The role of the seller’s stock performance in the market reaction to divestiture announcements

Divestitures have the potential to create shareholder value. However, the extent of the market reaction should depend on the likelihood of finding more valuable uses for the divested assets or the ability on the part of the seller to eliminate negative synergies. We hypothesize that strong performers have less scope to achieve substantial improvements compared to poorly performing firms. Using the seller’s stock return in excess of the market return in the 1-year and 2-year periods preceding the divestiture announcement to expose the divesting firm’s inefficient use of its assets, we show that the market reaction to divestiture announcements is significantly higher for underperforming firms. The difference in abnormal returns can be as high as 4 %. In contrast, none of the accounting-based variables that have been used in previous studies are found to be significantly related to the announcement returns. These results suggest that the firm’s stock performance is a more useful indicator of the wealth effect associated with divestitures.     

Cross-sectional variation in the stock market reaction to bond rating changes

Previous research has found that the stock market reacts negatively to bond rating downgrades and that downgrades tend to follow periods of negative returns, indicating that at least some downgrades are partially predictable. Hypothesizing that the reaction to a downgrade depends on both the implications for cash flows and the degree of surprise, we explore how the reaction to downgrade announcements varies across bond issues. We find that the equity market reacts much more negatively to bond rating downgrades to and within the speculative bond category than to downgrades within the investment grade category. Within the speculative category, the reaction is stronger, the lower the old and new ratings are. The reaction to multiple-level downgrades is not very different from that to single-level downgrades. The market reaction is also stronger if the firm has experienced negative pre-downgrade abnormal returns. Our evidence indicates that downgrades are viewed by the market as providing information on likely future earnings before interest charges, not just likely future interest charges. It is also consistent with Billett's (1996) hypothesis that low rated debt makes a firm less attractive as a takeover target.     

Location,Proximity, and M&A Transactions

In this paper, we examine how the geographic location of firms affects acquisition decisions and value creation for acquirers in takeover transactions. We find that firms located in an urban area are more likely to receive a takeover bid and complete a takeover transaction as a target than firms located in rural areas, and takeover deals involving an urban target are associated with higher acquirer announcement returns, after controlling for the proximity between the target and the acquirer. In addition, a target's urban location significantly attenuates the negative effect of a long distance between the target and the acquirer on acquirer returns, a fact that is documented in the existing literature. Our findings reveal a previously underexplored force—firm location—that can affect takeover transactions, in addition to proximity. Our paper suggests that a firm's location plays an important role in facilitating the dissemination of soft information and enhancing information‐based synergies.     

The quality assurance role of seller financing: evidence from second mortgages

Quality problems that are known to the seller of a product, but will become known to the buyer only after the purchase have the potential to frustrate voluntary exchanges. Where the determination of quality after the sale is cut-and-dried, brand names and unconditional guarantees will bond contract performance. When the problem is more subtle or confounded by the extent of consumer inputs, requiring risk-sharing by the contracting parties, these bonding devices typically are not sufficient. Under the circumstances, seller financing may be an efficient contracting solution for bonding the quality dimension of the contract. This form of financing makes both the buyer and the seller share the risk that the product may not suit the buyer’s needs in the way promised by the seller. This paper provides further empirical evidence on the quality assurance role of seller financing. We consider seller-financed second mortgages in the National Association of Realtors database. Seller financing in second mortgages may be a supplement to first mortgages supplied by conventional lenders. The role of seller financing as a quality assurance mechanism in second mortgages is more complex than its role in first mortgages, but is also less subject to an alternative interpretation of credit rationing than is its role in seller-financed first mortgages. To avoid further complexities, we do not consider second seller financing transactions that supplement first assumption mortgage transactions.     

Defensive acquisitions in the banking industry: The takeover premium hypothesis

We define defensive acquisitions as takeovers made by a firm so as to become so large that it becomes an unattractive target itself. A sample of defensive acquisitions in the banking industry is used to test the takeover premium hypothesis. Under this hypothesis, the defensive acquirers lose because a takeover premium that previously existed in their prices is deflated while the takeover premium increases for smaller competitors because they become more likely targets. We find that the defensive acquirers experience significant negative abnormal returns on the announcement day, and that smaller competitors have positive abnormal returns on the announcements of defensive acquisitions. In contrast, larger competitors do not react to the announcements. The results are consistent with the takeover premium hypothesis.     

Value Added and Corporate Control in the U.S.

This paper examines the ability of value added to assess the differences between target firms and their industries and to explain target firms' abnormal returns during the takeover period. In a sample of 234 completed takeovers over the period 1977 to 1989, takeover targets have lower value added to total assets ratios than other firms in their industries in the year preceding the year in which the takeover is completed. Target firm abnormal returns observed during the takeover period are positively related to the difference between target Firm and average industry value added to total assets. This suggests that while acquired firms are on average underperformers, acquiring firms value the access to, and possibly the ability to redistribute, the resources of target firms.     

Private benefits from control block trades in the Spanish stock exchange

A control block trade can be explained by the expectation of financial gains, shared by all shareholders, or by the expectation of private benefits, exclusive to the buyer and possibly at the expense of other shareholders’ rents. The market for corporate control contributes to social welfare when it improves the efficiency of the allocation of resources. When the objective of a block transaction is private benefits, social welfare may be negatively impacted as minority shareholders could withdraw from the market. Therefore the estimation of private benefits would allow the efficiency of the market for corporate control to be assessed. Specifically, the aim of this paper is to calculate private benefits in the Spanish market for partial control. Using a sample of partial control transactions over the period 1990–2016, we find that the median of private benefits is negative, therefore it appears that there is no inefficient use of resources in the Spanish partial control market as a whole, however private costs are detected. The variability of private benefits is explained in a significant way by variables related to the control structure of the target firm, such as the controlling position of the buyer after the transaction, the contestability of control and the cross-shareholdings between the buyer and large shareholders. Performance and the size of the firm are significant as well.     

Short sale constraints,dispersion of opinion,and stock overvaluation: Evidence from earnings announcements in China

Using a clean setting in China, we test the Miller (1977) hypothesis that stocks are overvalued in the presence of short sale constraints and dispersion of opinion as an extension of Berkman et al. (2009). We find that stocks with short sale constraints have significantly negative abnormal returns during earnings announcement periods, especially when investors have diverse opinions. These results are robust to alternative measures of abnormal returns and endogeneity concern. The findings help to explain the impact of short sale constraints on pricing efficiency and have important policy implications for relaxing restrictions on short selling and improving regular information disclosure in emerging markets.     

Market effects of private equity placement: Evidence from Chinese equity and bond markets

Research has provided empirical evidence for the stock market reaction toward private placement; however, similar research has not been conducted in terms of the bond market. Using the event study method, we empirically examine the explanatory power of the signaling, free cash flow, and wealth transfer hypotheses based on the reaction of the stock market, bond market, and firm abnormal returns to the private placement announcement. The results show that the stock market has a negative reaction toward private placement, whereas the bond market has a positive reaction. The results also show that the scale of private placement is correlated with the severity of the market reaction. Abnormal returns indicate no significant change both before and after the private placement, and they are unaffected by the scale of private placement. These results are consistent with the wealth transfer hypothesis; however, the market reaction is not attributable to the signaling hypothesis and the free cash flow hypothesis. Extensive research shows that the abnormal returns of private placement change dramatically in non-state-owned enterprises and firms with low credit rating bonds, whereas the bond maturity has no significant impact on the abnormal returns—the wealth transfer effect of private placement is stronger in non-state-owned enterprises and firms with low credit rating bond.     

商业信息在传统与电子两种销售模式下的收益分析

本文从传统销售模式和电子销售模式中信息发布和搜索成本的角度出发,用信号博弈的思想分析了有退款保证的商品交易模型,得出如下结论:在成本回收年限内,如果电子销售模式下买卖双方的信息搜索和发布成本小于其在传统销售模式下的成本时,可选择电子销售模式;否则,应选择传统销售模式。     

Information asymmetry,capital adequacy,and market reaction to loan loss provision announcements in the banking industry

This study finds significantly negative abnormal returns accompanying press announcements of loan loss provisioning in the banking industry. The negative reactions are shown to arise from both an informational asymmetry regarding asset value and the costs associated with capital adequacy regulation. It is further shown that the market reaction depends upon the type of asset being provisioned. Announcements regarding the provisioning of foreign debt are accompanied by positive market reactions, while announcements of the provisioning of real estate loans and other types of debt are accompanied by negative market reactions.     

Shareholder value implications of service failures in triads: The case of customer information security breaches

The rise in front-end service outsourcing in recent years, despite its advantages, has also exposed buyer firms to unique challenges. One of the most salient risks for buyer firms in service triads is service failure due to the service provider. Indeed such service failures may be more costly for firms due to the greater relational and operational costs that may arise from the presence of the third-party provider. Yet, neither the services literature nor extant operations literature on service triads has paid much attention to the financial consequences to the buyer firm – i.e., service risks – of such service failures in triads. To fill this gap, we investigate the financial penalty of service failures due to the service provider using the event study methodology and a sample of 146 customer information security breaches as our empirical context. Analysis of the abnormal returns reveals that service failures due to the front-end service provider lead to greater shareholder losses than such failures due to the buyer firm. This provides important new insight into the financial risks arising from outsourcing front-end services. Further, we investigate the ability of the buyer firm's employee and financial resources to temper these shareholder losses. We find that buyer firm employee productivity can moderate the greater financial penalty associated with such triadic service failures but that buyer firm leverage tends to not have such a mitigating effect. This provides new guidance for theory and practice regarding how buyer firms can position themselves to buffer the financial risks arising from service failures due to front-end service providers.     

Common-value auction versus posted-price selling: an agent-based model approach

Previous theoretical work has compared a private-value auction and posted-price market, and an affiliated-value auction and a posted-price market to determine the selling method preferred by sellers. Much less, however, is known about the seller’s preferred selling method when the buyers have a common value of the item. Our objective is to determine if a first-price auction or a posted-price market provides a seller with the larger expected revenue when buyers have a common value of the item being sold. An agent-based posted-price market and an agent-based first-price common-value auction with a reserve price are developed to compare these selling methods. Holding the buyers’ uncertainty about the value of the item constant, the seller prefers the posted-price market when the seller has no uncertainty about the item’s value. When the seller has an equal level of uncertainty as the buyers, the seller’s expected revenue for each market is similar. As the seller’s uncertainty increases beyond the level of the buyers’ uncertainty, the auction with a reserve price eventually becomes the preferred choice.     

Adverse selection and costly information acquisition in asset markets

We develop an asset exchange model with adverse selection and costly information acquisition incentives. A seller of an asset knows the true value of the asset, while a buyer can obtain information about the asset’s quality at a cost. An equilibrium offer is pooling, but a buyer can purchase only good assets after producing the costly information about the asset’s quality. When the probability that the seller holds good assets is above the threshold value, a trade can occur with and without information acquisition, depending on the information acquisition cost, and the trade volume and social welfare are higher in equilibrium without information production than in equilibrium with information production. When the probability of facing good assets is below the threshold value, a trade occurs only after screening the quality of assets, and, hence, the market collapses if the information acquisition cost is sufficiently high. As the information acquisition cost increases, social welfare can increase or decrease depending on the probability of facing good and bad assets.     

An investigation of causality between insider transactions and stock returns

Prior research shows that corporate insiders engage in profitable transactions by trading securities of their own firms. The main purpose of this study is to examine whether insider transactions and stock returns have causality relationships at the firm level for a sample of 2,521 firms during the period 1988 to 1998. We find a large impact of stock returns on subsequent insider transactions at both the aggregate and firm levels. The impact appears to be negative which suggests that insiders buy after stock price decreases and sell after stock price increases. Our findings on the predictive content of insider transactions for subsequent stock returns are primarily consistent with prior literature. We observe a positive but weak relationship between insider transactions and future stock returns.     

Executive compensation,method of payment and abnormal returns to bidding firms at takeover announcements

This study investigates the association between method of payment, long-term performance plans, managerial stockholdings and abnormal returns to bidding firms at takeover announcements, using a cross-sectional regression methodology. Previous studies have examined each of these factors separately. The results indicate that firms with long-term performance plans and high managerial stockholdings in cash offers experience significantly higher abnormal returns at the announcement of mergers prior to 1980. The study provides additional evidence in explaining the previous conflicting results (Jensen and Ruback, 1985), examining the stock market reaction of bidding firms at merger announcements.     

Financial crisis,REIT short-sell restrictions and event induced volatility

From September 19 through October 8, 2008 the SEC issued a short sale moratorium on approximately 800 financial stocks. The emergency order justified the ban based on concerns “that short selling in the securities of a wide range of financial institutions may be causing sudden and excessive fluctuations in the prices of such securities” (see Securities and Exchange Commission, 2008). Although Real Estate Investment Trusts (REITs) were initially excluded, the management of fourteen REITs requested that they be added to the restricted list. Diamond and Verrecchia (1987) develop a model in which short sale constraints decrease trading and increase the time required to adjust to new information resulting in greater price reaction. This research employs a GARCH version of the market model to test the impact of the SEC policy on the risk/return of the fourteen restricted REITs and a sample of fifty REITs not on the list. Rather than mitigate volatility it was determined that fifty of the sixty-four REITS in the combined samples exhibited significant event induced risk as a consequence of the ban with a significantly larger increase occurring among restricted REITs. A cross-sectional test failed to identify significant negative or positive abnormal returns as a consequence of the short sell ban.     

Optimal auctions under collusion of buyers with discrete valuations

The potential seller of an indivisible good faces two potential buyers whose valuations for the good are private information. We derive the optimal selling mechanism under the assumption that the buyers collude both when the valuations are independently distributed and when they are correlated. We find that when the valuations are independent the seller can obtain the same expected revenue as if the buyers behaved noncooperatively; if instend the valuations are correlated then collusion harms the seller. In this latter case, moreover, each buyer’s information at the collusion stage about the other buyer’s valuation turns out to be very relevant for the effectiveness of collusion.     

佣金约束条件下排污权双边叫价拍卖机制设计

通过排污权交易提高环境资源的使用效率和配置效率,实现环境资源最优配置。排污权和排污权市场理论研究是环境资源可持续利用的重要研究课题,而排污权交易模型是排污权市场理论与实践中排污权交易的核心。本文采用双边叫价拍卖交易模式,建立了排污权交易双边叫价拍卖的不完全信息博弈模型,给出了双边叫价拍卖的机制设计。该机制具有有效性和激励相容性。     

Do short selling restrictions destabilize stock markets? Lessons from Taiwan

Short sellers have been routinely blamed for triggering, or exacerbating, stock market declines. The experience of Taiwan provides an interesting case study of the impact of short selling bans on stock returns volatility in a time series framework due to the length of time the short selling ban was in place there. Estimating several variants of an asymmetric GARCH model and a Markov switching GARCH model we find robust evidence that short selling restrictions raise stock returns volatility. The only qualifier is that the impact of short sale bans is a feature of the expansionary phase of business cycles. During recessions this effect dissipates.