Defensive Changes in Corporate Payout Policy: Share Repurchases and Special Dividends

This paper examines defensive payouts announced in response to hostile corporate control activity. The evidence indicates that the announcement of defensive share repurchases is associated with an average negative impact on the share price of the target firm. In contrast, special dividend payments generally increase the wealth of target firm shareholders. Regardless of payout type, those firms remaining independent after the outcome of the corporate control contest experience an abnormal share price increase over the duration of the contest. Among these firms there are substantial post-contest changes in capital, asset, and ownership structure and abnormally high rates of top management turnover.     

MARKET REACTION TO DIVIDEND-DECREASE ANNOUNCEMENTS: PUBLIC UTILITIES VS. UNREGULATED INDUSTRIAL FIRMS

In this study I compare the common share price reaction to dividend-decrease announcements by public utilities with the share price reaction to dividend-decrease announcements by unregulated firms. Regressing cumulative prediction errors from an event study methodology on firm characteristics, the empirical evidence shows that dividend decreases by public utilities prompt stronger negative market reactions than similar announcements by unregulated firms, even when yield, yield change, firm size, and Tobin's Q differences are considered.     

CORPORATE TAKEOVER BARRIERS: VALUATION AND FIRM PERFORMANCE

This study provides additional evidence on the share price effect of takeover barriers such as antitakeover charter amendments, dual classes of common stock, and poison pill plans. The share price reaction to the construction of takeover barriers is found to be negative but insignificant. However, when disaggregated by type, significant negative share price reactions are found on construction of poison pill plans. New evidence on the possible relationship between firm performance and takeover barrier construction is also presented. The results of this study suggest that management of 'efficiently-run' firms may construct takeover barriers to deter value-diminishing takeovers.     

Confidential marketing in seasoned equity offers

Confidentially marketed public offers (CMPOs) represent a popular innovation in the market for seasoned equity offers (SEO) despite large negative announcement reactions. We find that CMPOs are often used by small firms with negative operating cash flows to raise a relatively substantial amount of capital, which is used largely for R&D intensive investments. We argue that the confidential marketing associated with CMPOs has made them a popular way for small firms to make fast-paced public offers, which are known to have reduced price pressure, while sidestepping the problem of inelastic demand. These firms are willing to trade off more negative announcement reactions for the chance to privately assess their prospects for raising capital.     

The effect of affiliated analysts on stock recommendations: Evidence from share pledges in China

We use the share pledge context in China to examine how affiliated analysts whose securities companies are pledgees of share pledge firms issue stock recommendations on these listed firms. We find that their recommendations are more optimistic than those of non-affiliated analysts, and they are more likely to issue Buy and Add recommendations, suggesting that they issue optimistic rating reports for share pledge firms due to their conflicts of interest. We also find a dynamic adjustment in the stock recommendation behavior of these analysts, and their probability after issuing optimistic stock recommendations is significantly reduced before and after the years that the affiliation relationship between them and share pledge firms both began and ended. These affiliated analysts continue to issue optimistic stock recommendations after visiting the share pledge firms if they work in the same location as the firms, or if they are star analysts among New Fortune’s “top five analysts,” and when the information transparency of the share pledge firms is higher. In addition, the optimistic stock recommendation behavior of affiliated analysts is more significant in our sample of firms with high share pledge ratios and downward stock price pressure. The earnings forecast quality of affiliated analysts is also found to be lower, and they are less inclined to downgrade stock recommendations for these share pledge firms. Buy recommendations issued by both non-affiliated and affiliated analysts can bring cumulative excess returns in the short event window, but those issued by affiliated analysts are significantly negative in the long-term event window, and significantly lower than those issued by non-affiliated analysts. Overall, our study shows that affiliated analysts issue optimistic rating reports on share pledge firms due to conflicts of interest, which leads to decision-making bias in investors and thus decreases the stock price crash risk of the firms. Our findings further reveal the economic consequences of share pledging and extend our understanding of the behavior of analysts in a conflict of interest situation from the share pledge perspective.     

Divergence of Cash Flow and Voting Rights,Opacity, and Stock Price Crash Risk: International Evidence

This study investigates whether and how the deviation of cash flow rights (ownership) from voting rights (control), or simply the ownership‐control wedge, influences the likelihood that extreme negative outliers occur in stock return distributions, which we refer to as stock price crash risk. We do so using a comprehensive panel data set of firms with a dual‐class share structure from 20 countries around the world for the period of 1995–2007. We predict and find that opaque firms with a large wedge are more crash prone than opaque firms with a small wedge. In addition, we predict and find that the positive relation between the wedge and crash risk is less pronounced for firms with more effective external monitoring and for firms with greater growth opportunities. The results of this study are broadly consistent with Jin and Myers’s theory that agency costs, combined with opacity, exacerbate stock price crash risk.     

Public Predisclosure Information, Firm Size, Analyst Following, and Market Reactions to Earnings Announcements

Abstract:   This study examines the effects of public predisclosure information on market reactions to earnings announcements. We develop an empirical measure of public predisclosure information impounded in price prior to earnings announcements by cumulating abnormal returns on public news release dates during the quarter. Consistent with prior literature, we document a negative association between this measure and market reactions to subsequent earnings announcements. Moreover, we find that after controlling for this measure, firm size and analyst following are significantly positively associated with market reactions to earnings announcements. Contrary to prior empirical evidence, our results suggest that, after controlling for actual predisclosure information impounded in price, market reactions to earnings announcements are greater in magnitude for larger, more widely-followed firms than for smaller, less widely-followed firms.     

Institutional ownership,analyst following,and share prices

We study the mutual relationships between institutional ownership, analyst following and share prices. We show that the pressure on firms to set lower share prices to attract analysts is attenuated by institutional monitoring. Our theory refutes the assumed causal relation between share price and institutional ownership, attributed to the share price–liquidity relation, and we show empirically that share prices and institutional ownership are positively related after controlling for liquidity. Our study provides a rationale for why better firms generally maintain higher share price levels, and offers new insights into the puzzling empirical linkages observed between nominal share price levels and firm fundamentals.     

Why Do Managers Explain Their Earnings Forecasts?

Managers often explain their earnings forecasts by linking forecasted performance to their internal actions and the actions of parties external to the firm. These attributions potentially aid investors in the interpretation of management forecasts by confirming known relationships between attributions and profitability or by identifying additional causes that investors should consider when forecasting earnings. We investigate why managers choose to provide attributions with their forecasts and whether the attributions are related to security price reactions to management earnings forecasts. Using a sample of 951 management earnings forecasts issued from 1993 to 1996, we find that attributions are more likely for larger firms, less likely for firms in regulated industries, less likely for forecasts issued over longer horizons, more likely for bad news forecasts, and more likely for forecasts that are maximum type. Furthermore, attributions are associated with greater absolute price reactions to management forecasts, more negative price reactions to management forecasts (forecast news held constant), and a greater price reaction per dollar of unexpected earnings. Our findings hold after control for the aforementioned determinants of attributions and after control for other firm‐ and forecast‐specific variables that are often associated with security prices.     

When bank loans are bad news: Evidence from market reactions to loan announcements under the risk of expropriation

In this paper we investigate whether inefficient bank loans can reduce the value of borrowing firms when expropriation of the stock of minority shareholders by controlling shareholders is a major concern. Using data from Chinese banks, we find that bank loan announcements generate significantly negative abnormal returns for the borrowing firms. In line with this expropriation view, negative stock price reactions following bank loan announcements are concentrated in firms that are perceived to be more vulnerable to expropriation by controlling shareholders. Finally, we find evidence that a negative relationship between market reactions and firm vulnerability to expropriation exists only when firms borrow from the least efficient banks.     

THE INTRA-INDUSTRY EFFECTS OF OPEN MARKET SHARE REPURCHASES: CONTAGION OR COMPETITIVE?

We examine the extent to which announcements of open market share repurchase programs affect the valuation of competing firms in the same industry. On average, although firms announcing open market share repurchase programs experience a significantly positive stock price reaction at announcement, portfolios of rival firms in the same industry experience a significant and contemporaneous negative stock price reaction. This suggests that perceived changes in the competitive positions of the repurchasing firms occur at the expense of rival firms and dominate any signals of favorable industry conditions. Thus, the competitive intra-industry effects of open market repurchases outweigh any contagion effects. In addition, cross-sectional tests indicate that these competitive effects are more pronounced in industries characterized by a lower degree of competition and less correlation between the stock returns of the repurchasing firm and its rivals.     

AN EMPIRICAL INVESTIGATION OF STOCK DIVIDENDS-IN-KIND

We investigate share price reactions to announcements of dividends payable in the common stock of corporations different from the issuing firm. We find that firms that declare these dividends (typically investment companies) experience positive abnormal returns upon announcement. We also find that such dividends are more likely to be declared when the shares to be distributed have peaked in value. Consistent with this finding, we document negative announcement-period abnormal returns for firms having their shares distributed. Additional tests reveal that prices respond more negatively when the information signal is strongest, when outside ownership is more dispersed, and when management is more entrenched.     

Why Do Foreign Firms Leave U.S. Equity Markets?

Foreign firms terminate their Securities and Exchange Commission registration in the aftermath of the Sarbanes–Oxley Act (SOX) because they no longer require outside funds to finance growth opportunities. Deregistering firms’ insiders benefit from greater discretion to consume private benefits without having to raise higher cost funds. Foreign firms with more agency problems have worse stock‐price reactions to the adoption of Rule 12h‐6 in 2007, which made deregistration easier, than those firms more adversely affected by the compliance costs of SOX. Stock‐price reactions to deregistration announcements are negative, but less so under Rule 12h‐6, and more so for firms that raise fewer funds externally.     

Excess insider control and corporate social responsibility: Evidence from dual-class firms

We investigate the corporate social responsibility (CSR) performance of firms with a dual-class share structure. Dual-class firms, which represent a fast-growing segment of the U.S. capital market, violate the "one share, one vote" principle by giving corporate insiders control in excess of their economic interest in the firm. We observe a negative association of excess insider control and firms’ CSR performance, primarily with respect to the community- and employee-related dimensions of CSR. Extended analyses reveal that this negative association is mitigated by high financial resource availability. Consistent with a trade-off between corporate spending on CSR or on benefits for insiders, we also observe a negative association between CSR performance and executive pay in dual-class firms. Taken together, these extended analyses are consistent with self-interested behavior of entrenched insiders who, unless resources are abundant, appear to reduce CSR activities to maintain resources available for their personal benefit. While the exposure to risks engendered by a dual-class equity structure may be reflected in the share price, our findings draw attention to an externality: diminished CSR performance affects not just shareholders, but all stakeholders.     

Shareholder Wealth Effects of European Domestic and Cross‐border Takeover Bids

This paper analyses the short‐term wealth effects of large intra‐European takeover bids. We find announcement effects of 9% for the target firms compared to a statistically significant announcement effect of only 0.7% for the bidders. The type of takeover bid has a large impact on the short‐term wealth effects with hostile takeovers triggering substantially larger price reactions than friendly operations. When a UK firm is involved, the abnormal returns are higher than those of bids involving both a Continental European target and bidder. There is strong evidence that the means of payment in an offer has an impact on the share price. A high market‐to‐book ratio of the target leads to a higher bid premium, but triggers a negative price reaction for the bidding firm. We also investigate whether the predominant reason for takeovers is synergies, agency problems or managerial hubris. Our results suggest that synergies are the prime motivation for bids and that targets and bidders share the wealth gains.     

Share price performance following actual share repurchases

Using unique actual daily share repurchase data from Hong Kong, this paper investigates share price performance surrounding and following actual share repurchases. It is found that repurchasing firms buy back shares following price drops, suggesting that they behave opportunistically when implementing actual share repurchases. On average, the initial 3-day market response to actual repurchases is about 0.43%. Repurchasing firms do not seem to exhibit superior abnormal performance over long horizons when they make actual share repurchases. However, the price performance of repurchasing firms varies across firm size and market–book value ratios, and shows a clear and consistent pattern. The market responds the most favorably to repurchases that are made by small and value (high book-to-market value) firms. Over a long horizon, there is some evidence that repurchases made by value firms show superior performance. The three-year buy-and-hold abnormal return, which is measured against a portfolio of control firms that are matched by size and book-to-market value ratios, is over 20%. At least, repurchases made by high book-to-market value firms, for which undervaluation is more likely to occur, can benefit long-term shareholders.     

Costs of Accounting to Lenders: Canadian Evidence

Do new accounting pronouncements impose costs on firms with accounting-based restrictions in their public lending agreements? Previous studies have not found significant, adverse share price reactions to such pronouncements. This paper posits that management is concerned with the total costs of the monitoring policies used for reporting to lenders, and that share price reactions are likely to comprise only a small portion of those costs. The episode of mandatory lease capitalisation in Canada is used to test some predictions that are consistent with this expanded view of the costs of accounting to lenders. Lessees ‘public lending agreements were examined to see if they stipulated restrictions based on accounting numbers; and, if they did, whether the constraints were based on GAAP (generally accepted accounting principles) or TAP (tailored accounting principles). The evidence strongly supports the hypothesis that there are costs of accounting to lenders; but these costs are unlikely to be observed by researchers who look only for adverse share price reactions to mandated accounting changes. It also indicates that Canadian standards setters were sensitive to lessees’ accounting costs.     

The effect of stock price on discretionary disclosure

I examine the impact of exogenous changes in stock prices on voluntary disclosure. Specifically, I investigate whether stock price declines prompt managers to voluntarily disclose firm-value-related information (management forecasts) that was withheld prior to the decline because it was unfavorable but became favorable at a lower stock price. Consistent with my predictions, I find that managers are more likely to release good-news forecasts following larger stock price declines but that there is no association between the likelihood of releasing good-news forecasts and the magnitude of stock price increases. Additional evidence indicates that the good-news forecasts eventually conveyed by withholding firms after negative price shocks would likely have resulted in negative market reactions had they been released before the shocks. More generally, I provide evidence that managers withhold bad news and that exogenous stock price declines can induce its disclosure.     

Loss firms’ annual report narratives and share price anticipation of earnings

We extend prior research into the association between disclosure quality and share price anticipation of earnings by discriminating between firms that report profits and firms that report losses. As a measure of disclosure quality we count the number of forward-looking earnings statements in annual report narratives. To measure the extent to which current share price movements anticipate future earnings changes we regress current stock returns on current and future earnings changes. The coefficients on the future earnings change variables are our measure of share price anticipation of earnings.Our regression results show that the association between annual report narratives and share price anticipation of earnings is not the same for profit and loss firms. For loss firms we find that the ability of stock returns to anticipate next period's earnings change is significantly greater when the firm provides a large number of earnings predictions in annual report narratives. We make no such observation for profit firms. In addition, once we control for variations in the intrinsic lead–lag relation between returns and earnings across industries, the observed difference between profit and loss firms becomes statistically significant. Overall, our results are consistent with annual report narratives being a particularly important source of information for loss-making firms.     

TARGET PAYOUT AND THE ASSOCIATION BETWEEN DIVIDENDS AND SHARE PRICES*

The hypothesis that share prices react differently to unexpected dividend changes conditional upon firm target payouts is examined empirically. The cumulative abnormal return metric is used to measure price reactions for firms in various combinations of target payout class and dividend change. Two models are used as surrogates for expected dividends: the Fama-Babiak model and one using analyst dividend forecasts. In general, the information hypothesis is not supported in the case of unexpected dividend decrease, but target payout is found to be a significant explanatory variable of share price behaviour in the case of unexpected dividend increase.