Poor Stock Performance Research Articles

Evaluating the financial case for investing in, or divesting from, tobacco investments.

Tobacco Free Portfolios urges institutions to pledge against investing in, and to withhold financial services from, tobacco companies. Their goal is to create a 'tobacco-free world'. They argue that without financial and investor support, these companies' operations will become less sustainable. To assess the financial rationale for investing in, or divesting from, tobacco companies. Using data sourced from Bloomberg from 2008 to 2023, we evaluate historical sales volumes, real revenue, real gross profit per cigarette, stock performance and price-to-earnings trends for nine leading listed global tobacco companies. Cigarette sales volumes have steadily declined from 2008 to 2023. Despite efforts to diversify towards novel products, revenues from these products remain small, and cigarettes remain the primary revenue source. Excluding inorganic growth, six of the nine companies experienced real revenue declines from 2008 to 2023. Since 2016, many companies experienced declines in real gross profit per cigarette, indicating that they find it increasingly difficult to offset reduced cigarette sales through net-of-tax price increases. Since 2016, all nine tobacco companies' stocks have substantially underperformed the market. This stands in contrast to the 2008-2016 period, during which all nine companies' stocks substantially outperformed the market. Tobacco companies have experienced deteriorating financial performance since 2016, amidst ever-escalating regulation. It remains unclear whether the growth in novel products will be rapid enough to mitigate the decline in cigarette sales. This uncertainty poses heightened risks for investors, and there is a real possibility of continued poor stock performance.

Isolation, characterization, and assessment of Bacillus rugosus potential as a new probiotic for aquaculture applications

Aquaculture is an important component of the world food supply and a significant source of protein. However, this industry faces numerous problems. Including poor fish feed digestion and uneconomic nutrient utilization. This can result in unsatisfactory growth rates and poor stock performance. Utilizing probiotics, which are beneficial microbes that can enhance digestive systems and general fish health, is one possible way to address these issues. This study was designed to identify and evaluate a novel strain of Bacillus as a promising probiotic. The strain of Bacillus rugosus that was examined and coded NM007 showed promising probiotic characteristics that could help fish digest and utilize their feed more efficiently, reduce feed waste, and improve their digestive systems. B. rugosus NM007 exhibited the ability to produce digestive enzymes like protease, amylase, and lipase, which are the main digestive enzymes. It showed strong auto-aggregation activity and co-aggregation activity with Aeromonas sp. and Streptococcus sp. It also demonstrated tolerance to the presence of bile salt, acidic pH, and salinity up to 60 ppt. The sensitivity analysis towards antibiotics, hemolytic activity and the safety assessment on Nile tilapia fish (Oreochromis niloticus) confirmed the safety of this isolate. Based on the findings of this investigation and the isolate’s characterization, Bacillus rugosus NM007 could serve as a new promising probiotic bacterium for aquaculture.

Why do managers announce the intention to sell large assets?

AbstractNearly one‐third of asset sale announcements are preceded by a public statement of the intent to sell. These voluntary disclosures generate significant average returns of 1.1%. Pre‐announcements bias returns around the actual asset sales toward zero. Due to opportunistic managerial behavior, pre‐announcements occur after poor stock performance and CEO turnover. Managers also opportunistically exercise options around the pre‐announcements and receive potential benefits from the uptick in stock prices. Although we find no effect of pre‐announcements on long‐term operational performance, we do observe a negative effect on stock returns using three and four‐factor models.

Is your surname remunerative? Surname favorability and CEO compensation

We find that CEOs with more favorable surnames receive significantly higher compensation. The estimated effect of surname favorability is unique and incremental to the documented effects of various firm, board, and CEO characteristics. CEOs with French or German surnames receive significantly lower compensation after the French and German governments' opposition to the Iraq war. Surname favorability is not associated with corporate investments, disclosure policies, or firm performances. The results are more pronounced for professional (i.e., non-founder) or short-tenured CEOs and for firms with lower institutional ownership. Surname favorability reduces the likelihood of forced CEO turnover following poor stock performance but is not associated with a CEO's self-serving behaviors. Our results suggest that the effect of surname favorability is attributable to inefficient contracting by the board of directors. Our findings have implications for corporate stakeholders who have committed to the efficient contracting of CEO compensations.

Causes and consequences of flocked resignations of independent directors: Inferences from firm impacts following Kangmei Pharmaceutical's scandal

The monitoring role of independent directors could be compromised by weak legal environments and a lack of law enforcement, especially in emerging markets. We explore this issue by investigating the possible causes and consequences of large-scale resignations of independent directors across Chinese firms following Kangmei Pharmaceutical's financial scandal. We show that those resignations signaled potential problems for respective firms because those companies were more likely to be exposed to financial misconduct and experience poor stock performance. Our evidence suggests that holding independent directors accountable for negligence of duty is an essential component of corporate governance.

What Has Gone Wrong With Japan’s Stock Performance Over the Last Three Decades?

Japan has a poor stock performance compared with the US in three decades (1989-2019). At the end of 1989, the Nikkei 225 Index reached its all-time high (38,916); by the end of 2019, the index was 23,657, a change of −39% over the entire period. Meanwhile, the S&P 500 Index increased from 353 to 3,231, a change of 815%. To comprehend this matter, we investigate the areas of economic conditions, corporate governance, corporate financial policies, corporate financial performance, and relative valuation. Our research method is a combination of qualitative and quantitative approaches. Our analyses reveal a variety of problems: slow GDP growth, weak legal protections and low governance ratings, insiders-dominated and cross-holding ownership structure, excess financial assets, low profitability, slow growth of earnings and revenues, and contraction of relative valuation. In the most recent decade (2009-2019), we note some improvements: expansionary monetary policy, productivity growth, better corporate governance, increased dividend payments and stock repurchases, earnings growth, and enhanced profitability. Therefore, Japan’s transformation is substantial, though it is gradual and incomplete.

Korean Firms’ Share Repurchase Activities: Firm Characteristics, Financing and Investment

This study examines Korean listed firms’ share repurchasing activities over the period 2006~2016 using the amount of net share repurchases from annual statements of cash flow. Korean firms use dividends rather than share repurchases as their primary payout method. Each year, the proportion of share repurchasing firms is lower than 20%, whereas the proportion of dividend-paying firms is around 70% or higher. Univariate analysis and Tobit regressions reveal that the incidence and amount of share repurchases increase with firm value, size, and cash flow. Our findings do not suggest that low valuations (or poor stock performance) or low debt ratios motivate share repurchases. Korean firms use primarily internal funds to finance share repurchases, as share repurchasing firms experience substantial increases in retained earnings. Share repurchasing firms do not invest less than other firms do, suggesting that share repurchases do not result in underinvestment. Compared to dividends, share repurchases are more positively associated with firm value. Compared to share repurchase, dividends are more positively associated with cash flow and financial maturity, but more negatively associated with stock return volatility. Finally, firms with high controlling shareholders’ ownership tend to choose dividends over share repurchases in their payout policy.

Once bitten twice shy? Evidence from the U.S. banking industry during the crash of the energy market

Abstract We explore whether banks learn from past experience and modify their risk culture. Evaluating bank risk culture during the 2014 energy crash fueled by excessive bank lending, we find banks with a quick recovery after the 2007 subprime crisis find it unnecessary to change their risk culture, and banks that struggled to recover modify their risk culture following the subprime crisis. As a result, banks with poorer stock performance and a lower z-score during the subprime crisis that had a quick recovery are more likely to underperform during the energy crash. However, results show that while these banks do not modify their overall risk culture, they have learned from the subprime crisis by better positioning themselves for potential losses. In addition, larger banks and banks that did not receive TARP funding have not significantly changed their risk culture following the subprime crisis.

CEO and director compensation, CEO turnover and institutional investors: Is there cronyism in the UK?

This paper provides new evidence that correlated abnormal compensation of CEOs and directors is symptomatic of agency problems associated with cronyism. We find that director abnormal compensation has a negative impact on the likelihood of CEO turnover and reduces the sensitivity of CEO turnover to poor stock performance. However, for firms with greater institutional ownership the adverse effects of director abnormal compensation are mitigated, and the negative impact of abnormal compensation on firm performance is reduced. These findings suggest that correlated abnormal compensation of CEOs and directors is likely associated with agency problems.

Can Deal Failure Be Predicted?

We examine whether realized value destruction is predicted by the market at acquisition announcement. To identify acquisition failure, we manually construct a sample of transactions with large goodwill write-downs. We find announcement returns fail to forecast the probability and magnitude of future write-downs. Prediction improves for large, public target, and large acquirer transactions, but errors remain large. Announcement returns also do not capture other ex-post symptoms of failure – poor stock and operating performance, distressed delisting, and CEO turnover. Our evidence suggests that acquisition value destruction may be largely triggered by latent factors that are unknown to the market at announcement.

Imation Corp.: An Activist Proxy Battle (a)

The A case in this series takes the viewpoint of a senior portfolio manager who has to decide how to vote the shares held by Wells Fargo Asset Management: she can vote for the current board members of Imation Corp. (IMN) or for the nominees put forward by an activist hedge fund. The hedge fund sent an open letter to IMN shareholders seeking support to replace the key members of IMN's board, as the first step in pushing through sweeping changes in compensation and strategy at IMN. The case illustrates the power of an activist investor to change the governance and strategy of a company. The B case reveals that the activist's nominees were elected, and a series of decisions ensued that dismantled IMN. The case presents students with ethical questions regarding the treatment of IMN shareholders; it also highlights the influence of proxy advisers in a proxy vote. The case has been taught in an MBA corporate finance elective as the second class in activism, following another activist case, Genzyme and Relational Investors: Science and Business Collide? (UVA-F-1660). It can be taught to all undergraduate and graduate levels of business students, as well as seasoned executives. Excerpt UVA-F-1841 Rev. Dec. 18, 2018 Imation Corp.: An Activist Proxy Battle (A) On May 10, 2015, Avery Yin, a senior portfolio manager at Wells Fargo Asset Management, was in the process of reviewing Wells Fargo's positions in Imation Corp. (IMN) across a number of its mutual funds. In April 2015, the Clinton Group, Inc. (CG), a New York City–based hedge fund with more than $ 1.5billion in assets under management, sent an open letter to shareholders seeking support to elect its slate of nominees to IMN's six-person, staggered board. CG's candidates would replace the three incumbent board members who were up for reelection: L. White Matthews (chairman), Mark Lucas (CEO), and David Stevens (director) (see Exhibit1). Replacing half of the board with its own appointees would be CG's first step in pushing through sweeping compensation and strategic changes in the company. Wells Fargo owned 10.2% of IMN's stock across a number of its funds and had been a loyal supporter of Lucas since he had taken over as CEO in 2010. Thus Yin found herself an important player in the battle for control of IMN. A shareholder, or “proxy,” vote would determine whether the current IMN board and management would continue to run the company or CG would pursue its strategy after replacing Matthews, Lucas, and Stevens with its own board candidates. When Yin considered that IMN's performance history had led to a stock price decline of 63% for the period 2010–14 (see Exhibit2), she was not surprised that an activist investor such as CG had emerged. Yin's decision would not be straightforward. On the one hand, she respected Lucas and had consistently supported him and his turnaround strategy. On the other hand, IMN's poor stock performance made her question how much longer she could support Lucas without a backlash from her superiors and from Wells Fargo's mutual fund investors. Her conversations with CG had revealed that it had some valid concerns, but she was hesitant to pledge her outright support to CG given its limited track record in activist investing and the fund's small stake of approximately 3% of IMN's outstanding shares. . . .

Labor Laws and Firm Performance

U.S. labor laws impose higher costs on unionized firms in states without right-to-work (RTW) laws. I find that these firms experience poor stock performance. The difference-in-differences analysis comparing the effect of RTW laws on unionized and nonunionized firms shows that unionized firms in states without RTW laws underperform by about seven percentage points per year. I find further evidence of underperformance using alternative methodologies to estimate abnormal stock performance, examining a natural experiment, showing expected cross-sectional patterns, as well as examining profitability and the market reaction to earnings announcements.

LABOR LAWS AND FIRM PERFORMANCE

AbstractU.S. labor laws impose higher costs on unionized firms in states without right‐to‐work (RTW) laws. I find that these firms experience poor stock performance. The difference‐in‐differences analysis comparing the effect of RTW laws on unionized and nonunionized firms shows that unionized firms in states without RTW laws underperform by about 7 percentage points per year. I find further evidence of underperformance using alternative methods to estimate abnormal stock performance, examining a natural experiment, showing expected cross‐sectional patterns, and assessing profitability and the market reaction to earnings announcements.

Internal control weakness, investment and firm valuation

We propose reduced investment as a potential explanation for why firms with internal control weakness (ICW) exhibit lower valuation relative to non-ICW firms. We show that ICW firms significantly reduce investment around ICW disclosure and also have poor stock performance. Additional evidence shows that many of the investment reductions have been announced during the year before ICW disclosure. A possible explanation for investment reductions is the higher costs of financial friction associated with ICW. Consistent with this explanation, we show that ICW firms with credit ratings do not reduce their investment as much and have much better stock performance than ICW firms without credit ratings.

The Disciplinary Effects of Proxy Contests

Using a manually collected data set of all proxy contests from 1994 through 2012, I show that proxy contests play an important role in hostile corporate governance. Target shareholders benefit from proxy contests: the average abnormal returns reach 6.5% around proxy contest announcements. Proxy contests that address firms’ business strategies and undervaluation are most beneficial for shareholders. By contrast, proxy contests that aim at changing capital structure and governance do not lead to higher firm values. Relative to matching firms, future targets are smaller, they have higher stock liquidity, higher institutional and activist ownership, lower leverage and market valuation, and higher investments. Whereas most of these characteristics predict proxy contests in time series, prior to proxy contests, targets also experience poor stock performance, decreases in investments, increases in cash reserves and payouts to shareholders, and increases in management’s entrenchment. These changes in corporate policies are consistent with targets’ attempts to affect the probability of a proxy contest. This paper was accepted by Amit Seru, finance.

Firing on All Cylinders? CEO Retention and Performance: A Learning Approach

The decision a board makes to dismiss or retain their manager is the most important one it faces. This paper utilises real options analysis to develop a new learning-based model of this decision. The model presents new implications for optimised CEO survival and termination thresholds through time. Empirical evidence is found to indicate a CEO is more likely to be publicly fired after poor recent stock performance and privately fired when the manager's average accounting performance falls. This suggests that when a firm’s current stock performance is poor, the board is forced to act publicly due to shareholder pressure. When this pressure does not occur, there is indication that the board evaluates the manager's performance through time and makes rational retention decisions. This is consistent with the view that boards are sensitive to the threat (real or perceived) of shareholder outrage (when their job is threatened), and that boards may be trying to optimise long-run firm value, whereas powerful shareholders (such as blockholders) have short term incentives in stock returns. This may indicate that powerful shareholders do not have incentives that are aligned with small shareholders in maximising firm value.

Skewness Preference and Seasoned Equity Offers

We find that the degree of expected idiosyncratic skewness in seasoned equity issuers’ stock returns is an important determinant of flotation costs and subsequent abnormal stock performance. High skewness issuers incur significantly greater offer price discounts, particularly when institutional share allocation is largest, pay higher gross underwriting spreads, and exhibit poorer stock performance in the three years after issuance, all compared to low skewness issuers. These results suggest that skewness-induced overpricing increases the flotation costs of seasoned equity offers and leads to poor subsequent stock performance. Received November 18, 2014; accepted December 17, 2015 by Editor Paolo Fulghieri.

Information Asymmetry and Corporate Governance

We examine the impact of a firm’s asymmetric information on its choice of three mechanisms of corporate governance: The intensity of board monitoring, the exposure to market discipline, and CEO pay-for-performance sensitivity. We find that firms facing greater asymmetric information tend to use less intensive board monitoring but rely more on market discipline and CEO incentive alignment. These results are consistent with the monitoring cost hypothesis. In addition, we find that high information-asymmetry firms that have to substantially increase board monitoring intensity after the Sarbanes–Oxley Act suffer poor stock performance. Our evidence therefore suggests that regulators should use caution when imposing uniform corporate governance requirements on all firms.

The Determinants and Consequences of Information Acquisition via EDGAR

AbstractUsing a novel data set that tracks all web traffic on the SEC's EDGAR servers from 2008 to 2011, we examine the determinants and capital market consequences of investor information acquisition of SEC filings. The average user employs the database very few times per quarter and most users target specific filing types such as periodic accounting reports; a small subset of users employ EDGAR almost daily and access many filings. EDGAR activity is positively related with corporate events (particularly restatements, earnings announcements, and acquisition announcements), poor stock performance, and the strength of a firm's information environment. EDGAR activity is related to, but distinct from, other proxies of investor interest such as trading volume, business press articles, and Google searches. Finally, information acquisition via EDGAR, both to obtain earnings news and to provide context for it, has a positive influence on market efficiency with respect to earnings news. Overall, our results are important because they provide a unique, user‐based perspective on investor access of mandatory disclosures and its impact on price formation.

Shareholder Incentive Alignment and CEO Turnover: The Case of Split-Share Structure Reforms in China

In this study we analyze the effect of split-share structure reforms on CEO turnover and performance relationship in Chinese listed firms. We use special dataset that manually categorizes a large number of CEO turnover events as either forced or non-forced. By employing logit regression and interaction effects we find that sensitivity of abnormal stock performance to probability of forced CEO turnover in Chinese SOEs was positive during 1999-2005 but negative during 2006-2011. Post-turnover abnormal stock returns were also higher during 2006-2011 compared to 1999-2005 for Chinese SOEs. The evidence shows that split-share structure reforms affected the CEO turnover-performance relationship through exposure effect, that exposure to stock price changes has forced the owners Chinese SOEs to evaluate the managers for the poor stock performance. This also shows that alignment in the incentives of the minority and majority shareholders helps protect the interests of the minority shareholders by changing the internal monitoring mechanisms of the managers.