MARKET SEGMENTATION AND INTERNATIONAL ASSET PRICES: EVIDENCE FROM THE LISTING OF WORLD EQUITY BENCHMARK SHARES

This article provides an empirical analysis of the announcement effect of the listing of the seventeen World Equity Benchmark Shares (WEBS) on the returns of the corresponding market index returns and closed‐end country fund premiums. I find that the announcement of the listing of the WEBS resulted in a positive market price reaction for the market indexes. Furthermore, there was a significant decline in premiums for closed‐end country funds. The findings are consistent with models of international asset pricing under market segmentation and they illustrate that the listing of internationally tradable securities is an effective mechanism for integrating international capital markets. JEL classification: G14, G15     

WHY ISSUE TRACKING STOCK? INSIGHTS FROM A COMPARISON WITH SPIN‐OFFS AND CARVE‐OUTS

In recent years, tracking stocks, which amount to a new form of corporate restructuring, have been gaining in popularity. In 1999 alone, 17 companies announced new tracking stock issues, and by February 2000 there were 40 tracking stocks trading in the U.S. equity markets. Why have tracking stocks become so popular in recent years? In this article, the authors present new evidence on the effectiveness of tracking stock issues in creating shareholder value as compared to the record of two other closely related forms of corporate restructuring—spin‐offs and equity carve‐outs. The authors find that the parents and subsidiaries of tracking‐stock firms are more “related” than those that undertake the other two forms of corporate restructuring, that there is a positive announcement effect (similar in size to that of spin‐offs but greater than that of equity carve‐outs) on stock prices, and that the number of analysts following the firm increases following the issuance of tracking stock. These findings are interpreted as suggesting that the main corporate motives for issuing tracking stock are the valuation benefits from providing investors with more information about the newly listed subsidiary, while at the same time preserving the existing synergies between the business units involved. This maintenance of existing synergies, however, appears to have come at a significant price. Under the tracking stock structure, there seem to be no benefits attributable, as in the case of spin‐offs, to improvements in corporate governance. While spinoffs significantly increase the probability that the parents or subsidiaries will later be taken over (with its disciplining effect on management), there is no such increase in takeover probability for firms issuing tracking stock. Consistent with this difference, the authors find that the market‐adjusted two‐year holding period return for tracking stock parents and subsidiaries is significantly lower than the corresponding return for spinoffs and their corporate parents.     

Do Spin‐offs Expropriate Wealth from Bondholders?

A wealth transfer from bondholders to stockholders is one of several hypotheses used to explain stockholder gains on the announcement of a spin‐off. However, previous empirical research has not found systematic evidence supporting the wealth expropriation hypothesis. Using a larger sample with comprehensive bond data, we find evidence consistent with wealth expropriation. Bondholders, on average, suffer a significant negative abnormal return during the month of the spin‐off announcement. However, even accounting for the loss to the bondholders, the aggregate value of the publicly traded debt and equity increases on a spin‐off announcement, suggesting that the wealth expropriation hypothesis is not a complete explanation of the stockholder gains. In explaining the magnitude of the losses to bondholders, we find they are a function of the loss in collateral in the spun‐off subsidiary and the level of financial risk of the parent firm. Consistent with a loss to bondholders, firms are more likely to have their credit rating downgraded than upgraded after a spin‐off. Additionally, consistent with the wealth transfer hypothesis, losses to bondholders tend to be more severe, the larger the gains to shareholders.     

Valuation and Performance of Reacquisitions Following Equity Carve‐Outs

While existing literature reports a positive market reaction to parent companies conducting carve‐outs, we find that the response to carve‐outs that are ultimately reacquired is negative or insignificant. Reacquired units perform considerably worse than those that are not reacquired. Thus, parents may perceive that the market does not recognize the potential of these poorly performing units, and reacquires them to capitalize on the parents' private information. The reacquisition announcement results in a favorable market reaction for the parents and the units. However, parents experience negative long‐term buy‐and‐hold abnormal returns when they reacquire less than 100% of units' shares.     

资本市场国际影响力提升效应研究——来自A股纳入明晟(MSCI)新兴市场指数的证据

2018年5月15日,首批纳入明晟(MSCI)新兴市场指数的A股股票名单正式公布。我们发现,被纳入MSCI的股票(标的股票)在公告日前后有显著为正的累计超额收益。相较于主要特征相似的匹配股票,标的股票纳入MSCI后的分析师评级有显著提升。进一步研究表明,在公告日前后融资(融券)交易量显著上升(下降),而换手率没有明显变化,并且净融资交易与公告效应显著正相关。本文的发现表明,A股纳入MSCI这一事件具有明显的信息含量,传递了有关企业前景的正面信息,并促使本地市场聪明投资者进行更活跃的交易,这对促进价格发现、促成价值投资具有一定的推动作用。     

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.     

Corporate Raiders,Performance and Governance in Europe

I analyse 136 block purchases made by corporate raiders in Europe between 1990 and 2001. Contrary to the hypothesis that these investors expropriate the target companies, there is a positive market reaction to the first public announcement of these purchases. In the long‐run, raiders earn an abnormal profit when they sell their stakes. When they still held their positions at the end of the sample period, abnormal returns were insignificant. Raiders' activities do not improve operating performance. The findings are consistent with superior stock picking ability among these investors, but do not support the hypothesis that raiders are governance champions.     

Open‐Market Stock Repurchases by Insurance Companies and Signaling

The signaling hypothesis of share repurchases implies that management uses repurchases to signal either that their firm's future operating performance will improve or that shares of their stock are simply underpriced by the market. This study examines which of the two interpretations can better explain open‐market share repurchase programs announced by insurance companies. We find no evidence that future‐operating performance of insurers improves following the repurchase announcement. In addition, changes in future operating performance cannot explain the announcement‐period abnormal return. Instead, the stock undervaluation prior to the repurchase announcement can significantly explain the announcement‐period abnormal return, particularly for life insurers. Overall, our results suggest that the positive market reaction to insurers’ open‐market share repurchase announcements is due to the stock undervaluation by the market, but not due to positive information content about future operating performance conveyed in the repurchase announcement.     

Corporate Sell‐offs in the UK: Use of Proceeds,Financial Distress and Long‐run Impact on Shareholder Wealth

This study examines the long‐run return performance following UK corporate sell‐off announcements. We observe significant negative abnormal returns up to five years subsequent to sell‐off announcements. Our finding is robust to various specifications, irrespective of the intended use of proceeds. We also find a significantly positive association between long‐run abnormal returns and the magnitude of cash proceeds for sellers reducing corporate debt as well as for sellers with deeper financial distress or higher growth prospects. Overall, we find that UK corporate sell‐offs are associated with declines in subsequent shareholder wealth.     

Merger proposals,management discretion and stockholder wealth

This paper provides evidence on the daily market reaction to the announcement and subsequent acceptance or rejection of merger proposals. There is a swift and large positive market reaction to the first public announcement of the merger proposal. Subsequently, there is a positive reaction to the approval of completed proposals and a negative reaction to cancelled proposals. Where proposals are vetoed by incumbent target management, there is a negative market reaction to the veto, but this does not eliminate the earlier positive reaction to the first announcement. In these proposals there is a permanent revaluation of the target shares. This is in contrast to cancelled proposals that incumbent managements do not veto, where the target stock price falls back, on average, to the preproposal level.     

THE WEALTH EFFECTS OF TRACKING STOCK RESTRUCTURINGS

We provide a comprehensive examination of the post‐issue wealth effects of 29 completed tracking stock restructurings. We document that for the parent stock and for the combined firm, tracking stock restructurings lead to insignificant long‐term excess returns. However, we find that shareholders of tracking stocks realize significant post‐issue wealth losses. Unlike spin‐offs and carve‐outs, announcements of tracking stock restructurings are preceded by negative one‐year excess returns, and unlike the positive post‐issue long‐term excess returns to spin‐off stocks and the insignificant long‐term excess returns to carve‐out stocks, tracking stocks experience negative long‐term excess returns.     

The horse has bolted: revisiting the market reaction to going concern modifications of audit reports

This paper examines what value is added by an audit report through an investigation of the information content for first‐time going concern modifications (GCMs). Consistent with prior research, we find no evidence of a short‐term market reaction to the public announcement of a first‐time GCM. We document a significant adverse medium‐term market reaction in the 12 months prior to a first‐time GCM announcement, but find no evidence of a persistent market underreaction in the 12 months following the announcement. These results are consistent with an audit opinion fulfilling an attestation function and confirming the deteriorating financial condition of a firm.     

Economic consequences of SFAS 142 goodwill write‐offs

This paper examines the economic consequences of goodwill write‐offs under Statement of Financial Accounting Standards No. 142 (SFAS 142). Although write‐off firms have performed poorly, it is evident that deteriorating economic performance explains only a small proportion of write‐offs. After controlling for endogeneity of write‐off choice, I fail to find evidence that investors and analysts fixate on SFAS 142 goodwill write‐offs. I also provide evidence that write‐off firms pay higher audit fees, suggesting that auditors charge higher fees in response to extra audit effort. These results are consistent with the principles of market efficiency, analyst‐forecast rationality and efficient audit pricing.     

Market rationality and dividend announcements

We investigate stock market rationality by examining the timeliness and unbiasedness of the market's response to dividend announcements. Our initial findings for market timeliness show a sluggish market reaction to dividend announcements; however, when the ex-dividend effect is controlled for, we find no evidence of a sluggish market reaction. We examine the unbiasedness of the market's response by testing whether the net announcement effect across a sample that is devoid of ex-post selection bias sums to zero. We observe a significant positive net announcement effect and examine several plausible conjectures for this puzzling phenomenon, but none provides a satisfactory explanation.     

Reactions of the International Stock Exchange to Company Employment Announcements: Redundancies and New Jobs

This paper is the first to look directly at the reaction of the London market to company announcements of changes to employee count. Using event study methodology, we examine market reactions to 54 redundancy announcements during the period 1990–1999 and 52 announcements of new jobs during the period 1993–1999. In line with previous US studies we find that market reaction, measured by cumulative abnormal returns, is negative before the day of redundancy announcement. The actual redundancy announcement is greeted positively by the market when measured in terms of the mean, but negatively when measured in terms of the median. Thus, in a minority of cases the announcements are seen as value enhancing. The market reacts positively before new job announcements and this positive reaction is highly significant when the announcement is made. The results suggest that new job announcements contain value–relevant information for the market. Potential causal factors other than announcement size are not significant.     

Market Reaction to Seasoned Offerings in China

This study examines stock market reaction to the announcement of various forms of seasoned issues in China. Our empirical evidence demonstrates that market reactions differ in ways that suggest a difference between management's internal assessment and the market's assessment of the stock price. The market responds unfavourably to the announcement, notably in the case of rights issues and also with regard to open offers. Private placements experience an unfavourable pre‐announcement reaction, which contrasts with the favourable reaction after the event. Convertible bond issues generate positive excess returns consistent with the market's confidence that they can help to align management and shareholders’ interests. Further investigation shows that market reaction is related to factors specific to the issuer and issue by reference to the period immediately surrounding the issue. Specifically, ownership concentration, agency matters connected with equity offerings, investor protection connected with fund allocation and security pricing, and the influence of powerful moneyed interests together provide an instructive insight into market reaction. Institutional inefficiency pertaining to underwriting, auditing, analysts’ forecasts and credit ratings are found to have a weak association with market price, consistent with due public scepticism concerning management and their gatekeepers.     

The impact of technology-motivated M&A and joint ventures on the value of IT and non-IT firms: a new examination

We extend Lee and Lim (Rev Quant Financ Account 27:111–123, 2006) who provide empirical evidence on the impact of mergers and acquisitions (M&As) and joint ventures on the value of information technology (IT) and non-IT firms. Using technology-motivated transactions, we examine whether there are differences in market response to the announcement of M&As and joint ventures, and we consider the long-term performance of such firms. We find the market provides no (positive) reaction to joint ventures (M&As) at the announcement. We also present new evidence suggesting the market reacts more favorably to the announcement of technology M&As relative to joint ventures for our full sample, IT sample and non-IT sample. However, our examination of these firms’ long-term performance suggests the initial reaction is not fully supported. The findings suggest improved (declining) operating performance for joint venture (M&A) firms, and evidence to conclude joint venture firms achieve superior long-term performance changes for both accrual- and cash-based measures. To explain these inconsistencies, we employ a set of control variables previously documented as determinants of the innovation ownership decision. For joint venture firms, we find that, while the market fails to consider the importance of the firms’ R&D intensity and growth prospects in its initial reaction, these are ultimately key indicators of their future performance. The evidence also suggests the market overreacts to M&A announcements because it over-weights the impact of R&D intensity on the firms’ future performance in its initial response.     

Does the Market Value Financial Expertise on Audit Committees of Boards of Directors?

We examine three‐day cumulative abnormal returns around the announcement of 702 newly appointed outside directors assigned to audit committees during a period before implementation of the Sarbanes‐Oxley Act (SOX). Motivated by the SOX requirement that public companies disclose whether they have a financial expert on their audit committee, we test whether the market reacts favorably to the appointment of directors with financial expertise to the audit committee. In addition, because it is controversial whether SOX should define financial experts narrowly to include primarily accounting financial experts (as initially proposed) or more broadly to include nonaccounting financial experts (as ultimately passed), we separately examine appointments of each type of expert. We find a positive market reaction to the appointment of accounting financial experts assigned to audit committees but no reaction to nonaccounting financial experts assigned to audit committees, consistent with accounting‐based financial skills, but not broader financial skills, improving the audit committee's ability to ensure high‐quality financial reporting. In addition, we find that this positive reaction is concentrated among firms with relatively strong corporate governance, consistent with accounting financial expertise complementing strong governance, possibly because strong governance helps channel the expertise toward enhancing shareholder value. Together, these findings are consistent with financial expertise on audit committees improving corporate governance but only when both the expert and the appointing firm possess characteristics that facilitate the effective use of the expertise.     

MARKET EFFECTS OF CHANGES IN THE STANDARD & POOR'S 500 INDEX

This paper examines the impact on stock returns of changes in the Standard & Poor's (S&P) 500 index. S&P states that firms are not added to or deleted from the index for valuation reasons but rather to maintain or improve the index's representative character. Results from market response tests indicate that stocks added to (deleted from) the index since 1975 experience a significant positive (negative) announcement day excess return. No announcement effect occurs in S&P changes prior to 1976. These announcement effects may be explained by a price-pressure hypothesis or by an information effect. Results of tests conducted to isolate which of these phenomena is present are reported.     

The Impact of the Source and Sequence of Information in Primary Equity Offerings

Empirical studies of the announcement effects of equity offerings have generally defined the event date as the earlier of the SEC registration date or the first mention in the Wall Street Journal (WSJ), the implicit assumption being that the two types of announcements are equally informative. This study examines whether the source of the event announcement might influence a study's results and whether subsequent announcements from other sources elicit a market reaction. Specifically, this paper investigates whether Dow Jones News Wire (DJNW) announcements that differ in timing from either of these information events elicit a market response and, more important, whether impacts from the DJNW announcements alter the validity of the widely used methodology. The results of the paper indicate that, for issues that are not mentioned in the WSJ Index, there is a negative and significant return on the registration date. However, no matter whether the registration occurs before or after its mention on the DJNW, the share price reaction is greater from mention on the DJNW than at registration. This finding leads to the conclusion that the DJNW should be used as the event date and that press coverage