Positive Valuation Effects Research Articles

Concentrated Control, Analyst Following and Valuation: Do Analysts Matter Most When Investors are Protected Least?

This paper uses a sample of over 2,500 firms from 27 countries to investigate the relation between ownership structure, analyst following, investor protection and valuation. We find that analysts are less likely to follow firms with potential incentives to withhold or manipulate information, such as when the Family/Management group is the largest control rights blockholder. Further, this relation is stronger for firms from low shareholder protection countries. Using valuation regressions that take into account potential endogeneity between analyst following and firm value, we find a positive valuation effect when analysts cover firms that have both potentially poor internal governance and weak country-level external governance. Overall, our findings suggest that corporate governance plays an important role in analysts' willingness to follow firms and that increased analyst following is associated with higher valuations, particularly for firms likely to face governance problems.

New product innovations, information signalling and industry competition

This paper examines the impact of new product innovations on the market values of industry rivals. The evidence indicates that, on average, firms introducing new products experience a significantly positive valuation effect at announcement, while portfolios of industry rivals experience a significant negative valuation effect. This result is consistent with the hypothesis that signals of adverse changes in the competitive position of rivals dominate expected benefits from an innovation spillover. Crosssectional analysis of the announcement period returns reveals that the competitive effects are more pronounced in industries with less concentration and high leverage. Additionally, we find that industry rivals perform as well as the new product firms during the three years following the innovations. We conclude that over a longer period, rival firms are able to respond to the competitive disadvantage of the new product by some alternative innovation or an imitation.

A Game Plan for Share Repurchases

Corporate share repurchases grew strongly as a popular means of returning cash to shareholders first in the US, then the UK, and later in the 1990s, in Continental European countries. Only in 1999 did the high rate of growth decline. This article documents the repurchase cycle and examines reasons given by corporates for undertaking repurchases which are then weighed against the evidence in practice. Several caveats can be issued against repurchases which diminish or reverse the positive valuation effects. In addition, alternative methods used in practice to implement repurchases are examined, and further measures which can enhance the effectiveness of repurchases are reviewed. The article concludes with a checklist or ‘Game Plan’ for a firm wishing to maximise financial value-added as well as strategic advantage from using the technique

Family Control and Corporate Governance: Evidence from Taiwan

A recent stream of literature shows that family control is central in most countries of the world, but little research exists regarding family control and corporate governance. This paper analyses family control and corporate governance using a sample of Taiwanese firms. The results suggest that family control is even more prevalent than previously suggested and that a non‐linear relation exists between family control and relative firm performance. Family‐controlled firms that have low levels of control have lower relative performance than both family‐controlled firms with high levels of control and widely held firms. This is consistent with the conflict of interest between majority and minority shareholders being the greatest when the majority shareholder’s level of control is high enough to influence a firm’s decision‐making process but ownership is low enough that the benefits of expropriation outweigh the costs. Furthermore, a positive valuation effect exists when controlling families hold less than 50% of a firm’s board seats. Taken together, the results in this paper suggest that when family control is central, high levels of family ownership and low levels of family board representation are effective ways of mitigating the separation of cash flow rights and control and, thus, decreasing the conflict of interest between majority and minority shareholders.

The Role of Negotiations in Corporate Governance: Evidence From Withdrawn Shareholder-Initiated Proposals

We examine shareholder proposals that are withdrawn by the sponsor during the period 1989 to 1995 to identify factors that affect the relative ability of shareholders and managers to negotiate. We determine factors that affect withdrawal probability and investigate the effect of relaxations in the regulatory environment brought about by the 1992 SEC Proxy reforms. We find that proposals sponsored by institutional shareholders and coordinated groups are more likely to be withdrawn indicating that larger entities have greater ability to negotiate. Likelihood of withdrawal also increases as the number of corporate governance proposals filed by a sponsor increases. Managers are more successful in negotiating a compromise that leads to a withdrawal prior to 1992, whereas proposal sponsors are more successful in achieving proposal adoptions without a compromise after 1992. We also find that withdrawn proposals are associated with a positive valuation effect before 1992 and a negative valuation effect after 1992. We conclude that negotiations between managers and shareholders are most effective when both parties can contribute to the negotiation process and that tilting the process in favor of one party has adverse effects.

Intra-industry signals embedded in bank acquisition announcements

Bank acquisitions have increased in recent years, as more banks attempt to exploit potential synergies, economies of scale, and other benefits. Numerous studies have determined that bank acquisitions generate strong positive valuation effects for targets on average, while the evidence of the impact on acquirers is mixed. Our objectives are: (1) determine whether the announcement of a bank acquisition transmits intra-industry signals; (2) explain why the intra-industry effects vary across acquisition announcements; and (3) explain why the valuation effects of individual rival banks vary. We find that bank acquisition announcements generate significant positive intra-industry effects, on average. The intra-industry effects of rival bank portfolios are not uniform across announcements, as they are conditioned by variables that could signal information about the probability that rival banks will become takeover targets. The valuation effects of rival bank portfolios are positively related to the valuation effects of the target banks, and inversely related to the size and prior performance of rival bank portfolios. Furthermore, the valuation effects are more favorable for individual rival banks that are ultimately acquired. To the extent that these variables reflect the probability of being acquired in the future, the intra-industry effects appear to be more favorable for acquisitions in which there is a higher probability that the corresponding rivals will become targets. Overall, investors discriminate based on event-specific and rival bank-specific characteristics when interpreting the signal transmitted as a result of bank acquisitions.

Intraindustry Effects of Bank Stock Repurchases

Bank stock repurchases have become increasingly popular over time. Because of the unique capital requirements and regulatory constraints on the use of bank funds, the intraindustry effects of bank stock repurchases may differ from intraindustry effects of stock repurchases by other firms. We find that bank stock repurchases result in a positive and significant valuation effect for the repurchasing banks. Moreover, we find positive significant intraindustry effects of bank stock repurchases, unlike previous research by Hertzel on firms from numerous industries that found no evidence of intraindustry effects in response to stock repurchases. We attribute the difference in results to the unique characteristics of the banking industry, which results in a less ambiguous signal emitted from the stock repurchase announcement. In addition, we find that the intraindustry effects are more favorable when the valuation effect for the repurchasing bank is more favorable. This implies that the degree of signal to the industry is conditioned on the degree of signal about the bank that is repurchasing its shares. Furthermore, intraindustry effects are more favorable when the capital position of rival banks is high, when the proportion of residential loans of rival banks is low, and when the announcing bank is a money center bank.

Regime Effects of EU Market Integration Policies on the UK Financial Sector

Standard equity capital market methods are used to estimate the share price effects in the UK market of the recent change in regime implied by passage of key provisions implementing the European single banking market. Empirical results indicate that events associated with increasing the likelihood of passage of the new Merger Control Regulation and the Second Banking Directive had positive valuation effects for the portfolio of UK firms involved in banking services.

Valuation effects of foreign divestitures

This study assesses announcement period valuation effects of foreign divestitures and explains why these valuation effects vary among firms. Significant positive valuation effects are observed. The valuation effects of foreign divestitures are positive and are similar in magnitude to those of a matched control group of domestic divestitures. Results of a cross-sectional analysis suggest that valuation effects are positively related to the relative size of the divested unit. Valuation effects are more favorable when divestitures are for strategic reorganization purposes and:or to raise cash, and valuation effects are more favorable for foreign divestitures in industrialized host countries. Several important managerial implications emerge from the results of this study. © 1998 John Wiley & Sons, Ltd.

Market Structure, Informed Trading, and Analysts' Recommendations

We examine stock price behavior in response to initial coverage, buy recommendations that are pre-released to important clients before the stock market opens, and find a strong positive valuation effect at the open. On average, it takes five minutes of trading for NYSE/AMEX stocks and 15 minutes for NASDAQ stocks to reflect the private information contained in these analyst recommendations, so when informational asymmetry is high, the centralized call market is more efficient than a competitive, but fragmented dealer market. Public news release leaves share prices unaltered. Overall, competition among informed traders causes private information to be rapidly incorporated into stock prices.

Long-term valuation effects of shareholder activism

The objective is to measure how the values of firms are affected when experiencing shareholder activism. According to several researchers, firms can benefit from increased monitoring. If activism prompts managers to focus more closely on shareholder goals, it could enhance firm value over time. Strong positive valuation effects are found for firms following shareholder activism. The valuation effects accumulated to 23% on average by the end of the third year following shareholder activism. The effects appear to be somewhat more pronounced following activism initiated by individual shareholders.

Valuation Effects of Foreign Company Listings on U.S. Exchanges

This study examines post-listing equity price performance of foreign firms which cross-listed sponsored American Depository Receipts (ADRs) on the New York and the American Stock Exchanges during the period 1982-1992. We use three valuation metrics – price-to-book, price-to-cash-earnings, and price-to-earnings – which are adjusted for the home country and world industry indices to which the listing firm's stock belongs. We find positive valuation effects associated with cross-listing for both country-benchmarked and industry-benchmarked price ratios. Variables that proxy for home country characteristics such as governance styles, disclosure quality, market liquidity, and so forth are unable to explain the cross-sectional variation in the data. Our results thus suggest that cross-listing in the U.S. enhances valuations for listing firms by simply reducing the overall effect of segmentation among different national securities markets.

The impact of credit line announcements on stock prices: Analysis of stated reasons and financial risk

We examine the valuation effects of credit line agreements for a sample of firms during the period 1979–1989. We test the proposition that the magnitude of the stock price reaction to credit line announcements is dependent upon the firm's financial health or risk and the stated reason for the borrowing. Consistent with previous findings we report positive valuation effects to credit line announcements. We find, however, that the intensity or strength of the abnormal returns is greater for financially weak firms and for firms requesting borrowing for financing capital expenditures.

The Intra‐Industry Effects of Going‐Private Transactions

ABSTRACTWe demonstrate that bids to take firms private generate significantly positive valuation effects for industry rivals of target firms. These valuation effects cannot reflect either synergy or monopoly since no consolidation of operating firms is involved in such transactions. Participation by buyout specialists in the bid does not significantly affect these gains. Bids by outsiders and bids by incumbent managers generate similar valuation effects for industry rivals. The effect on share prices of industry rivals is inversely related to the capitalized values of rival firms relative to the target firm. We also report valuation effects for target firms.

Toehold Acquisitions, Shareholder Wealth, and the Market for Corporate Control

This study examines the valuation consequences of control-related outcomes that fol? low toehold acquisitions. We find evidence that toehold acquisitions facilitate valueenhancing control transfers. The types of control transfers not only include takeovers, but also internal mechanisms, such as proxy fights and management turnovers. We find that toehold targets experiencing such control transfers exhibit an abnormal increase in share value, while those not experiencing such control transfers exhibit an abnormal de? crease in share value. The results suggest that the positive valuation effect associated with toehold acquisitions reflects the expected benefits of subsequent control transfers.

International Corporate Diversification, Market Valuation, and Size–Adjusted Evidence

Errunza and Senbet [ES, 7] analyze the effects of international operations on the market value of the both at theoretical and empirical levels. The theoretical model, which is largely heuristic, exploits the costly supply adjustment of multinational firms (MNCs) in providing international portfolio diversification services to investors who face differential cost barriers to direct holdings of assets across national boundaries. MNCs compete as financial intermediaries to undo the barriers so that, in equilibrium, profits are driven out; MNCs and pure domestic firms sell at an equivalent risk-adjusted return. However, costly financial intermediation and the associated relative efficiency leads to a positive valuation effect for MNCs relative to purely domestic firms. Further, the equilibrium analysis implies that demand-side (investor) barriers to international capital flows alone are inconsequential to the valuation of MNCs in their pure financial role, but that the interaction with the supply-side costs are necessary to produce a valuation effect at the corporate level. ES subject the theory to an empirical analysis in a value-based approach by employing a variant of Tobin's [17] qratio. The analysis, controlling for industrial market power, suggests that the relationship between the excess valuation and the degree of international involvement (DOI) has magnified over periods characterized by severe U.S. government controls vis-a-vis the more recent periods. In this paper we formalize the theoretical argument by viewing indirect portfolio diversification by MNCs as a means of completing the international capital market. We employ a paradigm in the unanimity literature and formally characterize the equilibrium in which there is a rationale for MNC financial intermediation. We then perform an expanded empirical study by employing generalized least squares and maximum likelihood procedures. Since the positive relationship between excess valuation and DOI (as suggested in ES [7]) might be attributed to the so-called small firm or size and the P/E effects, the test methodology controls for such effects. Also, the traditional literature has relied upon foreign sales percentage as a proxy for DOI. In view of the well recognized limitations of this proxy, we employ four different measures of international