Corporate governance and returns to emerging economy firm acquisitions in tax havens: An empirical test on Indian firms

Cross‐border acquisitions (CBAs) by emerging economy firms are known to yield positive stockholder returns. A nontrivial fraction of CBAs by emerging economy firms are in tax havens. We argue because of weak corporate governance in emerging economies and the secrecy afforded by tax havens, emerging economy firm CBAs in tax havens yield lower stockholder returns than their CBAs in nontax havens. We also argue the negative effect of tax haven destinations is greater for firms with greater business group ownership and for firms with greater foreign insider ownership. Furthermore, we argue the negative effect of tax haven destinations is mitigated for firms whose stock is actively traded in the market. Empirical tests in a sample of nearly 800 CBAs by Indian firms from 2002 to 2011 support our hypotheses. Our study contributes to a better understanding of stockholder returns to CBAs by emerging economy firms and the influence of corporate governance on these returns.     

掏空、支持与上市公司经营业绩关系研究

以1998-2003年的非金融类上市公司为样本,以大股东占款为研究对象,检验了我国上市公司大股东掏空与支持行为对上市公司经营业绩的影响,研究发现大股东的掏空行为对上市公司的经营业绩具有显著的降低作用,大股东的支持行为对上市公司以会计指标表示的经营业绩具有显著的提高作用,但对以市场指标表示的经营业绩的提高作用不显著,大股东占款程度与上市公司业绩具有显著的负线性关系。     

Impact of institutional reforms and industry structural factors on market returns of emerging market rivals during acquisitions by foreign firms

This paper seeks to understand the joint impact of institutional reforms and industry structural factors on market returns earned by rivals in an emerging market during foreign acquisitions. We use a sample of 238 foreign acquisitions in India during the period 2004–2013 and find empirical evidence to support the notion that institutional reforms, foreign competition and business group competition positively impact the market returns of the rivals of acquired firms. Additionally, we find that the effects of foreign competition and business group competition on rivals’ market returns are shaped by the degree of institutional reforms in the industry, indicating that firms’ market returns in emerging markets during foreign acquisitions can be better understood through the incorporation of the joint role of industry structural factors and institutional reforms.     

Law,finance, and emerging market returns

This paper investigates how legal foundation influences the return distribution, the growth rate of market capitalization, the ratio of market capitalization to gross domestic product (GDP) and the correlation structure of emerging market indices with developed market indices. Using a sample of 24 emerging markets, we find that emerging markets from the French [civil] law systems earned higher returns, have higher correlations with the world market portfolio, higher average growth rates in market capitalization and lower average market capitalization to GDP than their English common law counterparts. Finally, most emerging markets returns are more highly correlated to the returns of developed markets with an English common law tradition. Our results suggest that diversification potential is highest with the English common law emerging markets but that the diversification benefits come at the cost of reduced returns.     

Do cross-border mergers and acquisitions increase short-term market performance? The case of Chinese firms

Despite the new momentum in cross-border mergers and acquisitions (M&As) by emerging market firms, we have a limited understanding of the impact of these activities. Drawing on signalling theory and the institution-based view, this paper examines the extent of stock market reactions to the announcement of cross-border M&A deals, based on an event study of a sample of Chinese firms during the period 2000–2012. The findings indicate that the announcement of cross-border M&As results in a positive stock market reaction; this effect is more significant in the mainland Chinese stock markets (Shanghai and Shenzhen) than that in the Hong Kong market. The shareholders of Chinese firms that acquire a target firm in a host country with a low level of political risk gain higher cumulative abnormal returns than those firms targeting companies in countries with a high level of political risk. The shareholders of Chinese state-owned enterprises experience lower abnormal returns compared with those of Chinese privately owned firms when engaging in cross-border M&A deals.     

The Ethics of Managerial Compensation: The Case of Executive Stock Options

This paper examines the ethics of contemporary managerial compensation in the context of executive stock options. Economic considerations would dictate that executive stock options should be adjusted to eliminate the effect of overall stock market movements which are beyond the control of the executive. However, in practice, most executive stock options are not adjusted to control for these outside factors. Agency considerations are the most likely culprit. Adjusting for the influence of outside factors, such as a generally rising stock market, from executive stock options sets a higher bar for managers to reach. Furthermore, traditional accounting standards permitted firms that did not adjust options to avoid reporting options as expenses. This presents CEOs and boards of directors with a major ethical dilemma. On the one hand, their duty to their shareholders and stakeholders dictates that executive stock options should be adjusted to eliminate outside noise from unrelated movements in the overall stock market. However, financial statements are presented in the language of accounting. If the overwhelming majority of the users of a language define a particular item in one way, then to deviate from the norm implies that the recipient of such a deviant statement may not properly interpret the statement. Likewise, if the standard practice is for firms to use unadjusted options and thus under-report expenses, to deviate from this industry norm risks that users of financial statements would not properly interpret the financial statements, with perhaps negative consequences for the shareholders. In short, if “everyone else does it,” then it could be wrong for an individual firm to deviate from the norm as that would harm the shareholders. James J. Angel is an Associate Professor of Finance at the McDonough School of Business at Georgetown University. He is a financial expert whose research focuses on the operation of financial markets in the United States and other countries. He currently serves on the OTCBB Advisory Board, and he has served as Chair of the Nasdaq Economic Advisory Council. He earned his undergraduate degree from the California Institute of Technology, his MBA from the Harvard Business School, and he earned his Ph.D. in Finance from the University of California at Berkeley. Douglas M. McCabe is a Professor of Management at the McDonough School of Business at Georgetown University. He serves on the Editorial Boards of 20 scholarly journals, including Research on Ethical Issues in Organizations, JAI Press as well as the Employee Responsibilities and Rights Journal. Considered by the media to be an expert in his field, he has appeared more than 200 times on international (CNN), national (ABC, NBC, and CBS), and local television and radio. He holds a Ph.D. from Cornell University and is a member of Phi Beta Kappa.     

Moderating Effects of Firm Age on the Relationship between Debt and Stock Returns

This article investigates the moderating effects of firm age on the relationship between debt and stock returns. The system generalized method of moment’s results indicate that firm age has a positive moderating effect on the relationship between book debt and stock returns. The results are robust, as firm age positively moderates the relationship between market debt and stock returns. Moreover, firm age has a direct positive effect on stock returns. Results suggest that as firms grow older, they use their experience to make effective capital structure decisions (i.e., optimal debt-equity mix) to maximize debt interest-tax-shield and increase shareholders’ returns.     

Are Group-Affiliated Firms Really More Profitable than Nonaffiliated?

The role of corporate center in influencing the economic performance of business units has been a central research topic in the industrial organization and strategic management literature. A common finding is the limited corporate and business group effects. Recently, an emerging line of studies argues that the market inefficiencies and institutional voids in emerging markets can be overcome more efficiently by large diversified business groups than by non-group small firms. Some empirical evidence also shows that non-group small firms are significantly less profitable than group-affiliated firms. This paper raises this issue by empirically investigating the influence of group affiliation on the return on assets and Tobin's q of 340 group-affiliated firms versus 423 non-group firms in Taiwan, during the period of 1997–1999. The statistical results show that group affiliation can not always create value for member firms. The size of the business group matters. When affiliated with the largest business groups, member firms indeed show improved stock market performance, but when firms are affiliated with small- and medium-sized groups, their accounting performance suffers. Findings of this paper suggest a threshold effect and a U-shape relationship between group affiliation and profitability in emerging economies.     

Accounting and economic returns in British coal mining: The Carlton Main colliery, 1872–1909

Various estimates, both ex ante and ex post, have been produced of the accounting rate of return on investments in the late nineteenth-century coal industry, with some ex post figures also being calculated for individual firms engaged therein, such as the Consett Iron Co. Ltd. No one, however, has previously tried to calculate the economic rate of return from investing in a single coal mine over the duration of its life. In this article we examine both accounting and economic rates of return for the Carlton Main colliery, from its sinking during the 1870s through to its closure in 1909. Our results enable us to judge the accuracy of previous estimates of returns for the late nineteenth-century coal industry, and of contemporary estimates of the potential rate of return in coal mining. We also offer insights into the efficacy of using accounting rates of return as an indicator of the economic rate of return during that period.     

控制权转移的市场反应——基于私有收益视角

控制权转移可以引起公司股票价格以及股东财富的变化,国内外学者对此进行了大量研究,但鲜有结合控制权私有收益的分析。本文从私有收益视角出发,从事件期的累积超常收益、超常换手率、内幕交易指标、长期购买持有收益以及国有和民营买家超常收益的比较等方面进行了实证研究,结果表明:上市公司的控制权转移在很大程度上是新控股股东通过内幕交易获取私有收益的行为,并未真正为股东创造价值。     

Do Trademark Infringement Lawsuits Affect Brand Value: A Stock Market Perspective

Many firms find that they can benefit from copying orotherwise misusing the trademarks of their competitors. Firmsthat have maintained a positive brand image are likely to fightany dilution or eventual loss of their trademark by using lawsuitsagainst offending firms. These lawsuits help to staunch any lossesto the brand and leave the potential for the benefits from thetrademark to flow back to the firm. These benefits will be temperedby legal costs, potential infringement by other firms in futureand the need to file lawsuits in response. In contrast, firmsthat have infringed on a trademark are likely to lose if theowner of the trademark challenges them in court. This study relatesthe stock returns of firms to the filing of lawsuits to defendtrademarks. We study the impact of both the filing of the lawsuitand the eventual verdict of the court on the stock market valueof defendant and plaintiff firms. The protection of a trademarkby a plaintiff using a lawsuit resulted in a negative returnto the shareholders of the defendant firm that infringed on thetrademark. The returns to the plaintiff firms were mixed andof marginal magnitude due to offsetting factors although largefirms experienced positive returns.     

The effect of customer service on retailers’ shareholder wealth: The role of availability and reputation cues

Retailer customer service has been shown to lead to increases in consumer attraction and retention, but what is less apparent is whether shareholders are fully rewarded for retailers’ customer service efforts. Results from an event study on 48 retailer announcements of customer service strategies indicate that customer service increases retailer market values by 1.09 percent on average. The magnitude of this abnormal return suggests that customer service is one of the more effective ways for firms to create shareholder wealth. Further, analysis of the abnormal returns suggests that the shareholder value created by the retailer's customer service is affected by the heuristics and cues used to judge the likelihood of service delivery. Consistent with the availability heuristic, we find that services that are difficult to bring to mind and non-vivid services create significantly less shareholder value. Results further show that the retailer's reputation can also significantly inhibit the customer service's shareholder wealth creation.     

Financial profiles and the disclosure of expenditures for socially responsible purposes

Recently the relationship between “socially responsible” activities and the financial performance of corporations has received attention in the business literature. Most studies have focused on the market reaction of shareholders to the disclosure of both monetary and nonmonetary corporate contributions relating to pollution control, employee welfare, affirmative action, and other activities deemed to be in the public interest. Results of this research have been mixed, with some authors finding favorable market response to socially responsible actions, and others finding no difference between the market performance of more and less responsible firms. The purpose of this paper is to examine financial performance and socially responsible activities from a different perspective. Specifically, it examines the relationship between the disclosure of monetary expenditures for various social initiatives and composite financial accounting profiles of disclosing and nondisclosing firms. Using two-group discriminant analysis, the authors conclude that management tends to disclose monetary expenditures for these generally nonproductive purposes at times when the financial statements of the firm otherwise look favorable to shareholders. Such disclosure in a sample of Fortune 500 firms in 1976 and 1977 was clearly not unrelated to financial performance, and neither did it appear to occur in order to explain relatively poor financial statements.     

Limits to Arbitrage and Value Investing: Evidence From Brazil

ABSTRACT

In this article we show that the results obtained by accounting-based fundamental analysis strategies observed in the US market cannot be directly extended to emerging markets with less developed institutional environments and narrow equity markets as found in Latin America. We use Brazil as a special case and through standard tests show the apparent usefulness of financial statement analysis as an effective investment tool. We show that an investor could have changed his/her high book-to-market (HBM) portfolio one-year (two years) market-adjusted returns from 5.7% (42.4%) to 26.7% (120.2%) by selecting financially strong HBM firms listed on the São Paulo Stock Exchange. Our tests were performed using stock returns from 1995 to 2007 and financial and accounting data from 1994 to 2004. When one considers low book-to-market (LBM) firms, the results of the study indicate that an investor could change his/her mean (median) one-year market adjusted return from ?11.9% (?7.4%) to 8.1% (2.5%) by adopting the strategy proposed. However, additional investigation demonstrates that the returns generated by these strategies are significantly dependent on stock's liquidity, and when we consider only stocks where arbitrage is possible, the previous results do not hold. These findings contribute to the literature that tries to address the impact of limits to arbitrage on some well reported capital markets phenomena related to financial reporting.     

Overreaction in ChiNext IPOs' initial returns: How much and what caused it?

This paper studies overreaction in initial returns for ChiNext IPOs. We hypothesize the initial return contains a fundamental underpricing and an overreaction. The fundamental is represented by the 21st day return and the difference between the initial and 21st day returns represents overreaction. We investigate this conjecture and identify the variables that are significant for both returns, for one but not for the other, and for the difference. The initial return is driven more by short-term and market factors that cause overreaction while the 21st day return is affected more by an issuer's fundamentals. The overreaction is only weakly time-varying.     

The Short– and Long–run Performance of New Listings in Tunisia

This study examines abnormal stock market returns of new listings on the Tunisian Stock Exchange. Substantial positive abnormal returns are found on the first listing day and this finding is similar to that obtained in other countries. Subsequent performance is poor and investors who bought shares at the close of trading on the first day would have lost about 22% against the Tunis Stock Exchange index over a three–year period. The possible causes of this are investigated. Among the factors found in the literature that possibly affect the level of long–term performance, only the state of the IPO market, the initial return, the delay in reaching the ‘first market price’ and the size of the firms have significant coefficients. This result is supportive of the traditional fad’s interpretation of long–term underperformance.     

Limiting Laissez Faire Profits: The Financial Implications

Traditional corporate finance endorses the principle of stockholder wealth maximization as the purpose of business. In light of recent scandals and legislation, businesses are increasingly expected to use financial resources in a manner which benefits society and not just the owners of the firm. This imputation of a corporate soul will necessarily reduce investor returns, which has at least two major financial implications for the firm and the economy. The first is that it may cause investors to change their required rates of return and thereby change the amount of capital available to firms (in␣particular), and the economy (in general). The second is that it may implicitly replace equity with debt in the capital structure of firms, with all that implies for financing and corporate governance. The purpose of this article is to examine these implications and evaluate their sometimes counterintuitive consequences.     

Consumer Welfare and Inefficiency Among Regulated Industries

While the issue of efficiency on the side of production is still not a settled question, it is generally agreed that competition is more conductive to efficiency—both allocative and X—than monopoly. When the monopoly is regulated, i.e., receiving a rate of return less than it would if left unregulated but greater than the market rate of return, both allocative and X-inefficiency result. Since the degree of inefficiency amounts to a tax on consumers, the question of inefficiency in production has a twin companion in the form of consumer welfare losses. This is particularly true for many public utilities upon which low income families spend a large proportion of their income. The quasi tax that the regulated monopolist exacts neither generates a flow of public goods nor increases returns to shareholders. It is a particularly burdensome levy because the rate structure is highly regressive.     

When Bad Things Happen to the Endorsers of Good Products

We investigate how a firm's financial performance (as measured by stock returns) is influenced when celebrity endorsers become involved in undesirable events, i.e., events that have a deleterious effect on the spokespersons. We find that the stock market reaction to these events is negatively related to spokesperson blameworthiness. The lower (higher) the culpability, the higher (lower) the stock return. Interestingly, it is only those firms associated with spokespersons having high culpability that tend to experience losses in stock market value. In contrast, we find that events rated at or below the mean level of blameworthiness are associated with positive stock market returns.     

Cross-sectional regression analysis of return and beta in Japan

This paper investigates the relationship between return and beta using the cross-sectional regression method. Regression of return on beta without differentiating positive and negative market excess returns produces a flat relationship between return and beta. Taking into account the difference between positive and negative market excess returns yields significant conditional relationships between return and beta. The conditional relationship between return and beta is found to be in general better fit when the market excess return is negative than positive in terms of the goodness of fit measures such as R² and the standard error of the equation.