The Effect of Voluntary Sell-off Announcements on Shareholder Wealth

Sell-off activities arise when a firm sells part of its assets (e.g., a segment, a division, etc.) but continues to exist in essentially the same form. This study investigates the effect of voluntary sell-offs on stock returns. From a sample of over 1000 sell-off events (first public announcements), the evidence shows that both sellers and buyers earn significant positive excess returns from these transactions. The excess returns earned by buyers are smaller than those earned by sellers. There is also evidence that sell-off announcements are preceded by a period of significant negative returns for the sellers which suggests that the sellers, on average, performed poorly prior to their sell-off activities.     

The Effect of Board Independence on Target Shareholder Wealth

We seek insights into whether, and if so how, an independent board enhances the bid premiums offered to target firm shareholders during a takeover. The results indicate that the presence of an independent board enhances the initial bid premium by, on average, 21.1%. However, the results of more refined analysis suggest that the enhanced bid premium is in fact driven by independent boards comprising non-executive directors who have reputation capital at stake. We also find that independent boards that resist takeovers or include voluntary independent expert reports in target statements, increase the bid premium revision by, on average, 15.6% and 16.2%, respectively.     

The Effect of Voluntary Spin-off Announcements on Shareholder Wealth

This paper presents estimates of the effect of a voluntary spin-off announcement on shareholder wealth. The results show that spin-off announcements have a positive influence on stock prices and that the relative increase in share price is greater for large spin-offs than for small ones.     

The Effect of Golden Parachutes on Shareholder Wealth and Takeover Probabilities

This study seeks to determine whether stockholders experience increases in wealth due to a company's adoption of a golden parachute and resulting increased takeover bid probability. Market reaction to golden parachute adoption is examined by employing event analysis, logit analysis and metric regression. Our findings indicate that the adoption of a golden parachute does not signify an increased probability of a takeover bid, and stockholders experience a decrease in wealth.     

The Effect of Cross-Border Acquisitions on Shareholder Wealth — Evidence from Switzerland

We analyze the wealth effects of 114 domestic and international acquisitions announced by Swiss corporations between 1990 and 2001. We find no difference between national and cross-border mergers. This may indicate that the international capital markets are highly integrated and is in contrast to recent empirical findings on a prevailing segmentation of capital markets within Europe. We also analyze the role of professional advisors in Swiss M&A transactions. Our results indicate that the expenses for professional advice might outweigh the potential benefits.     

The Effects of International Joint Ventures on Shareholder Wealth

The purposes of this study are to measure the wealth effects of international joint ventures on the U.S. firms' shareholders and to determine whether these effects are related to the economics status of the partner's home country. The results indicate that overall investor reactions to joint ventures with foreign firms are negative and that only joint ventures with firms from lesser developed countries have nonnegative effects on shareholders' wealth. These findings are in contrast with previous reports of positive stock price reactions to both dimestic and international joint ventures.     

Corporate Sale-and-Leasebacks and Shareholder Wealth

In this paper, we examine the market valuation effects of corporate sale-and-leasebacks. Specifically, we test whether such transactions offer a net benefit to lessees or lessors by evaluating the impact on share prices from announcements of sale-and-leasebacks of major corporate assets. Our evidence indicates that the announcements are associated with positive abnormal returns to lessees. We conclude that this positive market reaction results from an overall reduction in the present value of expected taxes occasioned by the transactions. Our evidence also suggests that the gains from sale-and-leasebacks accrue solely to lessee firms.     

Mandatory Worker Representation on the Board and Its Effect on Shareholder Wealth

Several countries legally mandate representation of workers on boards of directors. The evidence on the shareholder wealth effects of such a corporate governance design is mixed. I examine abnormal announcement returns around major milestones leading to the passing of the German Codetermination Act in 1976. I find that news about the act causes an average decline in the equity value of firms that are certain to have been affected by the new law of up to 1.5% relative to the control firms. Firms close to the regulatory threshold of 2,000 employees remain unaffected implying an expectation of avoiding compliance.     

The Impact of In-Substance Defeasance on Bondholder and Shareholder Wealth

This paper hypothesizes and tests the argument that a defeasance transaction initiates a wealth transfer from stockholders to bondholders. Our empirical tests provide compelling evidence of bondholder gains, but no support for shareholder losses when a firm defeases debt. We speculate that the insignificance of the loss to shareholders is primarily due to the size disparity between the value of defeased debt and the market value of outstanding equity, since the suggested economic merits of defeasance appear unfounded. Although we cannot prove an agency motivation for defeasance, we find a very high correlation between compensation tied to earnings and defeasing debt at a book gain.     

Accelerated Vesting in Takeovers: The Impact on Shareholder Wealth

We study the impact of accelerated vesting of equity awards on takeovers, whereby the restricted stock and/or stock options of the target chief executive officer (CEO) immediately vest and become unrestricted upon the close of the acquisition. We find that takeover premiums are significantly larger when the target CEO receives the benefit of accelerated vesting as compared to target firms with CEO's that continue to vest in their awards after closing the deal. Our evidence suggests that these cash windfalls triggered by accelerated vesting are beneficial to shareholders in completed deals. Accelerated vesting appears to be an efficient form of ex ante managerial contracting.     

The Impact of Asbestos and Environmental Reserves Increases on Shareholder Wealth

Abstract

Between 1992 and 2001 significant reserves increase announcements were made by several major property/liability insurers. These reserves increases were for the purpose of recognizing expected asbestos and environmental (A&E) liability. Although most analysts agree that U.S. insurers are underreserved for asbestos and environmental liability, how the market reacts to an insurer’s announcement of an increase in these reserves has not been analyzed. An insurer that is significantly underreserved is likely to be viewed by the market as lacking financial stability for the long term. However, when a company increases its reserves, there is a charge to income and a reduction in capital. If surplus is diminished sufficiently as a result of the increased reserving, regulatory attention and eroding shareholder and market confidence could result as well. By calculating the sample insurers’ cumulative abnormal returns surrounding the largest asbestos and environmental reserves increase announcements made between 1992 and 2001, the study estimates and documents the market’s reaction to these reserves increase announcements. We further explore the potential impact of additional asbestos and environmental liability exposure reporting requirements. Starting with 1995 statutory annual accounting statements, Footnote 24 required additional reporting by insurers of their asbestos and environmental liability exposure (1995 statements were publicly available by the end of the first quarter of 1996). When looking at reserves increase announcements prior to this additional reporting requirement, we find that most insurers announcing large increases in asbestos and environmental reserves prior to 1996 experience a significant reduction in stock price in the days surrounding their announcement. However, consistent with the notion that the additional accounting disclosure requirements after 1995 (Footnote 24) provide valuable information on insurers’ exposure, we find that the announcement of A&E reserves increases after 1995 had no statistically significant effect on the market value of announcing insurers.     

Capital Structure Swaps and Shareholder Wealth

We show how capital structure swaps can increase the wealth of a firm's long‐term shareholders when a firm's debt or equity is misvalued. We review the conventional rule that a firm should issue equity and use the proceeds to retire outstanding debt (an equity‐for‐debt swap) when equity is overvalued, or repurchase equity with proceeds of new debt (a debt‐for‐equity swap) when equity is undervalued. We also analyse the more complex case where a firm's debt and equity are both undervalued, showing the optimal swap may be to issue undervalued equity, contrary to the conventional rule.     

Excess Asset Reversions and Shareholder Wealth

The ownership of pension assets in a defined benefit pension plan is an unresolved issue in corporate finance. The issue is important because it defines the appropriate investment policy for a pension fund. In this paper, we summarize the ownership debate in the form of two mutually exclusive theories. We then focus on a recently popular event in pension finance, excess asset reversions. Our paper demonstrates the valuation effects associated with this event in a stochastic dominance framework. Under certain conditions, a reversion constitutes an expropriation of wealth from the participants and beneficiaries of the plan to the firm. Using data provided by the Pension Benefit Guaranty Corporation and the Center for Research in Security Prices tape, we examine the returns to the shareholders of 58 companies which conducted excess asset reversions between 1980 and 1984. Our results show that large abnormal returns accrued to these shareholders around the time of the reversion. These findings have implications both for the appropriate investment policy of pension funds and for public policy with respect to plan terminations.     

Changes in Interstate Banking Laws: The Impact on Shareholder Wealth

This study examines the impact on shareholder wealth of changes in interstate banking laws. The research demonstrates that changes in state statutes which allow interstate banking have a positive impact on the stock prices of regional banking organizations and a negative impact on the stock prices of money center banks. Interstate banking statutes initially exclude those states in which the money center banks are headquartered. The findings provide evidence that, by excluding money center banks from expansion across state lines, the competition from the regional banks may have an adverse competitive effect on the money center banks.     

Management Buyouts of Divisions and Shareholder Wealth

This paper examines the wealth effects to parent company shareholders around the announcement of divisional management buyouts. Despite the relative absence of “arm's-length” bargaining between buyer and seller, there is no evidence that divisional management buyouts result in reductions in parent company share prices. Instead, small but statistically significant wealth gains are found during the two-day period surrounding the buyout announcement. This evidence suggests that divisional buyouts reallocate ownership of corporate assets to higher valued uses and that parent company stockholders share in the expected benefits of this change in ownership structure.     

A Comment on Excess Asset Reversions and Shareholder Wealth

This study re-examines the earlier finding of Alderson and Chen (1986a) that financial markets do not consider excess pension assets in determining share prices and that significant increases in shareholder wealth occur when an overfunded pension plan is terminated. The results document that specific event-time contamination (corporate restructuring announcements) provides the driving force for all the earlier findings.     

Dividend Imputation and Shareholder Wealth: The Case of New Zealand

On April 1, 1988, New Zealand stopped the double taxation of dividends by implementing a full dividend imputation program. Because many believed that the tax advantage of debt had led to more highly leveraged firms subject to greater financial risk than was socially optimal, it was hoped the removal of incentives to finance with debt would result in a more efficient allocation of capital. The empirical results suggest that the shareholder wealth gain from dividend imputation was more than offset in firms with large debt levels. Moreover, an examination of debt ratios indicates debt levels declined in the post–imputation period.     

Additional Evidence on the Relation Between Divestiture Announcements and Shareholder Wealth

This paper presents estimates of the effect of voluntary divestiture announcements on shareholder wealth. The results show that both spin-off and sell-off announcements tend to have a positive influence on the stock prices of the divesting firms, and that the spin-offs “outperform” the sell-offs on the day of the event. We also find that the economic gains to the shareholders of the selling and acquiring firms are nearly identical, suggesting that the sell-off decision is perceived by both investor groups as a positive net present value (NPV) transaction.