK

This paper investigates the long-term stock price performance of initial public offering (IPO) firms in the United Kingdom that were previously owned by leveraged buyout (LBO) funds. A sample of 128 LBO-backed IPOs and 1,121 non-LBO-backed IPOs between 1990 and 2006 is analysed for the long-term performance of these offerings. The analysis suggests that LBO-backed IPOs beat the stock market and outperform non-LBO-backed IPOs. The analysis identifies factors driving outperformance, most significantly the percentage of share capital held by the buyout group after the offering.

The Performance of Private Equity-Backed Initial Public Offerings in Germany

This paper investigates the long-term stock price performance of initial public offering (IPO) firms in Germany that were previously owned by private equity (PE) funds. A sample of 138 PE-backed IPOs (33 buyout- and 105 venture-backed) and 383 non-PE-backed IPOs between 1990 and 2007 is analysed for the long-term performance of these offerings. The analysis suggests that PE-backed IPOs outperform the stock market over the three-year term. On a risk-adjusted basis, returns are positive over a five-year post-IPO period. Within the PE-backed sample, venture capital-backed IPOs outperform buyout-backed offerings.

Strategic objectives, industry structure and the long-term stock price performance of acquiring and rival firms

An acquiring firm's strategic objective and post-acquisition stock price performance are determined, at least in part, by the industry's outlook and structure, and by the acquiring firm's market position. Acquiring-firm managers are more likely to acquire a related target firm when the industry outlook is favourable, the four-firm concentration ratio is low, and the firm is a major competitor. Related acquisitions by industry leaders are the most successful in terms of increasing acquiring-firm shareholder wealth. However, we find no evidence that acquiring firms systematically gain a competitive advantage over rival firms, when the rival firms are classified by size and competitive position.

The impact of enterprise systems on corporate performance: A study of ERP, SCM, and CRM system implementations

This paper documents the effect of investments in Enterprise Resource Planning (ERP), Supply Chain Management (SCM), and Customer Relationship Management (CRM) systems on a firm's long-term stock price performance and profitability measures such as return on assets and return on sales. The results are based on a sample of 186 announcements of ERP implementations, 140 SCM implementations, and 80 CRM implementations. Our analysis of the financial benefits of these implementations yields mixed results. In the case of ERP systems, we observe some evidence of improvements in profitability but not in stock returns. The results for improvements in profitability are stronger in the case of early adopters of ERP systems. On average, adopters of SCM system experience positive stock returns as well as improvements in profitability. There is no evidence of improvements in stock returns or profitability for firms that have invested in CRM. Although our results are not uniformly positive across the different enterprise systems (ES), they are encouraging in the sense that despite the high implementation costs, we do not find persistent evidence of negative performance associated with ES investments. This should help alleviate the concerns that some have expressed about the viability of ES given the highly publicized implementation problems at some firms.

Managerial Decisions and Long-Term Stock Price Performance

Managerial Decisions and Long-Term Stock Price Performance

Roll-Ups: Performance and Incentives for Industry-Consolidating IPOs

This study examines the motivations for and empirical performance of roll-up transactions, a special class of initial public equity offering where multiple small business entities are consolidated into a single publicly traded company. Using a sample of 47 deals initiated between 1994 and 1998, we find that the long-term stock price performance of roll-ups substantially lags that of several benchmarks. Further, measures of accounting profitability for these new firms are, on average, significantly lower than those for companies from comparable industries. An analysis of the cross-sectional variation in long-run stock performance reveals that it is important that managers and owners of companies acquired in the roll-up remain involved in the business as shareholders and directors. Further, while the market's response to announcements of subsequent acquisitions by the roll-up firms is positive, market-adjusted post-announcement returns are significantly negative. We conclude that, as an organizational form, roll-ups have not met investor expectations and have, on average, decreased shareholder value.

Why Do Firms Smooth Earnings?

We develop a model that explains why the manager of a firm may smooth reported earnings by reducing its variability through time. Greater earnings volatility leads to a bigger informational advantage for informed investors over uninformed investors. If a sufficient number of current shareholders are uninformed and face some likelihood of trading in the future for liquidity reasons, then an increase in the volatility of reported earnings will magnify the trading losses these uninformed shareholders perceive. They will, therefore, want their firm's manager to produce as smooth a reported earnings stream as possible. Interestingly, it is a concern with long-term stock price performance rather than a preoccupation with the short-term performance that causes smoothing. Empirical implications are drawn out that link earnings smoothing to managerial compensation contracts, uncertainty about the volatility of earnings and the ownership structure.