The reaction of firm ex ante cost of equity capital to the resolution of shareholder class action lawsuits

Existing research provides evidence that providers of capital (banks, public debt, and equity) all increase the expected return on securities after the initiation of a shareholder lawsuit. Many of these lawsuits are dismissed or settled with trivial monetary penalties, which suggests that an across-the-board permanent increase in the cost of capital is misguided. After estimating the probable outcome of a shareholder lawsuit using only information available at the time the shareholder lawsuit is filed, we study the resolution of shareholder lawsuits to determine if market participants adjust their expected return after a case is resolved. We find an increase (decrease) in the ex ante cost of equity capital when there is a surprise settlement (dismissal), which is consistent with an efficient market. Further, we present evidence consistent with equity market participants monitoring the progress of shareholder lawsuits prior to resolution. Overall, our results suggest that firm ex ante cost of equity capital only changes after the resolution of a shareholder lawsuit if the outcome of the case is different than initially predicted.     

Gains from Corporate Multinationalism: Evidence from the China Experience

This paper examines the valuation impact of U.S. multinational corporations' expansion into the Peoples Republic of China (PRC during 1979 to 1987. The market response to the announcement of a firm's initial entry into the PRC is found to be positive and statistically significant, suggesting that expansion into China was a value-enhancing activity. Equity joint venture modes of entry are found to result in greater shareholder gains than nonequity expansion modes. The influence of degree of multinationality, market share, growth, and technology-related variables on the size of shareholder gains is also analyzed.     

CAN STOCK MARKET LIBERALIZATION IN EMERGING ECONOMIES MITIGATE LEGAL SYSTEMS DEFICIENCIES?

We document positive valuation effects around the time of stock market liberalization. We find that the valuation effects are larger for countries with civil law traditions compared with countries with common law origins. Similarly, we find that countries with weaker shareholder protections exhibit greater market valuation increases compared with countries with stronger shareholder protections. The results reinforce the importance of country legal systems and of shareholder protections in determining the quality of corporate governance systems and financial market outcomes. The findings suggest that stock market liberalization may mitigate deficiencies in the existing institutional environments not supportive of effective corporate governance systems.     

Product Market Competition and Shareholder Rights: International Evidence

This paper examines the interaction between product market competition and international differences in shareholder rights in relation to firm performance and corporate policies. In contrast to existing literature, we provide evidence of complementarities between product market competition and country shareholder rights protections. The benefits of shareholder rights protections for firm performance are conditional on the presence of a competitive industry environment. We find that stronger shareholder rights protections are associated with better firm performance in competitive industries. However, this relation is not significant in concentrated industries. Consistent results are obtained from the analysis of key corporate policies.     

STATE ANTITAKEOVER LEGISLATION AND SHAREHOLDER WEALTH

The market reaction to state antitakeover legislation is examined case by case and in aggregate for six bills from four influential states that passed second-generation antitakeover statutes. Prior research offers mixed conclusions concerning the effect. In contrast to the reactions in some earlier studies, negative market reactions in this study are weak, producing little evidence of any permanent harm to shareholder wealth.     

The Effect of Shareholder Approval of Equity Issuances Around the World

Mandatory shareholder approval of equity issuances varies considerably across and within countries. In the United States and a few other countries, management typically needs the approval of only its board of directors to issue common stock. In most countries, however, by law or stock exchange rule, shareholders must vote to approve equity issuances when using certain methods or contemplating offers that exceed a specified fraction of outstanding shares. In some countries, shareholders must approve all equity issuances. Even in the United States, shareholder approval is mandatory under certain circumstances. The differences in the stock market reaction to shareholder‐approved equity issuances and to issues undertaken unilaterally by management are strikingly and consistently large. When shareholders approve stock issuances, whether public or rights offerings, or private placements, the average announcement returns are significantly positive, on the order of 2%. But when managers issue stock without shareholder approval, as in the case of U.S. public offerings, returns are significantly negative and 4% lower, on average, than for shareholder‐approved issues. What's more, the closer in time the shareholder vote is to the issue date, and the greater the required plurality (say, two‐thirds instead of half the vote required for approval), the more positive is the market reaction to the issue—and these findings hold for each of the three main kinds of offerings that take place in all 23 countries in the author's sample. Also telling, in countries where shareholder approval is required, such as Sweden and Malaysia, rights offers predominate over public issues. But in countries like the U.S. and Japan, where managers may generally issue stock without shareholder approval, public offers predominate over rights issues. These findings suggest that agency problems—the tendency of corporate managements to put their own interests before their shareholders'—play a major role in equity issuances. Such findings are also largely inconsistent with the adverse selection, market timing, and signaling explanations that currently dominate academic thinking about equity issuances by public corporations.     

Some evidence on Ross' resolution irrelevancy hypothesis

This research attempts to discriminate empirically between the predictable events and resolution irrelevancy hypotheses as both pertain to abnormal stock price performance around regular and special proxy statement mailing dates and the related shareholder meeting dates. We find no evidence that these events result in the positive wealth effects suggested by the predictable events hypothesis. We do find evidence of increased idiosyncratic stock price volatility or information flow around special meeting proxy statement mailing dates and special meeting dates. Thus, our evidence supports the resolution irrelevancy hypothesis.     

The Market Value of Corporate Votes: Theory and Evidence from Option Prices

This paper proposes a new method using option prices to estimate the market value of the shareholder voting rights associated with a stock. The method consists of synthesizing a nonvoting share using put‐call parity, and comparing its price to that of the underlying stock. Empirically, we find this measure of the value of voting rights to be positive and increasing in the time to expiration of synthetic stocks. The measure also increases around special shareholder meetings, periods of hedge fund activism, and M&A events. The method is likely useful in studies of corporate control and also has asset pricing implications.     

Chesapeake Energy Corporation

This case provides a summary of events reported in the proxy statements filed with the SEC by Chesapeake Energy Corporation from its initial public offering in 1993 through 2011. These actual events provide a vehicle for the discussion of corporate governance issues and the means to effect a change in governance practices. Students are asked to perform two tasks. The first is to identify possible governance issues. The second is to suggest actions a shareholder might take. The objective of the first task is to provide students with experience in critically evaluating the governance structure and related actions taken by an actual board of directors. On completion, students should be better prepared to recognize signs of governance weakness beyond commonly discussed structural elements. The second task asks students to create a list of tactics that could be employed to influence corporate policies. The objective is to highlight the limited options available to most investors and to prompt some students to pursue corporate activism or the defenses against activism. The case is intended for use at the graduate level.     

Does cross-listing facilitate changes in corporate ownership and control?

This paper examines whether controlling shareholders of foreign firms use a US cross-listing to facilitate changes in ownership and control. Prior to listing, about three quarters of the firms in our sample have a controlling shareholder. After listing, about half of the controlling shareholders’ voting rights decrease, with an average decrease of 24% points that differs significantly from that of the controlling shareholders of benchmark firms that do not cross-list. Large decreases in voting rights are associated with controlling shareholder characteristics, domestic market constraints, and better stock market performance and liquidity. In addition, there is control change in 22% of the firms. Controlling shareholders are more likely to sell control, and are more likely to do so to a foreign buyer, than controlling shareholders of benchmark firms. The results suggest that controlling shareholders who want to sell shares or their control stake can use a US cross-listing to decrease the cost of transferring ownership.     

Does Weak Governance Cause Weak Stock Returns? An Examination of Firm Operating Performance and Investors' Expectations

We investigate Gompers, Ishii, and Metrick's (2003) finding that firms with weak shareholder rights exhibit significant stock market underperformance. If the relation between poor governance and poor returns is causal, we expect that the market is negatively surprised by the poor operating performance of weak governance firms. We find that firms with weak shareholder rights exhibit significant operating underperformance. However, analysts' forecast errors and earnings announcement returns show no evidence that this underperformance surprises the market. Our results are robust to controls for takeover activity. Overall, our results do not support the hypothesis that weak governance causes poor stock returns.     

Performance of Cross Listed Dual-Class Firms: Evidence from Chinese Firms Cross Listed on US Exchanges

We compare operating and market performance of Chinese single- and dual-class firms cross listed on US exchanges. We find evidence in line with researchers who argue that a dual-class structure allows insiders to invest in long-term value-enhancing projects. We find that dual-class firms underperform prior to their initial public offering (IPO) and then improve and have better operating performance than single-class firms in the second year after IPO. We find that dual-class firms also have better market performance than single-class firms beginning in the initial year, which is contrary to the finding in most other studies. The reason for this might be that firms that list on US exchanges show a credible commitment to shareholder rights.     

Electronic voting in shareholder meetings and the market value of cash holdings

Electronic voting in shareholder meetings facilitates shareholders' direct monitoring by reducing the cost of attending the meetings. This study investigates how adopting electronic voting in shareholder meetings affects the market value of cash holdings. We document that the value of cash holdings is higher for firms adopting electronic voting than for non-adopting firms, especially for firms with large minority ownership and free cash flows. The increased value of cash is attributable to firms engaging in investments that are more value relevant. Collectively, the findings suggest that shareholders perceive corporate governance as strengthened with the adoption of electronic voting. This study contributes to the literature by providing initial empirical evidence on the benefits of electronic voting.     

Corporate strategy financialized: Conjuncture,arbitrage and earnings capacity in the S&P500

The conjuncture that ushered in the era of shareholder value served to embed capital market expectations into corporate governance aligning management and shareholder interests. Market arbitrage focussed on modifying contractual relations with stakeholders to extract a (higher) return on invested capital. In this article we focus on cash earnings on capital employed generated by the S&P 500 survivor group of firms covering the period 1990–2008. We use this financial data to construct three complementary perspectives on corporate financial performance: firm, firm-relative and macro. Within this framework the financial numbers and perspectives are analogous to a ‘hall of mirrors’ where ambiguity and contradiction are in play frustrating straightforward performative narratives that connect purpose with financial transformation an era of shareholder value.     

Ownership structure and open market stock repurchases in France

Abstract

This paper examines open market stock repurchases in France. We find a positive average market reaction to the repurchase announcement. However, the magnitude of the price reaction is found to depend on a number of corporate governance structure measures. The positive aspects of the announcement only appear for a company with a low likelihood of being taken over, and with a low risk of minority shareholder expropriation. Specifically, stock repurchase programmes are good news when the firm is supported by foreign institutional investors, and in the case of controlled firms, when the firm has a second large shareholder, which guarantees an effective balance of power for the controlling shareholders.     

Does the market understand the ex ante risk of expropriation by controlling shareholders?

We examine how the market values operating assets in the presence of time-varying ex ante risk that these assets may be tunneled away. We analyze pairs of Chinese publicly listed firms and their non-listed parents and examine the market valuation of current assets (cash balances, trade receivables, receivables due from the controlling shareholders, inventories) and fixed assets on the publicly listed firm's balance sheet. Our results show that in periods when the risk of tunneling from the publicly listed firm to its controlling shareholder increases, operating assets that are easy to tunnel (cash and receivables due from the controlling shareholder) are valued at larger discounts, while operating assets that are not easy to tunnel (trade receivables, inventories, fixed assets) are not valued at such discounts.     

Do analyst recommendations reflect shareholder rights?

We examine whether sell-side analyst recommendations reflect shareholder rights. Our rationale is that analysts should be influenced by external governance only if market participants do not efficiently price its value. We find that stronger shareholder rights are associated with more favorable recommendations. Further analysis reveals that analysts favor firms with strong shareholder rights only when strong rights appear to be warranted, but do not penalize firms for having strong rights when not needed. These findings occupy middle ground in the debate on the pricing efficiency of shareholder rights. Moreover, we find that firm value is positively associated with the strength of shareholder rights regardless of the expected external governance structure. The latter result is consistent with a “one-size-fits-all” interpretation, and implies that firms across the board could increase share value by reducing their number of anti-takeover provisions.     

Financial Distress and the Cross‐section of Equity Returns

We explicitly consider financial leverage in a simple equity valuation model and study the cross‐sectional implications of potential shareholder recovery upon resolution of financial distress. Our model is capable of simultaneously explaining lower returns for financially distressed stocks, stronger book‐to‐market effects for firms with high default likelihood, and the concentration of momentum profits among low credit quality firms. The model further predicts (i) a hump‐shaped relationship between value premium and default probability, and (ii) stronger momentum profits for nearly distressed firms with significant prospects for shareholder recovery. Our empirical analysis strongly confirms these novel predictions.     

Controller changes and auditor changes

Using listed companies in China’s A-share market from 1997 to 2009, this paper investigates the relationship between controller changes (including changes in controlling shareholders, directors and CEOs) and auditor changes. The empirical evidence indicates that controller changes are positively related to auditor changes and that auditor changes are more likely if there are extensive controller changes. For companies in which both the controlling shareholder and the auditor change, if the successor controlling shareholder is controlled by an other-province government, the auditor is more likely to be replaced and the successor auditor is more likely to be a smaller auditor from the same province as the new controlling shareholder.     

The market valuation of share repurchases in Europe

We analyze a uniquely constructed data set of open market share repurchases across a sample of European firms. We find that the announcement date market reaction is lower than that in the US, mainly because of (i) the relatively large number of recurring announcements which generate significantly lower returns than the initial announcements of intention to repurchase shares; (ii) the rather low market reaction in France, due probably to specific governance and corporate cultural issues; and (iii) the regulatory reform that allowed UK firms to keep the repurchased shares as treasury stock, which decreased their market impact. Across our countries, taxation, shareholder protection, and the European Union’s Market Abuse Directive do not affect significantly the market valuation of repurchases. Our results imply that ultimately, domestic institutional specificities and reforms play significant roles in the market valuation and popularity of share repurchases.