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.     

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.     

Inflexibility of Share Repurchases*

This paper investigates the flexibility inherent in open market share repurchases. Open market share repurchases are recognized as being flexible, since managers believe that they are not an ongoing commitment. However, I find that such returns significantly decrease upon announcing the completion of a repurchase program if firms do not concurrently announce new program authorizations. I also find that announcement returns significantly decline with completion rates and that a high completion rate acts as a negative signal, revealing that firms have finished the repurchasing activities and do not intend to continue share repurchasing in the foreseeable future. These results indicate that share repurchases are less flexible than they were previously thought to be.     

Repurchase Announcements, Lies and False Signals

Prior stock repurchase studies have found evidence that the announcement of a repurchase program sends a positive signal to the market. Firms engaging in open-market repurchase programs do not have to report how, when, and if they actually repurchased any shares. Evidence following the stock market crash of 1987 indicates that many firms announcing repurchase plans did not actually repurchase any share and, by their own admission, had no intention of repurchasing shares. Companies announcing plans and not following through are apparently within the letter of the law. However, we argue that companies announcing plans with no intention of repurchasing shares are guilty of either lying or sending false signals. These companies create distrust in the investment community and intentionally mislead the public in violation of the SEC's antifraud provisions. Changes in the reporting procedures concerning repurchase plans are ethically and legally warranted.     

Internal Restructuring and Firm Survival

We examine the impact of two common methods of internal restructuring, layoffs and divestitures on the survival of a sample of UK firms. Using a Poisson regression model, we find that divestitures improve survival likelihood by reducing the probability and speed of market exit via takeover or bankruptcy, whereas layoffs increase the probability and speed of market exit via bankruptcy. Surprisingly, classifying firms into financially distressed and healthy groups, we find that distressed firms are less likely to restructure. Furthermore, while divestitures improve survival likelihood in both groups, layoff firms are less likely to survive, irrespective of whether they are distressed or healthy. Our findings are consistent with event studies that examine the market reaction to layoffs and divestiture decisions, and so provide some support for the view that the market correctly values the consequences of these restructuring actions on firm survival. The results are robust to several econometric and modeling issues, including controlling for potential self‐selection bias.     

QUALITY,OPERATIONAL LOGISTICS STRATEGY,AND REPURCHASE INTENTIONS: A PROFILE DEVIATION ANALYSIS

Emerging thoughts on quality suggest that three principal sources of customer‐based value creation exist for firms operating in the online marketplace. These include a focus on delivering (1) service quality, (2) product quality, and (3) eBusiness quality. Drawing on strategic choice theory coupled with configuration theory, we conducted a profile deviation analysis among customers of online grocery firms using the “ideal” quality profile for four operational logistics strategies as the benchmark (semi extended strategy, fully extended strategy, de‐coupled strategy, and centralized extended strategy). The findings suggest that service, product, and eBusiness quality‐based fit with operational logistics strategy type are associated with customers' behavioral (repurchase) intentions. This lends support to the notion that capitalizing on the appropriately weighted quality‐focus represents a strategic vehicle to create superior outcomes in online businesses. The makeup of these ideal quality profiles that represent the strongest repurchase intentions of customers is also provided.     

Frequency and Motives for Stock Dividends in a Unique Environment

We investigate the possible differences in the information content of stock dividends between firms that distribute stock dividends frequently (frequent distributors) and firms that distribute stock dividends infrequently (infrequent distributors) using a unique data set from Oman where the market microstructure frictions are either absent or limited. We find that infrequent stock dividend distributors have higher postdistribution operating performance relative to frequent distributors. We also find that the illiquidity measure is significantly related to the announcement effect only for frequent stock dividend distributors, whereas short‐term performance is significantly related to the announcement effect only for infrequent distributors. Our findings indicate that infrequent stock dividends are used mainly to convey favorable private information about the firms’ future prospects, and frequent stock dividends are used to reduce stock price to an optimal trading range in order to improve trading liquidity. JEL classification: G14, G35.     

信邦制药股票回购动因及市场效应分析

股份回购在西方发展较早,已经成为资本主义国家公司管理层提高股价或调节资本结构的成熟手段.然而我国的股票回购在21世纪初才起步,实践经验较为不足.本文将分析信邦制药两次股票回购的市场反应并进行对比.结果发现,两次股票回购的实施确实产生了积极的市场影响.此外,基于差异性对比发现,回购目的、回购规模及高管增持公告三方面因素共...     

Consequences of Riding Takeover Waves: Australian Evidence

This paper uses Australian data to analyze takeover bid premiums and long‐term abnormal returns for mergers that occur during wave and non‐wave periods. Findings reveal that bid premiums are slightly lower in wave periods, and bidding firms earn normal post‐takeover returns (relative to a portfolio of firms matched on size and survival) if their bids were made in non‐wave periods. However, bidders who announced their takeover bids during wave periods exhibit significant underperformance. For mergers that took place within waves, there is no difference in bid premiums nor is there a difference in the long‐run returns of bidders involved during the first half and second half of the waves. We find that none of prominent theories of merger waves (managerial, misvaluation, and neoclassical) can fully account for Australian takeover waves and their effects. Instead, our results suggest that Banal‐Estanol et al.'s screening theory of merger activity, by combining the misvaluation and neoclassical theories, may provide a better explanation.     

Political Connections and Industrial Pollution: Evidence Based on State Ownership and Environmental Levies in China

This paper examines the effectiveness of public enforcement by studying the effects of regulatory intervention to curb tunneling through intercorporate loans in China. Specifically, we explore whether public enforcement efforts in 2006 (blacklisting and sanctions) resulted in less tunneling, and ultimately in increased performance for tunneling firms. We show that tunneling is among the dominant factors increasing the likelihood of becoming blacklisted. We also find that firms’ tunneling mechanisms decreased significantly after the regulatory shock, and that their performance increased significantly compared to non-tunneling firms after the regulatory shock. Finally, we find a positive market reaction to the public announcement of tunneling both for firms that have been blacklisted and other tunneling firms that are not blacklisted. Collectively, these results suggest that public enforcement in the presence of a credible threat succeeds in deterring the effect on tunneling behavior in China.     

Do cross-border mergers and acquisitions increase short-term market performance? The case of Chinese firms

Despite the new momentum in cross-border mergers and acquisitions (M&As) by emerging market firms, we have a limited understanding of the impact of these activities. Drawing on signalling theory and the institution-based view, this paper examines the extent of stock market reactions to the announcement of cross-border M&A deals, based on an event study of a sample of Chinese firms during the period 2000–2012. The findings indicate that the announcement of cross-border M&As results in a positive stock market reaction; this effect is more significant in the mainland Chinese stock markets (Shanghai and Shenzhen) than that in the Hong Kong market. The shareholders of Chinese firms that acquire a target firm in a host country with a low level of political risk gain higher cumulative abnormal returns than those firms targeting companies in countries with a high level of political risk. The shareholders of Chinese state-owned enterprises experience lower abnormal returns compared with those of Chinese privately owned firms when engaging in cross-border M&A deals.     

Corporate Refocusing

During the 1980s, many conglomerates and other diversified firms reduced their diversification by refocusing on their core businesses. This paper provides an economic explanation for this phenomenon. It is argued that: (a) refocusing represents the natural response of firms to a more volatile external environment and a more competitive capital market; and (b) over-diversified firms that refocus will achieve improved profitability and a higher market value, and will thus protect themselves from hostile takeover.     

我国上市公司资产出售的公告效应研究

文章以1999-2004年间185家企业226次资产出售事件为样本,检验了我国上市公司资产出售的公告效应,并对2008-2009年间我国上市公司的资产出售进行了稳健性检验.研究发现,我国企业的资产出售具有明显的年中和年末效应；企业股价对资产出售的反应显著为正,尤其是在(-2,0)区间内,资产出售的公告效应得到集中释放.对资产出售公告效应影响因素的检验表明,我国上市公司的资产出售更加符合有效配置假说,融资假说不能解释这种行为.     

Takeover protection and stock price crash risk: Evidence from state antitakeover laws

We exploit the passage of state antitakeover laws to examine the relation between takeover protection and stock price crash risk. We find that firms incorporated in states that passed the laws are negatively associated with future stock price crash risk in the post-law periods, suggesting that takeover protection mitigates bad news hoarding activities. Further analysis shows that the mitigating effect is more pronounced when firms have severe information asymmetry or face strong product market competition. Together, our findings shed new light on the impact of takeover threats on managerial incentives to engage in bad news hoarding.     

证券市场选择是否影响公司业绩与价值?--来自中国房地产行业的经验证据

企业在不同资本市场之间的选择往往是上市过程中一个重要决策。上市地点是否会影响其后续业绩表现以及价值？文章基于中国内地房地产企业数据的研究发现,在中国香港上市的企业比在中国内地上市的企业经营业绩更优,而两者在股市价值上并无显著差别。另外,在(中国)香港上市的房地产企业中,国有企业股市价值低于非国有企业;而在中国内地上市的房地产企业中,国有企业股市价值高于非国有企业。研究结果说明,证券市场完善的监管有利于降低代理人问题,提高企业经营业绩。     

Rules Governing the Transfer of Ownership: Wealth Effects and the Influence of Ownership Structure

This paper studies a unique change in regulation governing the transfer of share ownership in New Zealand. The new regulation requires all listed firms to adopt one of three proposed takeover regimes, ranging from almost free transferability of shares to a uniform pricing rule. Our empirical results indicate that a higher proportion of shares held by blockholders makes adoption of a liberal takeover regime more likely. We also find that an increase in the proportion of non‐beneficial shares held by directors and shares held by trust companies increases the probability that a firm adopts a more restrictive takeover regime. Furthermore, the results from an event study show that firms adopting the liberal takeover regime experience substantial positive abnormal returns compared to firms adopting the standard or restrictive regime.     

Impacts of International Greenfield Investment on Firm Valuation

Our study examines the announcement effects of 343 international greenfield investments by 289 U.S. firms for their impact on shareholder wealth. This paper develops five hypotheses based on the positive‐multinational‐network hypothesis. The evidence indicates that market reactions to announcements by firms entering developing countries are more favorable than those entering developed countries. In addition, the results show that the wealth effect for firms entering a host country for the first time is greater than for those that are already operating within the country. As for the long run, greenfield firms have shown improvement in their operating performance and stock performance. Copyright © 2012 ASAC. Published by John Wiley & Sons, Ltd.     

Management commitment to innovation and esop stock concentration

The separation of ownership and control can lead to managerial entrenchment and a convergence of decision making and decision control. Decision-making refers to management's authority to make strategic and operating decisions while decision control refers to the ratification and monitoring of management decisions. Managers that possess decision control may behave in a risk-reducing manner relative to the behavior of owner managers because of management's desire to maximize job security Amihud and Lev 1981, McEachern 1975. For example, the managers of such firms may choose to diversify the firm into a wide variety of industries in an attempt to smooth revenues and earnings and avoid a series of peaks and valleys in the company's financial performance. These managers may believe that stable earnings will be viewed positively by shareholders and should help lessen the risk of stockholder action to replace upper-level management. Managers that possess both decision-making and decision-control capabilities may pursue a variety of risk-reducing strategies in addition to broad diversification.The existence of large outside investors has been shown to result in management becoming less risk-averse; management is more willing to adopt a wide range of strategies that present greater risk, but offer greater returns to shareholders. Hill and Snell (1988) found a significant, positive correlation between stock concentration and R&D intensity, indicating that large outside beneficial owners or dominant stockholders can influence management to pursue higher risk-higher return strategies. R&D intensity is used as a proxy for innovation and is generally operationalized as a firm's industry-adjusted R&D expenditures as a percentage of its sales. Findings of other studies also suggest that large investors are associated with decreased risk aversion by management. When controlling for the effects of time, previous R&D spending, liquidity, market share, diversification, market concentration, industry, and leverage, Hansen and Hill (1992) found a mild positive correlation between institutional stock concentration and R&D spending.This paper examines management's ability to utilize employee stock ownership plans (ESOPs) to facilitate managerial decision control or the capability to ratify and monitor decisions and subsequently adopt greater risk-reducing behavior. It is possible that management may adopt an ESOP to enhance entrenchment by placing a large block of the company's shares under the control of company managers and employees that are under the supervision of management. As a result, some ESOPs may not be effective alignment mechanisms since participants may find it difficult to organize a vote against management proposals or generate adequate enthusiasm and momentum to replace top-level managers. The paper anticipates that a positive relationship exists between the degree of ESOP stock concentration and the reduced risk-taking behavior of management. Specifically, the study argues that as ESOP stock concentration increases, management will likely behave in a risk-reducing manner and decrease its commitment to innovation, as measured by R&D intensity.Employee stock ownership plans (ESOPs) are qualified retirement plans under the Employee Retirement Income Security Act of 1974 (ERISA) and are treated similarly under the Act to other qualified pension plans with the exception of portfolio diversification. Employee stock ownership plans consist only of shares of the employer's stock and the performance of an ESOP-based retirement fund hinges with the market performance of that single stock. An agency theory framework would suggest that ESOPs that control large blocks of outstanding shares have an effect on management similar to that of other large investors and act to encourage management to craft and implement strategies that will yield superior financial and market performance. As ESOP stock concentration increases, agency theory proposes that ESOP participants would readily act to protect their interests and the interests of other shareholders. However, some previous research suggests that large ESOPs are not alignment mechanisms, but further entrench current management into their positions.Gordon and Pound (1990) found that management can use large ESOPs to increase effective insider ownership to protect against unwanted changes in corporate control. The authors suggested that ESOPs were less effective than other types of large investors at monitoring management decisions since ESOPs are unilaterally undertaken by management, ESOP shares are held only by incumbent managerial and non-managerial employees, and ESOP trustees are frequently appointed by management. The market has been shown to view an ESOP as a management entrenchment mechanism when the ESOP was adopted as a possible takeover defense Chang 1990, Dhillon and Ramirez 1994. The market reacts more favorably to an ESOP adoption when other large outside shareholders are present who have the capability to offset the influence of inefficient managers who might choose to use the ESOP to further entrench themselves into their positions (Park and Song 1995).The results of this study find that after the implementation of an ESOP, R&D intensity decreases as ESOP stock concentration increases. A significant negative relationship exists between ESOP stock concentration and change in industry-adjusted R&D intensity at the 0.05 level when controlling for firm size and change in profitability. The sample included firms where ESOP stock concentration represented as little as 3% of the employer's outstanding shares and as much as 67% of all outstanding employer stock. The sampled firms with the greatest ESOP stock concentration were associated with the greatest decreases in industry-adjusted R&D intensity after the implementation of the ESOP. The results suggest that management of high ESOP stock concentration firms became more risk-averse in regard to commitment to innovation after implementation of the ESOP.Agency theory adequately explains the effect of large outside stockholders on management's choice of strategy. Hill and Snell (1988) and Hansen and Hill (1992) have found that as stock concentration increases, incentive alignment becomes increasingly likely. The independent nature of large outside blockholders contributes to a separation of decision making from decision control, a reduction in agency costs, and a minimization of managerial risk-reducing behavior. As highly independent blockholder size decreases, decision making and decision control converge, and management entrenchment is more probable.Agency theory fails to adequately explain the effect of employee stock ownership on managerial risk-reducing behavior. Employee stock ownership does have the capability to align shareholder and employee interests under the proper conditions. However, ESOPs lack independence from managerial influence and are much less likely than outside institutional investors to monitor management decision-making and pressure management to adopt strategies that incorporate greater risk and an opportunity for greater returns. The study found that increased ESOP stock concentration was associated with greater managerial risk-reducing behavior. The results suggest that agency effects are more likely in firms with modest ESOP stock concentration since the ESOP does provide incentives for an alignment of interests, but does not provide management with a mechanism to block the actions of other large blockholders. ESOPs with higher levels of stock concentration are likely to facilitate management entrenchment by preventing some large percentage of shares from aligning with other large shareholders to challenge management decision-making. If other investors lack the capability to put full pressure on management, the monitoring and ratification of management decisions has been yielded to management. Therefore, a managerial entrenchment hypothesis is better suited than agency theory in explaining the effect of large ESOPs on management's risk-reducing behavior.     

Foreign Acquisition and Firm Productivity: Evidence from Slovenia

This paper investigates the impact of foreign acquisition on the productivity of Slovenian manufacturing firms subject to takeover in 1997. It finds evidence that foreign investors acquire those enterprises with higher productivity, that are more inclined to export and that operate in more concentrated industries. It then controls for the estimation bias induced by this non‐random selection process by applying the combined propensity score matching and difference‐in‐differences estimation technique. The results of the empirical analysis show no robust statistical evidence of a positive causal effect of foreign acquisition up to two years following takeover. This finding suggests that a transfer of intangible assets from foreign firms to their Slovenian affiliates does not take place over this time period.     

Foreign Acquisition,Wages and Productivity

This paper studies the effect of foreign acquisition on wages and total factor productivity (TFP) in the years following a takeover by using unique detailed firm‐level data for Sweden for the period 1993–2002. The paper takes particular account of potential endogeneity of the acquisition decision (for example, due to ‘cherry picking’) by implementing an instrumental variable approach and propensity score matching with difference‐in‐difference estimation. Moreover, in line with the recent literature on firm heterogeneity and trade, this paper allows for the acquisition effect to differ depending on whether the targeted firms were domestic multinational or non‐multinationals before the foreign takeover. This paper also allows for the acquisition effect to differ depending on whether the acquisition is horizontal or vertical. Our results show that foreign acquisition has no effects on overall, skilled or less‐skilled wage growth, either in targeted Swedish MNEs or in targeted Swedish non‐MNEs or if the acquisition was motivated by vertical or horizontal motives. However, the results indicate that both targeted Swedish MNEs and non‐MNEs have better growth in TFP after vertical foreign acquisition only but no such impact from horizontal foreign acquisition.