Mergers in the Electric Utility Industry in a Deregulatory Environment

We document that the merger announcement returns are positive and significant for targets of acquiring electric utility industry firms, but are not as algebraically large as target returns documented in non-regulated industry merger announcements. Additionally, electric utility acquirer firms earn significant negative announcement returns when acquiring an electric utility. We find announcement returns for acquirers vary significantly based upon the timing of the merger announcement, with mergers announced after the Energy Policy Act of 1992 generating negative returns for acquirers. We also find a significant difference in the percentage change in aggregate entity value around the announcement date for diversifying mergers as compared to non-diversifying mergers, with diversifying merger announcements resulting in a decrease in aggregate entity value.     

Foreign Acquisitions in China and Multinationals’ Global Market Strategy

Using firm‐level data from 2000 to 2006, we find that foreign acquisitions in China change the target firms’ export extensive margins. We develop a three‐country model with cross‐border acquisitions to show that the acquirers can alter the targets’ export decision through three possible channels: fixed‐cost jumping, technology transfer and global market reorganization. We find evidence that foreign acquisitions change the Chinese target firms’ probability of exporting to a third market. Technology transfer is not observed. Evidence implies that fixed‐cost jumping is used to enable the targets to export, while global market reorganization is a key motive for the acquirers to withdraw the targets from the export market.     

Acquirer's return and the choice of acquisition targets: does acquisition experience matter?

We study a sample of 6503 UK acquisitions completed between 1985 and 2004 and control for previous deals similarities. Returns for frequent acquirers decrease constantly but they remain positive through high-order deals. We do not detect an improving pattern of returns but, at best, a stable one when the deal is settled for cash. Using ‘characteristics-based’ experience variables, our multivariate analysis shows that the acquirers’ returns are unaffected by prior acquisition experience. However, we find solid evidence for acquirers drawing inferences from prior experience in designing the method of payment, selecting the organizational form of the target firm and engaging in focused acquisitions, which is consistent with learning through acquisitions. The results are robust to various consistency checks.     

Technology-acquiring cross-border M&As by emerging market firms: role of bilateral trade openness

This paper investigates the role of bilateral trade openness in technology-acquiring cross-border mergers and acquisitions (M&As) by emerging market firms (EMFs). The cross-border M&A, patents, and financial data from January 2000 to December 2013 have been utilised for empirical analyses. By analysing cumulative abnormal returns of the acquirer EMFs from Brazil, Russia, China, India, and Mexico, the value-creating nature of technology-acquiring cross-border M&As has been confirmed. In addition, the number of the patents owned by the target firms showed a positive and significant effect on the stock performance of cross-border acquirers. Finally, the bilateral trade openness significantly and positively moderated the relation between the innovation capability of the target firms and EMFs’ stock performance.     

Does geopolitical risk matter for corporate investment decisions? Evidence from cross-border acquisitions

Heightened geopolitical risk has become the new normal. We study the effects of geopolitical risks on cross-border acquisition activity. Using military alliance to proxy for the degree of geopolitical risks, we find that the formation of military alliance between two countries is associated with greater cross-border acquisition flows. Using the recent North Atlantic Treaty Organization enlargements as identification strategy, we find stronger effects of military alliance, especially with defense pacts. One important channel is that military alliance can substitute for target countries’ institutional quality and minimize extreme geopolitical threats faced by acquirers. We find that countries with poor governance and weaker legal enforcement benefit more from military alliance, especially by receiving inbound acquisitions from major military powers. These findings highlight the role of military alliance in the global market for corporate control by reducing geopolitical risks.     

The interplay between target firm R&D,acquirer debt financing and takeover premia

The level of acquisition premia is of paramount importance in light of the vast sums paid to target shareholders and the often disappointing returns realized by corporate buyers. In this letter, we focus on the impact of R&D investments by targets on the acquisition premium contingent upon the acquirer’s financing choices. Based on a unique hand-collected sample of 407 listed European transactions, we find a positive effect of target R&D on premia paid. Yet, when acquirers finance the acquisition of an R&D intensive target with debt, the positive relation disappears. Consequently, we establish that financing sources affect bidding strategies of acquiring companies in case of difficult-to-value targets.     

The relation between asset growth and the cross-section of stock returns: Evidence from the Chinese stock market

This study examines the effect of firm investment on stock returns by using data on the Chinese stock market. We find that stocks with higher investment experience lower future returns and there is an obvious investment effect in the Chinese stock market. The investment effect is stronger for firms that have higher cash flows, lower debt or for state-owned firms. We further explore the relation between investment and returns over the 3 years around portfolio formation. The results show that the high investment firms earn higher returns than low investment firms before portfolio formation; however the high investment firms earn lower returns than low investment firms after portfolio formation, such evidence is supportive of investor's overreaction explanation. Additionally, the stock returns don't necessarily decrease after investment, and the stock returns don't significantly positively correlate with firm profitability or book-to-market, so the result don't support risk-based explanation. Overall, both our portfolio sort and two-stage cross-sectional regression analysis show that behavioral finance theories are better than risk-based theories in explaining the investment anomaly. Evidence from the Chinese stock market provides a useful perspective to understand the debate on the investment anomaly.     

The impact of cross-border acquisitions on target banks’ performance in an institutionally poor environment: Ukraine’s takeover wave

We investigate the impact of the 2005–2007 cross-border bank takeovers in Ukraine – a country with poor institutional quality – on the performance of the target banks. Because acquirers targeted mainly larger, less-capitalised banks, we control for selection bias by combining propensity score matching and a difference-in-difference methodology. We find that the cost efficiency of the acquired banks improved after takeover (because of a decreased reliance on deposits), but that neither their profitability nor their loan market shares increased. Overall, our findings tally only piecemeal with the existing multi-country studies for transition economies. This argues in favour of additional single-country research.     

Risk Appetite,Home Bias and the Unstable Demand for Emerging Market Assets

Home bias arises when the actual portfolio of an investor consists of a smaller proportion of foreign assets than that predicted by standard portfolio theory for the observed set of risks and returns on available assets. The existence and persistence of home bias undermines the theoretical case for the efficiency of international capital markets. In this paper we use data on UK pension fund portfolios to measure home bias, and find that this is doubly acute in the case of emerging market equity—a bias against overseas assets as a whole being further magnified by a bias against emerging markets within the foreign equity class as a whole. Moreover, contrary to the conventional assumption that risk aversion is both relatively low and stable over time (canonised in neoclassical theory by the derivation of constant relative risk aversion from the utility function itself) our finding that home bias fluctuates over time suggests that risk aversion is in fact time‐variant and path‐dependent. We sketch an alternative Keynesian approach in conclusion.     

Mergers and acquisitions as a response to the deregulation of the electric power industry: value creation or value destruction?

Many electric utilities, as a response to the deregulation of the electric power industry, adopted a strategy of acquiring other electric or gas utilities. We examine whether these merger and acquisition strategies create value for the utility shareholders and whether the strategies result in superior post-merger operating and stock-price performance relative to utilities that did not grow through acquisitions. We find little evidence that the mergers and acquisitions created long-term value for a fully diversified investor. Furthermore, the stock price and operating performance of the acquirers under performed the stock price and operating performance of a control portfolio of utilities that did not engage in merger activity.      

Option implied beta and option return

We study the information content of option-implied betas for future equity option returns, using data on the S&P 500 index options and all of the component stock options. We find a significantly strong relation between option-implied betas and option returns cross-sectional. The paper presents evidence that call (put) option returns increase (decrease) with the option-implied betas of the underlying stock. A trading strategy of buying high (low) implied beta call (put) option portfolio and selling low (high) implied beta call (put) option portfolio generates a statistically and economically significant return. Our results are robustly persistent even after controlling for various cross-sectional effects and are not explained by the risk factors in asset pricing.     

Does the merger paradox exist even without any regulations? Evidence from Germany in the pre-1914 period

This paper measures the market response triggered by merger announcements in an environment without regulations and without a strong separation of ownership and control in Germany. Based on event study methods applied to daily data and regression analyses, I evaluate whether the merger paradox existed, and how firm size, the way of financing a merger, and industry factors influenced the success of acquirers. Hence, my study can shed some light on commonly believed explanations for the bad performance of mergers. The whole portfolio of acquirers exhibited positive cumulated abnormal returns, which indicates a rejection of the merger paradox—but market values of some companies declined. Particularly, acquiring banks lost shareholder value, although the majority of mergers occurred in the banking industry. Caused by the new exchange law, banks were in a merger wave. Therefore, alternative explanations like the minimax-regret principle might explain why banks merged in spite of lacking success.     

Does market misvaluation drive post-acquisition underperformance in stock deals?

There is limited direct evidence on the impact of market misvaluation on acquirer long run performance. In this paper, we hypothesize that stock prices of stock-financed acquirers would move toward their fundamental value in the long run, thus correcting the initial overvaluation. Empirical results show that more overvalued acquirers are associated with poorer post-acquisition abnormal returns. We eliminate the concern that our findings are due to either overpayment or overvaluation-driven bad acquisitions. Our results are robust to controlling for market-wide valuation, alternative methods and assumptions used to calculate abnormal returns and fundamental value, and other factors affecting acquirer returns.     

International asset prices and portfolio choices under Bayesian learning

We calculate equilibrium asset prices and portfolio choices from a two-country OLG international asset pricing model under the assumption that investors are on a Bayesian learning path. Investors from both countries receive identical information flows, but domestic investors start off with less precise priors concerning foreign fundamentals. Learning is shown to produce first-order effects on the properties of asset prices, in the form of increased equity returns, volatility clustering, and time-varying correlations across national stock markets. Moreover, on a learning path, estimation risk generates portfolio biases similar to those observed empirically, i.e. a strong preference towards domestic securities and excessive turnover in foreign securities. These findings are robust to changes in prior beliefs, the calibration of initial information asymmetries, and the parameterization of the model. We use real GDP data for the US and Europe to calibrate the model and show that in the event of a financial liberalization during the 1970s, high excess returns, time-varying volatility, substantial home bias, and excess turnover should have been observed.     

Covered Call Investing in a Loss Aversion Framework

In a mean-variance framework, the covered call investment strategy has been seen as an inefficient method of allocating wealth. Covered calls reduce the riskiness of the portfolio and therefore lead to lower portfolio returns. Recent debate has focused on the shortcomings of mean-variance efficiency as an accurate depiction of investor utility. Using alternative utility functions, we find mixed support for the use of the covered call investing strategy. Using loss aversion, however, we reexamine the covered call investment decision and find it significantly enhances investor utility relative to an index portfolio investment strategy. We conclude that loss aversion's more accurate depiction of investor preferences and behavior helps to explain the popularity of the covered call investment strategy.     

A Recursive Modelling Approach to Predicting UK Stock Returns

This paper applies an extended and generalised version of the recursive modelling strategy developed in Pesaran and Timmermann (1995) to the UK stock market. The focus of the analysis is to simulate investors' search in 'real time' for a model that can forecast stock returns. We find evidence of predictability in UK stock returns which could have been exploited by investors to improve on the risk-return trade-off offered by a passive strategy in the market portfolio. Alternative interpretations of this finding are briefly discussed.     

Single Beta Models and Currency Futures Prices

The conditional capital asset pricing model is applied to foreign currency futures prices, covariance risk being measured relative to excess returns from a broadly diversified international portfolio of equities. Positive time-varying risk premia are found in all five currencies tested when the difference between the US and the average foreign interest rates is used as an instrumental variable for the expected excess return from the common stock portfolio.     

Asset return dynamics and the FX risk premium in a decentralized dealer market

The paper proposes a continuous time model of an FX market organized as a multiple dealership. The dealers have costly access to best available quotes. They interpret signals from the joint dealer-customer order flow and decide upon their own quotes and trades in the inter-dealer market. Each dealer uses the observed order flow to improve the subjective estimates of relevant aggregate variables, which are the sources of uncertainty. The risk factors are returns on domestic and foreign assets and the size of the cross-border dealer transactions in the FX market. These uncertainties have diffusion form and are dealt with according to the principles of portfolio optimization in continuous time. The model is used to explain the country, or risk, premium in the uncovered national return parity equation for the exchange rate. The two country premium terms that I identify in excess of the usual covariance term (consequence of the “Jensen inequality effect”) are: the dealer heterogeneity-induced inter-dealer market order flow component and the dealer Bayesian learning component. As a result, an “order flow-adjusted total return parity” formula links the excess FX return to both the “fundamental” factors represented by the differential of the national asset returns, and the microstructural factors represented by heterogeneous dealer knowledge of the aggregate order flow and the fundamentals.     

Herding by foreign investors and emerging market equity returns: Evidence from Korea

This paper studies the effect of herding by foreign investors on stock returns in the Korean market. We conduct both pre and post-liberalization analyses and utilize a three-stage least squares analysis in order to control for the simultaneous relationship. We find evidence of a significant impact of foreign investor herding on stock returns in addition to intra-year positive feedback trading by foreign investors. However, changes in domestic institutional ownership do not have any significant effect on stock returns. In addition, foreign investors tend to buy/sell shares that domestic institutions sell/buy in the herding year.     

Herding behaviour and the declining value relevance of accounting information: evidence from an emerging stock market

This article sheds light on the underlying mechanisms behind the changes in the value relevance of accounting information in the Karachi Stock Exchange (KSE) during the 1999–2010 period. We find that neither changes in earnings quality nor the earnings lack of timeliness hypothesis can explain the decline in the value relevance of accounting information in the KSE. Based on the stylized facts associated with the growth of the KSE and the broader economics literature, we argue that the reduction in the explanatory power of accounting information vis-à-vis stock returns was caused by herding behaviour. Empirical estimates from state-space model of herding behaviour confirm the existence of herding, and we find that the value relevance of accounting information is significantly lower in periods characterized by herding behaviour. This article is also amongst the first attempts to empirically demonstrate that an expansionary monetary policy and increases in foreign portfolio investment lead to increased levels of herding.