The effect of changes in ownership structure on performance: Evidence from the thrift industry

Restrictions on stock ownership may harm a company's performance, because restrictions prevent owners from choosing an optimal structure. We examine the stock-price performance and ownership structure of a sample of thrift institutions that converted from mutual to stock ownership. We find that after conversion and the expiration of ownership-structure restrictions, firm performance improves significantly, and the portions of the firm owned by managers and the firm's employee stock ownership plan increase. Changes in performance are positively associated with changes in ownership by managers, but negatively associated with changes in ownership by employee stock ownership plans.     

Are liquidity and corporate control priced by shareholders? Empirical evidence from Swiss dual class shares

Stadard asset pricing models generally exclude corporate control and liquidity considerations as joint explanatory factors of the stock price formation process. This empirical study investigates their influence on Swiss Bearer and Registered share prices issued by the same firm. It is shown that the statistical properties of both shares' returns differ without implying profitable arbitrage opportunities. A multifactor model of the ‘premium’ between Bearer and Registered stock prices is then proposed and tested. The results show that the freely negotiable equity book value, the existence of dominant shareholder positions and ownership transfer regime changes are significant variables in explaining the dual class share price differential.     

Are there monitoring benefits to institutional ownership? Evidence from seasoned equity offerings

We provide new evidence on the monitoring benefits from institutional ownership by analyzing the impact of institutional ownership on stock price and operating performance following seasoned equity offerings, a setting where the effects of monitoring are likely to be especially important. We find that announcement returns are positively and significantly related to total and active institutional ownership levels and concentration. Post-issue stock returns are positively and significantly related to the contemporaneous post-issue changes in total and active institutional ownership and the concentration of their shareholdings. Operating performance improvements are also related to institutional monitoring in the one, two, and three years following the equity issue. Our results continue to hold even after accounting for the possibility that institutional investors have an informational advantage that enables them to identify and invest in subsequently better performing firms. We also empirically eliminate the possibility that our findings are driven by institutions buying past winners and selling past losers as a way to window-dress their portfolio holdings.     

Liquidity, analysts, and institutional ownership

In this paper, we investigate the empirical relationship between institutional ownership, number of analysts following and stock market liquidity. We find that firms with larger number of financial analysts following have wider spreads, lower market quality index, and larger price impact of trades. However, we find that firms with higher institutional ownership have narrower spreads, higher market quality index, and smaller price impact of trades. In addition, we show that changes in our liquidity measures are significantly related to changes in institutional ownership over time. These results suggest that firms may alleviate information asymmetry and improve stock market liquidity by increasing institutional ownership. Our results are remarkably robust to different measures of liquidity and measures of information asymmetry.     

Stock repurchases: How firms choose between a self tender offer and an open-market program

In practice, open-market stock repurchase programs outnumber self tender offers by approximately 10–1. This evidence is puzzling given that tender offers are more efficient in disbursing free cash and in signaling undervaluation – the two main motivations suggested in the literature for repurchasing shares. We provide a theoretical model to explore this puzzle. In the model, tender offers disburse free cash quickly but induce information asymmetry and hence require a price premium. Open-market programs disburse free cash slowly, and hence do not require a price premium, but because they are slow, result in partial free cash waste. The model predicts that the likelihood that a tender offer will be chosen over an open-market program increases with the agency costs of free cash and decreases with uncertainty (risk), information asymmetry, ownership concentration, and liquidity. These predictions are generally consistent with the empirical evidence.     

Trading frequency and asset pricing on the London Stock Exchange: Evidence from a new price impact ratio

This study proposes a new price impact ratio as an alternative to the widely used Amihud’s (2002) Return-to-Volume ratio. We demonstrate that the new price impact ratio, which is deemed Return-to-Turnover ratio, has a number of appealing features. Using daily data from all stocks listed on the London Stock Exchange over the period 1991–2008, we provide overwhelming evidence that this ratio, while being unequivocal to construct and interpret, is also free of a size bias. More importantly, it encapsulates the stocks’ cross-sectional variability in trading frequency, a relatively neglected but possibly important determinant of stock returns given the recently observed trends in financial markets. Overall, our findings argue against the conventional wisdom that there is a simple direct link between trading costs and stock returns by strongly suggesting that it is the compound effect of trading frequency and transaction costs that matters for asset pricing, not each aspect in isolation.     

Large Shareholders,the Board of Directors and the Allocation of Cash Proceeds from Corporate Asset Sell‐offs

Recent finance literature suggests that managers of divesting firms may retain cash proceeds from corporate asset sell‐offs in order to pursue their own objectives, and, therefore, shareholders' gains due to these deals are linked to a distribution of proceeds to shareholders or to debtholders. We add to this literature by examining the role of various corporate governance mechanisms in the context of the allocation of sell‐off proceeds. Specifically, we examine the impact of directors' share‐ownership and stock options, board composition and external large shareholdings on (1) shareholders' abnormal returns around asset sell‐off announcements, and (2) managers' decision to either retain or distribute (to shareholders or to debtholders) sell‐off proceeds. We find that non‐executive directors' and CEO's share‐ownership and stock options are related to shareholders' gains from sell‐offs for firms that retain proceeds. However, corporate governance mechanisms are not significantly related to shareholders' gains for firms that distribute sell‐off proceeds. Furthermore, we find that the likelihood of a distribution of proceeds, relative to the retention decision, is increasing in large institutional shareholdings, executive and non‐executive directors' share‐ownership and non‐executive representation in the board.     

Information in balance sheets for future stock returns: Evidence from net operating assets

In this paper, we show that the negative relation of net operating assets (NOA) with future stock returns first documented by Hirshleifer et al. (2004) applies to both net working and investing pieces of NOA, while it is mostly driven by asset NOA components. Predictability of returns is significant only for their unexpected parts (unrelated to past sales growth) and not uniform across different industries. We also find that only high (low) NOA firms with asset expansion (contraction) and weak (strong) background of profitable investments exhibit negative (positive) abnormal returns. Our evidence suggests that the NOA anomaly may be present due to a combination of opportunistic earnings management and agency related overinvestment.     

Diversification and ownership concentration

If controlling shareholders can divert profits, equity ownership is more concentrated the higher the stock returns correlation. A higher returns correlation reduces the benefits of diversification, giving rise to both a higher investment by the controlling shareholder in the asset that he controls and a lower investment by the non-controlling shareholders. The empirical analysis supports the predictions of the model: equity ownership is more concentrated in countries where the stock returns correlation is higher; moreover the intensity of the relationship between the stock returns correlation and ownership concentration is amplified by poor investor protection.     

CEO incentive plans and corporate liquidation policy

To investigate CEOs' incentives to liquidate their firms, we examine the effects of insider ownership and compensation in stock options on 30 voluntary liquidation decisions by industrial firms in the period 1975–1986. We find that liquidation decisions are influenced by CEO incentive plans and increase shareholder value. Firms with more outside board members, smaller market-to-book ratios, and attempts by outsiders to gain control are more likely to be liquidated. Although few top executives of liquidating firms subsequently take comparable jobs, at least 41% of CEOs who downsize are made better off by liquidation.     

Locals, foreigners, and multi-market trading of equities: Intraday evidence from Thailand

We study stock market orders and trades in a developing country, Thailand, where foreign ownership limits partially segment local and foreign investors into two distinct markets. Some foreigners forgo voting rights and distributions to trade on the “local board”, while some locals forgo such benefits and pay a price premium to trade on the “foreign board”. Regardless of nationality, these cross-market traders typically submit orders when liquidity is high, fill orders at relatively beneficial prices, exploit patterns in stock prices across markets, display profitable holding-period returns, and enhance price discovery. This suggests that skilled, informed trading that affects market quality does not depend on trader nationality.     

Local ownership as private information: Evidence on the monitoring-liquidity trade-off

We investigate how ownership patterns affect the way the firm is monitored, the liquidity of its shares, and its stock price. We show that informed ownership improves governance and induces value-enhancing decisions (less over-investment and fewer but better acquisitions). At the same time, it increases the adverse selection discount required by less informed investors to trade, reducing the firm's liquidity. Both effects are impounded in the stock price. This explains why ownership seems to be unrelated to performance. Informed investors affect prices in opposite directions: monitoring would raise prices, but the lower liquidity induced by their presence would reduce them.     

The persistent effects of a false news shock

In September 2008, a six-year-old article about the 2002 bankruptcy of United Airlines' parent company resurfaced on the Internet and was mistakenly believed to be reporting a new bankruptcy filing by the company. This episode caused the company's stock price to drop by as much as 76% in just a few minutes, before NASDAQ halted trading. After the “news” had been identified as false, the stock price rebounded, but still ended the day 11.2% below the previous close. We explore this natural experiment by using a simple asset-pricing model to study the aftermath of this false news shock. We find that, after three trading sessions, the company's stock was still trading below the two-standard-deviation band implied by the model and that it returned to within one standard deviation only during the sixth trading session. On the seventh day after the episode, the stock was trading at the level predicted by the asset-pricing model. We investigate several potential explanations for this finding, but fail to find empirical evidence supporting any of them. We also document that the false news shock had a persistent negative effect on the stock prices of other major airline companies. This is consistent with the view that contagion effects would have dominated competitive effects had the bankruptcy actually taken place.     

The economic value of range-based covariance between stock and bond returns with dynamic copulas

The covariance between stock and bond returns plays important roles in the setting up of asset allocation strategies and portfolio diversification. In the present study, we propose a multivariate range-based volatility model incorporating dynamic copulas into a range-based volatility model to describe the volatility and dependence structures of stock and bond returns. We then go on to assess the economic value of the covariance forecasts based on our proposed model under a mean-variance framework. The out-of-sample forecasting performance reveals that investors would be willing to pay between 39 and 2081 basis points per year to switch from a dynamic trading strategy under the return-based volatility model to a dynamic trading strategy under the range-based volatility model, with more risk-averse investors being willing to pay even higher switching fees. Furthermore, additional economic gains of between 33 and 1471 annualized basis points are achieved when taking the leverage effect into consideration.     

Do optimal diversification strategies outperform the 1/N strategy in U.K. stock returns?

This paper examines whether optimal diversification strategies outperform the 1/N strategy in U.K. stock returns. The study focuses on the performance of recent strategies developed by Tu and Zhou (2011) and Kirby and Ostdiek (2010). I find that a number of optimal asset allocation strategies can significantly outperform the 1/N strategy even after adjusting for trading costs. The strategies developed by Kirby and Ostdiek outperform the 1/N strategy, even at higher trading costs, due to the low turnover of these strategies. The strategies of Tu and Zhou have mixed performance after adjusting for trading costs due to the high turnover of these strategies. The results of the paper provide support for the use of optimal diversification strategies.     

IS THE BOOK‐TO‐MARKET RATIO A MEASURE OF RISK?

We develop a leverage‐based alternative to traditional asset pricing models to investigate whether the book‐to‐market ratio acts as a proxy for risk. We argue that the book‐to‐market ratio should act as a proxy because of the expected relations between (1) financial risk and measures of capital structure based on the market value of equity and (2) asset risk and measures of capital structure based on the book value of equity. We find no relation between average stock returns and the book‐to‐market ratio in all‐equity firms after controlling for firm size, and an inverse relation between average stock returns and the book‐to‐market ratio in firms with a negative book value of equity.     

Endogenous leverage and expected stock returns

This note clarifies conditions under which endogenous choice of debt induces a negative relation between leverage or default risk and expected stock returns. In the context of the model of George and Hwang [2009. Journal of Financial Economics 96, 56–79], we correct the contention that variation in bankruptcy costs across firms is sufficient. Variation in asset risk parameters can lead to the desired relation, but may not when also controlling for variation in book-to-market ratios. A simple parameterization of cross-sectional heterogeneity in risk and profitability implies a negative association of expected return with leverage and distress risk and a positive association with book-to-market.     

Extreme dependence with asymmetric thresholds: Evidence for the European Monetary Union

Existing papers on extreme dependence use symmetrical thresholds to define simultaneous stock market booms or crashes such as the joint occurrence of the upper or lower one percent return quantile in both stock markets. We show that the probability of the joint occurrence of extreme stock returns may be higher for asymmetric thresholds than for symmetric thresholds. We propose a non-parametric measure of extreme dependence which allows capturing extreme events for different thresholds and can be used to compute different types of extreme dependence. We find that extreme dependence among the stock markets of ten initial EMU member countries, the United Kingdom, and the United States is largely asymmetrical in the pre-EMU period (1989–1998) and largely symmetrical in the EMU period (1999–2010). Our findings suggest that ignoring the possibility of asymmetric extreme dependence may lead to an underestimation of the probability of co-booms and co-crashes.     

Stabilizing non-fundamental asset price movements under discretion and limited information

Inflation, output and interest rate stabilization are all potential central bank objectives. We explore whether monetary policy should respond to asset price fluctuations when they are driven by irrational expectational shocks to the future returns to capital. In our model, an optimistic shock to future returns generates both an increase in equity prices and physical investment. The increased investment is inefficient and, thus, a central bank optimally responds to this expectations shocks. This induces a trade-off between stabilizing nominal prices and non-fundamental asset price movements. We compare the optimal policy under different assumptions: full versus limited information and commitment versus discretion. If the central bank has limited information about whether an asset price movement has a fundamental or non-fundamental origin, then the central bank responds less aggressively to the non-fundamental exuberance shocks than under full information. Without commitment, a central bank responds more aggressively to non-fundamental exuberance shocks.