Poor Stock Research Articles

Behavioral Timing, Valuation and Postissue Performance of UK Initial Public Offerings

ABSTRACTUsing a sample of 1,926 UK initial public offerings (IPOs) launched from 1987 to 2007, this study introduces a new angle on testing the behavioral timing hypothesis in the context of UK IPOs via investigating relationships between the magnitude of IPOs misvaluation and postissue stock price and operating performance. IPO misvaluation is measured using (i) an intrinsic value of the firm estimated using residual income valuation model and (ii) intensity of IPO issuance activity. The findings show that stock price and operating underperformance in the postissue are directly linked to the degree of IPOs' misvaluation. Specifically, the stock price and operating performance are found to be significantly and robustly different between hot markets IPOs and cold market IPOs 3 years postissue. We also show that overvalued IPOs have lower long-run stock returns, but outperforming operating performance, than undervalued IPOs do. Our findings are broadly consistent with the behavioral explanations of the poor stock price and operating performance, supporting the U.S. results of Purnanandam and Swaminathan [2004] and Loughran and Ritter [2000].

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.

The Corporate Governance - Performance Puzzle: New Insights

This paper provides newer insights on governance – performance relationship using recent data (2007 to 2015) on anti-takeover provisions' incidence in the sample firms. Looking beyond the equally weighted methodology employed in related literature for constructing G-Index, E-Index, and Gov-Score, we present an alternate unequally weighted "new Governance (nG) Index" as governance proxy. We show that our proposed nG-Index traces governance – performance relationship more persistently than the equal-weighted measure. Firms with better governance structures are found to show higher firm values and superior operating performances in our sample period. Our analysis further reveals that a zero-investment hedge going long on poor governance stock portfolio and shorting the good governance one would have generated an abnormal return of over 1.33% per month or about 16% per year. This hedge is completely opposite to the long good governance – short poor governance strategy suggested in prior literature. We posit that such hedge reversal is an indication that, in recent years, investors seek compensation for high riskiness associated with poorly governed firms.

An application of a Chartered Institute of Management Accounting strategy on stock control: a case of the South African municipality

The aim of the study is to demonstrate how best a municipal stock control can be applied in conformity with strategic requirements of the Chartered Institute of Management Accounting (CIMA). A quantitative research method was applied. The questionnaire was formulated based on information obtained from the literature, and was distributed to only one KwaZulu-Natal (KZN) local government department. The sample consisted of 82 respondents, selected using a census sampling method. The results indicate that the stores department lack CIMA stock control strategies, leading to poor stock control policy formulation and application. Staff experience and the effect of municipal stock control policy have shown a positive and significant relationship at .000* level. Proper documentation of strategic stock control and staff experience has also shown a positive significant relationship at .004* level. Moreover, the municipal strategic stock control framework has been proposed at the end of this paper and is subject to further experiments by the scholars. Keywords: stock control, stock control policy, stock control strategies. JEL Classification: H54, M40

The effect of bidder conservatism on M&A decisions: Text-based evidence from US 10-K filings

This paper examines whether and how bidders' conservative tone in 10-K filings influences the subsequent mergers and acquisitions (M&A) investment decisions of these US firms from 1996 to 2013. Based on 39,260 firm-year observations, we find, consistent with behavioural consistency theory, that conservative bidders are less likely to engage in M&A deals. Further, those that decide to engage in M&As are likely to acquire public targets and within-industry firms. These bidders are inclined to employ more stock acquisitions than cash acquisitions. Our results also indicate that conservative bidders experience abnormally poor stock returns around the announcements of M&A investments. This provides new insights on the mechanism through which bidders' sentiments influence shareholders' wealth. Overall, these findings highlight the implications of the textual sentiment of corporate disclosure for the forecasting of corporate investment and financing decisions. Our results have practical implications, since they shed light on the value relevance of the information content of major Securities Exchange Commission (SEC)-mandated 10-K filings.

Climate Risks and Market Efficiency

We investigate whether stock markets efficiently price risks brought on or exacerbated by climate change. We focus on drought, the most damaging natural disaster for crops and food-company cash flows. We show that prolonged drought in a country, measured by the Palmer Drought Severity Index (PDSI) from climate studies, forecasts both poor stock returns and profitability ratios for food companies in that country. A long-short portfolio of global food stocks based on PDSI generates a 9.2% annualized return from 1985 to 2015. This excess predictability is larger in countries having little history of droughts prior to the 1980s. Our findings support regulatory concerns of markets inexperienced with climate change underreacting to such risks and calls for disclosing corporate exposures.

Under new management: Equity issues and the attribution of past returns

There is a strong link between measures of stock market performance and subsequent equity issues. We find that management turnover weakens the link between equity issues and the returns that preceded the new chief executive officer (CEO). Moreover, there is a discontinuity in the distribution of equity issues around the specific share price that the CEO inherited, while there is no discontinuity around salient share prices prior to turnover. The evidence suggests that capital allocation involves an attribution of past returns not only to the firm but also to its CEO. A corollary is that a firm with poor stock market performance may be better able to raise new capital if its current CEO is replaced.

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 Production, Volume, and Return Dynamics

We study volume-return dynamics using a framework in which information flows are endogenously determined and linked to a firm's investment activities. The framework generates time-varying differences of opinion (across investor types) and trading volume, especially when a firm receives unexpectedly positive news. In addition, the framework produces cross-sectional variation in the ability of volume shocks to predict future returns (often referred to as the volume return premium). Using monthly CRSP data, we document that the high volume return premium is economically and statistically stronger (increases from 5.5% to over 10% per annum) for firms exhibiting poor stock market performance prior to volume shocks; for firms receiving positive news contemporaneously with a volume shock; and for firms with high degrees of information asymmetry. Volume shocks around earnings announcements provide additional support for this information-based framework.

Stock Returns Over the FOMC Cycle

We document that since 1994 the equity premium in the US and worldwide is earned entirely in weeks 0, 2, 4 and 6 in FOMC cycle time, i.e. in even weeks starting from the last FOMC meeting. We tie the even-week pattern causally to the Fed. The even-week returns are driven primarily by the Fed reacting to poor stock returns with more accommodation than expected (a “Fed put”). The timing comes from Fed monetary-policy decision-making tending to happen in even weeks. Evidence suggests systematic informal communication of Fed officials with the media and financial sector is the information transmission channel.

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.

An Empirical Investigation on the Appointments of Supply Chain and Operations Management Executives

This paper provides empirical evidence on the performance effects and choice of appointments of supply chain and operations management executives (SCOMEs). The analysis is based on a sample of 681 SCOME appointments that were publicly announced during the 2000–2011 period. We find that the stock market reaction is positive on the day of the announcement. Categorizing the SCOME appointments as new or old and insider or outsider, we find that the market reaction for newly created SCOME positions is positive. The market also reacts more positively when a SCOME is an outsider rather than an insider. The strongest positive reaction is observed when outsiders are hired for newly created SCOME positions. We find evidence of both poor stock price performance and poor operating performance in the period preceding the appointment of new SCOMEs. New SCOME appointments are not followed by an immediate improvement in stock price and operating performance. However, there is no further decline in performance, suggesting that the decline observed in the preappointment period does not continue after the new SCOME is appointed. We also find that the likelihood of a SCOME being an outsider is greater for firms that are smaller, operate in more concentrated industries, and have experienced poor prior performance. This paper was accepted by Serguei Netessine, operations management.

Market Timing with a Robust Moving Average

In this paper we entertain a method of finding the most robust moving average weighting scheme to use for the purpose of timing the market. Robustness of a weighting scheme is defined its ability to generate sustainable performance under all possible market scenarios regardless of the size of the averaging window. The method is illustrated using the long-run historical data on the Standard and Poor's Composite stock price index. We find the most robust moving average weighting scheme, demonstrates its advantages, and discuss its practical implementation.

Obsolete Pesticides in Saudi Arabia: Problems, Prevention and Disposal

Expired and deteriorated stocks of pesticides are present in most developing countries. Those products no longer can be used to control the intended target pests as recommended on the label. The existence of obsolete pesticides can be due to many reasons such as inadequate storage facilities or storage containers, in addition to poor stock management and record keeping. Banning the pesticides while in storage and poor assessment of pesticide requirements, such as inability to forecast pest outbreaks, may cause prolonged storage of products with short shelf lives. Furthermore, marketing systems with aggressive profit motive by vendors may lead to accumulation of expired pesticides. These stocks are often stored in poor conditions, which may cause damage and leaking of the containers with obsolete and dangerous pesticides that may pose a threat to human health and the environment. Disposal of obsolete pesticides in a safe and environmentally sound manner are only available in a few newly industrialized countries, but the developing countries do not have such facilities. Therefore, the recommended disposal method for stockpiles of obsolete pesticides in developing countries should systematically undergo various steps. These would include inventory, repackaging, safe guarding of the pesticides and then shipment of the pesticides to a country that has appropriate hazardous waste incineration facilities. This global environmental issue is a result of decades of mishandling. It is most dramatic in the developing world which lack the resources and funding for remediation of the hazardous waste sites and obsolete pesticides. Conservative estimates find well over 500,000 tons of obsolete pesticides in developing countries, with 50,000 to 100,000 tons just in Africa alone. The collaborative Programme on the Prevention and Disposal of Obsolete Pesticides, established by the Food and Agricultural Organization of the United Nations (FAO) in 1994, underlines the urgency and importance of a concerted international effort to solve this problem.

Extrapolation Errors in IPOs

We examine the effect of pre-IPO growth rates on the valuation and long-run performance of new issues. IPOs with rapid pre-IPO revenue growth obtain significantly higher offer value and secondary market valuation but have relatively poor long-term stock returns. There is no evidence that performance differentials are due to risk premia. Indeed the high-growth firms are riskier according to traditional measures. Finally, we show that analysts’ forecasts are upwardly biased for all firms, and the magnitude of these biases is greatest for firms with rapid pre-IPO growth. Overall these results are consistent with the behavioral model suggested by Lakonishok, Shleifer and Vishny (1994) and La Porta (1996).

Stock Selection Skill, Manager Flexibility, and Performance: Evidence from Unit Investment Trusts

Unlike mutual funds, unit investment trusts invest in a fixed portfolio of stocks for a predetermined period of time and hold limited cash positions. Thus, UITs provide an ideal sample to measure stock selection skill. We examine a sample of 1487 UITs over the period 2004 to 2013. We find that UITs generate significant negative alphas indicating poor stock selection skills. We compare the UITs to actively managed mutual funds characterized by high turnover ratios and high cash holdings. The UITs significantly underperform both groups of mutual funds suggesting that restricting flexibility and maintaining full investment in the market does not result in better risk adjusted performance.

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.

Global Growth from an Investor’s Point of View - Initial Public Offerings in the Fashion and Accessories Industry

In this paper we analyze the long-run stock price performance of 207 initial public offerings in the fashion and leather accessories industry between 1990 and 2007. We find a highly significant underperformance of IPO stocks compared to corresponding benchmark indices. Cross-sectional regression analysis reveals that underperformance is mainly driven by offerings of smaller, less mature companies that are not taken public by a prestigious underwriter. Nevertheless, we also find that fashion IPO firms experience a considerable reduction in their systematic risk exposure due to the realization of real options which helps to explain at least part of their seemingly poor stock price performance.

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.