Stock‐Split Post‐Announcement Returns: Underreaction or Market Friction?

We explore the relationship between stock splits and subsequent long‐term returns during the period from 1950 to 2000. We find that, contrary to much previous research, firms do not exhibit positive long‐term post‐split returns. Instead, we find that significant positive returns after the announcement date do not persist after the actual date of the stock split. We also observe that abnormal returns are correlated with the price‐delay or market friction. We conclude that the stock‐split post‐announcement “drift” is only of short duration, and it is attributable to trading frictions rather than behavioral biases.     

Open‐Market Stock Repurchases by Insurance Companies and Signaling

The signaling hypothesis of share repurchases implies that management uses repurchases to signal either that their firm's future operating performance will improve or that shares of their stock are simply underpriced by the market. This study examines which of the two interpretations can better explain open‐market share repurchase programs announced by insurance companies. We find no evidence that future‐operating performance of insurers improves following the repurchase announcement. In addition, changes in future operating performance cannot explain the announcement‐period abnormal return. Instead, the stock undervaluation prior to the repurchase announcement can significantly explain the announcement‐period abnormal return, particularly for life insurers. Overall, our results suggest that the positive market reaction to insurers’ open‐market share repurchase announcements is due to the stock undervaluation by the market, but not due to positive information content about future operating performance conveyed in the repurchase announcement.     

Valuation and Performance of Reacquisitions Following Equity Carve‐Outs

While existing literature reports a positive market reaction to parent companies conducting carve‐outs, we find that the response to carve‐outs that are ultimately reacquired is negative or insignificant. Reacquired units perform considerably worse than those that are not reacquired. Thus, parents may perceive that the market does not recognize the potential of these poorly performing units, and reacquires them to capitalize on the parents' private information. The reacquisition announcement results in a favorable market reaction for the parents and the units. However, parents experience negative long‐term buy‐and‐hold abnormal returns when they reacquire less than 100% of units' shares.     

Equity Markets Do Not Fit All: an Analysis of Public‐to‐Private Deals in Continental Europe

Concentration of family‐based ownership and recent development of private equity companies in Continental Europe suggest that the motivations and results of public‐to‐private (PTP) deals may differ from well‐studied cases in the USA and the UK. We overview the PTP market and measure the cumulative abnormal returns (CARs) of 106 PTP deals concluded in Continental Europe from 2000 to 2005, introducing a model to explain the abnormal returns. Our results partially confirm findings of previous studies, namely, that undervalued and smaller firms register higher CARs. We additionally find that deals promoted by family owners register higher abnormal returns, whereas financial investors and private operating firms show no impact.     

Earnings Management and Firm Performance Following Open-Market Repurchases

Both post‐repurchase abnormal returns and reported improvement in operating performance are driven, at least in part, by pre‐repurchase downward earnings management rather than genuine growth in profitability. The downward earnings management increases with both the percentage of the company that managers repurchase and CEO ownership. Pre‐repurchase abnormal accruals are also negatively associated with future performance, with the association driven mainly by those firms that report the largest income‐decreasing abnormal accruals. The study suggests that one reason firms experience post‐repurchase abnormal returns is that post‐repurchase realized earnings growth exceeds expectations formed on the basis of pre‐repurchase deflated earnings numbers.     

The Wealth and Information Effects of Insurers' Open Market Stock Repurchase Announcements

This article examines the use of an increasingly popular method of cash disbursement in the insurance industry: stock repurchase programs. Using a sample of stock repurchase announcements between 1981 and 1997, we examine the motivation for stock repurchase, estimate the market reaction to the repurchase announcement, and evaluate the magnitude of the reaction as it relates to particular insurance industry and firm characteristics. We examine the abnormal returns around the announcement day and find a significant positive wealth effect associated with repurchase announcements—a result that is consistent with that of other studies of both nonfinancial and financial firms. However, we suspect that the nature of the insurance product and the highly regulated status of the insurance industry might serve to mitigate the magnitude of an announcement effect. In fact, we find that the effect for all insurers is smaller than that obtained in samples of industrial firms. Finally, we examine the relationships between the magnitude of the announcement effect and various firm characteristics and test the significance of information signaling and Jensen's free cash flow theories in the insurance setting.     

Corporate Governance and Acquirer Returns

We examine whether corporate governance mechanisms, especially the market for corporate control, affect the profitability of firm acquisitions. We find that acquirers with more antitakeover provisions experience significantly lower announcement‐period abnormal stock returns. This supports the hypothesis that managers at firms protected by more antitakeover provisions are less subject to the disciplinary power of the market for corporate control and thus are more likely to indulge in empire‐building acquisitions that destroy shareholder value. We also find that acquirers operating in more competitive industries or separating the positions of CEO and chairman of the board experience higher abnormal announcement returns.     

Valuation effects of investor relations investments

We investigate the stock price performance of 146 firms announcing the appointment of a new investor relations (IR) officer or the hiring of an IR firm between 1999 and 2005. We find positive abnormal returns around the announcement day. In addition, we find evidence that firms with lower valuations, higher idiosyncratic risk, greater chief executive officer holdings, and firms that announce in the post‐Sarbanes‐Oxley Act era experience greater valuation effects. Finally, we document significant reductions in the information asymmetry and significant increases in the liquidity and visibility of IR firms in the year following the IR announcement.     

Does market misvaluation help explain share market long‐run underperformance following a seasoned equity issue?

We examine the relation between pre‐seasoned equity offering (SEO) announcement date misvaluation and long‐run post‐SEO performance for a large sample of Australian SEOs made between 1993 and 2001. Our study is motivated by inconsistent findings across countries with respect to the SEO long‐run underperformance anomaly first documented in the USA, inconclusive findings with respect to the hypothesis that managers exploit market misvaluation when timing equity issues, and a recent Australian Stock Exchange proposal to loosen SEO regulation. We find SEO firms underperform common share market benchmarks for up to 5 years after the announcement. Using a residual income valuation method, we show that this underperformance is related to pre‐announcement date misvaluation. An unexpected result is that underperformance and misvaluation are more severe for private placements than rights issues. Institutional factors unique to the Australian setting, particularly the large number of smaller loss‐making firms among private placement issuers, appear to explain the poorer performance of placement firms. Our results are robust to various measurement methods and assumptions, and demonstrate the importance of researching SEO performance in alternative institutional settings.     

Governance quality and privately negotiated stock repurchases: Evidence of agency conflict

This study examines the impact of shareholder rights on the wealth effects of privately negotiated stock repurchases. Our results show that wealth gains are lower when shareholder rights are more suppressed. We also find that the premium paid for shares is inversely related to the strength of shareholder rights, and this suggests that managers pay higher premiums when shareholder rights are more restricted. These findings imply that managers use shareholders’ funds to eliminate blockholders who are more likely to monitor them when shareholder rights are relatively weak, thereby entrench themselves. Consistent with this view, we further show that significant positive abnormal long-run returns after private stock repurchases are limited to firms with stronger shareholder protection. Overall, the evidence is consistent with the predictions of agency theory.     

Does consideration matter to China’s split share structure reform?

We investigate the share market response to China’s split share structure reform and find average negative daily return around the government announcement on 29 April 2005. However, there is a turnaround at individual companies’ decision to implement the reform where we find positive and significant average daily return, contingent on the type of consideration. We attribute this change in market sentiment to the company’s announcement that the reform will involve the payment of consideration to holders of tradable A‐shares. Our results also show that holders of tradable A‐shares earn significant abnormal daily returns when companies propose to pay in cash or warrants or combine any of these payment methods with bonus shares.     

OPEN MARKET REPURCHASES: THE VALUE FROM BUYING SHARES AT A DISCOUNT

This article shows that share repurchase announcements create value for shareholders when the shares of the industrial firm sell at a discount from the value of the underlying assets, even when shareholders and managers share full information about the firm's prospects and the firm's operating performance is not expected to improve. The value created by capturing the discount on the repurchased shares is a function of only two variables: the percentage discount prior to the announcement and the proportion of shares to be repurchased.
For a sample of 100 companies selling below net asset value, the authors report that the excess stock returns surrounding their announcements of open market repurchases are (significantly) positively associated with the authors' estimates of the value captured from buying shares at a discount. Moreover, the stock market's response to repurchase announcements by companies that are selling at a discount is considerably more positive than to announcements by firms selling at a premium.     

Are corporate managers savvy about their stock price? Evidence from insider trading after earnings announcements

We find that insiders trade as if they exploit market underreaction to earnings news, buying (selling) after good (bad) earnings announcements when the price reaction to the announcement is low (high). We also find that insider trades attributable to public information about earnings and the price reaction generate abnormal returns. By demonstrating that managers spot market underreaction to earnings news, our results imply that managers are savvy about their company’s stock price.     

The Effect Of Stock Splits On Liquidity And Excess Returns: Evidence From Shareholder Ownership Composition

We examine the influence of firm ownership composition on both the abnormal returns at the announcement of a stock split and liquidity changes following a stock split. We find three results. First, the largest post‐split increase in institutional ownership occurs for firms that had low institutional ownership before the split. Second, changes in liquidity are negatively related to the level of institutional ownership before the split. Last, the abnormal return following a split is negatively related to the level of institutional ownership before the split. These findings are important as they shed new light on the source of stock split announcement returns.     

Accelerated share repurchases

Accelerated share repurchases (ASRs) are credible commitments by firms to repurchase shares immediately. Including an ASR in a repurchase program reduces the flexibility that firms have to alter an announced program in response to subsequent changes in the price and liquidity of its shares, unexpected shocks to cash flow and/or investment, etc. Thus, we investigate whether firms' decisions to include ASRs in their repurchase programs are associated with factors expected to influence the costs of lost flexibility and the benefits of enhanced credibility and immediacy. We find robust evidence consistent with the costs of lost flexibility and the benefits of credibility and immediacy being important determinants of ASR adoption. Additionally, we find that ASR announcements are associated with positive average abnormal stock returns.     

Acquisitions,Overconfident Managers and Self‐attribution Bias

We examine whether acquisitions by overconfident managers generate superior abnormal returns and whether managerial overconfidence stems from self‐attribution. Self‐attribution bias suggests that overconfidence plays a greater role in higher order acquisition deals predicting lower wealth effects for higher order acquisition deals. Using two alternative measures of overconfidence (1) high order acquisition deals and (2) insider dealings we find evidence supporting the view that average stock returns are related to managerial overconfidence. Overconfident bidders realise lower announcement returns than rational bidders and exhibit poor long‐term performance. Second, we find that managerial overconfidence stems from self‐attribution bias. Specifically, we find that high‐order acquisitions (five or more deals within a three‐year period) are associated with lower wealth effects than low‐order acquisitions (first deals). That is, managers tend to credit the initial success to their own ability and therefore become overconfident and engage in more deals. In our analysis we control for endogeneity of the decision to engage in high‐order acquisitions and find evidence that does not support the self‐selection of excessive acquisitive firms. Our analysis is robust to the influence of merger waves, industry shocks, and macroeconomic conditions.     

Open-Market Stock Repurchase and Stock Price Behavior When Management Values Real Investment

This paper provides a simple explanation of open‐market stock repurchases and the stock price behavior surrounding them. There is ex ante asymmetry of information with regard to the private benefits that corporate managers can attain from real investments. In our model, open‐market repurchase announcements reveal information about the managers' private benefits when real investment opportunities are unprofitable in terms of firm values. This study differs from previous studies in that we show that announcements of open‐market repurchase programs can be believable without the restriction that the announcements are commitments. Empirically, the model simultaneously predicts that a stock price will drop prior to an open‐market repurchase announcement and will rise in response to the announcement. These predictions are consistent with stylized facts.     

AN EMPIRICAL INVESTIGATION OF STOCK DIVIDENDS-IN-KIND

We investigate share price reactions to announcements of dividends payable in the common stock of corporations different from the issuing firm. We find that firms that declare these dividends (typically investment companies) experience positive abnormal returns upon announcement. We also find that such dividends are more likely to be declared when the shares to be distributed have peaked in value. Consistent with this finding, we document negative announcement-period abnormal returns for firms having their shares distributed. Additional tests reveal that prices respond more negatively when the information signal is strongest, when outside ownership is more dispersed, and when management is more entrenched.     

Uncertainty triggers overreaction: evidence from corporate takeovers

Behavioural finance models suggest that under uncertainty, investors overweight their private information and overreact to it. We test this theoretical prediction in an M&A framework. We find that under high information uncertainty, when investors are more likely to possess firm-specific information, acquiring firms generate highly positive and significant gains following the announcement of private stock and private cash acquisitions (positive news) while the market heavily punishes public stock (negative news) deals. On the other hand, under conditions of low information uncertainty, when investors do not possess private information, the market reaction is complete (i.e. zero abnormal returns) irrespective of the type of acquisition. Overall, we provide empirical evidence that shows that information uncertainty plays a significant role in explaining short-run acquirer abnormal returns.     

Common stock repurchases and market signalling: An empirical study

This paper examines the pricing behavior of securities of firms which repurchase their own shares. The results are consistent with a market in which investors price securities such that expected arbitrage profits are precluded. The results are also consistent with the hypothesis that firms offer premia for their own shares mainly in order to signal positive information, and that the market uses the premium, the target fraction and the fraction of insider holdings as signals in order to price securities around the announcement date. The observation that repurchases via tender offer are followed by abnormal increases in earnings per share and that mainly small firms engage in repurchase tender offers, provides further support for the signalling hypothesis.