The Operational Hedging Properties of Intangible Assets: the Case of Non–voluntary Foreign Asset Selloffs

In this paper we examine the valuation effects and long–term performance of US multinational firms involved in forced transfers of their foreign operating assets during the 1965–88 period. The evidence suggests that the operational hedging ability of the firm to address country risk (nationalization threats) is related to the level of its intangible assets. While it is well known that firms with high levels of intangible assets prefer foreign direct investment, our results show that intangible assets have hidden properties of protection against country risk as well. We document significantly negative abnormal returns only for divesting firms with low levels of intangible assets, but not for firms with high levels of intangible assets. In addition, we show that low (high) growth firms are involved in partial (complete) withdrawals, and show that the long–term economic performance of firms choosing the complete withdrawal strategy is better than those that opt to remain. We argue that management's attempt to maintain economic links in a hostile foreign environment can be attributed in part to the firm's low growth opportunities, performance, and lack of contingent plans to address country risk.     

Stale and Scale Effects in Markets-Based Accounting Research: Evidence from the Valuation of Dividends

Abstract

This study revisits prior research on the valuation of dividends in an accounting-based valuation framework. Using a battery of tests, we show that market value deflation is essential in market-based tests of dividend displacement and signalling because it controls for ‘stale’ information in addition to scale (size) differences across firms. For US firms, we show that after controlling for ‘stale’ information, the empirical association between dividends and market values switches from positive to negative. This switch is not explained by scale differences across firms. Further, we show that after controlling for staleness, the valuation of dividends remains positive for European firms. This result is explained by the relatively stronger association of dividends with future earnings in these settings (i.e. signalling). Lastly, our country-specific estimates of dividend valuation provide a potentially valuable index for studies aimed at examining the effects of accounting and securities regulation on information asymmetries in an international context.     

Institutional Investment Patterns in Troubled Corporations: A Sociological analysis

A bstract . Classical or neo-classical economic theories do not adequately explain institutional investment patterns in troubled corporations. Macroeconomic perspectives contend that abstract market forces direct investment capital away from troubled companies, and that bankruptcy weeds weak firms out of the economy for the general good. Microeconomic perspectives focus on the seemingly autonomous decisions of firms and their managers, where bad management leads to troubled and bankrupt firms and a corresponding loss of investment in these companies. Neither perspective is useful for understanding recent patterns of institutional investment. A more critical, sociological perspective for understanding these investment patterns has two main threads. First, investment activity is embedded in more general social relationships and cannot be understood strictly on "economic" grounds and with "economic" ideas. Second, social power—rather than abstract market forces —is critical in fostering specific investment patterns. More specifically, the organizational power of large financial firms may be the pivotal factor shaping investment patterns in troubled companies. Recent case studies of troubled and bankrupt corporations demonstrate the usefulness of this more sociological perspective, and suggest areas for future research.     

Corporate entrepreneurship and acquisitions: creating firm wealth

Acquisition is one way entrepreneurial firms have to capture the assets needed to achieve their strategic objectives. We investigate shareholder value creation of Spanish listed firms in response to announcements of acquisitions over the period 1991–2006. Similar to foreign markets, bidders earn insignificant average abnormal returns regardless of the pricing model used in the estimation procedure. When we relate these results to company and transaction characteristics our evidence suggests that the listing status of the target firm is a critical key in the strategic decision to acquire a company. This listing status effect is mainly associated with the fact that unlisted firms tend to be smaller and lesser–known firms, and thus suffer from a lack of competition in the market for corporate control. Consequently, the payment of lower premiums and the possibility of diversifying shareholders’ portfolios lead to unlisted firm acquisitions being viewed as value–orientated transactions which have major implications for managers.     

Synergies and Internal Agency Conflicts: The Double-Edged Sword of Mergers

This paper investigates the interaction between synergies and internal agency conflicts that emerges endogenously in multi-division firms. A divisional manager's entrenchment choice depends directly on the specificity of her division's assets, because the specificity governs whether entrenchment activities reduce the likelihood of her division being divested. The presence of synergies, by modifying the difference between the value of assets in their current use and in alternative uses, may alter the divisional manager's entrenchment incentive. In "the double-edged sword of mergers," synergy and internal agency effects are of opposite sign and merger gains may not be increasing in expected synergies. We characterize when divisions should optimally stand alone and when they should be part of a merged firm. We predict an absence of diversifying mergers in industries plagued by misdeployed assets, offer a novel explanation for the cross-sectional variation in postmerger valuation, and explain why mergers may be valuable ex ante while leading to successful divestitures ex post.     

Information effects of announced stock index additions: evidence from S&P 400

The study examines the information content of press announcements of S&P 400 additions between 2002 and 2007. Prior research into stock index additions has explained the positive valuation effects of additions to S&P indices mostly in terms of the price pressure hypothesis and downward sloping curve hypothesis. The two hypotheses attribute the positive market reaction purely to index-fund buying rather than information effects of announcements. My empirical investigation further reinforces the credibility of the information hypothesis by showing that the market varies its response to added firms depending on the information released about them at the announcement. The analysis demonstrates that the mode of addition, exchange listing, reason for index change, and firm size can modulate valuation effects of stock index additions. The paper also strengthens the argument that announcements of additions to an S&P index contain new signals about the industries represented by the added firms. Positive and significant wealth effects are exclusively attributable to ??non-member?? rival firms. Overall, the results imply that the market discerns and rewards firms that come from outside the S&P universe (pure additions) and rival firms that are not part of a target index.     

Performance following ESOP formations by publicly-held corporations

The study assesses the stock performance of publicly-traded firms following ESOP formations. The results show that ESOPs contributing common stock elicit a more favorable market response than ESOPs contributing convertible preferred stock. This result is consistent with the argument that the convertible preferred contribution reduces the regularity of the repurchase of common shares in the market. Also, ESOPs intended to defend against takeovers elicited no market reaction while other ESOPs elicited a favorable market response. This result supports the hypothesis that ESOPs intended to prevent takeovers may eliminate external market discipline. The study also assesses the long-term performance of firms following ESOP formations to determine whether some hypothesized effects of ESOPs are realized. Results of the analysis suggest that firms experienced favorable long-term valuation effects following the creation of new ESOPs. However, the expansion of existing ESOPs was not as favorable. Differences in the effect can be attributed to the loss of external discipline when an expanded ESOP leads to an increase in proportional ownership. *** DIRECT SUPPORT *** A00HA012 00006     

Value relevance on intellectual capital valuation methods: the role of corporate governance

Development of a knowledge economy has changed the main value of a firm from traditional physical assets to intellectual capital or intangible assets. Therefore, the accumulation and management of intellectual capital is the competitive advantage of knowledge-based industries. Intellectual capital valuation is the essential factor in firm valuation. Scholars have presented valuation methods of intellectual capital, such as Tobin’s Q, Knowledge Capital Earnings (KCE), and Value Added Intellectual Coefficient (VAIC). Management power of modern firms is separate from ownership, and easily occurs in the agency problem; therefore, firms must implement corporate governance to solve this problem. Researchers have presented that a complete appraisal of the firm value includes the effect of corporate governance. This study is the first to apply multi-regression models to examine value relevance on valuation methods of intellectual capital, and to further analyze the role of corporate governance for the information and electronic industry in Taiwan. The results show that Tobin’s Q, KCE, and VAIC have a positive relationship to firm value. The characteristic of director board, including board size, the ratio of outside directors, employed independent directors, and the manager concurrently the director, are correlated with the valuation of intellectual capital.     

Leverage and the price volatility of equity shares in equilibrium

The traditional valuation formulas for corporate debt, which are derived in a complete market setting and are based on the no-arbitrage principle, imply that equity prices become more volatile as leverage increases. If the asset structure is incomplete, the presence of corporate debt affects the linear subspace spanned by the payoffs of the existing assets, and the pricing of corporate debt and shares of levered firms becomes a simultaneous valuation problem. This paper characterizes the relationship between the price of corporate debt and the share price of a levered firm in an equilibrium framework where corporate debt is a non-redundant asset. While, in the absence of bankruptcy, higher leverage always implies riskier equity, it does not necessarily mean more volatile equity prices. In fact, the link between leverage and equity price volatility depends in a particular way on investors’ preferences towards risk.     

The Economic Incentives and Consequences of Land Write-Ups

Firms in Taiwan are allowed to write up their assets when certain conditions are met. Tax benefits from higher depreciation expenses are granted to encourage corporate investment and capital maintenance. Land write-ups, unlike write-ups of depreciable assets, do not generate tax benefits. This paper investigates the economic incentives for firms in Taiwan to write up their land, and the security price reactions to land write-ups.
An analysis of annual financial data for the manufacturing firms listed in the Taiwan Exchange between 1982 and 1992 shows that firms write up their land by a larger amount when raising capital. Firms with relatively higher debt-asset ratios write up their land by a larger amount. Furthermore, the capital raised was invested in working capital or operational assets, but not in securities of other firms. The results suggest that land write-ups may reduce firms' difficulties in raising external capital, and may enhance corporate investments. The result from capital market analysis offers weak evidence that land write-ups are positively correlated with the market adjusted rate of returns of a firm's stock.     

Enhancing Market Valuation of ESG Performance: Is Integrated Reporting Keeping its Promise?

This paper studies the effectiveness of a firm's strategy to report on its ESG activities with regard to the extent and direction in which the firm's ESG performance is valued by capital market investors. It is the first to disentangle the moderating effects of different types of ESG reporting on market valuation of ESG performance and to analyze whether following the current integrated reporting trend is worth the effort. Results indicate that ESG performance is valued more strongly and in the (desired) positive direction when firms publish an ESG report, irrespective of its type (stand‐alone or integrated). Furthermore, integrated reporting is associated with superior outcomes compared with a stand‐alone report for composite ESG and corporate governance performance. Our findings are important for corporate managers, as they help to understand market valuation of ESG performance in dependence on the reporting type and provide guidance for formulating and evaluating the reporting strategy. Copyright © 2016 John Wiley & Sons, Ltd and ERP Environment     

Corporate governance, Sarbanes-Oxley, and small-cap firm performance

The recent debate on the onerous costs of compliance with the Sarbanes-Oxley Act has primarily focused on small firms. I study the effects of SOX compliance on such firms by comparing the performance of Canadian small-cap firms that are subject to SOX provisions with those that are not, while: (a) taking into account firms’ internal and external governance mechanisms, including the market for corporate control, and (b) accounting for the simultaneous interactions between alternative governance mechanisms and firm performance. Firms subject to Sarbanes-Oxley experienced an incremental increase in market valuation ranging between 15.7% and 34% depending on the measure of board independence used in the estimation. Some sub-optimal deployment of the endogenous governance mechanisms is observed, while the market for corporate control serves as a positive disciplining factor.     

Does it pay to be green? A disaggregated analysis of U.S. firms with green patents

The objective of this paper is to investigate the relationship between environmental performance and financial performance on a sample of 361 U.S. firms over the 2007–2016 period. We contribute to the literature by considering firms active in sustainable innovations by obtaining green patents. We also contribute to the literature by using disaggregated measures of environmental performance collected from the Bloomberg ESG database, including environmental disclosure score, greenhouse gas emissions, waste emissions and water use. Panel data regressions' results show that environmental transparency positively influences current accounting and stock market performance, but negatively influences the return on capital employed. Furthermore, lower pollution emissions tend to improve the current return on assets, while being harmful for the efficiency of long‐term capital employment at the same time. The empirical results also indicate that the Global Financial Crisis (2007–2010) increased the environmental transparency of firms with green patents but negatively impacted their price to earnings ratio. At the same time, lower waste disposal diminishes stock valuation while the opposite is true with water use. Taken together, our results suggest that environmental transparency and greenhouse gas emissions generally appear to be the most important environmental variables influencing financial performance, with increasing importance attributed to them by the market after the global crisis period.     

Valuation effects of foreign divestitures

This study assesses announcement period valuation effects of foreign divestitures and explains why these valuation effects vary among firms. Significant positive valuation effects are observed. The valuation effects of foreign divestitures are positive and are similar in magnitude to those of a matched control group of domestic divestitures. Results of a cross-sectional analysis suggest that valuation effects are positively related to the relative size of the divested unit. Valuation effects are more favorable when divestitures are for strategic reorganization purposes and/or to raise cash, and valuation effects are more favorable for foreign divestitures in industrialized host countries. Several important managerial implications emerge from the results of this study. © 1998 John Wiley & Sons, Ltd.     

An analysis of foreign takeovers in the United States

Using a sample of 96 US companies taken over by foreign companies during the period 1975-87, we assess foreign takeovers in two stages: pre-takeover and takeover. We find evidence that foreign firms target US firms whose operations are related to their own operations and that have low market-to-book ratios, suggesting foreign bidders acquire firms that provide a greater opportunity for market entry and synergistic gains. The synergistic gains appear to result from the foreign buyer using its own intangible assets (e.g. managerial skills) to improve the target. We also find that foreign takeover activity is aimed primarily at US industries that themselves make high levels of foreign direct investments, implying that the bidders use takeovers as a quick way to counteract rival firms' moves. We find evidence that foreign takeovers take place in relatively mature, low-growth industries and that foreign targets are, on average, smaller than the non-targets. The wealth effect on the announcement of a takeover is significantly higher for foreign takeovers than for takeovers by domestic firms. Also, we find that foreign bidders pay a slightly higher premium for targets whose operations are related to their own.     

The role of the seller’s stock performance in the market reaction to divestiture announcements

Divestitures have the potential to create shareholder value. However, the extent of the market reaction should depend on the likelihood of finding more valuable uses for the divested assets or the ability on the part of the seller to eliminate negative synergies. We hypothesize that strong performers have less scope to achieve substantial improvements compared to poorly performing firms. Using the seller’s stock return in excess of the market return in the 1-year and 2-year periods preceding the divestiture announcement to expose the divesting firm’s inefficient use of its assets, we show that the market reaction to divestiture announcements is significantly higher for underperforming firms. The difference in abnormal returns can be as high as 4 %. In contrast, none of the accounting-based variables that have been used in previous studies are found to be significantly related to the announcement returns. These results suggest that the firm’s stock performance is a more useful indicator of the wealth effect associated with divestitures.     

Hedge funds versus private equity funds as shareholder activists in Germany — differences in value creation

We investigate the valuation effects of German firms targeted by hedge funds and by private equity investors. We argue that both types of investors differ from other blockholders by their strong motivation and ability to actively engage and reduce agency costs. Consequently, we find positive abnormal returns following a change in ownership structure. However, these effects differ markedly between both investors, as proxy variables for agency costs only explain the market reaction for our private equity subsample. We conclude that private equity funds seem to be more successful at creating shareholder value, which could be due to their longer-term perspective and a higher adaptability to the surrounding corporate governance system.     

Shadow costs of incomplete information and short sales in the valuation of the firm and its assets

This paper presents a simple framework for the valuation of compound options within shadow costs of incomplete information and short sales. The shadow cost includes two components. The first component is the product of pure information cost due to imperfect knowledge and heterogeneous expectations. The second component represents the additional cost caused by the short-selling constraint. Information costs are linked to Merton's (1987. Journal of Finance 42, 510) model of capital market equilibrium with incomplete information, CAPMI. This model is extended by Wu et al. (1996. Review of Quantitative Finance and Accounting, 7, 136) who propose an incomplete-information capital market equilibrium with heterogeneous expectations and short sale restrictions, GCAPM. This model is used in our paper to provide for the first time in the literature analytic solutions for derivatives in the presence of both shadow costs of incomplete information and short sales.When deriving the compound call option formula, we consider a call option on a stock, which is itself an option on the assets of the firm. Our methodology incorporates shadow costs of incomplete information and short sales on the firm's assets as well as the effects of leverage in the capital structure. The formula can be useful in the valuation of several corporate liabilities in the presence of information uncertainty and short sales constraints about the firm and its cash flows. Our analysis can be used for the valuation of several real options.     

Winner Take All: Competition, Strategy, and the Structure of Returns in the Internet Economy

In this paper, we develop an economic rationale for the following stylized fact: Web-based firms spend profligately on advertising and marketing and usually lose money. Our rationale is based on the winner-take-all structure of high fixed cost, low marginal cost, markets for information goods. This market structure ensures that market participation and investment policy are highly stochastic. Moreover, if a firm chooses to participate in a Web market, it is optimal to act very aggressively through saturation advertising. Although increases in advertising costs reduce the probability of entry, once the decision to enter is made, firm strategies are insensitive to advertising price. Consistent with empirical studies of the profitability of internet firms ( Hand, 2001 ), our model predicts returns that are highly positively skewed, that is, even the firms that survive the competition for market position have a small chance of huge gains combined with a large probability of very modest returns. In dynamic competition, firms weakened by early rounds are less likely to challenge in subsequent rounds. However, when a challenge is attempted, it is always aggressive. In addition, because large expenditures in the first period produce valuable strategic real options in later periods, which are treated as expenses using traditional accounting methodology, the financial valuation of Internet firms may actually be negatively related to performance when using standard accounting measures of profitability that fail to capitalize these strategic real options.     

资产质量分析——基于我国上市公司的数据

本文研究的是我国上市公司的资产质量。以K值作为衡量调整前后每股净资产的波动幅度的指标,以2000-2002年上市公司3年的样本为研究对象,分析了我国上市公司资产质量及其与盈利能力的相关问题。我们发现,K值越小,上市公司的资产质量就越好;上市公司资产质量越好,其当年的盈利能力就越好,而其未来的盈利能力却不一定好。