Shareholder wealth effects of M&A withdrawals

This paper provides evidence on the wealth effect in the event of the withdrawal of a merger or acquisition, and the impact of termination fee provisions on acquirer withdrawal returns. I report a significant negative correlation between acquirer withdrawal returns and announcement returns, consistent with the theory of managerial learning in M&As. Target firms reap net gains in deal withdrawals, showing evidence of a permanent revaluation of targets even if the deals fail. I also find that acquirer termination fee provisions are positively associated with acquirer withdrawal returns, suggesting that such provisions may play a disciplinary role in the withdrawal decision-making and protect acquirer shareholders’ interests in deal withdrawals. Furthermore, my results also show that target termination fee provisions are negatively associated with acquirer withdrawal returns, which supports the efficiency hypothesis.

     

Shareholder activism and voluntary disclosure

We examine the relation between shareholder activism and voluntary disclosure. An important consequence of voluntary disclosure is less adverse selection in the capital markets. One class of traders that finds less adverse selection unprofitable is activist investors who target mispriced firms whose valuations they can improve. Consistent with this idea, we find that managers issue earnings and sales forecasts more frequently when their firm is more at risk of attack by activist investors, and that these additional disclosures reduce the likelihood of becoming an activist’s target. These additional disclosures also prompt a positive price reaction, contain more precise guidance, and exceed prevailing market expectations. These findings imply that managers use voluntary disclosure to preempt activism at their firm, and that activists prefer to target relatively opaque firms.     

Shareholder wealth effects of rights issues: Evidence from the New Zealand capital market

This study examines security price reaction to the announcement of rights issues by New Zealand firms between 1976 and 1994. Over this period, price reaction to rights issue announcements in New Zealand was significantly negative. The price reaction to the announcement was more negative for underwritten compared to non-underwritten rights issues. The evidence suggests non-underwritten rights issues have higher expected participation in the issue by existing shareholders. The results are broadly consistent with the adverse selection cost arguments of Eckbo and Masulis [Eckbo, B.E., Masulis, R.W., 1992. Adverse selection and the rights offer paradox. Journal of Financial Economics 32, 293–332] and help further explain the rights offer paradox whereby firms in a small capital market, like New Zealand, continue to rely on rights issues to raise new equity. Price reaction to the rights issue announcement was also more negative the larger the relative issue size. This result supports both the adverse selection cost and information asymmetry arguments of Krasker [Krasker, W.S., 1986. Stock price movements in response to stock issues under asymmetric information. Journal of Finance 41, 93–105] and the signaling framework hypothesis of Miller and Rock [Miller, M.H., Rock, K., 1985. Dividend policy under asymmetric information, Journal of Finance 40, 1031–1051].     

Shareholder wealth effects of interstate banking: The case of Delaware's Financial Center Development Act

The Financial Center Development Act (FCDA) of Delaware was signed into law in March 1981, to permit out-of-state bank holding companies (BHCs) to establish special purpose banking subsidiaries within the state of Delaware. The FCDA can be viewed as part of the growing national trend toward interstate banking. If interstate banking is to succeed, the benefits from BHCs establishing interstate subsidiaries must be consistent with the welfare of the BHCs shareholders. The purpose of this study is to determine the impact on shareholder wealth of the decision by BHCs to establish subsidiaries within the state of Delaware. Using event study methodology, the results from this study show that the decision to establish a special purpose banking subsidiary within the state of Delaware under the FCDA is consistent with the maximization of shareholder wealth.Funding for this research was made available by the University of Delaware General Research Fund. The authors thank Paul Horvitz, Kevin Scanlon, Ron Watson, and David Walker for helpful comments.     

Shareholder activism of public pension funds: The political facet

This paper studies the political incentive of public pension funds in shareholder activism. Using a sample of shareholder proposals from 1993 to 2013 and a hand-collected data set of the political variables of public pension funds, we document evidence consistent with the “political attention hypothesis.” We find that the number of politicians on public pension fund boards is significantly positively related to the frequency with which portfolio firms are targeted. Moreover, the frequency of social-responsibility proposals by public pension funds increases significantly, as the funds have a greater number of board members running for election to public office. However the frequency of corporate governance proposals is not related to the number of board members running for elections to public office. Furthermore, we document that political connection between a portfolio firm and a public pension fund mitigates the firm’s likelihood of being targeted by the fund with social-responsibility proposals. This result supports the “political contribution hypothesis.” The paper provides direct evidence that public pension-fund board members employ shareholder proposals to enhance their political capital.     

Shareholder wealth effects and bid negotiation in freeze-out deals: Are minority shareholders left out in the cold?

This paper examines the shareholder wealth effects of bids by controlling shareholders seeking to acquire the remaining minority equity stake in a firm, deals commonly referred to as minority freeze-outs. Minority claimants in freeze-out offers receive an allocation of deal surplus at the bid announcement that exceeds their pro rata claim on the firm. An analysis of bid outcomes and renegotiation indicates that minority claimants and their agents exercise significant bargaining power during freeze-out proposals. Overall, our results suggest that legal standards and economic incentives are sufficient to deter self-dealing by controllers during freeze-out bids.     

Shareholder wealth,information signaling and the specially designated dividend: An empirical study

This paper examines common stock returns and dividend and earnings patterns surrounding specially designated dividends labeled by management as ‘extra’, ‘special’ or ‘year-end’ and compares them to those surrounding regular (unlabeled) dividend increases. The results support the notion that management uses the labeling of dividend increases to convey information to the market about the future potential of the firm. Unlabeled increases appear to contain the most positive information. Contrary to the sometimes suggested view, specially designated dividends appear to convey positive information about future dividends and earnings beyond that relating to the current period.     

The wealth effects of shareholder-sponsored proposals

Shareholder-sponsored proposals represent direct attempts to improve the operating and governance performance of publicly held corporations. This study examines the different types of shareholder proposals to determine their impact on value. While some recent studies show positive wealth effects for small or specific samples associated with shareholder proposal announcements or no wealth effects at all, this study documents significant negative abnormal returns for a large sample of firms. The results of previous studies suggest that shareholder proposals are beneficial to shareholders, and this study shows that to be true for only a fraction of them. Although management opposes the overwhelming majority of shareholder proposals, there are rare instances in which they either support the proposal and negotiate a settlement or in which the proposal receives enough support at the annual meeting to pass. This study documents positive abnormal returns for these cases.     

Divestitures,wealth effects and corporate governance

We analyse the market reaction to divestiture decisions and determine the impact of corporate governance practices. We find the market reaction is significant and can be determined using internal governance mechanisms. We evaluate the determinants of the decision to sell using a control sample of firms displaying characteristics often associated with divestitures indicating that these firms may face the same incentives to divest but elect not to restructure in this manner. Our results suggest that a combination of strong internal and external governance may force managers to act in a manner that is incompatible with their personal desires.     

Bank shareholder wealth effects of California's proposition 103

Proposition 103, approved by California voters on November 8, 1988, allows California state-chartered banks to become vendors of life, health, and property-liability insurance products. It is hypothesized that such a regulatory realignment should have resulted in a wealth increase for California state-chartered banks. An examination of the market response among these banks indicates a statistically significant positive stock price response on the dates of passage of Proposition 103 and a subsequent Supreme Court ruling upholding its constitutionality.     

Leverage,governance and wealth effects of asset purchasers

We examine a sample of 670 firms that announce asset purchases. We hypothesize that buyer announcement returns should be higher in the presence of better monitoring and better governance. Consistent with the monitoring hypothesis, we find that buyers with higher private debt make purchase decisions that increase shareholder value. Consistent with the governance hypothesis, we find that returns are higher for buyers that have lower antitakeover provisions in place. Consistent with the managerial discretion hypothesis, buyer announcement-period returns increase with buyer leverage. Consistent with the liquidity hypothesis, we find that announcement-period returns decrease with the seller's Z-score, suggesting that buyers benefit from the lower liquidity of assets sold by sellers with lower debt capacity and higher financial distress. We also find that buyer announcement-period returns are directly related to their operating performance in the post-purchase year.     

The wealth effects of portfolio rebalancing in emerging equity markets

This paper analyzes the wealth effects of alternative portfolio rebalancing strategies for equity investments in nine emerging markets for the period from 1976 to 1998. The choice of rebalancing intervals has a large effect on wealth accumulation and the geometric mean return. The difference between no rebalancing and semi-annual rebalancing is 5.87 percentage points per year. Surprisingly, semi-annual rebalancing, which was optimal for this data set, was also 2.62 percentage points per year better than monthly rebalancing. Positive first- and second-degree autocorrelation among the monthly returns appears to account for the decrease in returns for rebalancing more frequently than semi-annually.     

An examination of the wealth effects of share repurchases on bondholders

While reports in the financial press suggest that share repurchases are harmful to bondholders, academic studies report conflicting empirical evidence. Using newly available daily bond data (versus monthly data used in existing studies) and modern methods of analysis, we find no evidence of bondholder wealth expropriation. Merton (1974) model estimates of changes in the value of debt during share repurchases and changes in credit ratings following share repurchases produce no evidence of bondholder wealth expropriation. Overall, we find no evidence that repurchases measurably harm bondholders, suggesting concerns raised in the financial press are unfounded.     

The wealth effects of takeover bids regulation in the European Union

We investigate the wealth effects of the Takeover Bids Directive, enacted by the European Union (EU), on mergers and acquisitions. The directive aims at protecting target minority shareholders by restricting antitakeovers provisions and preventing managerial entrenchment. We test the regulation impact using a treatment sample of EU public acquisitions and a control sample from outside the EU. Our results suggest diverse effects of the regulation across treatment countries: acquirers from countries with better shareholder protection engage in more value-enhancing acquisitions postregulation that could otherwise be too costly. The regulation also increases the likelihood of firms becoming targets and raises market value.     

Uncertainty during tender offers and the measurement of shareholder wealth effects

Uncertainty concerning the ultimate outcome of tender offers may affect the measurement of changes in shareholder wealth. The uncertainty regarding the outcome of tender offers is measured by estimating the probability of acceptance of tender offers during the period when the tender offers are outstanding. The estimated probability of acceptance of tender offers implies that the amount of uncertainty prior to knowledge of the ultimate outcome is substantial and affects the measurement of expected equity gains. The uncertainty-adjusted measure of the change in shareholder wealth indicates that previous studies may have underestimated the gains expected to result from tender offers.     

Shareholder election of CSR committee members and its effects on CSR performance

We examine the election of directors to corporate social responsibility (CSR) committees and whether shareholder votes influence CSR committee effectiveness. Our study is motivated by the importance that shareholders place on CSR and the responsibilities of the board in overseeing a firm's CSR practices. We find that CSR committee members receive greater shareholder support than other directors. We further find that among CSR committee members, those who are more experienced and skilled receive greater shareholder support. Furthermore, when a firm's CSR performance is poorer (better), CSR committee members receive lower (greater) shareholder support compared with other directors. Finally, we find that through voting, shareholders can increase the efficacy of the CSR committee, leading to improvements in CSR committee structure and performance. Overall, our results suggest that shareholders value the services and expertise of CSR committee members and hold them accountable for CSR performance. Shareholder votes are also effective in enhancing CSR performance.     

A comprehensive examination of the wealth effects of recent stock repurchase announcements

The main purpose of this paper is to examine the wealth effect of stock repurchase announcements using a sample of 11,862 repurchase programs announced during 1994–2007. The results of several recent industry surveys indicate that managerial motivations for repurchasing shares may have changed in recent years. To better understand the reasons for repurchasing shares we classify our sample in various ways—by year, by the method used for repurchasing shares, and by the stated purpose of the program. We find that the median size of firms repurchasing shares has increased dramatically recently, and concomitantly, the announcement returns have declined. Signaling undervaluation of share prices appears to become less important than previously assumed. While smaller firms signal undervaluation using open market repurchases, tender offers are chosen to enhance shareholder values by other means.     

The wealth effects of real estate transactions: The case of REITs

Recent literature analyzing corporate acquisitions and sales of real estate has shown that statistically significant gains accrue to both buyers and sellers when the transaction is announced. In this paper, we focus solely on the real property transactions of tax-qualified Real Estate Investment Trusts (REITs) to determine if REIT shareholders experience a similar pattern of positive wealth effects. We find that REITs do not experience any significant wealth effects from transaction announcements. However, we provide evidence that a significant positive wealth effect does occur upon the announcement of a sale transaction when the sale is associated with an increase in REIT dividends.     

Investment bank reputation and shareholder wealth effects in mergers and acquisitions

This paper investigates the relationship between the reputation of investment banks employed in mergers and acquisitions transactions and the resulting wealth effects. Two hypotheses are tested: the superior deal hypothesis, stating that high reputation advisors suggest deals with higher overall transaction gains; and the bargaining advantage hypothesis, stating that the larger share of transaction benefits is attributed to the party employing a highly reputed advisor. Evidence from 285 European M&A-transactions announced between 1997 and 2002 does not support any of these hypotheses. On average, wealth effects are not significantly different for transactions advised by different advisor tiers.     

Going private transactions,bondholder returns,and wealth transfer effects

We examine how buyout activity and deal characteristics drive bondholder returns and the wealth transfer effects between bondholders and stockholders in going private transactions from 1981 to 2006. We find that various deal characteristics are major determinants of the cross-sectional variation in bondholder returns. In particular, a single private equity acquirer mitigates bondholder losses. On the other hand, bondholders have larger losses when a reputable buyout firm is involved in the deal. Bondholders experience losses in the 1980s and 2000s, but enjoy gains in the 1990s. Our findings remain robust to consideration of deal financing, relative cost of credit, and level of market overheating. We find a negative and significant relationship between stockholder and bondholder wealth effects, which supports the wealth transfer hypothesis.