The light and dark side of TARP

This paper empirically investigates the impact of the first announcement of TARP, the announcement of revised TARP, respective capital infusions under TARP–CPP and capital repayments on changes in shareholder value and the risk exposure of supported US banks. Our analysis reveals a light and a dark side of TARP. While announcements as well as capital repayments may provoke positive wealth effects and a decrease in bank risk, equity capital injections to banks are observed to be a severe impediment to restore market confidence and financial stability. Furthermore, while TARP announcements and capital injections may increase systemic risk, no significant effect on systemic risk is found for capital repayments.     

Voluntary disclosure and the cost of equity capital: Evidence from management earnings forecasts

This paper examines the directional effects of management earnings forecasts on the cost of equity capital. We find that forecasters of bad news experience a significant increase in the cost of equity capital in the month after their disclosure. Conversely, the cost of equity capital for good news forecasters does not change significantly in the same period. We also indicate that the magnitude of changes in the cost of capital for good news forecasters is significantly lower than that for bad news forecasters and non-forecasters, which suggests that investors may view good news forecasts less credible. Finally, we show that the effect of the subsequent earnings announcement on the cost of equity capital is preempted by the management forecasts for bad news firms, and that the combined effects of the management earnings forecasts and the earnings announcement are not significant for both good news and bad news forecasters. Our paper contributes to the literature by adding evidence on directional effects of voluntary disclosures and on long-term economic consequences of management earnings forecasts.     

Information Content of Insider Trading Around Corporate Announcements: The Case of Capital Expenditures

There is gathering evidence of insider trading around corporate announcements of dividends, capital expenditures, equity issues and repurchases, and other capital structure changes. Although signaling models have been used to explain the price reaction of these announcements, a usual assumption made in these models is that insiders cannot trade to gain from such announcements. An innovative feature of this paper is to model trading by corporate insiders (subject to disclosure regulation) as one of the signals. Detailed testable predictions are described for the interaction of corporate announcements and concurrent insider trading. In particular, such interaction is shown to depend crucially on whether the firm is a growth firm, a mature firm, or a declining firm. Empirical proxies for firm technology are developed based on measures of growth and Tobin's q ratio. In the underlying “efficient” signaling equilibrium, investment announcements and net insider trading convey private information of insiders to the market at least cost. The paper also addresses issues of deriving intertemporal announcement effects from the equilibrium (cross-sectional) pricing functional. Other announcement effects relate the intensity of the market response to insider trading, variance of firm cash flows, risk aversion of the insiders, and characteristics of firm technology (growth, mature, or declining).     

The Chinese Stock Dividend Puzzle

In this paper, we examine the announcement effects of dividends with an emphasis on stock dividends in China's capital market. We find that dividend-paying stocks exhibit significantly positive abnormal returns while non-dividend-paying stocks show a negative announcement effect. Further, we document that the cumulative abnormal returns for pure stock dividends and combined dividends are the main drivers of this announcement effect. In contrast, pure cash dividend stocks experience no significant price run-up before announcement. The significant announcement effect of stock dividends is robust to controlling the earnings surprise effect. We offer some discussion of the possible explanations.     

SEASONED EQUITY OFFERINGS: THE CASE OF ALL-EQUITY FIRMS

Three theories have been widely proposed to explain the significant negative market response to the announcement of a new equity issue. By observing a similar negative effect in a sample of zero and near zero long-term debt firms, we are able to conclude that the capital structure hypothesis is not the sole explanation. Regressions of announcement period abnormal returns against subsequent cashflow change while controlling for price pressure effects provide evidence in support of the information hypothesis. Decomposition of the sample by issue purpose reveals a differential impact at the time of announcement consistent with an information-based explanation.     

RETURN OF CAPITAL: CASH FLOW,WEALTH TRANSFER AND INFORMATION SIGNALLING EFFECTS

This paper examines the price effects of an announcement to distribute cash to shareholders via the return of capital procedure currently applying under Australian company law. The impact of such announcements on the market value of ordinary shares is analysed in terms of three hypothesised effects: the cash flow effect, the wealth transfer effect and the information signalling effect. Using data from 17 companies which announced a return of capital between 1970–1978, and applying the “comparison period” methodology, significant positive returns were observed at the time of the announcement of a return of capital. Possible explanations for this result are considered.     

The dynamic adjustment path for perfectly foreseen changes in monetary policy

This paper investigates the real effects of announced or perfectly foreseen changes in monetary policy produced by the Mundell-Tobin effect. A particularly good place to study these non-neutralities appears to be the period between announcement and implementation of new policies. At announcement the economy jumps to a new equilibrium path moving continuously even after implementation. All transition paths between announcement and implementation are established to be scalar multiples of each other. The path depends upon the structure of the economy and the discounted present value of the change in policy. Both algebraic and diagrammatical analyses are presented.     

Productivity,restructuring, and the gains from takeovers

This paper investigates how takeovers create value. Using plant-level data, I show that acquirers increase targets' productivity through more efficient use of capital and labor. Acquirers reduce capital expenditures, wages, and employment in target plants, though output is unchanged. Acquirers improve targets' investment efficiency through reallocating capital to industries with better investment opportunities. Moreover, changes in productivity help explain the merging firms' announcement returns. The combined announcement returns are driven by improvements in target's productivity. Targets with greater productivity improvements receive higher premiums. These results provide some first empirical evidence on the relation between productivity and stock returns in takeovers.     

The Differences Between Stock Splits and Stock Dividends: Evidence on the Retained Earnings Hypothesis

Abstract:  This paper investigates stock dividends and stock splits on the Copenhagen Stock Exchange (CSE), which is of interest because several of the more recent explanations for a stock market reaction can be ruled out. The main findings are that the announcement effect of stock dividends as well as stock splits is closely related to changes in a firm's payout policy, but that the relationship differs for the two types of events. A stock dividend implies an increase in nominal share capital and hence a decrease in retained earnings. Firms announcing stock dividends finance growth entirely by debt (explaining the need for an increase in nominal share capital) and retained earnings. Basically all firms announcing a stock dividend with a split factor of less than two can also afford to increase their total cash dividends permanently, at least proportionally to the increase in share capital, leading to a significant announcement effect of 4.23%. Firms announcing a stock dividend with a split factor of two or more also increase total cash dividends permanently, but less than proportionally to the increase in share capital. This leads to an insignificant announcement effect of 0.08%. These findings support a retained earnings/signaling hypothesis. For stock splits, no separate announcement effect was found when a firm's payout policy was controlled for. This lends support to the idea that a stock split per se is a cosmetic event on the CSE and is also consistent with the fact that making a stock split on the CSE is virtually cost free.     

The Impact of Capital Structure Change on Firm Value: Some Estimates

This study develops a model based on current corporate finance theories which explains stock returns associated with the announcement of issuer exchange offers. The major independent variables are changes in leverage multiplied by senior security claims outstanding and changes in debt tax shields. Parameter estimates are statistically significant and consistent in sign and relative magnitude with model predictions. Overall, 55 percent of the variance in stock announcement period returns is explained. The evidence is consistent with tax-based theories of optimal capital structure, a positive debt level information effect, and leverage-induced wealth transfers across security classes.     

Capital gains taxes and the market response to public announcements in an indexation-based tax regime

This paper addresses the impact of capital gains taxes on the market price and trading volume response to public announcements in an indexation-based tax regime. Our analysis indicates that indexation makes share prices more responsive to public announcements. Moreover, ‘over responsiveness’ induces negative correlation between short-term price changes around the public announcement and subsequent long-term price movements. This effect is greater when anticipated inflation is higher. Our analysis also indicates that trading volume is increasing in price changes around the public announcement.     

Asset Returns,Discount Rate Changes,and Market Efficiency

The primary purpose of this paper is to reconcile the previous findings of discount rate endogeneity with the presence of discount rate announcement effects in securities markets. The crux of this reconciliation is the distinction between “technical” discount rate changes that are endogenous and “nontechnical” changes which contain some informative policy implications. In essence, we attempt to separate expected discount rate changes from unexpected changes, or equivalently, the expected component of discount rate changes from the unexpected component. If markets are efficient, the former should have no announcement effects while the latter may be associated with an announcement effect. Accordingly, the focus of the empirical analysis is on the interaction between discount rate exogeneity, the specific monetary policy regime, and accouncement effects. In addition, we examine whether the behavior of these markets in the postannouncement period is consistent with the rapid price adjustment implied by market efficiency.     

An empirical investigation of mergers and acquisitions by Chinese listed companies, 1997–2007

We examine 136 M&A deals from 1997 to 2007 initiated by Chinese companies listed on the Shanghai and Shenzhen Stock Exchanges, where the acquirer gains complete control of the target. Our data shows that the Chinese M&A market is dominated by domestic deals with unlisted targets that are either stand-alone private firms or wholly owned subsidiaries. Acquirers experience significant positive abnormal stock returns around the announcement date and over the three years after the acquisition. These results are largely driven by state-owned firms, cash acquirers and firms that acquire related targets. Cross-sectional tests show that announcement period returns are related to the acquirer's ownership status, industry relatedness of the acquirer and target, capital structure changes of the acquirer and the nature of the unlisted target. We find no change in operating performance from the pre to the post acquisition period for the acquirers.     

MARKET EFFECTS OF CHANGES IN THE STANDARD & POOR'S 500 INDEX

This paper examines the impact on stock returns of changes in the Standard & Poor's (S&P) 500 index. S&P states that firms are not added to or deleted from the index for valuation reasons but rather to maintain or improve the index's representative character. Results from market response tests indicate that stocks added to (deleted from) the index since 1975 experience a significant positive (negative) announcement day excess return. No announcement effect occurs in S&P changes prior to 1976. These announcement effects may be explained by a price-pressure hypothesis or by an information effect. Results of tests conducted to isolate which of these phenomena is present are reported.     

The Wealth Effects of Capital Investment Decisions: An Empirical Comparison of Korean Chaebol and Non‐Chaebol Firms

Abstract:   This paper investigates the capital investment decisions of Korean firms and their impact on shareholder wealth. Overall, we find positive abnormal returns surrounding the announcements of 697 cases of investment projects during the period 1992–1999. This paper also finds that the investment decisions of business group ( chaebol ‐affiliated) firms do not increase shareholder wealth, while the capital investment decisions of non‐ chaebol firms generate significantly positive abnormal returns. The multivariate tests provide consistent evidence that the announcement effects for chaebol firms are lower than for non‐ chaebol firms, after growth opportunities, investment size and firm size are controlled for. The findings support the view that the organizational structure of Korean chaebols creates an incentive for managers to make non‐value maximizing capital investment decisions.     

More than meets the eye: Convertible bond issuers' concurrent transactions

We document that, in recent years, over 60% of convertible bond issuers conduct concurrent transactions including share repurchases, call option purchases, warrant sales, seasoned equity offerings, and stock lending program initiations. We investigate the determinants of issuers' choice of concurrent transactions and find that a proxy for capital supply (flows to convertible bond arbitrage hedge funds) is a significant determinant. Option purchases are more likely when capital supply is low and the convertible is dilutive to earnings. SEOs are more likely when firms have valuable growth opportunities and capital supply is low. Convertible issuers establish lending programs when arbitrageurs likely encounter difficulty shorting their stock, suggesting that these firms facilitate short selling in their own stock. These results suggest that, in the convertible bond market, the influence of capital supply extends beyond the issuance decision to the use of concurrent transactions and that these transactions offer important flexibility to issuers. We find that average equity market announcement effects differ when issuers conduct concurrent transactions. Consistent with models of adverse selection, concurrent transactions that reduce the dilutive impact on earnings, thereby making the design more debt-like, are associated with less negative announcement effects. Conversely, concurrent transactions that increase the dilutive impact on earnings, thereby making the design more equity-like, are associated with more negative announcement effects.     

Defensive Changes in Corporate Payout Policy: Share Repurchases and Special Dividends

This paper examines defensive payouts announced in response to hostile corporate control activity. The evidence indicates that the announcement of defensive share repurchases is associated with an average negative impact on the share price of the target firm. In contrast, special dividend payments generally increase the wealth of target firm shareholders. Regardless of payout type, those firms remaining independent after the outcome of the corporate control contest experience an abnormal share price increase over the duration of the contest. Among these firms there are substantial post-contest changes in capital, asset, and ownership structure and abnormally high rates of top management turnover.     

How Do Stock Markets in the US and Europe Price Efficiency Gains from Bank M&As?

This paper examines whether the stock markets price changes in operating efficiency as a result of bank mergers and if the premiums paid by the acquiring banks also reflect these changes. The sample covers mergers and acquisitions consummated in the US and Europe during the period of 1997 to 2003. Changes in cost and profit efficiency are calculated using the non-parametric Data Envelopment Analysis (DEA) method 1 year prior and 3 years following the merger announcement. Evidence suggests a significant relation between the announcement-period abnormal returns and the post-merger profit efficiency changes. Results also indicate that bank managers are likely to pay a higher premium for those M&A transactions that can bring about greater efficiency gains, particularly on the profit side. Further, although acquirer shareholders in the US and Europe appear to react differently to the announcement of a bank merger, our results for target shareholders suggest that regional differences might be less important than the degree of capital market development in explaining wealth effects.     

Stock Index‐linked Debt and Shareholder Value: Evidence from the Paris Bourse

French banks and non‐financial companies issue index‐linked debt whose value at maturity is indexed to the CAC 40 or to a basket of European indices. This paper examines stock announcement effects associated with these bonds on three dates: the date the issuer's General Assembly decides future capital needs, the publication in the journal of the COB (the stock market board), and the issue date. We find the issuance of index‐linked debt has significant positive announcement effects on the issue date, which we attribute to its market‐completion property. In order to examine further whether market completion is at play, we decompose the value of the bond at issue into its straight bond and option values. We determine that the bonds are overvalued again supporting market completion.     

Effects of early bond refundings: An empirical investigation of security returns

This paper examines bond-for-bond refundings and their effects on stock returns. Refundings can affect the reported income, cash flows (including taxes), dividend constraints and financial ratios of firms. For a sample of 36 NYSE and ASE firms that performed refundings between 1971 and 1980, stock returns were significantly higher than predicted (only) around the release of the quarterly earnings announcement that included the refunding's effects. While the refundings were found to have many characteristics that were hypothesized to benefit shareholders, only the change in earnings per share was found to be associated with the prediction errors. Further, there appears to be no refunding-related information released in the quarterly earnings announcement, except for the refunding gain. These results imply that a portfolio of refunding firms can be created in advance of the quarterly earnings announcement that will generate abnormal returns around the earnings announcement. Because trading rules are inconsistent with the concept of an efficient capital market, these results constitute an anomaly.