Accruals, Cash Flows and the Post‐Earnings‐Announcement Drift

Abstract:   Several prior studies have shown that cash flows have significantly greater impact on stock prices than accruals. We examine the implications of these findings for the post‐earnings‐announcement‐drift anomaly. We argue that, if investors under‐react to earnings news, then the larger price impact of cash flows causes the cash flow component of earnings news to predict future returns better than the accruals component. Consistent with this argument, we show that unexpected cash flows are more positively related to future returns, than are unexpected accruals. Also, unexpected cash flows are found to predict future returns above and beyond that predicted by earnings surprises. Finally, we show that a strategy that decomposes earnings news into its components significantly outperforms strategies based on earnings news alone. The results support under‐reaction explanations for the drift.     

Odd‐lot Costs and Taxation Influences on Stock Dividend Ex‐dates

Abstract:   Past research has revealed significant abnormal ex‐date returns for stock dividends even though the ex‐date is known in advance and the distribution contains no new information. Various researchers have suggested that the higher transaction cost of selling odd‐lot share parcels compared to round‐lot share parcels is a key driver in the abnormal returns. However, no study to date has directly compared the ex‐date price reaction of stock dividends distributed when odd‐lot transaction costs were charged to those issued when odd‐lot costs were not evident. As odd‐lot trade costs were eliminated from the New Zealand Stock Exchange on 1 October, 1991, the New Zealand market provides a unique opportunity to directly test the role, if any, that odd‐lot transactions costs have in explaining stock dividend ex‐date returns. We find that prior to October 1991 stock dividend ex‐dates exhibit significantly positive returns, however, we do not find any significant ex‐date return once the higher odd‐lot transaction costs were removed. The New Zealand market also enables us to examine an imputation tax based argument of the ex‐date price reaction and we find evidence that imputation tax credits have a value greater than zero.     

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.     

Re‐assessing the long‐term underperformance of UK Initial Public Offerings

Previous work has identified that IPOs underperform a market index, and the purpose of this paper is to examine the robustness of this finding. We re‐examine the evidence on the long‐term returns of IPOs in the UK using a new data set of firms over the period 1985–92, in which we compare abnormal performance based on a number of alternative methods including a calendar‐time approach. We find that, using an event‐time framework, there are substantial negative abnormal returns to an IPO after the first 3 years irrespective of the benchmark used. However, over the 5 years after an IPO, abnormal returns exhibit less dramatic underperformance, and the conclusion on negative abnormal returns depends on the benchmark applied. Further if these returns are measured in calendar time, we find that the (statistical) significance of underperformance is even less marked.     

CAPM, Higher Co‐moment and Factor Models of UK Stock Returns

In this paper we examine the variables that explain the cross‐section of UK stock returns. Previous studies have found that the CAPM beta has moderate or even insignificant explanatory power once the Fama French factors are included. However, we control for different realised risk premia in up and down markets by using the same methodology as Pettengill, Sundaram and Mathur (1995). Unlike previous work, we find that beta is highly significant in explaining the cross‐section of UK stock returns and more importantly remains significant even when the Fama French factors are included in the cross‐sectional regressions. We also investigate whether higher co‐moments (co‐skewness and co‐kurtosis) have any explanatory power but find that empirical support is weaker.     

FOREX Risk: Measurement and Evaluation Using Value‐at‐Risk

Abstract:   We measure and evaluate the performance of a number of Value‐at‐Risk (VaR) methods using a portfolio based on the foreign exchange exposure of a small open economy (Ireland) among its trading partners. The sample period highlights the changing nature of Ireland's exposure to risk over the past decade in the run‐up to EMU. Our results offer an indication of the level of accuracy of the various approaches and discuss the issues of models ensuring statistical accuracy or more conservative leanings. Our findings suggest that the Orthogonal GARCH model is the most accurate methodology while the EWMA specification is the more conservative approach.     

The Impact of Mandated Cash Flow Disclosure on Bid‐Ask Spreads

Abstract:   This study provides evidence that mandatory cash flow disclosure required by Approved Australian Accounting Standard AASB 1026, Statement of Cash Flows (June 1992) was associated with a decline in bid‐ask spreads following the introduction of the regulation, even after controlling for changes in trading volume and price volatility. More pronounced decreases in bid‐ask spreads were associated with firms having lower correlations between reported CFO and estimates of CFO using balance sheet reconstructions. We conclude that mandatory cash flow disclosure reduces information asymmetry across market participants.     

Not‐for‐Profit Annual Reports: What do Museum Managers Communicate?

This study addresses: (1) What disclosures are provided in annual reports of not‐for‐profit entities?(2) What characteristics of the reporting entities explain variations in the quantity of financial disclosure?(3) How do not‐for‐profit disclosures compare with those in for‐profit corporate reports? The annual reports of 170 not‐for‐profit museums were examined. The reports were highly variable. Some contained no financial data and only 22 percent included complete financial statements with footnotes. Regression analysis indicated that the amount of museum financial data was positively associated with museum size, a larger number of pages of donor disclosures, and museum type (art and history, but not science, natural history, or general).     

Real‐Time Risk Pricing Over the Business Cycle: Some Evidence for the UK

Abstract:   The fully‐revised data typically utilized in empirical research do not reflect the true information available to financial market participants at the time of their decision‐making. This paper uses a new real‐time macroeconomic dataset to appraise the relative importance of different vintages of data on economic variables as determinants of UK stock returns using the framework of Arbitrage Pricing Theory. We find that two factors influence expected stock returns, namely unanticipated inflation and economic uncertainty, but only when measured in real‐time. Moreover, their pricing influence is only present during phases of the business cycle when their associated risks are at their most prevalent.     

The Wealth Effects of Capital Investment Decisions: An Empirical Comparison of Korean Chaebol and Non‐Chaebol Firms

Abstract:   This paper investigates the capital investment decisions of Korean firms and their impact on shareholder wealth. Overall, we find positive abnormal returns surrounding the announcements of 697 cases of investment projects during the period 1992–1999. This paper also finds that the investment decisions of business group ( chaebol ‐affiliated) firms do not increase shareholder wealth, while the capital investment decisions of non‐ chaebol firms generate significantly positive abnormal returns. The multivariate tests provide consistent evidence that the announcement effects for chaebol firms are lower than for non‐ chaebol firms, after growth opportunities, investment size and firm size are controlled for. The findings support the view that the organizational structure of Korean chaebols creates an incentive for managers to make non‐value maximizing capital investment decisions.     

Board Share‐Ownership and Takeover Performance

Abstract:   We investigate the relation between takeover performance and board share‐ownership in the acquiring company for a sample of 363 UK takeovers completed in the period 1985–96. In investigating this relationship we pay particular attention to the composition of board shareholdings as well as their size. Thus, in addition to the analysis of total board holdings, we analyse the separate impact of CEO shareholdings and of the pattern of non‐executive and executive holdings within the board. In addition to our detailed examination of board holdings we assess the impact of non‐board holdings. Our analysis controls for a number of non‐shareholding constraints on discretionary director behaviour and for a variety of other influences on takeover outcomes including: the means of payment; acquirer size and market to book value; the relative size of the acquirer and the target; the nature of the bid in terms of hostility and industrial direction; and the pre‐takeover performance of the acquiring company. We assess performance in terms of announcement returns, long run share returns and a portfolio of accounting measures. We find evidence that overall board ownership has a strong positive impact on long run share returns and a weak positive impact on operating performance. However, much stronger effects are found when the overall board measure is split into CEO, executive, and non‐executive directors. We find strong evidence of a positive relation between takeover performance and CEO ownership, which holds for both long run returns and operating performance measures. This finding is robust to controlling for other factors that determine takeover performance and holds in a two stage least squares framework that controls for endogeneity effects. Shareholdings of other executive directors, non‐executive directors, and non‐board holdings are found to have no significant effect on takeover performance.     

Signalling and the Long‐run Performance of Spanish Initial Public Offerings (IPOs)

Abstract:   Academic research into firms that have gone public has focused on the study of two anomalies: initial underpricing and long‐run underperformance. We analyse Spanish Initial Public Offerings to provide additional evidence on the long‐run performance of IPOs and its relationship with initial underpricing. Results reveal the existence of negative long‐run abnormal stock returns, in line with the international literature. Long‐run performance presents a positive relationship with underpricing and the volume of funds obtained in seasoned offerings, in consonance with the predictions of Allen and Faulhaber (1989) , Welch (1989) and Grinblatt and Hwang (1989) .     

Scale and the Scale Effect in Market‐based Accounting Research

The nature of the data we usually encounter in market‐based accounting research is such that the results of the regressions of market capitalization on financial statement variables (referred to 'price‐levels' regressions) are driven by a relatively small subset of the very largest firms in the sample. We refer to this overwhelming influence of the largest firms as the 'scale effect'. This effect is more than heteroscedasticity. It arises due to the non‐linearity in the relation between market capitalization and the financial statement variables. We present the case that scale is market capitalization rather than a correlated omitted variable. Since scale is market capitalization, we advocate its use as a deflator in a regression estimated using weighted least squares. This regression overcomes the scale effect and the resultant regression residuals are more economically meaningful. Christie's (1987) depiction of scale is the same as ours but he advocates the use of the returns regression specification in order to avoid scale effects. We agree that returns regressions should be used unless the research question calls for a price‐levels regression.     

Decomposing and Testing Long‐term Returns: an Application on Danish IPOs

An improved method for measuring and testing long‐run returns is proposed. The method adjusts for the right‐skewed distribution of long‐run buy‐and‐hold by decomposing average cross‐sectional buy‐and‐hold returns into mean components and volatility components. The method is applied to initial public offerings in Denmark. The mean‐component under performance of initial public offering stocks compared to the market is 30% and significant after 5 years. Compared to matching firms the under performance of IPO stocks is 13% after 5 years but insignificant.     

Glamour Acquirers, Method of Payment and Post‐acquisition Performance: The UK Evidence

We study the effect of different acquirer types, defined by financial status and their payment methods, on their short and long‐term performance, in terms of abnormal returns using a variety of benchmark models. For a sample of 519 UK acquirers during 1983–95, we examine the abnormal return performance of acquirers based on their pre‐bid financial status as either glamour or value acquirers using both the price to earnings (PE) ratio and market to book value ratio (MTBV). Value acquirers outperform glamour acquirers in the three‐year post‐acquisition period. One interpretation is that glamour firms have overvalued equity and tend to exploit their status and use it more often than cash to finance their acquisitions. As we move from glamour to value acquirers, there is a greater use of cash. Our results are broadly consistent with those for the US reported by Rau and Vermaelen (1998). However, in contrast to their study, we find stronger support for the method of payment hypothesis than for extrapolation hypothesis. Cash acquirers generate higher returns than equity acquirers, irrespective of their glamour/ value status. Our conclusions, based on four benchmark models for abnormal returns, suggest that stock markets in both the US and the UK may share a similar proclivity for over‐extrapolation of past performance, at least in the bid period. They also tend to reassess acquirer performance in the post‐acquisition period and correct this overextrapolation. These results have implications for the behavioural aspects of capital markets in both countries.     

Managements' views on share buy‐backs: an Australian survey

Share buy‐backs are a relatively new concept in the Australian business environment. This study surveys managements' motivations and various other aspects concerning share buy‐back activity. The results reveal that these motivations vary across the five different types of buy‐backs. For on‐market buy‐backs the most relevant motivations are to improve financial performance (i.e., earnings per share) and financial position (i.e., net asset backing per share) followed by signalling of future expectations or underpricing. Interestingly, managements' response regarding the relevant motivations is similar regardless of whether their companies had conducted a buy‐back or not. This provides evidence of widespread support for the relevant motivations. In addition, Australian managers believe that they are familiar with the potential benefits and legislative requirements of buy‐backs, but that their shareholders often do not understand or are not favourably disposed towards buy‐back events. Finally, two major explanations are identified for the initial conservatism towards buy‐backs. Those explanations are (i) legal complexity and cost and (ii) the perceived negative disposition of the sharemarket towards buy‐backs.     

Day‐of‐the‐Week Effect in High Moments

Evidence from equity markets worldwide indicates that the Day‐of‐the‐Week anomaly appears to fade from the first moment of the distribution of daily returns. We report highly significant pair‐wise weekend effects in high moments when comparing the first and last trading days of the week. The second moment alone appears to distinguish the return distribution of the first trading day from all others. A probable explanation of the phenomena appears to be information dissemination: corporate announcements released after closing of the last trading day of the week spill‐over to the opening of the first trading day, increasing its variability and carrying the closing sign.     

The Timeliness of Accounting Write‐Downs by U.S. Financial Institutions During the Financial Crisis of 2007–2008

I examine the timeliness of write‐downs taken by U.S. financial institutions during the financial crisis of 2007–2008. The timeliness of write‐downs is measured by benchmarking the quarterly accounting write‐down schedule with the devaluation schedule implied by exposure‐specific credit indices such as the ABX. The results show that the accounting write‐downs are less timely than the devaluations implied by credit indices. In a cross‐sectional analysis of the determinants of the timeliness of write‐downs, I document that corporate governance quality, regulatory investigations, and litigation pressure are positively related to the timeliness of write‐downs, whereas the write‐downs by firms with higher financial leverage, tighter regulatory constraints, and more complex exposures are less timely. I control for numerous exposure‐specific characteristics and document that less risky exposures and exposures that were affected later during the financial crisis were written down later. Regarding the consequences of timeliness, I find that the exposure to risky assets is reflected faster in stock returns for firms with timelier write‐downs.     

Managements' views on share buy‐backs: an Australian survey

Share buy‐backs are a relatively new concept in the Australian business environment. This study surveys managements' motivations and various other aspects concerning share buy‐back activity. The results reveal that these motivations vary across the five different types of buy‐backs. For on‐market buy‐backs the most relevant motivations are to improve financial performance (i.e., earnings per share) and financial position (i.e., net asset backing per share) followed by signalling of future expectations or underpricing. Interestingly, managements' response regarding the relevant motivations is similar regardless of whether their companies had conducted a buy‐back or not. This provides evidence of widespread support for the relevant motivations. In addition, Australian managers believe that they are familiar with the potential benefits and legislative requirements of buy‐backs, but that their shareholders often do not understand or are not favourably disposed towards buy‐back events. Finally, two major explanations are identified for the initial conservatism towards buy‐backs. Those explanations are (i) legal complexity and cost and (ii) the perceived negative disposition of the sharemarket towards buy‐backs.     

Earnings Conservatism, Litigation and Contracting: The Case of Cross‐Listed Firms

Abstract:   We compare earnings conservatism of UK companies cross‐listed in the US to that of UK companies without a US‐listing. We expect that conservatism will be more pronounced for cross‐listed firms than for firms with a UK listing only, because the cross‐listed firms face a stricter enforcement regime. Furthermore, cross‐listed firms may use a listing on a US exchange to signal high‐quality reporting to investors. Using a matched‐pairs research design, we find that earnings of UK cross‐listed firms are significantly more conservative than earnings of UK firms without a US listing. Moreover, cross listed firms display particularly high levels of conservatism during the early years of their cross‐listing. This indicates that firms use earnings conservatism to commit to highly demanding reporting requirements and in doing so communicate a perception of investor care.