Lower Abnormal Returns Research Articles

Intermediation in Private Equity: The Role of Placement Agents

Intermediation in private equity involves illiquid investments, professional investors, and high information asymmetry. We use this unique setting to empirically evaluate theoretical predictions regarding intermediation. Placement agent usage has become nearly ubiquitous, but agents are associated with significantly lower abnormal returns in the cross-section. However, returns are higher for funds employing a top-tier agent, and for first-time funds employing an agent. We also find evidence that agents may mitigate investment risk. Our results provide support for both the certification and influence peddling roles of intermediaries discussed in theoretical literature, suggesting heterogeneous motives for intermediation in the private equity industry.

Liquidity Spillovers in Hedge Funds: Evidence from the Holdings of Funds of Hedge Funds

We examine the funding liquidity risk of funds of hedge funds (FoFs) by proposing a new measure, illiquidity gap, which captures the mismatch between the liquidity of a FoF’s portfolio and the liquidity that a FoF offers to its own investors. We find that hedge funds that are exposed to distressed sales of FoFs, especially those with higher illiquidity gaps, subsequently exhibit lower abnormal returns. We show that FoFs with greater illiquidity gaps are less likely to access star hedge funds, perform worse during market crises, and have greater exposure to investor runs.

On the precision of public information and mutual fund performance

I show that mutual fund managers who adjust their portfolio holdings based on changes in the variation of analyst forecasts achieve significantly lower abnormal returns. Utilizing a partially revealing rational expectations equilibrium (REE) setup, I show that an uninformed (hence, unskilled) investor places greater weight on the public signal relative to an informed investor, given an increase in the precision of public information. Following Kacperczyk and Seru, I formulate a new measure of managerial skill based on the standard deviation of analyst recommendations. This measure, dubbed RPIσ, captures the sensitivity of changes in mutual fund portfolio holdings because of changes in the standard deviation of analyst forecasts. Statistical evidence shows that abnormal returns decrease in RPIσ. The results are robust to various conventional performance benchmarks and alternative formulations of RPIσ using analyst price targets, earnings per share forecasts and coefficients of variation.

Effect of information disclosure and transparency ranking system on mispricing of accruals of Taiwanese firms

This paper examines whether disclosure transparency, as measured by the rankings of “Information Disclosure and Transparency Ranking System” (IDTRS) constructed by Taiwan Securities and Futures Commission in 2003, reduces accrual anomaly and is useful particularly for sophisticated investors in valuing stocks using accruals. The preliminary results indicate that firms with high rankings show a limited reduction in overpricing of accruals and cash flow and lower abnormal returns, relative to firms with low rankings in disclosure transparency. Given more disclosure, firms with more sophisticated institutional shareholders exhibit significantly lower mispricing of accruals and future abnormal returns. However, after controlling for confounding factors influencing stock returns, we find no evidence that accruals predict abnormal returns. Taken together, the findings suggest that IDTRS is useful in reducing mispricing of accruals for sophisticated investors, but the disclosure effect of the IDTRS may not be considerable enough to exhibit substantial benefit from disclosure on mitigating the mispricing of accruals. The evidence provides policy implications to the regulatory authority in developing a mechanism to lessen the information asymmetry problem.

The cross-section of returns, benchmark model parameters, and idiosyncratic volatility of nuclear energy firms after Fukushima Daiichi

This study analyzes how the stock market returns, the factor loadings from the Carhart (1997) 4-factor model, and the idiosyncratic volatility of shares in energy firms have been affected by the Fukushima nuclear accident. Unlike existing studies, which provide evidence of a wealth transfer from nuclear to renewable energy firms for specific countries, we use an international sample and investigate whether changes in the regulatory environment and the firm-specific commitment to nuclear and renewable energies correlate with the capital market's reactions to the Fukushima Daiichi accident. Our findings suggest that the more a firm relies on nuclear power, the more its share price declined after the accident. A commitment to renewable energies does not prevent declines in share prices but significantly helps to reduce the increase in market beta that is associated with this event. Nuclear energy firms domiciled in countries with a higher number of regulatory interventions that were triggered by the catastrophe have lower abnormal returns than those that are domiciled elsewhere. However, as a cross-sectional analysis reveals, a stronger commitment to nuclear power is the main driver for negative stock market returns. Furthermore, nuclear energy firms domiciled in countries with stronger regulatory shifts away from nuclear energy experience significant increases in market beta and the book-to-market equity factor loading according to the Carhart (1997) 4-factor model. We conclude that capital market participants are able to differentiate between the affectedness of firms with respect to their product portfolio. Energy firms could prevent increases in market beta due to catastrophes such as the Fukushima Daiichi accident by shifting some of their energy production from nuclear to renewable or other sources.

Go Down Fighting: Short Sellers vs. Firms

This study examines battles between short sellers and firms. Firms use a variety of methods to impede short selling, including legal threats, investigations, lawsuits, and various technical actions intended to create a short squeeze. These actions create short sale constraints. Consistent with the hypothesis that short sale constraints allow stocks to be overpriced, firms taking anti-shorting actions have in the subsequent year very low abnormal returns of about −2% per month.

The Effects of the Fukushima Daiichi Nuclear Accident on Stock Prices of Firms with Nuclear, Renewable and Conventional Energy Production

This study analyzes how the stock market returns, the factor loadings from the Carhart (1997) 4-factor model, and the idiosyncratic volatility of shares in energy firms have been affected by the Fukushima nuclear accident. In comparison with existing studies, which provide evidence of a wealth transfer from nuclear to renewable energy firms for specific countries, we use an international sample and investigate whether changes in the regulatory environment and the firm-specific commitment to nuclear and renewable energies correlate with the capital market's reactions to the Fukushima Daiichi accident. Our findings suggest that the more a firm relies on nuclear power, the more its share price declined after the accident. A commitment to renewable energies does not prevent declines in share prices but significantly helps to reduce the increase in market beta that is associated with this event. Nuclear energy firms which are domiciled in countries with a higher level of regulatory changes that were triggered by the catastrophe have lower abnormal returns than their peers. However, as a cross-sectional analysis reveals, higher commitments to nuclear power are the main driver for negative stock market returns. Furthermore, nuclear energy firms domiciled in countries with stronger regulatory shifts away from nuclear energy experience significant increases in the size- and book-to-market equity factor loadings from the Carhart (1997) 4-factor model. We conclude that capital market participants are able to differentiate between the affectedness of firms with respect to their product portfolio. Energy firms could prevent increases in market beta due to catastrophes such as the Fukushima Daiichi accident by shifting some of their energy production from nuclear to renewable or other energies.

War And Peace: The Reaction Of Defense Stocks

In this paper we examine the response of a portfolio of defense contractors to war- and peace-related events. An event-study methodology is employed, and GARCH estimates of abnormal returns suggest that on balance the defense portfolio responds positively to war-related announcements and negatively to peace-related announcements. A cross-sectional analysis of the abnormal returns to firms in the Gulf War indicates that larger abnormal returns are associated with R&D intensive firms in concentrated industries, while lower abnormal returns are associated with firms that commit to above-average levels of capital expenditures.

Is Idiosyncratic Risk a Cost to Short-Sellers? Evidence from China

Examining the lift of the ban on short-sales in Chinese equity markets, I find that, consistent with Miller (1977), stocks that become eligible for short selling experience a decline in prices. More importantly, I find that within the first 15 days of short-selling, stocks with relatively higher idiosyncratic risk are associated with relatively less short-selling and relatively lower price declines. The documented trend in prices reverses over time so that stocks with relatively high idiosyncratic risk have lower abnormal returns after day 15. The main results are more pronounced when idiosyncratic risk is high and are robust to controls for dispersion of analyst opinions, market capitalization, and stock cross-listings. Overall, my findings prove empirical support for the idea proposed by Shleifer and Vishny (1997) that idiosyncratic risk deters arbitrageurs from taking short positions in overvalued stocks.

The 2008 short sale ban: Liquidity, dispersion of opinion, and the cross-section of returns of US financial stocks

This study examines the cross-sectional impact of the 2008 short sale ban on the returns of US financial stocks. Motivated by the large cross-sectional variation in the extent to which banned stocks suffer an illiquidity shock, we hypothesize that stocks with larger liquidity declines are associated with poorer contemporaneous stock returns. The evidence supports this hypothesis and suggests that this effect is stronger for more liquid stocks, as predicted by Amihud and Mendelson (1986). Moreover, consistent with Miller’s (1977) model, we report a valuation reversal whereby stocks with higher abnormal returns at the onset of the ban have lower abnormal returns at its removal. Our findings are robust when we control for firms most affected by TARP, include non-banned matched firms, and compare banned firms’ stock returns with their bond returns. From a policy standpoint, the ban reduced valuations, ceteris paribus, of the stocks that were hardest hit by illiquidity.

Revenue enhancement and wealth effects of mergers and acquisitions in Asian emerging markets

Revenue enhancement and value creation are core issues of mergers and acquisitions (M&A). Revenue enhancing synergy associated with cross-industry M&A is supported by Asian emerging markets. Both within-industry M&A and cross-industry M&A deals realise significant positive abnormal returns. The difference between the two categories of M&A is statistically significant in a three-day window, but not statistically significant in a two-day window. Information leakages may be driving the larger valuation effects because a three-day window includes one day before the announcement date. Since large firms tend to diversify their business, the result that cross-industry M&A deals realise lower abnormal returns than within-industry may be driven by the firm size effect.

Value creation through spin‐offs: A review of the empirical evidence

This paper reviews the literature on the factors that influence the wealth effects associated with the announcements of corporate spin‐offs (also known as demergers). Meta‐analysis is used to summarize the findings of 26 event studies on spin‐off announcements. A significantly positive average abnormal return of 3.02% is found during the event window. Returns are higher for larger spin‐offs, for divestments that are tax or regulatory friendly and for spin‐offs that lead to an improvement of industrial focus. It is also found that spin‐offs that are later completed are associated with lower abnormal returns than non‐completed spin‐offs. The second part of the paper overviews studies on the long‐run stock price performance of spin‐offs. Even though early studies find a long‐run superior performance, this effect is no longer found in later studies that use more refined statistical tests.

The 2008 Short Sale Ban: Liquidity, Dispersion of Opinion, and the Cross-Section of Returns of U.S. Financial Stocks

This study examines the cross-sectional impact of the 2008 short sale ban on the returns of U.S. financial stocks. Motivated by the large cross-sectional variation in the extent to which banned stocks suffer an illiquidity shock, we hypothesize that stocks with larger liquidity declines are associated with poorer contemporaneous stock returns. The evidence supports this hypothesis and suggests that this effect is stronger for more liquid stocks, as predicted by Amihud and Mendelson (1986). Moreover, consistent with Miller’s (1977) model, we report a valuation reversal whereby stocks with higher abnormal returns at the onset of the ban have lower abnormal returns at its removal. Our findings are robust when we control for firms most affected by TARP, include non-banned matched firms, and compare banned firms’ stock returns with their bond returns. From a policy standpoint, the ban reduced valuations, ceteris paribus, of the stocks that were hardest hit by illiquidity.

O/S: The Relative Trading Activity in Options and Stock

Relatively little is known about the trading volume in derivatives relative to the volume in underlying stocks. We study time-series properties and the determinants of the options/stock trading volume ratio (O/S) using a comprehensive cross-section and time-series of data on equities and their listed options. O/S is related to many intuitive determinants such as delta and trading costs, and it also varies with institutional holdings, analyst following, and analyst forecast dispersion. O/S is higher around earnings announcements (suggesting increased trading in the options market), and higher O/S predicts lower abnormal returns after the earnings announcement, suggesting that options trading improves market efficiency.

The Value of Your IPO Advisor's Advice: An M&A Perspective

This empirical paper addresses the issue of the quality of financial advice given by investment banks regarding firms’ acquisition activities. Motivated by anecdotal and documented evidence on the cases of ”fee generating” motives in advisory business, the hypothesis of the paper is whether the better established contacts of investment bankers with firm’s executives can boost the phenomenon of ”chasing deals” and lead to a larger number of value destroying acquisitions. We investigate whether closer contacts between investment bankers and corporate management established at IPO, lead the firm to perform acquisitions characterized with lower abnormal returns. In this paper, the conjecture is that those banks, who have underwritten company’s IPO issue, have preferential access to its corporate executives, in that the bankers can easily identify and pitch potential takeover targets deliberately and insistently. If the ”fee generating” hypothesis is true, we expect the abnormal returns at acquisitions to be lower for firms that went public with banks actively advising on M&As, and when the underwriter’s current M&A business is deteriorating. In contrast, whenever a firm goes public with an IPO-specialized bank, which does not seek fees from extra M&A advisory, we expect this firm to have higher announcement returns at acquisitions. This paper is the first to our knowledge that analyzes the misalignment of M&A advisory bankers, in a framework of relationship banking emerging during IPO underwriting. The results suggest that there is indeed a negative relation between the aspiration of the underwriter to do advisory business and firm’s stock performance at acquisitions. The results stay robust when controlling for possible endogeneity of strategic choice of the investment banker for IPO. ∗I am grateful to Michel Habib, Alexander Ljungqvist, Lucy White, Alex Edmans, Zsuzsanna Fluck and Gerzensee Doctoral Workshop participants for valuable comments and suggestions. Correspondence: Swiss Finance Institute, Plattenstr 32, 8032 Zurich T. +41 44 6343596 e-mail: plaksen@isb.uzh.ch

Count on Me: Investment Banks and Prevention of Wealth Transfer in Share Repurchases

We study how related conglomerates, financial conglomerates that had a previous advisory/underwriting relationship in the bond market with a firm and hold an equity stake in it, condition the firm's payout policy. We focus on share repurchases. We argue that the prior underwriting/advisory position in the bond markets leaves the conglomerate with a reputational concern about the institutions it has helped to place bonds with that induces it to use its equity stake to push against the wealth transfer from bondholders to equityholders embedded in the repurchase. We find a negative correlation between the probability of the share repurchase and the equity ownership by the related conglomerate. An equity stake of the related conglomerate is also associated with lower stock abnormal returns, both around the repurchase and in the long run. In particular, companies with equity ownership by related conglomerates exhibit 3(7)-day abnormal returns lower by 0.65%(1.32%) and 1(2,3)-year abnormal returns lower by 4.52%(8.64%,12.17%) then the abnormal returns of companies with no equity ownership by related conglomerates. This leads to lower wealth transfer from the bondholders to the equity holders. Indeed, the related conglomerate's stake is linked to a lower increase in the bond yields: the higher the stake, the lower the drop in price of the bonds around the repurchase. We present evidence that equity ownership by related conglomerates reduces the magnitude of wealth transfer in our sample by about 1/3.

Value Creation Through Spin-Offs: A Review of the Empirical Evidence

This paper reviews the literature on the factors that influence the wealth effects associated with the announcements of corporate spin-offs. We use meta-analysis to summarize the findings of 26 event studies on spin-off announcements. We find a significantly positive average abnormal return of 3.02% during the event window. Returns are higher for larger spin-offs, for divestments that are tax or regulatory friendly and for spin-offs that lead to the divestiture of a non-related division. We also find that spin-offs that are later completed are associated with lower abnormal returns than non-completed spin-offs. In the second part of the paper we overview studies on the long-run stock price performance of spin-offs. Even though early studies find a long-run superior performance, this effect is no longer found in later studies that use more refined statistical tests.

The evolution of the January effect

This paper extends recent studies of the January effect by investigating the evolution of the daily pattern of the effect across size deciles. Our evidence documents a sizable mean reverting component beginning in the latter part of January and a shorter duration of the seasonal effect. Despite lower abnormal returns in the second part of January, higher abnormal returns in the first part of January keep the magnitude of the January effect unchanged. Further analysis of daily trading volumes suggests a stable trading volume intensity in the first part of January and a substantial decline in trading volume intensity in the second part of January.

Determinants of firm‐specific thresholds in acquisition decisions

AbstractWe develop a model to explain why some firms make acquisitions, while other firms with equal performance expectations do not. We argue that the decision to acquire is not strictly a function of expected abnormal returns, but also depends on a firm's unique acquisition threshold. Our model posits that the threshold is determined by governance, managerial competence, synergy with assets in place, and synergy with growth options. Our empirical findings, drawn from a sample of over 27 000 US acquisitions, offer strong support for the model, suggesting that firms with low thresholds may choose to invest despite comparatively low abnormal returns. Copyright © 2007 John Wiley & Sons, Ltd.

Alternative Methods of Convergence Toward U.S. Market and Legal Regulations: Cross-Listing vs. Merging with U.S. Bidders

Non-U.S. firms have two options to converge toward U.S. capital market and legal regulations - to cross-list in the U.S. or to agree to be acquired by a U.S. bidder. We show that companies that have lower growth opportunities, are more capital intensive, and seek bonding benefits through compliance with U.S. exchange (rather than OTC market) requirements are more likely to be acquired, and that firms from civil law countries tend to cross-list. We document that the adoption of Sarbanes-Oxley Act of 2002 (SOX) led to an increase in the propensity to be acquired for firms from civil law countries, and to a greater rate of cross-listings for capital intensive firms from common law countries and for firms from countries with strong protection of investor rights. We also show that Market-to-Book values of non-U.S. firms following cross-listing in the U.S. tend to be lower when these firms were expected to be acquired. Similarly, both non-U.S. targets and U.S. bidders experience lower abnormal returns in acquisitions involving targets expected to cross-list. Our results imply the existence of optimal convergence choices of non-U.S. firms. In addition, the adoption of SOX appears to have changed some determinants of these choices due to shift in benefits and costs of compliance with U.S. regulations.