Information asymmetry and accounting disclosures for joint ventures

In September 1999, the Financial Accounting Foundation issued a special report recommending the use of the equity method supplemented with appropriate disclosures for corporate joint ventures in the United States. This study, using data for corporate joint ventures in Singapore, provides some preliminary evidence regarding the effect of the supplementary information disclosure on information asymmetry among market participants as measured by bid-ask spreads. The results show that the disclosure of supplementary information of joint ventures is associated with a significant decline in bid-ask spreads. The results also indicate that the decline in information asymmetry is larger when the investment in joint ventures is significant and that larger investing firms tend to have a smaller decline in information asymmetry compared to smaller investing firms. The implications of this study, that the provision of supplementary information about joint ventures could reduce information asymmetry among participants in equity markets, thus leveling the playing field among traders, could have implications for policymakers.     

An empirical study of the value-relevance of using proportionate consolidation accounting for investments in joint ventures

This research examines bond risk premiums to determine whether creditors of companies with investments in joint ventures reflect legal or implicit measures of the debts of joint ventures. The legal view suggests that the amount of potential loss from an investment in a joint venture is limited to the investment. The implicit view suggests that the operations of the joint venture and the venturer are interdependent. Equity method accounting reflects the legal view and proportionate consolidation reflects the implicit view.The study examines whether bond risk premiums are more highly associated with accounting numbers from proportionate consolidation than equity method accounting. The study uses data from 10Ks, the Wall Street Journal, and Moody's Bond Record from May 1, 1995 through April 30, 1998. These 4 years are used because US interest rates were fairly stable during this period, which is an important factor when examining bond risk premiums. Additionally, the companies in the study needed to remain stable across the window of study – no mergers, acquisitions, buy-outs, or liquidations – in order to maintain a comparative sample over the entire time period. The risk premium model uses measures of default that change between equity method accounting and proportionate consolidation. Differences in the explanatory power of the model determine how creditors view the joint venture debts.The study shows that approximately half of equity investments represent investments in joint ventures. Furthermore, the average joint venture uses debt to finance about two-thirds of the assets. The results show that proportionate consolidation fails to improve the explanatory power of the model when examining the entire set of companies that invest in joint ventures. However, the data reject the null hypothesis of no improvement with proportionate consolidation when examining companies who guarantee the debt of their joint venture. The policy implication of this study indicates that a change to proportionate consolidation would provide more value-relevant information to creditors when companies guarantee the debt of the joint venture.     

Empirical evidence of the value of monitoring in joint ownership

Joint ownership of assets by two partners can have an adverse effect on the incentives to invest and can result in unstable and inefficient organizational structures. Control sharing, however, plays an important role in economic, political, and social institutions. There is scarce empirical evidence on the benefits of joint ownership in corporate finance. We analyze acquisitions of corporate assets by joint ventures to empirically ascertain the value of joint ownership in economic activities. The results indicate that firms experience significantly larger returns in joint acquisitions than in full-control acquisitions and that this difference is restricted to the sample of firms in which both partners share equal ownership in the target. These findings suggest that monitoring in joint ownership structures ameliorates the possibility of value-destroying corporate decisions.     

The impact of M&A and joint ventures on the value of IT and non-IT firms

This paper aims to study and provide empirical evidence on the impact of mergers and acquisitions (M&A) and joint ventures on the value of IT and non-IT firms. Using the event study methodology, we investigate the effect of such strategic alliance announcements on firm value in a sample of 170 firms. The results show that such strategic alliance announcements create significant gains in firm value. When the sample is divided into IT and non-IT firms, we find stronger support for positive impact on gains in firm value among non-IT firms than among IT firms. We also find that the smaller strategic alliance partners perform better than their larger partners. However, we fail to find any significant difference in impact on firm value between merger/acquisition and joint venture announcements. This work was supported by the research fund of Hanyang University (HY-2004). JEL Classification L1 · G14 · G34     

Asymmetric business cycles: Theory and time-series evidence

We offer a theory of economic fluctuations based on intertemporal increasing returns: agents who have been active in the past face lower costs of action today. This specification explains the observed persistence in individual and aggregate output fluctuations even in the presence of i.i.d shocks because individuals respond to the same shock differently depending on their recent past experience. The exact process for output, the sharpness of turning points and the degree of asymmetry are determined by the form of heterogeneity. Our general formulation, under certain assumptions, reduces to a number of popular state space (unobserved components) models. We find that on US data our general formulation performs better than many of the existing econometric models, largely because it allows sharper downturns and more pronounced asymmetries than linear models, and is smoother than discrete regime shift models. Our estimates imply that only modest intertemporal returns are needed for our model to explain US GNP, and that heterogeneity across agents plays an important role in the propagation of business cycle shocks.     

The flash crash: An examination of shareholder wealth and market quality

We investigate stock returns, market quality, and options market activity around the flash crash of May 6, 2010. Abnormal returns are negative on the day of and the day after the flash crash for stocks that had trades that executed during the crash subsequently cancelled by either Nasdaq or NYSE Arca. Consistent with studies that suggest that other sources of liquidity withdrew from the markets during the flash crash, we find that the fraction of trades executed by the NYSE increases during this volatile period. Market quality deteriorates following the flash crash as bid-ask spreads increase and quote depths decrease. Evidence from the options markets indicates that investor uncertainty increased around the time of the crash and remained elevated for several days.     

The Evidence on Product-Market Diversifying Acquisitions and Joint Ventures by U.S. Banks

We examine the acquisition and joint venture strategies of U.S. banks from 1980 to 1998 to diversify into non-banking sectors. We find that the market responds favorably to both types of expansions, with the gains being shared between acquiring banks and their targets and venture banks and their non-bank partners, respectively. Acquisitions expose acquiring banks to significant increases in nonsystematic, market, and total risk, while joint ventures result in significant decreases in the nonsystematic and total risk measures for participating banks. Our results suggest that product-market expansions, in general, provide U.S. banks with value-enhancing opportunities, and that joint ventures may improve both the return and risk characteristics of the partner banks.     

Underpricing and entrepreneurial wealth losses in IPOs: theory and evidence

We model owners as solving a multidimensional problem when takingtheir firms public. Owners can affect the level of underpricingthrough the choices they make in promoting an issue, such aswhich underwriter to hire or on what exchange to list. The benefitsof reducing underpricing in this way depend on the owners' participationin the offering and the magnitude of the dilution they sufferon retained shares. We argue that the extent to which ownerstrade off underpricing and promotion is determined by the minimizationof their wealth losses. Evidence from a sample of U.S. initialpublic offering confirms our empirical predictions.     

The certification value of private debt renegotiation and the design of financial contracts: Empirical evidence from Europe

By using a sample of bank loan renegotiations by European firms, I show that the renegotiation of financial contracts bears a certification value, while deeply changing the contractual features of the loan over time, to the benefit of shareholders. I find that amendments to financial covenants and to loan amounts increase the cumulative abnormal returns of a borrowing firm by 10–15%. Early and less frequent renegotiations of bilateral loans with short maturities also imply a positive stock market reaction. Amendments signaling the early accrual of new and positive information allow increasing firm value.     

Value creation in banking through strategic alliances and joint ventures

A large number of studies (DeYoung et al., 2009) analyze merger outcomes in the financial industry, while other forms of business cooperation are still poorly investigated. Our paper examines results of strategic alliances and joint ventures in European and US banking over the period 1999–2009. First, we estimate abnormal returns around the deal announcement date and then these are regressed on a large set of explanatory variables. We show that joint ventures create shareholder value when involving non-banking financial partners and allowing banks to expand abroad, while international strategic alliances tend to destroy shareholder value.     

An event study analysis of international ventures between banks and insurance firms

The current study examines the effects on shareholders wealth as a result of the bank–insurance interface. Using a global sample of financial intermediaries and an event-study framework the findings reveal significant abnormal returns surrounding the announcement of bank–insurance ventures. A control sample using financial institutions that do not pursue bank–insurance deals shows negative abnormal returns with much higher magnitude in absolute terms. When the sample is separated on the basis of the bidder's nature, then bank-bidders earn significant positive returns, while the insurance-bidders experience significant losses. The analysis further unveils either statistically significant negative returns or insignificant values for bank–insurance divestments. Finally, profitability, size and functional diversification are all found significant in determining abnormal returns over various intervals.     

The impact of IMF term loans on US bank creditors’ equity values: an event study of South Korea's case

This study investigates whether the IMF term loan announcements to South Korea in late November and early December 1997 significantly increased the implicit value of the U.S. bank loans and investments to South Korea and hence, the equity values of its U.S. bank creditors. Using both the market model and the SUR model, this paper examines the potential abnormal performance of a total of 230 U.S. banks during mid-November to early December 1997. The findings show that there was a statistically significant positive equity response to the international bank creditors during the major event announcements. Further, the evidence shows the existence of different pricing behavior of different groups: groups that were more exposed experienced a more positive equity-price response.     

The sources of shareholder wealth gains from going private transactions: The role of controlling shareholders

The present study investigates the sources of shareholder wealth gains – as measured by cumulative abnormal returns and premiums – from going private transactions (GPTs). Using data for 314 GPTs from 18 Western European countries, we find that the announcements of GPTs generate a cumulative average abnormal return of about 22% and that pre-transaction shareholders on average receive a raw premium of about 36%. We further find that these shareholder wealth gains increase with the degree of separation of cash-flow and control rights of the pre-transaction ultimate owner and decrease with its ownership interests and with the presence of a second large shareholder. Taken together, these findings support the view that GPTs are expected to mitigate the inefficiencies induced by pre-transaction agency problems between controlling and minority shareholders. Thus, shareholder wealth gains from GPTs reflect the potential additional value that will be created under private ownership.     

Family firms,tax avoidance,and socioemotional wealth: evidence from tax reform in Taiwan

Review of Quantitative Finance and Accounting - In 2018, Taiwan implemented a tax reform package that abolished the imputation regime, providing managers stronger incentive to engage in tax...     

Proportional consolidation versus the equity method: A risk measurement perspective on reporting interests in joint ventures

Under Canadian generally accepted accounting principles (GAAP), firms are required to proportionally consolidate joint venture investments, as opposed to the United States where the equity method is used. Using a sample of Canadian firms, this study investigates the relative information content of equity method and proportionally consolidated financial statement amounts for explaining market risk. This is possible for Canadian firms where detailed footnote disclosures permit the calculation of pro forma equity method amounts. The findings are surprising in that whereas proportionally consolidated financial statements are more risk relevant than equity method statements for explaining price volatility, equity method statements are more risk relevant than proportionally consolidated ones for explaining bond ratings. The findings suggest that different market participants use financial statement information differently. The study also finds that failure to disclose disaggregated joint venture accounting amounts, as is the case under US GAAP, masks information that could help market participants assess risk.     

Are trading bans effective? Exchange regulation and corporate insider transactions around earnings announcements

There is considerable controversy on the role of corporate insider trading in the financial markets. However, there appears to be a consensus view that some form of regulation concerning their activities should be imposed. One such constraint involves a trading ban in periods when corporate insiders are expected to be advantaged vis-à-vis the information flow. This paper directly tests whether constraints of this kind are effective in curtailing insider activity through a study of the trading characteristics of UK company directors. The London Stock Exchange Model Code (1977) imposes a two-month close period prior to company earnings announcements. We find that although the close period affects the timing of director trades, it is unable to affect their performance or distribution. Directors consistently earn abnormal returns irrespective of the period in which they trade. They tend to buy after abnormally bad earnings news and sell after abnormally good earnings news. Moreover, there are systematic differences in the trading patterns of directors surrounding interim and final earnings announcements. It appears that many corporate insiders have private information and exploit this in their trading activities. As a result, one can conclude that trading bans do not impose significant opportunity costs on the trading of corporate insiders.     

Productivity-based asset pricing: Theory and evidence

In a general real business cycle model, we derive a pricing kernel that involves only production function arguments. The productivity shock is the single factor and the capital stock relative to a productivity measure is the conditioning variable. The model compares favorably with the complementary consumption-based and market-based approaches and with the Fama-French three-factor model. A size premium arises from differences in unconditional sensitivities—small firms are more sensitive to productivity shocks—and a value premium from differences in conditional sensitivities to productivity shocks—growth firms are more sensitive to productivity shocks when the productivity risk premium is low.     

Foreign equity investment restrictions, capital flight, and shareholder wealth maximization: theory and evidence

This article provides a theory of foreign equity investmentrestrictions. We consider a model where the demand functionfor domestic shares differs between domestic and foreign investorsbecause of deadweight costs in holding domestic and foreignsecurities that depend on the country of residence of investors.We show that domestic entrepreneurs maximize firm value by discriminatingbetween domestic and foreign investors. The model implies thatcountries benefiting from capital flight have binding ownershiprestrictions such that foreign investors pay a higher pricefor shares than domestic investors. The empirical implicationsof this theory are supported by evidence from Switzerland.     

Financial leverage clienteles: Theory and evidence

This paper examines the hypothesis that investors will sort themselves out into tax-induced ‘financial leverage clienteless’ in which the common stocks of highly levered firms will be held by individuals with low personal tax rates, while the shares of firms with little or no leverage will be held by individuals with high personal tax rates. Although the idea of financial leverage clienteless has appeared in the literature before, the immediate motivation for this investigation is a recent paper by Merton Miller. In that paper he argues that under the current U.S. tax structure, personal taxes will offset corporate taxes such that in equilibrium the value of any individual firm will be independent of its use of debt financing. We extend his analysis to show specifically the way in which financial leverage clienteles would come about in his assumed tax environment. We then conduct some direct empirical tests of the leverage clientele hypothesis. These tests can also be viewed as indirect tests of Miller's new proposition on the irrelevance of capital structures. The results of the tests are mixed: The relationship between corporate leverage policies and investors' tax rates is statistically significant, but its magnitude is less than would be predicted by the theory.