The impact of business group affiliation on stock price informativeness: Evidence from an emerging market

This paper examines the relationship between business group affiliation and stock price informativeness in an emerging market setting. We use stock price synchronicity as a measure, and study the impact of group affiliation ‐specifically the extent of affiliation, ownership structure and existence of group bank‐ on firm specific information content. Results reveal that the amount of firm‐specific information capitalized into stock prices tends to be lower (higher) when the firm is group‐affiliated (unaffiliated), indirectly (directly) owned, and affiliated group has (does not have) a group bank. Additionally, the extent of group affiliation maintains a non‐linear relationship with synchronicity, suggesting that the perception of higher versus lower levels of group ownership differs.     

The influence of ownership structure,analyst following and institutional infrastructure on stock price informativeness: international evidence

Using firms from 20 non‐US countries, we investigate whether and how ownership structure, analyst following and country‐level institutions influence stock price informativeness (SPI). We find that stock price informativeness decreases with control‐ownership wedge (the detachment of voting rights from cash flows rights), and this SPI‐reducing effect of the wedge is attenuated for firms with high analyst following and in countries with strong country‐level institutions. We also find that stock price informativeness decreases with analyst following, but this SPI‐reducing effect of analyst following is attenuated in countries with strong country‐level institutions.     

Managerial hedging,equity ownership,and firm value

Suppose risk‐averse managers can hedge the aggregate component of their exposure to firm's cash‐flow risk by trading in financial markets but cannot hedge their firm‐specific exposure. This gives them incentives to pass up firm‐specific projects in favor of standard projects that contain greater aggregate risk. Such forms of moral hazard give rise to excessive aggregate risk in stock markets. In this context, optimal managerial contracts induce a relationship between managerial ownership and (i) aggregate risk in the firm's cash flows, as well as (ii) firm value. We show that this can help explain the shape of the empirically documented relationship between ownership and firm performance.     

Ownership and the Value of Political Connections: Evidence from China

Research has found that political connectedness can have both positive and negative effects on firm value. To resolve these mixed findings, we investigate the impact of political ties conditional on ownership for a sample of Chinese firms over the period 1999–2006. We find that private firms with politically connected managers have a higher value and obtain more government subsidies than those without connected managers, whereas local state‐owned enterprises with connected managers have a lower value and employ more surplus labour than those without connected managers. Our results indicate that the effect of political ties is subject to firm ownership.     

Managerial ownership dynamics and firm value

From 1988 to 2003, the average change in managerial ownership is significantly negative every year for American firms. We find that managers are more likely to significantly decrease their ownership when their firms are performing well and more likely to increase their ownership when their firms become financially constrained. When controlling for past stock returns, we find that large increases in managerial ownership increase Tobin's q. This result is driven by increases in shares held by officers, while increases in shares held by directors appear unrelated to changes in firm value. There is no evidence that large decreases in ownership have an adverse impact on firm value. We rely on the dynamics of the managerial ownership/firm value relation to mitigate concerns in the literature about the endogeneity of managerial ownership.     

Returns to scale and asset prices

The q‐theory of investment is proposed to explain firm growth effects, where previous papers identify a negative effect of firm growth, including asset growth, real investment and net share issuance, on future stock returns. This paper uses returns to scale from the production function to test the dynamic q‐theory, which predicts that the firm growth effect is theoretically weaker for firms with decreasing returns to scale (DRS) than for non‐DRS firms. Our empirical results generally support the prediction of dynamic q‐theory. However, we find that the dynamic q‐theory explains little of the value, momentum and ROE effects from the standpoint of returns to scale.     

R2: Does it Matter for Firm Valuation?

A considerable amount of research has been devoted to why R² differs across firms or markets, but little attention has been paid to the consequences of this difference. We fill this gap by investigating how differing R² affects investors’ assessment of firm value. Using a sample of 90,111 firm‐year observations from 1970 to 2004, we find that higher R² leads to higher firm valuation and that, on average, high‐R² firms experience significant underperformance in the long run. These results suggest that high‐R² firms tend to be overpriced.     

Effects of Passive Intensity on Aggregate Price Dynamics

We find that passive intensity (PI), measured by the passive‐linked share of total stock market trading volume, is strongly related to the overall pattern of stock price movements. A one‐standard‐deviation increase in PI is associated with an 8% higher price synchronicity. We further investigate the channels through which this relation is established by separately analyzing its impact on aggregate systematic and idiosyncratic volatility of stock returns. PI has a positive effect on systematic volatility and a negative impact on firm‐specific volatility. Consistent with the effect of passive trading on price dynamics, we find evidence that PI is negatively associated with mutual funds alpha dissimilarity. After controlling for market and idiosyncratic volatility, a one‐standard‐deviation increase in PI corresponds to a 0.20% decrease in fund dissimilarity. Our findings are robust after controlling for various macro and corporate factors known to affect systematic or firm‐specific volatility.     

Ownership structure, family control, and acquisition decisions

We investigate how ownership and family control influence the decision to take part in M&As as an acquirer or as an acquired company in a sample of 777 large Continental European companies in the period 1998-2008. We find that ownership is negatively correlated with the probability of launching a takeover bid, and family firms are less likely to make acquisitions, especially when the stake held by the family is not large enough to assure the persistence of family control. On the passive side of M&A deals, the effect of the largest shareholders' ownership on the decision to accept an acquisition proposal depends non-linearly on the voting rights they hold, and family control reduces the probability of being acquired by an unrelated party. We do not find evidence that family-controlled firms destroy wealth when they acquire other companies. Finally, we document that ownership and family control, while being negatively correlated with M&A activity, are not negatively correlated with growth in firm size.     

The influence of the degree of state ownership and the ownership concentration on the performance of listed Chinese companies

This study investigates the influence of the degree of state ownership and ownership concentration on firm performance using annual data for 1034 companies listed on China's two exchanges for the period from 2000 to 2004. We find that, on average, the firms’ performance is negatively influenced by the state ownership. However, such a negative relationship is significant only at high levels of government ownership. Moreover, we find that a balanced ownership structure enhances the firm performance and there are indications of detrimental effects of block ownership.     

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.     

Pay me Right: Reference Values and Executive Compensation

This paper examines the importance of reference values for executive compensation contracts. We rely on a quasi‐experimental setting (the adoption of pay guidelines), and a well‐defined measure of individual‐specific reference values to provide evidence on how a change in CEO reference compensation leads to subsequent changes of actual pay. We find that executive compensation adjusts gradually towards the new reference values, and that the speed of the adjustment depends on the corporate governance characteristics: the firm ownership structure, the role of the State and of the employees in the firm decision making. These results provide empirical support for theoretical models of bargaining that take into account reference values.     

The Changing Landscape of Accrual Accounting

A fundamental property of accrual accounting is to smooth temporary timing fluctuations in operating cash flows, indicating an inherent negative correlation between accruals and cash flows. We show that the overall correlation between accruals and cash flows has dramatically declined in magnitude over the past half century and has largely disappeared in more recent years. The adjusted R ² from regressing (changes in) accruals on (changes in) cash flows drops from about 70% (90%) in the 1960s to near zero (under 20%) in more recent years. In exploring potential reasons for the observed attenuation, we find that increases in non‐timing‐related accrual recognition, as proxied by one‐time and nonoperating items and the frequency of loss firm‐years, explain the majority of the overall decline. On the other hand, temporal changes in the matching between revenues and expenses, and the growth of intangible‐intensive industries play only a limited role in explaining the observed attenuation. Finally, the relative decline of the timing role of accruals does not appear to be associated with an increase in the asymmetrically timely loss recognition role.     

Agency Costs and the Short‐Run Stock Price Response to Capital Expenditures

We estimate the short‐run stock price response to unanticipated capital expenditures. We use association study methodology to avoid the self‐selection bias in event studies and to facilitate construction of a large sample of firm‐years likely to exhibit agency problems. We find that the average price response to routine capital expenditures is negative, and that commonly used agency cost measures explain fully the negative response. Subsample results support the conclusion that the market is skeptical of cash flow financed spending by low‐q firms and even capital spending by high‐q firms when the firm is large and q is only marginally high.     

Asymmetric information consolidation and price discovery: Inferring bad news from insider sales

Due to the paucity of sources of negative firm‐specific information, US capital markets have more difficulty identifying and incorporating bad news into stock prices than they do good news. Even though insider selling is a potentially important proxy for undisclosed bad news, researchers have difficulty ex ante identifying information‐based sales due to an inability to separate liquidity‐motivated from information‐based insider trades. We hypothesize that when insiders in multiple firms sell shares of one firm in which they are insiders and at the same time buy shares of other insider portfolio firms, the sale is more likely to be information‐based, since the proceeds are reinvested. Conversely, when an insider sells one firm without purchasing others or sells multiple insider firms the sale is likely liquidity‐motivated. We find that insider sales identified as information‐based using this algorithm are followed by significant negative abnormal returns. Information‐based sales are also more likely to be associated with delistings, earnings declines and earnings restatements. Analysts are also more likely to revise their earnings forecasts downwards for these firms. It is thus possible to ex ante identify insider sales with information content. Our results will be of interest to investors and also to regulators designing insider trading rules.     

Algorithmic trading and block ownership initiation: An information perspective

This paper examines the impact of algorithmic trading (AT) on investors' incentives to initiate block ownership in U.S. public companies. We find that a one standard deviation change in AT activity reduces the block ownership initiation likelihood by 3.5%. Using the SEC's randomised tick size pilot experiment in 2016 as a negative shock to AT, we show that the effect of AT on block ownership initiation is causal. Further evidence supports the information-hindering explanation that AT discourages sophisticated investors from acquiring information, which results in a decrease in block ownership initiation. We find that the effect of AT is more pronounced among information-sensitive investors and that institutional investors reduce their information-gathering activities in AT-targeted stocks. Additional tests exploring information-based trading behaviour in the presence of AT provide strong evidence to support the explanation of information-hindering, and our results hold across a battery of robustness tests.     

Financial development,government ownership of banks and firm innovation

Using a newly-available World Bank survey of over 28,000 firms from 46 countries, we examine how financial development affects firm innovation around the world. We find that while stock market development significantly enhances firm innovation, banking sector development has mixed effects. We show that the latter result can be explained by different levels of government ownership of banks. Specifically, in countries with lower government ownership of banks, banking sector development significantly enhances firm innovation; while in countries with higher government ownership of banks, banking sector development has no significant or sometimes even significantly negative effects on firm innovation. Such negative effects are significantly stronger for smaller firms. The results are robust to various controls such as firms’ human capital and ownership structure, to estimations using instrumental variable techniques and alternative measures of firm innovation.     

The Dark Side of International Cross‐Listing: Effects on Rival Firms at Home

We analyse the stock price impact of firms' US cross‐listing on home‐market rival firms. Using an empirical event study approach we find negative cumulative average abnormal returns for the rival firms around both the listing and announcement of listing dates. The evidence suggests both positive and negative spillover effects on rival firms, where the dominant effect is that investors see rivals at a relative disadvantage to the cross‐listing firm. As firms cross‐list in the US and commit to the increased disclosure and investor protection associated with the US listing, they are better able to take advantage of growth opportunities relative to their non cross‐listing counterparts, and this results in negative spillover effects on rival firms. Our results are consistent with the idea that firms cross‐list as a means to reduce agency costs of controlling shareholders and thus are able to exploit growth opportunities as they have better access to external finance.     

Large Shareholders,the Board of Directors and the Allocation of Cash Proceeds from Corporate Asset Sell‐offs

Recent finance literature suggests that managers of divesting firms may retain cash proceeds from corporate asset sell‐offs in order to pursue their own objectives, and, therefore, shareholders' gains due to these deals are linked to a distribution of proceeds to shareholders or to debtholders. We add to this literature by examining the role of various corporate governance mechanisms in the context of the allocation of sell‐off proceeds. Specifically, we examine the impact of directors' share‐ownership and stock options, board composition and external large shareholdings on (1) shareholders' abnormal returns around asset sell‐off announcements, and (2) managers' decision to either retain or distribute (to shareholders or to debtholders) sell‐off proceeds. We find that non‐executive directors' and CEO's share‐ownership and stock options are related to shareholders' gains from sell‐offs for firms that retain proceeds. However, corporate governance mechanisms are not significantly related to shareholders' gains for firms that distribute sell‐off proceeds. Furthermore, we find that the likelihood of a distribution of proceeds, relative to the retention decision, is increasing in large institutional shareholdings, executive and non‐executive directors' share‐ownership and non‐executive representation in the board.