Positive Abnormal Stock Returns Research Articles

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.

Why are Stock Buyback Announcements Good News?

The positive stock price reaction to stock buyback announcements reported in many previous studies is commonly interpreted as a signal that the firm's future profitability will rise, or that the firm is decreasing its agency costs by dispersing free cash flow, or that the firm is increasing its leverage toward a more optimal capital structure. We examine a sample of 7,079 buybacks (open market and tender offers) announced between 1981 and 1995, and follow each firm for five years after their buyback announcement. Consistent with prior work, we find that our sample firms repurchase most (and more in many cases) of the shares that they target in their announcements. We also find, however, that our sample firms issue shares following buyback announcements. In fact, our average sample firm increases its shares outstanding 23.73 percent following its buyback announcement, and our typical sample firm has an insignificant change of -0.88 percent. With no change in shares outstanding, our results are generally not supportive of commonly accepted buyback theories. For example, we find no consistent evidence of positive long-term abnormal operating performance or stock returns following buybacks; we also find no consistent evidence of a decrease in cash flow from financing, or an increase in the firm's debt ratio or default risk. Instead, we find that the buying and selling of their own shares that firms do following buyback announcements increases their stock's liquidity and this explains the positive stock price reaction to these announcements.

Do Japanese CEOS Matter?

In a country where individualism is emphasized less than in Western countries, we ask whether the CEO (shacho) of a Japanese corporation positively affects firm performance. To answer this question, we construct a shacho-firm matched panel data set in the period 1990 through 2002 of all listed 1,419 Japanese manufacturing firms and their 3,520 shachos. Though we find a positive abnormal stock return on the date a shacho change is announced, especially when the shacho change is non-routine, we document that this effect is short-lived. There seems to be no long-run positive change in performance or policies after a shacho change, even when the shacho change is non-routine. Finally, in trying to explain firm performance or policies, we attempt to separate a firm-fixed effect from a shacho-fixed effect, and are unable to disentangle a shacho-fixed effect. We are thus left to conclude that shachos do not positively matter in the Japanese corporation in this decade of a stagnant economy.

A theory of corporate spin-offs

We develop a new rationale for corporate spin-offs, and for the performance and value improvements following them, based on corporate control considerations. We consider a firm with multiple divisions, with incumbent management having different abilities for managing these divisions. If the incumbent loses control to a more able rival, it benefits all shareholders (including the incumbent) by increasing equity value, but involves the incumbent losing his private benefits of control. We show that a spin-off increases the incumbent's chance of losing control to such a rival. This, in turn, motivates the incumbent either to work harder at managing the firm (in order to avoid any loss of control), or to relinquish control of one of the firms resulting from the spin-off (either immediately following the spin-off, or subsequently in a control contest). We show that spin-offs will be associated with positive announcement effects and increases in long-term operating performance. Further, certain categories of spin-offs will exhibit long-term positive abnormal stock returns.

Economic consequences of regulated changes in disclosure: the case of executive compensation

The 1992 revision of executive compensation disclosure rules in the U.S. could have benefited shareholders by inducing corporate governance improvements or harmed them by increasing disclosure costs. Consistent with the governance improvement hypothesis, companies that lobbied against the regulation had, relative to control firms: (i) return-on-assets and return-on-equity that improved by 0.5% and 3%, respectively; and (ii) excess stock returns of 6% over the 8-month period between the announcement and the adoption of the proposed regulation. Also, firms lobbying more vigorously against the proposal had more positive abnormal stock returns during events that increased the probability of regulation.

Economic Consequences of Regulated Changes in Disclosure: The Case of Executive Compensation

The 1992 revision of executive compensation disclosure rules in the U.S. could have benefited shareholders by inducing corporate governance improvements or harmed them by increasing disclosure costs. Consistent with the governance improvement hypothesis, companies that lobbied against the regulation had, relative to control firms: (i) return-on-assets and return-on-equity that improved by 0.5% and 3%, respectively; and (ii) excess stock returns of 6% over the 8-month period between the announcement and the adoption of the proposed regulation. Also, firms lobbying more vigorously against the proposal had more positive abnormal stock returns during events that increased the probability of regulation.

Acquisitions as a Means of Restructuring Firms in Chapter 11

This paper provides empirical evidence that takeovers can facilitate the efficient redeployment of assets of bankrupt firms. We investigate two questions central to the debate over acquisitions of bankrupt companies based on a sample of 55 firms acquired in Chapter 11. First, we examine whether these acquisitions occur in a competitive environment. Although bankrupt targets are on average purchased at a 45% discount relative to prices paid for non-bankrupt targets in the same industry, there are often multiple bidders competing for the target firm. Bidders are generally in related industries and often have some prior relationship to the target, suggesting they are well informed with respect to the value of the target. Second, we consider whether acquisitions in bankruptcy create value be examining ex-post measures of the success of the transaction. We find that on average acquisitions result in improved operating performance in spite of the fact that many acquirers are highly levered and operate in distressed industries. We also find positive and significant abnormal stock returns for the bidder and target firms at the announcement of the acquisition, suggesting the market perceives the acquisition as favorable for both acquirer and target company shareholders.

THE VALUATION EFFECTS OF OUT‐OF‐THE‐MONEY CALLS OF CONVERTIBLE SECURITIES

AbstractWe examine the valuation effects of out‐of‐the‐money calls of convertible securities. In general, out‐of‐the‐money calls generate positive abnormal stock returns. These returns are higher when the call price exceeds the market value of the called securities (positive premium calls), compared with when the market value exceeds the call price (negative premium calls). Furthermore, Value Line Investment Survey net operating income forecasts are significantly higher after call announcements for positive premium calls, while the revision is insignificant for negative premium calls. The results are consistent with the hypothesis that positive premium calls signal positive information.

The Information Content of Common Stock Repurchases: An Empirical Study1

SUMMARYShare repurchase announcements are known to be associated with significant positive abnormal stock returns. Past studies have argued that the main explanation of this value creation is that share repurchases signal new (and favourable) information about the repurchasing firms' future cash flows. This paper examines this hypothesis and provides evidence on the nature of the information revealed by share repurchases. Using a sample of 41 repurchase announcements from the USA, we show that the new information signalled to the stock market through share repurchasing is not only about changes in the level of future cash flows but also about changes in the riskiness of these cash flows.

Securityholder Taxes and Corporate Restructurings

Previous studies have found that positive abnormal stock returns are associated with corporate spin-offs and divestitures. Using a simplified model of the process of investor tax trading, we show that an improvement in the value of the tax-timing option component of securities prices is a likely contributing factor to those abnormal returns. The analysis indicates that the same phenomenon also may be part of the explanation for the generally higher returns observed for spin-offs than for divestitures, both when leverage is and is not present in the restructuring transactions.

Additional Evidence on the Information Content of Management Earnings Forecasts

Prior studies have documented that management earnings forecasts which exceed expected earnings (good forecasts) are associated with significant positive abnormal stock returns, on average, when publicly released. However, no significant negative abnormal returns are observed immediately surrounding the release of management forecasts which are defined as bad news.' These findings conflict with the results to date on price reactions associated with earnings announcements. For example, Ball and Brown [1968] found that good news (bad news) annual earnings announcements are associated with positive (negative) abnormal returns in the months preceding and including the annual earnings announcement. Foster [1977] reported similar findings for quarterly earnings announcements. Beaver, Clarke, and Wright [1979] found a positive ordinal association between the magnitude of unexpected earnings (the difference between actual earnings and expected earnings)