Short-run Returns Research Articles

American arms and industry in a changing international order

ABSTRACT United States support for Ukraine and preparation for a potential, likely protracted, conflict with China has drawn attention to the fragility of the U.S. defense industrial base. Since the end of the Cold War, the American defense industry has optimized for peacetime and low-attrition conflicts, prized efficiency and cost-savings over capacity and flexibility, and incentivized short-run returns over resilience and innovation. While this design may have made sense in a period of undisputed U.S. dominance, the rise of the People’s Republic of China as a peer competitor and the emerging demand that the U.S. deter and, if necessary, win one or more protracted conflicts requires that Washington take a more intentional and direct role in shaping the capability, capacity, and resilience of the U.S. defense industrial base.

Value added tax and household consumption in Sub-Saharan Africa: Evidence from Nigeria and South Africa

This study focuses on Nigeria and South Africa and examines how value added tax (VAT) affects household consumption in sub-Saharan Africa. We use time series data from 1994 to 2021 as well as panel Autoregressive Distribution Lag (ARDL) regression through pooled mean group estimation. The findings show that in the long -run and with a 0.05 degree of materiality, VAT has a significant positive influence on household consumption and the exchange rate significantly depletes household consumption. In the short term, at 10% importance, VAT has a significant impact on household spending. According to the Error Correction Model (ECM), there will be a short-run return to equilibrium of 93.7%. According to the country specific results for Nigeria, VAT at 10% has a significant positive impact on CPI but at lag 3, CPI has a significant negative reaction to VAT and the Exchange rate (EXG). EXG has a significant positive influence on CPI at lags 1 and 2. For South Africa, CPI affects itself positively and significantly at lags 1 and 2 but VAT appears to be harmfully unimportant whereas EXG affects CPI positively and significantly at lags 1 and 3 but becomes minor at lag 2. The study concludes that VAT implications are detrimental to households in the short run despite having a positive impact in the long term. As a result, the study recommends adequate public awareness prior to VAT implementations as well as zero VAT for basic household goods and services in African regions that have yet to implement such policies.

External Debt, Institutional Quality and Economic Growth in East African Countries

This study aimed to analyze the impact of external debt on economic growth with mediating role of institutional quality by employing a heterogeneous panel Autoregressive distributed lag (ARDL) model through a pooled mean group (PMG) estimator over periods of 22 years spanning from 1998 to 2019 in East African countries. The finding reveals a significant long-term positive relationship between the stock of external debt as a percentage of GNI and economic growth. However, its square revealed a significant long-term negative relationship, suggesting a non-linear relationship. The positive effect of external debt on economic growth is limited to a threshold level of 62.9%. According to the error term’s coefficient, the rate at which short-run returns to long-run equilibrium became disequilibrium in the current year was 45.5%. Furthermore, the result shows that institutional quality’s indirect effect on external debt interaction had a significant positive impact on economic growth, indicating that the negative impact of external debt on economic growth decreased as the region’s institutional quality rose. Therefore, a comprehensive improvement in institutional quality is required to both lessen the negative effects of external debt and maximize the benefits of government borrowing. In order to stabilize the external debt, governments should cut back on wasteful spending and uphold sound fiscal management.

Ownership Concentration and Firm Value: New Evidence from Owner Stakes in IPOs

We study the relationship between ownership concentration and firm value using hand-collected data on the stakes of owner–managers before and after initial public offerings (IPOs). We instrument for the reduction in stake using market returns shortly before IPOs. Short-run market returns are plausible instruments because owners engage in market timing by selling more when prior returns are high, but high short-run returns are unlikely to directly affect firm value years after the IPO. As predicted by agency theory, a large reduction in ownership concentration at the IPO is negatively related to valuation. Future asset growth is low when owners have low stakes. This paper was accepted by Victoria Ivashina, finance. Funding: B. Larrain acknowledges funding from ANID/CONICYT Proyecto FONDECYT Regular [Grant 1180593]. Supplemental Material: The online appendix and data are available at https://doi.org/10.1287/mnsc.2021.01039 .

Investor attention and IPO returns: evidence from Indian markets

PurposeThe regulatory design of Indian stock market provides us with the opportunity to disaggregate initial returns into two categories, i.e. voluntary premarket underpricing and post market mispricing. This study explores the impact of investor attention on the disaggregated short-run returns and long-run performance of initial public offerings (IPOs).Design/methodology/approachThe study employs regression techniques on the sample of IPOs listed from 2005 to 2019. It measures investor attention with the help of the Google Search Volume Index (GSVI) extracted from Google Trends. Along with GSVI, the subscription rate is used as a proxy to measure investor attention.FindingsThe empirical results suggest a positive and significant relationship between initial returns and investor attention, thus validating the attention theory for Indian IPOs. Furthermore, when the returns are analysed for a more extended period using buy-and-hold abnormal returns (BHARs), it was found that price reversal holds in the long run.Research limitations/implicationsThis study highlights the importance of information diffusion in the market. It emphasizes the behavioural tendency of the investors in the pre-market, which reduces the market efficiency. Hence, along with fundamentals, investor attention also plays an essential role in deciding the returns for an IPO.Originality/valueAccording to the best of the authors’ knowledge, this is one of the first studies that has attempted to explore the influence of investor attention and its interplay with underpricing and long-run performance for IPOs of Indian markets.

Evaluation of Nexus Between Short-Run Return Measures of IPOs in India

Purpose : This study aimed to provide a better understanding of the initial performance of initial public offerings (IPOs) on the day of listing by separating the gains on the listing day into primary and secondary market returns. An industry-wise evaluation of different return measures was done, and a year-on-year analysis was also conducted to understand more about the underpricing anomaly of IPOs. Methodology : The short-run IPO performance was analyzed using market-adjusted average returns (MAAR), focusing on the role of different factors in determining underpricing. The initial returns were divided into primary and secondary returns, and a sectoral analysis was conducted to evaluate the behavior of IPOs on the first day of trading. The quantitative analysis considered the returns from the issue date to the listing day opening price and compared the listing day opening and closing prices of all sample IPOs. Findings : The sectoral analysis revealed a reversal of the level of underpricing during the secondary market, which explains the listing day performance of IPOs under different industries over the last decade. According to the findings of this study, the subscription rate is a major determinant of short-run IPO performance. Practical Implications : To improve the short-run performance of IPOs, issuers should focus on increasing their subscription rates. This study recommended that corporations should publish credible, accurate, and adequate information and invite active participation from shareholders. Originality : Unlike prior research on IPOs, this study separated listing day gains into primary and secondary market returns, carried out an industry-wise evaluation of different return measures, and analyzed IPO behavior on the first day of trading to provide improved insights into the underpricing anomaly of IPOs.

Impact of Merger Announcements on the Stock Returns of Brazilian Acquiring Firms

Abstract This paper assesses the impact of merger announcements on the market value of Brazilian acquiring firms based on 31 transactions that took place from 2004 to 2019 and in which the market value of the target was at least 10% of the market value of the acquirer. The estimates from the BEKK model, which extends the market model to incorporate time-varying betas and volatility clustering, suggest that abnormal returns to acquirers’ stockholders over a 15-day window around the merger announcement are statistically and economically significant, amounting to 5.3584%. Financial and accounting indicators of acquirers prior to and after the merger do not rule out the possibility that these short-run returns reflect misassessment of market participants of the value created by mergers.

Nexus Between Discount Rate and Industrial Performance

This study investigates the short-run responses and long-run performances of seven industries’ stock indices with discount rate changes in the firms listed in the Pakistan Stock Exchange (PSE) between 2009 and 2018. The results indicate that short-run returns react positively to discount rate reduction, excluding the oil industry and vice versa. Therefore, long-term performance responds favourably with a reduction in the discount rate. Discount rate changes affect the apparel industry the most, while the oil industry is the least on the list. This study serves potential investors for their returns against investment among these industries. Furthermore, it works as a guideline for regulators and policymakers to manage fluctuations for a stable capital market.

Small-minus-big predicts betting-against-beta: Implications for international equity allocation and market timing

ABSTRACT We demonstrate a strong relationship between short-term small-firm premium and future low-beta anomaly performance. Rises (declines) in small-firm prices temporarily improve (deteriorate) funding conditions, benefiting (impairing) the short-run returns on the low-beta strategy. To investigate this phenomenon, we examine returns on betting-against-beta (BAB) and small-minus-big (SMB) factor portfolios in 24 developed markets for the years 1989–2018. A zero-investment strategy of going long (short) in BAB factors in the quintile of countries with the highest (lowest) three-month SMB return produces a mean return of 1.46% per month. The effect is robust when controlling for major risk factors in equity markets, alternative portfolio construction methods, and subperiod analysis. The predictability of BAB performance by SMB returns is also present in the time series of individual country returns, forming the grounds for effective timing in the low-beta strategies.

Ownership Concentration and Firm Value: New Evidence from Owner Stakes in IPOs

We revisit the relationship between ownership concentration and firm value using hand-collected data on the stakes of owner-managers immediately before and after IPOs. We instrument for the reduction in concentration using market returns on the three months prior to the IPO. Short-run market returns are plausible instruments since owners engage in naive market timing by selling more when prior returns are high, but high prior returns are unlikely to affect long-run firm value. As predicted by agency theory, a larger reduction in ownership concentration at the IPO is negatively related to valuation.

Not Playing Favorites: An Experiment on Parental Fairness Preferences

We conduct a lab-in-the-field experiment to identify parents' preferences for investing in their children. The experiment exogenously varied the short-run returns to educational investments to identify how much parents care about maximizing total household earnings, minimizing cross-sibling inequality in outcomes (child-level earnings), and minimizing cross-sibling inequality in inputs (child-level investments). We show that while parents place some weight on maximizing earnings, they also display a strong preference for equality in inputs, forgoing roughly 40% of their potential earnings or 90% of a day’s wage to equalize inputs. We find no evidence that parents care about equalizing outcomes.

A Comprehensive Analysis of Cyber Data Breaches and Their Resulting Effects on Shareholder Wealth

Cyber Security data breaches are an evolving major risk that corporations, public and private alike, have to contend with as part of their risk management scenarios. Historically, studies evaluating shareholder ramifications of cyber data breaches have been limited by the lack of data available to the public regarding company specific cyber attack details. The few studies that have been done have been mainly limited to sample sizes of only 100 to 200 companies over various time frames with hand collected data. This study uses a comprehensive proprietary data set developed by Advisen Ltd., the leading provider of data, media, and technology solutions for the commercial property and casualty insurance market, to develop a representative sample of almost four thousand separate cases of public companies from all over the world experiencing cyber data breaches during the period 1990 to 2019. Using events study methodology, our results analyze both short term and long term shareholder cumulative abnormal returns around the public first notice date. The results, using the overall sample, do support smaller studies that show significantly negative short run returns for event windows that range from -1 up to 5 days after announcement date. However, our results are lower than many of the original studies that find much higher negative returns with smaller data sets. Segmenting the sample by industry and type of data breach shows a mixture of short run negative results for industries like the highly targeted service companies, while finance companies show an over correction, which result in significant positive short run, returns for investors by day 3 and 5. Returns associated with cyber attacks involving either Personal Financial Information (PFI) or Personal Identity Information (PII) support short run negative returns that are significant, but data related to Personal Health Information (PHI) show a significant overcorrection of short run excess returns. Long term results of the entire sample show significantly negative results for up to 250 trading days from announcement date of up to -7.46%.

Not Playing Favorites: An Experiment on Parental Fairness Preferences

We conduct a lab-in-the-field experiment to identify parents' preferences for investing in their children. The experiment exogenously varied the short-run returns to educational investments to identify how much parents care about maximizing total household earnings, minimizing cross- sibling inequality in outcomes (child-level earnings), and minimizing cross-sibling inequality in inputs (child-level investments). We show that while parents place some weight on maximizing earnings, they also display a strong preference for equality in inputs, forgoing roughly 40% of their potential earnings or 90% of a day’s wage to equalize inputs. We find no evidence that parents care about equalizing outcomes.

A post-merger performance of acquiring firms: evidence from French stock market

This paper investigates the impact of takeovers on the short- and long-run stock market performance of a sample of 87 mergers and acquisitions transactions undertaken between 2008–2012 by French financial and real estate industry. For the short horizon event studies, document short-run non-significant abnormal returns of acquiring companies. Furthermore, we test the financial performance by computing the cumulative abnormal returns (CAR), the buy and hold abnormal returns (BHAR) and the Jensen measure (alpha) to study long horizon of up to 60 months, as part of the calendar analysis, and 36 months in the event approach. The results show negative and significant long-term abnormal returns on acquiring companies either on event time or in calendar analysis for different horizons.

Failure and success in mergers and acquisitions

This paper provides an overview of the academic literature on the market for corporate control, and focuses specifically on firms' performance around and after a takeover. Despite the aggregate M&A market amounting to several trillions USD on an annual basis, acquiring firms often underperform relative to non-acquiring firms, especially in public takeovers. Although hundreds of academic studies have investigated the deal- and firm-level factors associated with M&A announcement returns, short-run returns are often not sustained in the long run. Moreover, the wide variety of performance measures and heterogeneity in sample sizes complicates the drawing of accurate and unambiguous conclusions. In this light, our survey compiles the recent literature and aims to identify the areas of research for which short-run returns predict (or fail to predict) long-run performance. We find that post-takeover deal performance is affected by key determinants including serial acquisitions, CEO overconfidence, acquirer-target relatedness and complementarity, and shareholder intervention in the form of voting or activism.

Characterizing the Tail-Risk of Factor Mimicking Portfolios

By assuming that short-run returns are independent and identically distributed, it is straightforward to extrapolate short-run risks to longer horizons. However, by generalizing the variance-ratio test to include higher co-moments, we establish a significant and sizable intertemporal dependency in all higher moments of equity returns. The intertemporal dependency is strong enough to prevent the convergence to normally distributed returns, at least up to a five-year holding period. We also demonstrate that the intertemporal dependency is both horizon \emph{and} portfolio-specific. Consequently, the common practice of extrapolating the short-run risk by assuming independent and identically distributed returns will severely bias the expected long-run risk.

Failure and Success in Mergers and Acquisitions

This paper provides an overview of the academic literature on the market for corporate control, and focuses specifically on firms’ performance around and after a takeover. Despite the aggregate M&A market amounting to several trillions USD on an annual basis, acquiring firms often underperform relative to non-acquiring firms, especially in public takeovers. Although hundreds of academic studies have investigated the deal- and firm-level factors associated with M&A announcement returns, short-run returns are often not sustained in the long run. Moreover, the wide variety of performance measures and heterogeneity in sample sizes complicates the drawing of accurate and unambiguous conclusions. In this light, our survey compiles the recent literature and aims to identify the areas of research for which short-run returns predict (or fail to predict) long-run performance. We find that post-takeover deal performance is affected by key determinants including serial acquisitions, CEO overconfidence, acquirer-target relatedness and complementarity, and shareholder intervention in the form of voting or activism.

Small-Minus-Big Predicts Betting-Against-Beta: Implications for International Equity Allocation and Market Timing

We demonstrate a strong relationship between short-term small-firm premium and future low-beta anomaly performance. Rises (declines) in small firm prices temporarily improve (deteriorate) funding conditions, benefiting (impairing) the short-run returns on the low-beta strategy. To investigate this phenomenon, we examine returns on betting-against-beta (BAB) and small-minus-big (SMB) factor portfolios in 24 developed markets for the years 1989–2018. A zero-investment strategy of going long (short) in BAB factors in the quintile of countries with the highest (lowest) three-month SMB return produces a mean return of 1.46% per month. The effect is robust to controlling for major risk factors in equity markets, alternative portfolio construction methods, and subperiod analysis. The predictability of BAB performance by SMB returns is also present in the time-series of individual country returns, forming the ground for effective timing in the low-beta strategies.

An investigation of the short-term performance of the Canadian IPO market.

This article explores the short-term return performance of the Canadian initial public offering (IPO) market. Historically, the Canadian IPO market has shown to be one of the least underpriced markets in the world. This paper uses recent IPOs from 2010 to 2017, and the results confirm that the Canadian IPO market remains one of the least underpriced IPO markets in the world. The mean (median) first-day returns show that Canadian IPOs are marginally underpricing at only 1.45% (0.24%) during the sample period. Additional short-run return measures indicate that Canadian IPOs underperform the market in their 1-month, 6-month, and 12-month holding periods. This research also contributes to the existing IPO literature by showing that restricted voting share offerings tend to be more underpriced and perform poorly over the short-term.

The efficiency of IPO issuing mechanisms and market conditions: evidence in China

This study conducts a comparison analysis on the efficiency of bookbuilding and secondary market proportional offering (hereafter, SMP offering) in the China stock market. SMP offering as described in this paper is not a follow-on offering, but an initial offering applicable to investors in the secondary market. Specifically, as a unique type of fixed price offering, SMP offering only allows the existing investors who are holding shares (of any listed firms) in the secondary market to subscribe to IPO shares. The amount of IPO shares available to be subscribed by the existing investors is proportional to market value of shares held by them in the secondary market. We find some interesting evidence showing that, compared with bookbuilding, SMP offering is more efficient for pricing IPOs, particularly, in a volatile market. SMP offering leads to lower underpricing and lower cross-sectional variation of short-run returns of IPOs. Also, SMP offering is better able to counteract adverse market conditions in the form of low market return and/or high market volatility. Our results are robust to various alternative tests, e.g., the Heckman (Econometrica 47:153–161, 1979) two-stage procedure and an out-of-sample test, after controlling for the problem of endogeneity and for the influence of the exchange of listing, respectively.