Market valuation of marketing alliances in East Asia: Korean evidence

This paper investigates firm value created by non-equity marketing alliance announcements of Korean listed firms in terms of stock price reactions to the announcements. We find evidence that on the Korean stock market, the announcements of marketing alliances produce significant positive abnormal returns, which reflect an increase in firm value, around the announcement date. This suggests that firm managers need to seek for various marketing alliances not only for an effective competition in competitive business environments but also for enhancement in shareholder wealth. The increase in firm value has inverse relationship with firm's size and growth opportunity. In particular, marketing alliances with firms based in G7-countries create greater firm value than ones with firms based in the home country. Our study provides investors, firm managers, and academics with valuable implications of an importance of marketing alliances for valuation of firms in other Asian countries as well as in Korea.     

Share Repurchase Reasons and the Market Reaction to Actual Share Repurchases: Evidence from Australia

Using repurchase reasons provided by Australian companies for their stock repurchase programs, we ask if the market's response is different across repurchase motivations by examining actual daily share repurchases. We find that firms with the undervaluation motive experience a more positive stock price reaction when they report their repurchases to the market. We show that undervaluation motive firms repurchase fewer shares and have a lower program completion rate than other motives firms. During the 1‐year period following the repurchases, undervaluation motive firms do better than their control sample firms whereas other motive firms do not perform better or worse than their control sample firms. Overall, our results suggest that the undervaluation motive is a stronger signal than other repurchase motives, and contrary to the predictions of the standard signaling theories, management statements carry some value for the market. We also present some evidence suggesting that a costly action may not be needed for a signal to be credible.     

Product Regulation and Stock Prices: The Case of the US Food and Drug Administration

This study focuses on the stock market effects associated with the announcements of product approvals, denials and recalls by the US Food and Drug Administration (FDA), and the impact of product approvals on research and development expenditures (R&D) and forecasts of earnings by Value Line. When the FDA announces approvals, the shareholder wealth of affected firms increases significantly. The announcements of denials and recalls by the FDA are associated with stock price declines. The stock price impact of recalls is dependent on whether the firm voluntarily withdraws a product or if the withdrawal is mandated by the FDA. Specifically, voluntary recalls are not associated with a change in stockholder wealth, while FDA mandated recalls are associated with decreases in stock price. In addition, we find that partial product recalls have a smaller impact than total recalls. An examination of the effects on competitors' stock price reveals losses when the FDA announces an approval or a recall, but no imt for a d. An analysis of changes in risk around FDA decisions suggests that, on average, betas do not change around approvals, recalls or denials. In addition, our results suggest that announcement period stock price behavior is unrelated to risk changes except for approvals where returns are positive and significant for firms with either increasing risk or no change in risk. We also find that approvals are associated with increases in R&D and forecasts of earnings for the sample firms, with returns to stockholders upon announcement of the approval being related to the increases in R&D and short-term earnings forecasts.     

Information asymmetry and investor trading behavior around bond rating change announcements

This study examines stock market reactions to public announcements (corporate bond rating changes), including changes in stock prices and investor behavior in terms of trading volumes and patterns. Abnormal returns, abnormal volumes, and net order imbalances are estimated using high-quality stock transaction data from Korean firms, whose bonds were rated by Korea's leading credit rating agencies between 2000 and 2015. We find positive (negative) abnormal stock returns around upgrades (downgrades), although the stock price reactions to downgrades are more statistically significant than those to upgrades. Significant abnormal volumes and order imbalances are found around rating changes, and the extent to which each investor group (domestic individuals, domestic institutions, or foreign investors) reacts to a rating change varies. Our analyses also support that foreign and domestic institutional investors are better informed than individual investors.     

Long‐Run Stock and Operating Performance of Underwriter Warrants: Evidence from Seasoned Equity Offerings

We examine the long‐run stock and operating performance of firms issuing underwriter warrants. Using matched samples, we found significant long‐run underperformance of seasoned equity offerings (SEOs) with warrant compensation, relative to SEOs with cash compensation, following offering announcements. Profitability measures of firms issuing underwriter warrants are also significantly lower over the post‐offering period. In sharp contrast to these results, growth measures of warrant‐issuing firms are greater for both pre‐ and post‐offering periods. Combined together, our results suggest that underwriter warrants are offered in a way to take advantage of the higher growth potential of issuing firms in the short term, whose growth trend is, however, transitory and not materialized into higher stock or operating performance over the long‐run, post‐offering period. We interpret our results as suggesting that the certification effect of SEOs with warrant compensation through growth signaling does not last in the long run. We further offer a behavioral approach as explanations of the short‐run outperformance of SEO firms with warrant compensation with empirical evidence supporting the Miller's divergence of opinion hypothesis.     

Investment opportunities and dividend omissions

This study examines the market's reaction to dividend omission announcements and finds that if dividends are skipped to preserve cash for good investments, investors do not necessarily regard the omission as negative information. Markets penalize firms for dividend omissions only in the absence of a good stream of investments. In addition, the positive relation between investment opportunity and abnormal stock returns around the announcements is stronger when the level of information asymmetry between management and the rest of the market participants is low. Additional tests reveal that good omitters overcome underperformance faster in the post period. Overall, the results suggest that financial markets interpret differently the information conveyed in the announcement of dividend omission depending on the firm's future prospects.     

Is corporate governance important for regulated firms’ shareholders?: Evidence from Japanese mergers and acquisitions

This paper compares the reaction of bidders’ stock prices to acquisition announcements by regulated non-financial firms, banks, and unregulated companies in Japan. Results suggest that regulated non-financial firms do not experience a significant stock price response at merger and acquisition (M&A) announcements, although banks’ and unregulated firms’ M&A announcements are regarded favorably by the stock market. Furthermore, the effect of stock option usage and strict boards on the stock price response is weak for regulated non-financial bidders. The results provide additional evidence that regulation results in managerial decisions’ having less influence on shareholder wealth and thereby changes the firm's optimal governance structure. In contrast, the results provide no clear evidence that, for bank bidders, there is a significantly stronger or weaker relationship between governance and the stock price response to an M&A announcement than that of unregulated firms or regulated non-financial firms. The result does not support the view that regulatory monitoring weakens the effect of ordinary governance mechanisms.     

The value of celebrity endorsements: A stock market perspective

Are celebrity endorsements worthwhile investments in advertising? To answer this question, we analyze a unique sample of 101 announcements made between 1996 and 2008 by firms listed in the USA. Internet is the main medium of communication for these announcements. We employ event study methodology and document statistically insignificant abnormal returns around the announcement dates. This finding is consistent with the notion that the incremental benefits from celebrity endorsements closely match the incremental costs due to such contracts. Further, we investigate if the announcement date return depends on a number of characteristics that are often used in the endorsement literature. As a result, we find that endorsements of technology industry products coincide with significant positive abnormal returns around the announcement dates. Finally, we find weak support for the match-up hypothesis between celebrities and endorsed products.     

Should “big food” companies introduce healthier options? The effect of new product announcements on shareholder value

In recent years, big food companies, such as Kellogg, PepsiCo, and Kraft have been under increasing pressure to introduce more healthful offerings to their existing product portfolio. Our research seeks to understand if such announcements are viewed favorably by the stock market. Are firms rewarded for introducing healthy new products? Using established methodologies, we are able to isolate what percent of an increase or decrease in a firm’s stock price can be attributed from such an announcement. Our analysis reveals some interesting results on how healthy new product announcements impact shareholder value. Findings suggest that big food companies are indeed rewarded financially for introducing healthy new products into the marketplace, and this increase is higher than when introducing less healthy products. We also find that positive ingredient additions (e.g., added fiber) are more highly valued than negative ingredient reductions (e.g., reduced sugar). We discuss the significant implications of our findings and provide managerial recommendations.     

Strategic alliances by financial services firms

We examine a sample of strategic alliances made by financial services firms during 1986 to 2003. The market reacts positively to the announcements of alliances and seems to incorporate the information about the value of alliances at the time of alliance announcements. We find no evidence of abnormal stock performance after announcements. Our results also suggest that strategic alliances usually are used as a final form of cooperation rather than as a first step towards closer cooperation between firms. For instance, only about 5% of alliances are followed with joint ventures or mergers of partner firms. Nevertheless, strategic alliance firms are more likely to form joint ventures or merge than randomly selected and matched firms. Furthermore, the market reacts more favorably to the alliance announcements by firms that are subsequently acquired by the alliance partners.     

The Causes and Consequences of Accelerated Stock Repurchases

We examine the choice between accelerated share repurchase (ASR) and open market repurchase (OMR) as repurchase mechanisms between 2004 and 2007. For a sample of ASRs and OMRs that actually buy shares in the announcement quarter, we find that ASR firms have lower market‐to‐book ratios, less cash, but greater managerial entrenchment. Prior to repurchase, ASR firms are subject to significantly more takeover rumors than OMR firms are, and this, along with entrenchment and undervaluation, affects the choice to use ASRs. ASR firms experience positive average abnormal returns both before and after the announcement. Moreover, the latent takeover probability is significantly lower for both ASR and OMR firms (when compared with pre‐announcement levels), but the reduction for ASR firms is more pronounced. Our results suggest that repurchases, and especially ASRs, indeed make a firm a less attractive prospect for takeover.     

The Effect of Timeliness and Credit Ratings on the Information Content of Earnings Announcements

This paper investigates the impact of timeliness and credit ratings on the information content of the earnings announcements of Greek listed firms from 2001 to 2008. Using the classical event study methodology and regression analysis, we find that firms tend to release good news on time and are inclined to delay the release of bad news. We also provide evidence that the level of corporate risk differentiates the information content of earnings according to the credit rating category. Specifically, firms displaying high creditworthiness enjoy positive excess returns on earnings announcement dates. In contrast, firms with low creditworthiness undergo significant share price erosions on earnings announcement days. We also observe a substitution effect between timeliness and credit ratings in relation to the information content of earnings announcements. Specifically, we find that as the credit category of earnings-announcing firms improves, the informational role of timeliness is mitigated.     

The Role of Executive Stock Options in On‐Market Share Buybacks*

The increasing use of on‐market buyback programs in Australia may not be fully explained by the typical motivations of information signaling and free cash flows offered by previous researchers. For some firms at least, management may believe the shares are overvalued. It is in this context that we examine whether managers of firms with high levels of executive stock options have an incentive to initiate buyback programs. It has been argued that managers may be motivated to undertake on‐market buyback programs in order to neutralize the dilution of earnings per share caused by their stock options, rather than for signaling purposes. Our findings are consistent with this argument because we find that the higher the proportion of executive stock options outstanding the more likely it is for firms to undertake larger on‐market buyback programs. Overall our results indicate that the existence of executive stock options influences managers' decision to implement on‐market buyback programs but that it is not the only factor that managers take into consideration.     

中国上市公司首次股票股利信号传递有效性的实证研究

20世纪90年代中后期股票股利曾是我国证券市场较为盛行的分配方式,并因能够带来积极的股价超额收益而被视为是一种典型的信号传递过程。然而本文通过对A股一般行业上市公司首次股票股利分配后的公司业绩进行长期跟踪考察,发现首次分配股票股利的公司无论盈利性或增长能力都明显持续下降,并不能充分支持信号传递假说。统计检验和模型分析均表明,在信息不对称条件下,公司盲目追求股权融资和市场过热的投资预期,在一定程度上削弱了我国股票股利政策传递积极信号的功能,这是这种分配方式不断降温的内在原因。     

Is there Informational Value in Corporate Giving?

In this article, we propose that giving in cash and non-cash (in-kind) differ in their relation with the giving firm’s future corporate financial performance (CFP) and only cash giving is associated with future CFP. Using a novel dataset from ASSET4 that differentiates corporate giving over a sample period of 2002–2012, we examine three competing hypotheses: (1) agency cost hypothesis that cash giving reflects agency cost and destroys value for shareholders, (2) investment hypothesis that cash giving is an investment by management that aims for better future return, and (3) information hypothesis that cash giving has informational value to shareholders as cash is a critical resource at a firm and giving is a decision by managers who are insiders. We find that indeed, only cash giving is positively associated with future CFP and firm value, measured by Fama–French five-factor abnormal risk-adjusted stock returns, future return on assets, and Tobin’s Q. In addition, we find that the positive association exists only between excess, i.e., unexpected, but not expected cash giving and future CFP. Our empirical findings support the information hypothesis, but neither the agency hypothesis nor the investment hypothesis, and are robust to a number of endogeneity tests, including orthogonalized cash giving, instrumental variable regression using geography-based instruments, and propensity score matching. Furthermore, we show that the positive association between future CFP and unexpected cash giving is only pronounced at firms with good governance and relatively higher sales growth where agency problems are less likely, and at firms with no alternative mechanisms to demonstrate the strength of cash flow. Additionally, we do not find evidence that suggests in-kind giving to possess any informational value.     

Labor-Friendly Corporate Practices: Is What is Good for Employees Good for Shareholders?

As corporate managers interact with non-shareholder stakeholders, potential tradeoffs emerge and questions arise as to how these interactions impact shareholder value. We argue that this shareholder–stakeholder debate is an important issue within the overall corporate governance and corporate policy domain and examine one such stakeholder group – employees – by studying labor-friendly corporate practices. We find that announcements of labor-friendly policies are associated with positive abnormal stock returns. Labor-friendly firms also outperform otherwise similar firms, both in terms of long-run stock market returns and operating results. In addition, we find that the probability and benefits of labor-friendliness increase with the demand for highly skilled labor. Our analysis of excess executive compensation suggests that top management derives no pecuniary benefits from labor-friendly practices. We interpret our results as consistent with a genuine concern for employees translating into higher productivity and profitability, which in turn facilitate value creation. It appears that the benefits of labor-friendly practices significantly outweigh the costs and that what is good for employees is good for shareholders.     

Born globals,the choice of globalization strategy,and the market's perception of performance

This paper analyzes which characteristics of born global firms determine their choice for international entry mode. Using a logistic regression analysis, we study 124 newly public firms in the United States that undertake 261 international joint ventures or international acquisitions within the first 6 years of their founding. We find that the market responds positively to announcements of international expansions by born global firms, and that larger, more profitable, and more liquid firms have a higher propensity to engage in joint ventures rather than acquisitions. We also find that the market favors firms that announce joint ventures, rewarding them with significantly positive abnormal returns. Furthermore, while we find that cultural similarity affects mode choice, it does not affect the market's reaction to the announcements.     

Credibility of corporate announcements and market reaction: evidence from Canadian share repurchase programs

Do market participants evaluate the credibility of a firm's share repurchase announcement based on the firm's share repurchase history? Using a sample of 1,507 share repurchase programs for firms listed on the Toronto Stock Exchange from 1994 to 2005, we find that 69% of firms fail to acquire the target number of shares specified at announcement and many firms fail to repurchase any shares. We develop credibility indices and find a positive relationship between current announcement abnormal returns and completion credibility of previous announcements. We conclude that the market prices completion credibility of past share repurchase announcements in reacting to current repurchase announcements. Copyright © 2010 ASAC. Published by John Wiley & Sons, Ltd.     

When do informed traders acquire and trade on informational advantage? Evidence from Federal Reserve stress tests

Using Federal Reserve bank stress test announcements, we examine when option traders acquire informational advantage and when they exploit it. We find consistent evidence of informed options trading around announcements. However, when test results are announced in successive weeks we find high abnormal option volume, considerably positive abnormal returns and significant return predictability in the first week, but not the following week. This suggests that informed option traders are able to anticipate upcoming news events and skillfully process public information but it also suggests that trading on acquired information is conditioned on the level of information asymmetry in the market.     

Foreign Ownership and Corporate Cash Holdings in Emerging Markets

This article examines the link between foreign ownership and corporate cash holdings. We utilize a data sample of firms listed on the Ho Chi Minh City stock exchange covering the period 2007–2015. Employing different econometric techniques for panel data, we find that higher foreign ownership is associated with more corporate cash holdings. This finding suggests that foreign investors in the Vietnam stock market are subject to precautionary motive and agency motive forcing firms to hold more cash. However, the outcome suggests potential agency problems because managers might subsequently use this cash reserve for their own advantages. These problems are even more pronounced in emerging markets where investor protection mechanism is weak. Accordingly, this highlights the importance of a monitoring mechanism to refrain corporate managers from investing in value‐destroying projects.