Failed bank takeovers and financial stability

Current discussion about the design of bank resolution frameworks suggests that the takeover of a failed bank by an incumbent one has two effects on financial stability. First, the incumbent takeover may boost financial stability by providing bankers with incentives to be solvent so as to profit from their competitors’ failure. Second, the incumbent takeover may spoil financial stability by creating “Systemically Important Financial Institutions”. The innovation of this paper is to capture these two effects in a theoretical model. We show that when incumbent bankers are impatient enough (i.e., they have high discount rates), the second effect prevails over the first one. We discuss the implications of this result for the design of bank resolution policies.     

The evidence of bidders' overpayment in takeovers: the valuation ratios approach

Empirically, bidder returns at the time of takeover announcements are negative. This paper investigates the relation between bidder returns and overpayment in mergers and tender offers while controlling for other potentially important factors. Unlike other studies, the paper measures overpayment using two valuation ratios: earnings-price ratio and book-to-market ratio. Results show these ratios are important in explaining negative bidder returns. The paper also finds that the payment method in mergers and tender offers produces an information effect.     

Asymmetric information and target firm returns

This article examines the relationship between asymmetric information and target firm returns in mergers and acquisitions (M&As). We argue that if managers possess favourable (unfavourable) asymmetric information, they will offer, ceteris paribus, a high (low) premium, affecting target firm returns accordingly. We propose several proxies of asymmetric information. The empirical evidence strongly supports our hypothesis as we find that target firm returns are significantly negatively related to asymmetric information regarding synergy gains. Our results are robust after controlling for several target and deal characteristics.     

Taxation of shareholder capital gains and the choice of payment method in takeovers

From December 1999, shareholders who disposed of shares in Australian takeovers in exchange for scrip could elect to defer capital gains taxation until the disposal of the shares received. We investigate payment method choice by acquiring firms before and after this regulatory change to assess whether target shareholder capital gains tax liabilities became an important factor considered in choosing the form of payment. The results show that, subsequent to the regulatory change, there is a significantly higher probability that equity will be offered as consideration where target shareholder capital gains are greater. This finding confirms the importance of shareholder level taxation in explaining corporate acquisition structure and adds to previous European and US evidence on factors associated with payment method choice in takeovers.     

Liquidity and information asymmetry considerations in corporate takeovers

ABSTRACT

We examine how stock market liquidity and information asymmetry considerations influence the wealth effects of Mergers and Acquisitions (M&As). We present a simple model predicting that M&As of listed targets that have relatively illiquid stocks are profitable for acquirers due to (a) the weak bargaining power of the targets’ shareholders, and (b) the limited information asymmetry concerns when evaluating takeover synergies. Our results show that cash-financed M&As of listed targets that have relatively illiquid stocks are associated with an increase in acquirer risk-adjusted returns. These gains are equivalent to those realized from comparable private target M&As. When engaging in stock-financed listed-target M&As, acquirers with liquid stocks enjoy significant gains when the targets have relatively illiquid stocks. This result holds especially when the deal is announced during periods of deterioration in the overall stock market liquidity. Lastly, we find that liquidity considerations affect the acquirer’s choice of the target firm’s listing status, as well as the M&A method of payment.     

支付方式与收购公司财富效应

股权分置改革之后,股票支付成为我国上市公司并购的主要支付工具之一。本文以股改后并购事件为研究对象,采用事件研究法来实证检验收购公司在并购首次公告期间的财富效应,且分别检验不同支付方式下的财富效应差异。结果表明,股改之后并购为收购公司股东创造了正的财富效应,股票支付的收购公司所取得的超常收益显著为正,且显著大于现金支付所获得的超常收益。超常收益的影响因素分析发现一些交易特征对收购公司超常收益有显著的影响。     

Determining returns to bidding firms’ shareholders using different benchmark methods: an Australian study

This article revisits the determinants of cumulative abnormal returns (CAR) for bidder firm shareholders around takeover bid announcements and in particular, if bidder CAR estimates differ significantly between conditional and unconditional models. The results indicate that CAR estimation is significantly different between the two models. The conditional model is theoretically superior to the traditional unconditional model due to the former controlling for unobservable factors surrounding the bid announcement. This study shows that it is important to account for unobservable factors in growth (organic versus takeover) strategies to infer the true effect of the bidder's characteristics on CAR.     

Nominal rigidities,asset returns,and monetary policy

Asset-return implications of nominal price and wage rigidities are analyzed in general equilibrium. Nominal rigidities, combined with permanent productivity shocks, increase expected excess returns on production claims. This is mainly explained by consumption dynamics driven by rigidity-induced changes in employment and markups. An interest-rate monetary policy rule affects asset returns. Stronger (weaker) rule responses to inflation (output) increase expected excess returns. Policy shocks substantially increase asset-return volatility. Price rigidity heterogeneity produces cross-sectoral differences in expected returns. The model matches important macroeconomic moments and the Sharpe ratio of stock returns, but only captures a small fraction of the observed equity premium.     

Dispersion of beliefs,ambiguity, and the cross-section of stock returns

We examine whether ambiguity is priced in the cross-section of expected stock returns. Using the cross-sectional dispersion in real-time forecasts of real GDP growth as a measure for ambiguity, we find that high ambiguity beta stocks earn lower future returns relative to low ambiguity beta stocks. This negative predictive relation between the ambiguity beta and future returns is consistent with theory, which predicts the marginal utility of consumption to rise when ambiguity is high. We further show that the ambiguity premium remains significant after controlling for exposures to expected real GDP growth, VIX, and financial market dislocations index.     

Time-varying moments, idiosyncratic risk, and an application to hot-issue IPO aftermarket returns

This paper proposes time-varying idiosyncratic risk as a component driving conditional abnormal returns and outlines a corresponding Engle et al. [Econometrica 55 (1987) 391] ARCH-M market model. An application is given to initial public offering (IPO) aftermarket stock returns, where a positive relation between idiosyncratic risk and returns is consistent with young issues’ equity as a contingent claim on firm assets. The empirical results for an illustrative sample of German Neuer Markt stocks traded during the first two years after initial listing indicate pronounced skewness as well as a positive relation between conditional idiosyncratic risk and expected returns. Conditioning aftermarket performance on risk yields much lower levels of abnormal return significance than a standard approach.     

Cash holdings,risk, and expected returns

In this paper I develop and empirically test a model that highlights how the correlation between cash flows and a source of aggregate risk affects a firm's optimal cash holding policy. In the model, riskier firms (i.e., firms with a higher correlation between cash flows and the aggregate shock) are more likely to use costly external funding to finance their growth option exercises and have higher optimal savings. This precautionary savings motive implies a positive relation between expected equity returns and cash holdings. In addition, this positive relation is stronger for firms with less valuable growth options. Using a data set of US pubic companies, I find evidence consistent with the model's predictions.     

The Impact on UK Acquirers of Domestic, Cross‐border, Public and Private Acquisitions

Abstract:   We examine the announcement and post‐acquisition share returns of UK acquirers in over 4,000 acquisitions of domestic, cross‐border, public and private targets. Domestic public acquisitions result in negative announcement and post‐acquisition returns, whilst cross‐border public acquisitions result in zero announcement returns and negative post‐acquisition returns. In contrast, both domestic and cross‐border private acquisitions result in positive announcement returns and zero post‐acquisition returns. The main differences between private and public acquisitions are that glamour acquirers underperform in public acquisitions but not in private acquisitions, and that acquirers using noncash methods of payment underperform in domestic public acquisitions but not in domestic private acquisitions. Overall, cross‐border acquisitions result in lower announcement and long run returns than domestic acquisitions. In cross‐border acquisitions, those involving high‐tech firms perform relatively well, as do those with low national cultural differences.     

Cross-sectional dispersion and expected returns

This study investigates whether the cross-sectional dispersion of stock returns, which reflects the aggregate level of idiosyncratic risk in the market, represents a priced state variable. We find that stocks with high sensitivities to dispersion offer low expected returns. Furthermore, a zero-cost spread portfolio that is long (short) in stocks with low (high) dispersion betas produces a statistically and economically significant return. Dispersion is associated with a significantly negative risk premium in the cross section (–1.32% per annum) which is distinct from premia commanded by alternative systematic factors. These results are robust to stock characteristics and market conditions.     

Earnings volatility,ambiguity, and crisis-period stock returns

Financial crises are marked by substantial increases in ambiguity where prices appear to decouple from fundamentals. Consistent with ambiguity-based asset pricing theories, we find that ambiguity concerns are more severe for firms with higher earnings volatility, causing investors to demand a higher ambiguity premium for such firms. While there is no relation between earnings volatility and stock returns under normal conditions, there is a significant negative relation between crisis-period stock returns and prior earnings volatility. The effect is stronger in firms with low institutional ownership and low analyst following, consistent with ambiguity concerns being greatest amongst firms with unsophisticated investors.     

Stock market volatility, excess returns, and the role of investor sentiment

Using the Investors' Intelligence sentiment index, we employ a generalized autoregressive conditional heteroscedasticity-in-mean specification to test the impact of noise trader risk on both the formation of conditional volatility and expected return as suggested by De Long et al. [Journal of Political Economy 98 (1990) 703]. Our empirical results show that sentiment is a systematic risk that is priced. Excess returns are contemporaneously positively correlated with shifts in sentiment. Moreover, the magnitude of bullish (bearish) changes in sentiment leads to downward (upward) revisions in volatility and higher (lower) future excess returns.     

Monetary policy,bond returns and debt dynamics

Using the government׳s intertemporal budget constraint, we quantify the contribution of returns paid on the U.S. government׳s debt portfolio to the evolution of the debt-to-GDP ratio. We show that announcements of unconventional monetary policy measures by the Federal Reserve between 2008.IV and 2012, as a part of macroeconomic stabilization, were associated with a sizable increase in returns and debt-to-GDP ratios and contributed to fiscal imbalances. We use the Federal Reserve׳s portfolio composition as a proxy for unconventional monetary policy measures and show that it is significantly related to future bond returns and fiscal balances.     

Capital gains taxation and shareholder wealth in takeovers

Before December 1999, the capital gains of shareholders who sold their shares into Australian takeovers have been taxable irrespective of payment method. Subsequently, shareholders can elect to rollover capital gains in equity takeovers. We examine the effect of this change on the association between target shareholder capital gains and bidder and target firm shareholder wealth. The results indicate that prior to the regulatory change, cash consideration results in higher target shareholder returns for non‐taxation reasons. After the introduction of capital gains tax rollover relief, we find that target and acquiring firm shareholders earn lower returns when cash consideration is offered to shareholders with greater capital gains.     

Time-dependent lottery preference and the cross-section of stock returns

Highlighting the importance of benchmark to identify lottery-like payoffs of stocks, this study proposes that investors’ lottery preference is formed toward tracking stocks’ performance over time. Accordingly, we develop a strategy based on time-dependent maximum daily return (denoted as TMAX) by buying (short selling) stocks with the most recent maximum daily returns (MAX) ranked in the bottom (top) decile of the historical distribution. The TMAX strategy generates significant premium that subsumes the profitability of Bali, Cakici, and Whitelaw’s (2011) MAX strategy, but not vice versa. A major advantage of the TMAX strategy is its time-invariant profitability across different periods and sentiment states. Further analyses show that the TMAX premium can be explained by shorting flow and behavioral theories, supporting the time-dependent feature of lottery preference.     

Cash holdings,costly financing and the q theory of returns

I add cash holdings into an investment-based model of stock returns. I motivate cash holdings via costly outside financing. The model shows a relation between stock returns and cash holdings and provides a structural foundation for estimating the value of cash holdings from regressions. I estimate the model at the firm level—a task notoriously difficult for q theoretic models. Adding cash into the model substantially improves model fit on average, and accounting for costly investment and financing help improve fit across firms.     

The relative pricing of European dividend futures and their predictive abilities for index returns

We use dividend futures prices to derive a dividend future discount model. Arbitrage arguments postulate that the sum of discounted dividend futures prices should equal the index price, i.e. the sum of discounted dividends. We analyze whether this relation holds and find that the two valuation approaches lead to a different valuation of expected dividends. These observations indicate that dividend futures and index prices seem to provide the investor with different information on future dividends. We further show that the difference in valuation can be used to forecast index returns and show how an investment strategy can exploit this predictability.