The Industry Effects Regarding the Probability of Takeovers

This study attempts to determine whether an acquisition announcement signals potential gains to the corresponding industry rivals of the target, and whether these gains can be explained by industry-specific and rival firm-specific factors that reflect the likelihood of a takeover. The research finds that the valuation effects of the target, combined acquirer and target, and industry rivals of the target are positive and significant. The mean valuation effects per corresponding industry are significantly related to industry-specific characteristics that reflect the probability of a takeover. Specifically, industries characterized as having a higher level of free cash flow, a higher level of tangible assets, and a smaller market value experience a more favorable revaluation. A supplemental analysis of the individual rival firms is also conducted, since the variation in the valuation effects between rival firms within each of the industries is distinctly different from the variation of mean industry effect across industries. The analysis of the individual rivals finds that the same rival-specific variables are significant and in the same direction as the analysis of the industry-specific variables. In addition, the valuation effects of individual rivals are also inversely related to their previous performance. Overall, the results suggest that industry-specific and rival firm-specific characteristics that reflect a higher probability of a takeover are important in explaining acquisition gains and motivation.     

INTRA-INDUSTRY EFFECTS OF BOND RATING ADJUSTMENTS

Several studies find that bond rating downgrades cause negative valuation effects. Other studies find that signals conveyed by earnings releases, earnings forecasts, bankruptcies, and stock offerings of individual firms can be transmitted to their corresponding industries. By combining the two sets of studies, we hypothesize that bond rating changes may contain relevant information not only about the firm, but also about the corresponding industry. We find significantly negative valuation effects for rating downgrades, which are transmitted throughout the industry. Furthermore, we find that intra-industry effects depend on particular characteristics of the bond downgrade, the downgraded firm, and industry rivals. Specifically, the negative intra-industry effects are more pronounced when (1) the downgraded firm experiences a more severe share price response to the bond rating downgrade, (2) the downgraded firm is dominant in the industry, (3) the downgraded firm is more closely related to its rivals in the industry, and (4) the downgrade is due to a deterioration in the firm's financial prospects.     

THE INTRA-INDUSTRY EFFECTS OF OPEN MARKET SHARE REPURCHASES: CONTAGION OR COMPETITIVE?

We examine the extent to which announcements of open market share repurchase programs affect the valuation of competing firms in the same industry. On average, although firms announcing open market share repurchase programs experience a significantly positive stock price reaction at announcement, portfolios of rival firms in the same industry experience a significant and contemporaneous negative stock price reaction. This suggests that perceived changes in the competitive positions of the repurchasing firms occur at the expense of rival firms and dominate any signals of favorable industry conditions. Thus, the competitive intra-industry effects of open market repurchases outweigh any contagion effects. In addition, cross-sectional tests indicate that these competitive effects are more pronounced in industries characterized by a lower degree of competition and less correlation between the stock returns of the repurchasing firm and its rivals.     

Expert reports in Australian takeovers: fees and quality

Target firms in Australian takeovers are required to commission the preparation of an independent expert report in circumstances where there is a perceived conflict of interest with the bidder. As approximately half of these reports are prepared by firms with which the target has other business dealings, concern has been expressed over the quality of these reports due to the suggestion that such reports are provided at lower fees. We examine the 191 independent expert reports provided in all 649 Australian takeover bids initiated in the period 1990 to 2000 inclusive. Using an expert-fee model, we find that the fees for reports by experts with other business dealings with the target are not lower than those of unrelated experts. In addition, the results indicate that experts with other dealings with the target provide reports with a significantly smaller valuation range, consistent with these reports being of higher, rather than lower, quality. Our findings are inconsistent with the U.S. and New Zealand experience of prohibiting audit firms from providing valuation advice in takeovers.     

Intra-industry effects of completed and cancelled cross border acquisitions in Australia: A test of the acquisition probability hypothesis

Globalization has led to an increase in cross-border mergers and acquisitions in recent years. Australian firms have featured prominently as acquisition targets in the latest merger wave. Cross-border acquisitions significantly affect industry dynamics and competitive balance. We investigate the intra-industry effects of cross-border acquisition of Australian firms and find, among others, that the target firms' rivals realized significantly positive abnormal returns following both the acquisition proposal and termination announcements. We relate our results to competing hypotheses and find evidence consistent with the acquisition probability hypothesis. Interestingly, we find that the abnormal returns earned by the rival firms at the time of the termination of the acquisition involving their industry counterparts were greater than the returns earned at the time of the acquisition proposal announcement. These results are consistent with the assertion that the likelihood of acquisition of the rival firms increases following the termination of the initial acquisition proposal involving their industry counterparts.     

Does political connection distort competition and encourage corporate risk taking? International evidence

We investigate the impact of political connection on corporate risk-taking by connected firms, their industry counterparts, as well as non-rival firms from 48 countries. We find that political connection induces higher risk taking by connected firms. By contrast, we do not find evidence that political connection, with the attendant potential competitive distortions in the industry, induces higher risk taking by competitors. We focus on non-financial industries. Our results are consistent with the hypothesis that the inability to avail themselves of political rents compels the non-connected rivals to adopt more conservative strategies. However, large rival firms, generally considered to be too-important-to-fail, exhibit evidence of higher risk taking. The top size quartile industry rivals take as much risk as the politically connected firms. The higher risk exhibited by large rivals of politically connected firms suggests that our baseline regression results of lower risk-taking among rivals of politically connected firms are biased upward by firms that would be considered too-big-to-fail. This finding also suggests that the too-big-to fail phenomenon is not unique to banks. Our results are robust to the use of alternative measures of risk, to the exclusion of privatized and state-owned firms, and to controlling for the effects of financial crisis.     

INDUSTRY EFFECTS OF ANALYST STOCK REVISIONS

We examine the industry valuation effects of analyst stock revisions and identify the variables that influence these effects. Our results show that industry rivals experience significant abnormal returns in response to revision announcements. Although the mean stock price response suggests contagion effects, there is also evidence of significant competitive effects. The valuation effects are influenced by the magnitude of the rated firm's announcement return, along with analyst‐specific and industry‐specific characteristics. However, the sensitivity of the valuation effects to these characteristics is conditioned on whether the industry effects are contagious or competitive.     

INDUSTRY PROSPECTS AND ACQUIRER RETURNS IN DIVERSIFYING TAKEOVERS

We use a sample of 816 diversifying takeovers from 1978 to 2003 to examine whether takeover announcements release negative information about the future prospects of the acquirer's main industry. We find that rivals that are most similar to the acquirer (homogeneous rivals) experience significant negative cumulative abnormal returns (CAR) around takeover announcements. Takeovers that result in negative wealth effects to acquirers are associated with negative abnormal revisions in analysts' forecasts of homogeneous rivals' earnings per share. We also find a decline in the posttakeover operating performance of rival firms. The decline is especially pronounced for homogeneous rivals and for takeovers with negative wealth effects to acquirers. Our findings imply that CAR-based estimates of acquirer wealth gains from takeovers that do not account for industrywide information releases are significantly biased downward.     

Intra-industry transfer effects of credit risk news: Rated versus unrated rivals

We examine the information transfer effect of bond-rating adjustments on industry rivals. Our research is based on the premise that the transfer effect is influenced by the rated status of rivals, i.e., whether the rival’s debt is rated by any credit rating agency. The results reveal that credit rating adjustments induce different/stronger effects. First, the intra-industry transfer effects (on returns and risk) are stronger on rated rivals than on unrated rivals. Second, the credit risk news produces lower co-movements between the returns of the two types of rivals. Third, the differential effect is stronger in the manufacturing industry, in the riskiest industries and in the industries with the lowest competition levels. Interestingly, our results suggest that credit rating news is more relevant for rivals with access to the public debt market (such as re-rated firms) than for rivals that focus on other sources of funding.     

Unionization,product market competition,and strategic disclosure

We examine the disclosure policies of non-unionized firms operating in unionized industries. We test the hypothesis that non-unionized firms have an incentive to disclose more information when their unionized rivals are engaged in labor renegotiations; that is, to weaken them. We find that non-unionized firms disclose more information and more good news when renegotiations are ongoing. This behavior is stronger for larger firms, firms with fewer peers in the industry, and firms more similar to their renegotiating rivals. We also find some evidence that unionized firms are harmed by this behavior and that non-unionized firms benefit from their increased disclosures.     

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.     

CLUSTERED SYNERGIES IN THE TAKEOVER MARKET

In a competitive market for takeover bids, the takeover premium serves as an effective proxy for the expected synergy. We find that the expected synergy is primarily related to the premiums paid in other recent takeovers in the same industry. This relation is even stronger when considering previous takeovers (especially over the previous three‐month horizon) in the same industry that have the same payment method (cash versus stock) or form of takeover (tender offer versus merger). More of the variation in expected synergies among takeovers can be explained by the premiums derived from recent takeovers in the same industry than by all bidder‐ and target‐specific characteristics combined. We also find that the bidder valuation effects are inversely related to the premium paid for targets, implying that abnormally high premiums may reflect overpayment rather than abnormally high synergies.     

THE EFFECTS OF SPIN-OFFS ON CORPORATE INVESTMENT AND PERFORMANCE

We examine characteristics of firms involved in spin-offs and test whether these spin-offs induce changes in investment incentives and economic performance. We find that firms engaging in spin-offs are larger, more highly leveraged, and have higher asset turnover and lower real asset growth than their industry rivals. We also find that spin-offs generate significant increases in real asset growth and cash flow margin on sales for combined firm measures (spun-off firm plus parent firm). The gains result from increases in real asset growth for parent and spun-off firms, and improvements in cash flow margin on sales for parents. Our evidence is consistent with models in which spin-offs create value by improving investment incentives and economic performance.     

Stock selling during takeovers

Stock sales during takeover negotiations weaken the target board's ability to recommend against the takeover, i.e., to resist. Sophisticated shareholders therefore face a coordination problem when deciding whether to sell-out early; and their actions generate a feedback loop between trading volumes and takeover outcomes. Bidding firms, anticipating the pressurising effect of future share sales on the target board, may reduce their bids. We study these tensions theoretically. We find that increasing the influence of shareholders during the bidding process lowers equilibrium bids; elongates the bidding process; but raises the overall probability of bid acceptance; and raises expected premia for unsophisticated shareholders.     

Industry structure and horizontal takeovers: Analysis of wealth effects on rivals,suppliers, and corporate customers

We examine the wealth effects of horizontal takeovers on rivals of the merging firms, and on firms in the takeover industry's supplier and customer industries. Inconsistent with the collusion and buyer power motives, we find significant positive abnormal returns to rivals, suppliers, and corporate customers for the subsample of takeovers with positive combined wealth effect to target and bidder shareholders. Overall, our findings suggest that the average takeover in our sample is driven by efficiency considerations. However, we find evidence suggesting that horizontal takeovers increase the buyer power of the merging firms if suppliers are concentrated.     

Valuation impact of Sarbanes–Oxley: Evidence from disclosure and governance within the financial services industry

The Sarbanes–Oxley (Sarbox) legislation aimed to reduce the opacity of financial statements and improve the integrity of financial reporting by enhancing corporate disclosure and governance practices. We estimate the valuation effects of Sarbox for firms in the financial services industry and find that, except for securities firms, these firms significantly benefited from its adoption. As hypothesized, these positive effects may be attributed to expected improvement in the transparency of the relatively opaque financial services firms.We find that the cross-sectional variation in the valuation effects can be explained by disclosure and governance characteristics. Several of the significant factors are supportive of a compliance cost hypothesis. In particular, we find that the effects were less favorable for firms with less independent audit committees, without a financial expert on the audit committee, with less financial statement footnote disclosures, with less involved CEOs, and if they were smaller. In addition, reflecting the value of stronger governance, more favorable effects occurred for firms with a greater degree of independence of the board and the board committees, when there is greater motivation and ability of board members to monitor the firm, and with a greater degree of institutional ownership. Lastly, we find the wealth effects of firms viewed as non-compliant are significantly lower than firms viewed as compliant, and the variation across the group of non-compliant firms is explained by disclosure and governance measures.     

Competitive and Information Effects of Cross-Border Stock Listings

We examine the effect of 269 cross‐border listings on rivals in the listing and domestic markets and find that U.S. rivals experience significant gains whereas domestic rivals do not. Both competitive and information effects are important in explaining the reaction of U.S. rivals. Regarding the competitive effects, the reaction of rivals is less favorable when listings originate in developed countries and more favorable when listing firms do not have prior operating presence in the United States. Regarding the information effects, the reaction is less favorable when listings are combined with equity offerings and more favorable when the listing is the first to occur within an industry.     

The impact of strategic interaction on earnings expectations associated with corporate product strategies

We examine how strategic interaction in an industry influences the earnings expectations of financial analysts with regard to new product strategies. We find that following announcement of new products, analysts revise earnings forecasts upward more for announcing firms competing in low-strategic interaction industries than for firms competing in high-strategic interaction industries. For value-enhancing (value-reducing) product strategies, earnings forecast revisions are more favorable for rivals competing under a high (low) degree of strategic interaction than for rivals competing under a low (high) degree of strategic interaction. Overall empirical evidence indicates that the nature of strategic competition within the industry is important in assessing the market expectations of earnings for new product announcers and their rivals.     

Intra-lndustry Effects of Corporate Capital Investment Announcements

We examine how announcements of corporate capital investments by one firm affect the stock prices of its competitors. We find that on average, rivals experience a signifi cantly negative valuation effect. The results suggest that for the sample as a whole, the competitive effect dominates the contagion effect. We further examine various factors that could potentially explain the heterogeneous intra-industry effects of capital investment announcements. We find that rivals' share prices are more adversely affected when the announcer experiences a higher announcement effect or is the first mover in the industry. We also show that rivals experience a greater wealth loss when they have poorer investment opportunities or higher financial leverage.     

The underpricing of private targets

We examine acquisitions of private firms with valuation histories and find a positive relation between acquirer announcement returns and target valuation revisions. Similar to other studies, acquirer announcement returns are positive, on average. However, positive acquirer announcement returns are mainly driven by targets that are acquired for more than their prior valuation. This relation is consistent with pricing effects associated with target valuation uncertainty and behavioral biases in negotiation outcomes.