Three-day Window Research Articles

How Do Emerging-Market Acquirers Create Value in Cross-Border Mergers & Acquisitions?

As new emerging-market multinationals have cheap production cost in the primary markets and the need to upgrade productivity, they set their globalization strategy accordingly. I find that emerging-market acquirers receive 0.93% mean return over the three-day announcement window in cross-border acquisitions. Three channels to acquire complementary resources are explored. Firstly, deals that facilitate knowledge transfer generate higher acquirer returns by targeting at firms with R&D record, retaining the target CEO, and utilizing the acquirers’ primary market. Secondly, the acquirer returns are unaffected by transfer in managerial efficiency. Lastly, the acquirer returns are lower for the deals aiming at natural resources.

Small Is Beautiful? A Comparison of Major and Minor Credit Rating Agencies Credibility

The events linked to the subprime crisis undoubtedly damaged the reputation of credit rating agencies (CRAs), at least in the short and medium-term. In this paper, we intend to gauge the extent of that reputational damage by examining the reaction of the market to rating actions. Using a standard event study methodology, we measure the abnormal return of stock prices in the three-day window centred on the announcement day during the period November 2003 – November 2013. Our theory is that the market reaction to downgrades, upgrades and credit watches is lower – after the crisis – than it used to be due to a lack of trust in the neutrality and reliability of the rating agencies. We expect the phenomenon to be more pronounced for the three major CRAs – Moody’s, Standard & Poor’s and Fitch – who had more direct involvement in the scandal. For the minor players, the impact of the crisis is potentially twofold. On one side, they may have suffered from a general mistrust of the rating industry. On the other side, they may have benefited from a higher level of attention from investors in search for a cross-check of opinions.The evidence strongly supports the theory of a lower market reaction to rating announcements, especially for the three major agencies. The abnormal returns of equity prices in an event window of a rating action are significantly lower after the crisis than they were before, after considering various explicative factors relating to the features of the announcement and the market conditions in terms of volatility. In line with previous literature on the topic, we find that, due to the “certification” role that many regulations grant to rating agencies, the abnormal return is stronger when the valuation is near to the border between investment and speculative grade. As a consequence, where the certification role is prevalent, there is no difference in the market reaction to announcements before and after the crisis. Conversely, the cumulative abnormal return is significantly lower after the crisis when there is no “regulation-induced” trading and the market investors’ behaviour is predominantly guided by the faith put in the informative content of the rating.

Estimating the market value of Steve Jobs using an event study

ABSTRACTUsing an event study approach, we seek to estimate the value investors placed on Steve Jobs by investigating the stock market reactions to his death. In the three-day window surrounding his death, the estimated cumulative abnormal returns are −5.76%. Given the market capitalization of Apple at the time, it can be inferred that investors valued Steve Jobs at 20 billion dollars. While tragic, the news about Jobs’ death is greeted favourably by Apple’s competitors. The competitors appear to be convinced that, without Steve Jobs, they can compete with Apple better.

'Trading' Political Favors: Evidence from the Impact of the STOCK Act

This paper demonstrates the tacit benefits that accrue to both politicians and the firms to which they are connected through stock ownership. Specifically, we show strong evidence that politicians use private information and political favors for financial gains from stock investments in their personal portfolios, and that these favors have a real impact on the value and economic outcomes of the firms in which they invest. To do so, we assemble the stock ownership and trading data for all members of the U. S. Congress from 2010 to 2013 and use the passage of the Stop Trading on Congressional Knowledge (STOCK) Act in 2012 as an experiment to examine changes in politicians' trading performance as well as in firm value and outcomes. We find that prior to the STOCK Act, members of the Congress earn significant abnormal returns on their stock trades, and an increase in their holdings of a firm's stock positively predicts the firm's likelihood of being acquired as well as its revenue and earnings surprises. After the passage of the Act, politicians exhibit no such informational advantage in trading or outperformance. On the firms' side, we show that companies with politician ownership on average lose 1.4% in value during the three-day window around the Act's passage, while firms not owned by politicians experience no abnormal returns. Correspondingly, after the Act's passage, these politician-owned firms lose a significant amount of procurement contracts and government grants and become less likely to be selected by the government into high-profile trade missions compared to during the pre-Act period. We find that these mutual benefits are particularly pronounced for politicians who are powerful and firms that are politically active.

Cross-Border M&As and Credit Risk: Evidence from the CDS Market

This paper examines the impact of the cross-border acquisition announcements on the U.S. Bidders’ credit risk. On average, we find a substantial difference in the way CDS markets respond to transactions in emerging vs. Developed markets: bidders’ rating-adjusted CDS spread increases by 2 bps in the three-day window surrounding an acquisition in an emerging market (EM), and declines if the target firm is in a developed country. The EM result is driven primarily by majority but not full control transactions, for which the CDS spread change is approximately 5 bps. The surge in bidders’ CDS spreads is mainly associated with weak creditor protection in the target nation. Moreover, creditor concerns regarding EM deals are contagious: a CDS spread rise around the announcement of a transaction in an emerging economy is followed by a similar increase in spread for the next bidder making an acquisition in the same target nation. Finally, we also attribute some of the surge in acquirers’ CDS spreads to wealth expropriation.

The Debt Market Relevance of Disclosure Tone: Evidence from the Pricing of Credit Default Swaps

This paper examines whether corporate disclosure tone conveys credit risk-relevant information to the credit default swaps (CDS) market. Using a large sample of the Securities and Exchange Commission (SEC) 10-K and 10-Q filings, I find that the change in CDS spreads over the three-day window surrounding the SEC filing date is positively associated with the pessimism of the language used in the 10-K or 10-Q filing. Consistent with nonlinear payoff functions for creditors, this association is more pronounced for reference entities with speculative credit ratings. These findings indicate that the tone of periodic SEC filings is useful for CDS investors to evaluate the reference entity’s credit risk. In addition, I find stronger reaction of CDS spreads to disclosure tone when the CDS contract has shorter maturity, equity short sellers are more active, or the reference entity has lower visibility (i.e., smaller size or lower analyst coverage). Overall, these results support the view that disclosure tone has information content for investors in the CDS market in particular and the debt market in general.

Does the Market Punish the Many for the Sins of the Few? The Contagion Effect of Accounting Restatement for Foreign Firms Listed in the U.S.

In this paper, we hypothesize and find that accounting restatements issued by foreign firms traded in the U.S. induce a negative market reaction to non-restating foreign firms that are from the same home country as the restating firms (restatement-induced home-country contagion effect). Moreover, the magnitude of the contagion effect varies with the strength of the home market institutions of the restating firms. Non-restating firms from countries with a weak rule of law underwent an average stock price decline of about -1.11% while peer firms from strong rule of law countries experience an average negative return of only -0.18% over a three-day announcement window. Our results suggest that restatements filed by weak rule of law country-firms appear to be more “contagious” than those issued by strong rule of law country-firms. This is consistent with the notion that U.S. investors take into account the strength of home market institutions of foreign firms when evaluating the information disclosed by restatements.

Rapid Overreaction: Perceived Value Creation Via Alliance Announcements

The management literature has widely acknowledged the importance of studying and understanding the determinants of the market’s reactions to the announcements of strategic alliances. With a focus on dyadic alliances, I ask what types of information signaled to the market by the alliance announcement influence the investors’ perception of value. I hypothesize that the type of technical expertise, relationship expertise, and market expertise of each alliance partner, expressed as either explorative or exploitative, sends decodable signals to the investors, which in turn influences their reaction to the new alliance announcement. Using a sample of 927 alliances extracted from a unique biopharmaceutical dataset, I proxied investors’ reaction to the alliance announcements by calculating the cumulative abnormal return during a three-day window around the alliance announcement. I found that while technical expertise does not appear to be a signal that investors consider when valuing firms involved in a new alliance, both relationship expertise and market expertise showed a statistically significant influence on the investors’ perception of value.

The Effects of the Fasb's Relaxation of Fair Value Rules on the Quality of U.S. Bank Earnings

In the face of political pressure in 2009, the FASB relaxed fair value rules to give managers more discretion in measurement of fair value. Supporters argued that the accounting regulatory change would help convey managers’ private information on the measurement of fair values, while critics of the change were concerned that the increased managerial discretion would be opportunistically exploited by managers to achieve regulatory forbearance. This study investigates these two assertions by examining the impacts of relaxing fair value rules on the quality of earnings. Using a sample of U.S. bank holding companies we find that an apparent increase in managerial discretion in fair value is associated with a lower earnings response coefficient during the three-day window around earnings announcements and a higher probability of meeting analysts’ forecasts. Overall, the results indicate that the relaxation of fair value measurement rules adversely impacted the quality of financial reporting by U.S. banks.

Temporal variation of the arterial pressure in healthy young people and its relation to geomagnetic activity in Mexico

We present a study of the temporal behavior of the systolic (SBP) and diastolic (DBP) blood pressure for a sample of 51 normotensive, healthy volunteers, 18 men and 33 women with an average age of 19years old in Mexico City, Mexico, during April and May, 2008. We divided the data by sex along the circadian rhythm. Three geomagnetic storms occurred during the studied time-span. The strongest one, a moderate storm, is attributed to a coronal hole border that reached the Earth. The ANOVA test applied to the strongest storm showed that even though we are dealing with a moderate geomagnetic storm, there are statistically significant responses of the blood pressure. The superposed epoch analysis during a three-day window around the strongest storm shows that on average the largest changes occurred for the SBP. Moreover, the SBP largest increases occurred two days before and one day after this storm, and women are the most sensitive group as they present larger SBP and DBP average changes than men. Finally, given the small size of the sample, we cannot generalize our results.

The options market response to accounting earnings announcements

We examine the reaction of the equity options market to accounting earnings announcements over the period 1996–2008 using changes in implied volatility to measure the options market response to earnings news. We find that positive earnings surprises and positive profit announcements produce a larger uncertainty resolution than negative earnings surprises and loss announcements. We demonstrate an inverse relation between the change in implied volatility and earnings news in a three-day window immediately after an earnings announcement. We refer to the magnitude of this relation as the ‘options market earnings response coefficient’. This ‘options market earnings response coefficient’ is stronger for both bad news announcements and positive profit announcements. We do not find any significant relation between changes in implied volatility and earnings news in the pre- or post-announcement periods. We conclude that the options market efficiently absorbs earnings information.

Management Insights

Management Insights

The Party's Over: The Role of Earnings Guidance in Resolving Sentiment-Driven Overvaluation

This paper shows that an important link between investor sentiment and firm overvaluation is optimistic earnings expectations, and that management earnings guidance helps resolve sentiment-driven overvaluation. Using previously identified firm characteristics, we find that most of the negative returns to uncertain firms in months following high-sentiment periods fall within the three-day window around the issuance of management earnings guidance. Comparisons of guidance months to nonguidance months show that guidance issuance affects the magnitude and not just the daily distribution of negative returns. There is also some evidence of negative returns around earnings announcements for firms that previously issued guidance, suggesting that guidance does not entirely correct optimistic earnings expectations. To provide additional insight into the strength of the guidance effect, we show that the market reacts more strongly to surprises, particularly negative surprises, following high-sentiment periods. Finally, firms with higher transient institutional ownership are less likely to guide, and their guidance is less likely to contain bad news following high-sentiment periods, indicating that managers with a short-term focus are hesitant to correct optimistic market expectations.This paper was accepted by Brad Barber, Teck Ho, and Terrance Odean, special issue editors.

Digital repeat photography for phenological research in forest ecosystems

Digital repeat photography has the potential to become an important long-term data source for phenological research given its advantages in terms of logistics, continuity, consistency and objectivity over traditional assessments of vegetation status by human observers. Red-green-blue ( RGB) color channel information from digital images can be separately extracted as digital numbers, and subsequently summarized through color indices such as excess green ( ExG = 2 G − [ R + B]) or through nonlinear transforms to chromatic coordinates or other color spaces. Previous studies have demonstrated the use of ExG and the green chromatic coordinate ( g cc = G/[ R + G + B]) from digital landscape image archives for tracking canopy development but several methodological questions remained unanswered. These include the effects of diurnal, seasonal and weather-related changes in scene illumination on ExG and g cc , and digital camera and image file format choice. We show that g cc is generally more effective than ExG in suppressing the effects of changes in scene illumination. To further reduce these effects we propose a moving window approach that assigns the 90th percentile of all daytime values within a three-day window to the center day ( per90), resulting in three-day ExG and g cc . Using image archives from eleven forest sites in North America, we demonstrate that per90 is able to further reduce unwanted variability in ExG and g cc due to changes in scene illumination compared to previously used mean mid-day values of ExG and g cc . Comparison of eleven different digital cameras at Harvard Forest (autumn 2010) indicates that camera and image file format choice might be of secondary importance for phenological research: with the exception of inexpensive indoor webcams, autumn patterns of changes in g cc and ExG from images in common JPEG image file format were in good agreement, especially toward the end of senescence. Due to its greater effectiveness in suppressing changes in scene illumination, especially in combination with per90, we advocate the use of g cc for phenological research. Our results indicate that g cc from different digital cameras can be used for comparing the timing of key phenological events (e.g., complete leaf coloring) across sites. However, differences in how specific cameras “see” the forest canopy may obscure subtle phenological changes that could be detectable if a common protocol was implemented across sites.

Pay for Performance? CEO Compensation and Acquirer Returns in BHCs

We examine how managerial incentives affect acquisition decisions in the banking industry. We find that higher pay-for-performance sensitivity (PPS) leads to value-enhancing acquisitions. Banks whose CEOs have higher PPS have significantly better abnormal stock returns around the time of the acquisition announcements. On average, acquirers in the high-PPS group outperform their counterparts in the low-PPS group by 1.4% in a three-day window around the announcement. Higher PPS helps reduce the incentives for making value-destroying acquisitions, while at the same time promotes value-enhancing acquisitions. The positive market reaction can be rationalized by post-merger performance. Following acquisitions, banks with higher PPS experience greater improvements in their operating performance. We show that the effect of PPS is mainly evident in small and medium-sized banks, but is not present in large banks. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

Revenue enhancement and wealth effects of mergers and acquisitions in Asian emerging markets

Revenue enhancement and value creation are core issues of mergers and acquisitions (M&A). Revenue enhancing synergy associated with cross-industry M&A is supported by Asian emerging markets. Both within-industry M&A and cross-industry M&A deals realise significant positive abnormal returns. The difference between the two categories of M&A is statistically significant in a three-day window, but not statistically significant in a two-day window. Information leakages may be driving the larger valuation effects because a three-day window includes one day before the announcement date. Since large firms tend to diversify their business, the result that cross-industry M&A deals realise lower abnormal returns than within-industry may be driven by the firm size effect.

A TAIL FULL OF SUNS

1 1 7 R A T A I L F U L L O F S U N S A U S T I N S E G R E S T And whatsoever my eyes desired I kept not from them – Ecclesiastes 2:10 When my peacocks arrived the post o≈ce called at four a.m. – eight babies only two days old with a three-day window to live o√ their yolks. I taught them to eat and drink. I built them a warm house, fenced it in. Little brown sprigs, they trailed me around the yard. After a week, they were tilting their tails, trying to fan out. Their necks turned black, then blue in the sun. A sapphire pan shone between their shoulders. Night and day they had an audience: glowing sets of cats’ eyes, a pit bull on top of the cage, a possum hung in the netting. Their feathers grew longer and more intricate – in the shade like giant dusters, but in the sun spanning indigo to gold. I could have gone to the cage a hundred times over. In my day I had a harem – if that’s the word – a pride of teenage boys hanging around my place. I was no saint, but they were free to do as they pleased. They needed somewhere to be. I o√ered food, cigarettes, tea and yes, even sex. Some wanted a man, some a woman. I could do both. One just wanted to take o√ his clothes and try on mine. Don’t get me wrong. There was nothing I wanted more than to give 1 1 8 Y myself completely to someone closer to my age, but it wasn’t to be. I was thirty, then forty. Mother asks when I’m going to grow up and I say that’s the worst thing anyone’s ever said to me. Dad got his colon nicked and bled out by week’s end. He’d said, ‘‘Steve, your brothers all have businesses and houses. We want you to have something.’’ I was alone then, my friends all gone, holed up in my apartment doing coke. I never thought I’d like it out here. I’d been in the city so long. I managed to assemble a shed kit, attached it to the garage next to the cage so I could have a place to smoke and watch my movies or my birds, whichever I please. The couch pulls out but I don’t sleep much now. Mother sits with me in the morning when a wind comes down the valley and the birds catch the sun and flare that kaleidoscope of colors I swear’s better than any drug. The peacocks pretty much have run of the place. You’re as likely to find one in the bed of my truck as in the cage. Our gardens are full of peacock plaques and statues, and inside the house, the turkey pheasant is the main décor motif. 2. My illustrated bible showed Solomon entranced by birds, the bristles of their blue crowns bobbing as they preened. Those colors burned into my retinas like those years watching volts fuse at an electronics factory in Arab, Alabama. Once, after second shift I went to a party at this house surrounded by pasture, the pasture by woods. I woke up on the couch, everyone asleep, the TV static. 1 1 9 R Through the curtain blue lights were flashing. I was hitting people, screaming the cops are here wake up dammit! But no one would. Across the road, hundreds of purple and blue and yellow-green bolts were leaping out of this field up to maybe fifty feet in the air. The sky was totally clear, the stars piercing, and this cluster of bolts seemed to walk – or stalk on legs of lightning toward the house. There was no thunder, no sound. Whatever it was, it just walked o√ – like my green hen, who, first chance it got, struck out for the woods and never looked back. 3. In one of my first memories I’m with my brother in our crib. A creature’s standing...

Modeling Remote Sensing Satellite Collection Opportunity Likelihood for Hurricane Disaster Response

State and local agencies involved in emergency response to natural disasters such as hurricanes have explicitly indicated they need imagery covering the disaster area within three days of the event; and more desirably within 24 hours of the event. Airborne image collections have often been used but suffer from several problems, most noticeably the collection time (days or week) required for larger areas. The use of remote sensing satellites carrying high spatial resolution sensors has often been touted as the logical response for rapidly collecting post-disaster event imagery for emergency response. Unfortunately, satellites are maintained on fixed orbits. The repeat interval for remote sensing satellites carrying high spatial resolution sensors, even with pointable sensors, is on the order of several days, depending on the latitude for the disaster event. Fortunately, more than one satellite carries high spatial resolution imagery. This combination of requirements and restrictions may result in either a relatively high (or low) likelihood of collecting imagery within the three-day window of opportunity. This research investigated the likelihood of collecting imagery over a hurricane disaster area based on the orbital cycles of three high spatial resolution imaging satellites. Using the spatial-temporal distribution of historic hurricane landfall locations as a proxy for the probability distribution of future hurricanes by latitude, the "visibility" of each landfall location to future satellite imaging opportunities was determined. The results indicate that the likelihood of collecting imagery within one day of the event varied between 17 and 39 percent by relying on one satellite image provider. However, if either of three satellite imagery sources (i.e., Ikonos-2, Quickbird-2, and Orbview-3) could be used, then the likelihood increased to 61 percent. By relying on three satellite imagery providers there is a likelihood of between 94 and 100 percent of collecting imagery within two or three days, respectively, after the event.

The Party's Over: The Role of Earnings Guidance in Resolving Sentiment-Driven Overvaluation

This paper shows that an important link between investor sentiment and firm overvaluation is optimistic earnings expectations, and that management earnings guidance aids in resolving sentiment-driven overvaluation. Using the firm characteristics identified by Baker and Wurgler (2006), we find that most of the negative returns to uncertain firms in months following high sentiment periods fall within the three-day window around management earnings guidance issuance. Comparisons of guidance months to non-guidance months show that guidance issuance affects the magnitude and not just the daily distribution of negative returns. There is also some evidence of negative returns around earnings announcements for firms that previously issued guidance, suggesting that guidance does not entirely correct optimistic earnings expectations. To provide additional insight into the strength of the guidance effect, we show that the market reacts more strongly to surprises and particularly negative surprises following high sentiment periods. Finally, firms with higher transient institutional ownership are less likely to guide and their guidance is less likely to contain bad news following high sentiment periods, indicating that managers with a short-term focus are hesitant to correct optimistic market expectations.

The Impact of Earnings on the Pricing of Credit Default Swaps

ABSTRACT: This study evaluates the impact of earnings on credit risk in the Credit Default Swap (CDS) market using levels, changes, and event study analyses. We find that earnings (cash flows, accruals) of reference firms are negatively and significantly correlated with the level of CDS premia, consistent with earnings (cash flows, accruals) conveying information about default risk. Based on the changes analysis, a 1 percent increase in ROA decreases CDS rates significantly by about 5 percent. We also find that (1) CDS premia are more highly correlated with below-median earnings than with above-median earnings and (2) CDS premia are more highly correlated with earnings of low-rated firms than with earnings of high-rated firms. Evidence indicates further that short-window earnings surprises are negatively and significantly correlated with CDS premia changes in the three-day window surrounding the preliminary earnings announcement, although the impact is concentrated in the shorter maturities.