Insider Trading and Corporate Governance: The Case of Germany

We analyse transactions by corporate insiders in Germany. We find that insider trades are associated with significant abnormal returns. Insider trades that occur prior to an earnings announcement have a larger impact on prices. This result provides a rationale for the UK regulation that prohibits insiders from trading prior to earnings announcements. Both the ownership structure and the accounting standards used by the firm affect the magnitude of the price reaction. The position of the insider within the firm has no effect, which is inconsistent with the informational hierarchy hypothesis.     

The value of financing through cross-border asset sales: Shareholder returns and liquidity

We examine a sample of 1458 divestitures of domestic assets by U.S. firms to foreign and domestic buyers over the period 1998–2008. Cross-border asset sales yield higher abnormal returns to the seller than domestic sales. This incremental return is driven by liquidity-seeking sellers engaging in cross-border transactions. Larger seller returns in these international deals are associated with favorable economic conditions in foreign buyers' home markets relative to the U.S. We also find positive abnormal returns for buyers, albeit smaller than seller returns, but no significant difference between buyer returns in cross-border and domestic transactions.     

Relative performance evaluation in board cash compensation: UK empirical evidence

This paper presents an empirical examination of whether evidence of the implicit use of relative performance evaluation (RPE) can be found in the cash compensation of boards of directors for 169 UK non-financial listed companies that existed for all of the period from 1971 to 1998. We perform two types of analyses. Initially, we estimate individual firm time series regressions of the change in board cash compensation against measures of firm and peer group performance. The measures of firm performance we use are annual cash stock market returns and pre-tax accounting earnings. Peer group measures of performance are industry value-weighted average cash stock market returns and industry value-weighted average pre-tax accounting earnings. Subsequently, we analyse the data as a balanced panel.We provide evidence that board cash compensation is positively related to accounting earnings and negatively associated with peer group pre-tax accounting earnings. Some evidence suggests that board cash compensation is related to firm stock market returns but none suggests it is related to peer group market returns. This result implies the presence of RPE based on accounting earnings in the design of UK board compensation, with the cash compensation of boards of directors implicitly (partially) protected from industry uncertainties.     

Net equity issuance effect in the UK

Net equity issuance (NEI) by firms has predictive power for US stock returns. This paper examines the NEI anomaly for UK stocks, using regression on firm characteristics and sorted portfolios with several factor models. The anomaly generalises to the UK only in part. We confirm the existence of a large NEI effect for small and midsize stocks, but not for large stocks. The repurchase effect, of positive abnormal returns following repurchases, is absent in the UK. We also find that the NEI effect in smaller stocks is not exploitable by investors, allowing for transaction costs.     

Acquisition of Divested Assets and Shareholders' Wealth

The divesting of corporate assets has become quite popular. Previous studies of divestitures have found conflicting impacts upon shareholders' wealth of the buying firm. This study measures the impacts of product-line relatedness between the acquiring firm and the divested unit and financial weakness of the selling firm upon the abnormal returns to the acquiring firm. Although the study finds that the impact of financial strength of the seller is ambiguous, the purchase of related assets produces more wealth than does the purchase of unrelated divested units. Further, firms that purchase related divested units have larger proportions of insider ownership.     

EVIDENCE OF THE EFFECT ON SHAREHOLDER WEALTH OF CORPORATE SPINOFFS: THE CREATION OF ROYALTY TRUSTS

Corporate spinoffs and divestitures cause positive revaluation of the firm by the market. This paper examines a particular kind of spinoff, one of mineral interests into a royalty trust. Royalty trusts are associated with abnormal returns that come from positive market revalution and from special tax incentives inherent to trusts.     

The profitability of asset sales as an explanation of asset divestitures

Using Korean fixed asset divestiture data, I extend the investigation of the financing hypothesis of divestitures proposed by Lang et al. (Lang, L., Poulsen, A., Stulz, R., 1995. Asset sales, firm performance, and the agency costs of managerial discretion, Journal of Financial Economics 37, 3.37). In particular, I take into account the profitability of announced asset divestitures and I employ a unique sample constructed to avoid effects that might confound the results. I also take into account the financial condition of the selling firms. The results are consistent with the financing hypothesis proposed by Lang et al. and show that the financing hypothesis of divestitures is robust to controls for the profitability of asset sales and the financial condition of selling firms.     

Restructuring Using Operating Asset Exchanges: Issues and Evidence

This study examines restructuring in which a firm divests an operating asset in exchange for another operating asset. Since liquidity, capital structure, and distributional issues are not immediately associated with tax‐free asset‐for‐asset exchanges, they are well suited for examining the competing hypotheses related to divestitures. We find that the abnormal returns associated with asset exchanges are generally smaller than those associated with other divestiture restructurings except when indications of value are provided. Our analysis identifies positive valuation effects for firms undertaking focus‐enhancing exchanges, but a dominating consideration is whether the value of the units traded is indicated.     

Predicting Stock Returns Using Financial Statement Information

We examine the profitability of the Ou and Penman (1989a) Pr trading strategy and the Holthausen and Larcker (1992) Prob trading strategy over the period 1980–1992 in the UK. This is a test of whether an investor can earn abnormal returns by exploiting fundamental accounting data. We employ alternative abnormal return metrics and research designs to control for risk. Using a UK dataset offers an independent test because the UK differs from the US in its formal and informal financial reporting environment, its structure of share ownership, and the behaviour of its economy over the study period. We find consistent evidence that an investor could have used a summary measure of financial statement information to predict future abnormal returns by indirectly predicting one-year-ahead earnings changes, but only weak and inconsistent evidence that an investor could have used a summary measure of financial statement information to predict one-year-ahead stock returns directly. We offer some thoughts on the reasons for these different results.     

The Relevance of Target Accounting Quality to the Long-Term Success of Cross-Border Mergers

Abstract:  We investigate a sample of cross-border mergers involving US firms that acquired foreign targets between 1985 and 1995. Our general interest is in the long-term success of the acquisitions, measured by the post-merger abnormal returns to the US acquirers. Our primary focus is the relationship between the quality of the foreign target's accounting disclosures and the acquisition's long-term success. Employing a procedure recommended by Lyon et al. (1999) , we find that US acquirers in cross-border mergers experience significantly negative long-term abnormal returns post-merger. These returns also are significantly more negative than those realized by a matched sample of US acquirers that acquired US targets. To investigate the potential association between the US acquirers' post-acquisition returns and target firms' accounting disclosures, we classify the merger transactions by target firm home country. We define variables to reflect the quality of accounting disclosures and control for other important country-specific features. The results reveal that post-merger abnormal returns are less negative for acquirers of targets based in countries where accounting data is less value relevant. This may be due to a higher cost of capital for target firms in these countries, resulting in a built-in discount in the pricing of targets. An examination of the premiums paid in a subset of 79 cross-border mergers reveals evidence consistent with this contention: premiums are lower for target firms based in countries where accounting data is less value relevant. These results suggest that shareholders of targets from such countries pay a price for their country's institutional framework that makes accounting information less value relevant.     

Are there economies of scale in the demand for money by firms? Some panel data estimates

We estimate elasticities of scale in the demand for money by firms using firm level panel data from Spain, the UK, and the US. This elasticity is one for Spain and the UK but smaller for the US. We find that the errors in the money demand equations contain two terms that are correlated with sales. Firstly, a permanent firm effect that captures differences in technological sophistication. Secondly, a measurement error in sales, which becomes relevant when relying on changes in sales to account for fixed effects. Failure to control for these correlated unobservable terms results in important biases in the estimated sales elasticities.     

Insider trading in Hong Kong: Some stylized facts

This paper examines the characteristics and price movements of legal insider transactions in Hong Kong. Abnormal returns are analyzed for intensive trading, as well as for samples grouped by industry classification, firm size, book-to-market ratio, price–earnings ratio, and relative trading volume of the insider transactions. Results show that insiders are able to earn abnormal profits from both buying and selling activities. The magnitude of and duration for abnormal profits depend significantly on firm-specific and transaction-specific factors. We also document the persistence of abnormal returns associated with insider sales, while abnormal profits associated with insider purchases are concentrated in certain transactions.     

Insider trading patterns

We revisit the information content of stock trading by corporate insiders with an expectation that opportunistic insiders will spread their trades over longer periods of time when they have a longer-lived informational advantage, and trade in a short window of time when their advantage is fleeting. Controlling for the duration of insiders' trading strategies, we find robust new evidence that both insiders' sales and purchases predict abnormal stock returns. In addition, we provide evidence that insiders attempt to preserve their informational advantages and increase their trading profits by disclosing their trades after the market has closed. When insiders report their trades after business hours, they are more likely to engage in longer series of trades, they trade more shares overall, and their trades are associated with larger abnormal returns. Finally, we show how accounting for these trading patterns sharpens screens for corporate insiders who trade on infor- mation.     

Target Firm Returns: Does the Form of Payment Affect Abnormal Returns?

Research indicates that at the time of a takeover announcement, target firm shareholders receiving cash earn larger abnormal returns than those receiving stock. Our work confirms that cash targets receive larger direct payments from bidders and that the size of target firm abnormal returns is related to the relative size of this direct payment. Once we control for the size of the payment, however, we find the target firm abnormal returns to be unrelated to the payment method. Thus the relationship between payment method and target firm abnormal returns is indirect. This finding is important because it casts doubt on the signaling (asymmetric information) hypothesis. That is, cash offers do not seem to be valued by the market as a means of reducing this uncertainty. Something else, such as the tax implication differences between cash and stock offers, drives cash target firms to demand larger payments from bidding firms.     

An Analysis of the Theories and Explanations Offered for the Mispricing of Accruals and Accrual Components

Numerous accounting studies claim that investors fail to rationally price accrual‐related information and that investors are functionally fixated. This study documents the importance of performing robustness tests when testing economic or behavioral explanations for apparent accounting‐related security mispricing. We find that performing robustness tests that exclude a small number of firm‐year observations (approximately 200 firm‐year observations or about 1% of the entire sample) reveals an inverted U‐shaped relation between buy‐and‐hold abnormal returns and total accruals. An inverted U‐shaped relation is inconsistent with the functional fixation (earnings fixation) hypothesis. We conduct similar robustness tests for the abnormal accrual anomaly and the net operating assets anomaly proposed by other investigators, and also find an inverted U‐shaped relation between buy‐and‐hold abnormal returns and abnormal accruals and net operating assets. These findings are inconsistent with the explanations put forth by those investigators. Such evidence leads us to conclude that the accrual‐related anomalies are unlikely to be due to investors' inability to process accounting information, as suggested by the functional fixation hypotheses tested.     

The Impact of Mispricing and Asymmetric Information on the Price Discount of Private Placements of Common Stock

The price discount on privately placed stock is large and can vary substantially among firms. While earlier studies attribute price discounts on privately placed stock to illiquidity and costs of gathering information, we offer a more complete explanation. We find that firms exhibiting higher overvaluation have significantly larger price discounts in private stock sales. We also find that higher levels of asymmetric information about the issuing firm and about the stock market environment at the time of the private placement cause more pronounced discounts in the offer price. Our analysis also shows that post-issue abnormal returns following private placements are higher when discounts are less pronounced.     

Does venture capital syndication affect mergers and acquisitions?

We find that venture capital (VC) syndicate-backed targets receive higher acquisition premiums and spend more time negotiating transaction terms. The acquirers of syndicate-backed targets receive lower cumulative abnormal returns surrounding the acquisition announcement, but they outperform the individual-backed targets in the long-term. We show that VC syndication creates value for entrepreneurial firms by leading to larger and more independent boards of directors prior to acquisition. It also leads to better incentive alignment between the CEO and the shareholders of the acquiring firm. In addition, syndicate-backed targets prefer stock as the method of payment in mergers and acquisitions. Collectively, we show that VC syndication creates value for both entrepreneurial firms and their acquirers in the long-term.     

Is the M&A announcement effect different across Europe? More evidences from continental Europe and the UK

The United Kingdom (UK) and Continental Europe are two of the most dynamic markets for mergers and acquisitions in the world. Using a sample of 2823 European acquisitions announced between 2002 and 2010, we investigate the effect of M&A announcements on stock returns of acquiring companies located in Continental Europe and the UK. The analysis is based on characteristics of takeover transactions such as method of payment, listing status of the target company, geographic scope (cross-border vs. domestic), industry relatedness of the bidding and the target company, amongst other factors. We find that European bidders earn positive abnormal returns both in cross-border and domestic acquisitions, and there is a significant difference between the abnormal returns of stock and cash deals, and between acquisitions of listed and unlisted target companies. However, the cross-border wealth effects are not significantly different between the UK and Continental Europe. We find that bidding firm’s shareholders gain more in equity than in cash offers if they are located in the UK and if they acquire unlisted targets. Cash bids for listed targets are associated with higher abnormal returns for bidders located in Continental Europe. We do not find supportive evidence that industry diversification destroys value for shareholders of both Continental European and the UK bidders.     

Market Discounts and Shareholder Gains for Placing Equity Privately

Despite selling at substantial discounts, private placements of equity are associated with positive abnormal returns. We find evidence that discounts reflect information costs borne by private investors and abnormal returns reflect favorable information about firm value. Results are consistent with the role of private placements as a solution to the Myers and Majluf underinvestment problem and with the use of private placements to signal undervaluation. We also find some evidence of anticipated monitoring benefits from private sales of equity. For the smaller firms that comprise our sample, information effects appear to be relatively more important than ownership effects.     

Selling to buy: Asset sales and acquisitions

This study explores the impact of joint corporate asset restructuring decisions, where firms sell an asset in order to fund a subsequent acquisition (selling-to-buy). We find that firms with asset sales are associated with increased acquisition probability. The effect is more pronounced for financially constrained firms. We also show that, in addition to the established improved firm efficiency from focus-increasing asset sales, financially constrained firms obtain the necessary funds to conduct focus-increasing acquisitions, improving further their efficiency. This translates into both higher long-run operating performance and stock abnormal returns at the asset sale announcement.