Valuing the Potential Transformation of Banks into Financial Service Conglomerates: Evidence from the Citigroup Merger

The merger between Citicorp and Travelers Group on April 6, 1998 could have emitted two relevant signals for firms that provide financial services. The first signal is the endorsement by two prominent financial institutions that benefits from cross‐selling of bank services with insurance services, brokerage services, and other financial services can be realized. The second signal is that regulators will allow the combination of commercial banking with insurance underwriting and full‐service brokerage, paving a path for similar combinations in the future. We document a favorable share price response for commercial banks, insurance companies, and brokerage firms, which supports the argument that the merger sets a precedent for other combinations between banks and nonbank financial services that will facilitate cross‐selling and efficiencies.     

Use of reference point theory to explain the price paid for private targets

Review of Quantitative Finance and Accounting - We investigate whether reference points influence the price paid for private targets. Contrary to prior literature, we consider reference points of...     

The Impact of Mispricing and Asymmetric Information on the Price Discount of Private Placements of Common Stock

The price discount on privately placed stock is large and can vary substantially among firms. While earlier studies attribute price discounts on privately placed stock to illiquidity and costs of gathering information, we offer a more complete explanation. We find that firms exhibiting higher overvaluation have significantly larger price discounts in private stock sales. We also find that higher levels of asymmetric information about the issuing firm and about the stock market environment at the time of the private placement cause more pronounced discounts in the offer price. Our analysis also shows that post-issue abnormal returns following private placements are higher when discounts are less pronounced.     

The Industry Effects Regarding the Probability of Takeovers

This study attempts to determine whether an acquisition announcement signals potential gains to the corresponding industry rivals of the target, and whether these gains can be explained by industry-specific and rival firm-specific factors that reflect the likelihood of a takeover. The research finds that the valuation effects of the target, combined acquirer and target, and industry rivals of the target are positive and significant. The mean valuation effects per corresponding industry are significantly related to industry-specific characteristics that reflect the probability of a takeover. Specifically, industries characterized as having a higher level of free cash flow, a higher level of tangible assets, and a smaller market value experience a more favorable revaluation. A supplemental analysis of the individual rival firms is also conducted, since the variation in the valuation effects between rival firms within each of the industries is distinctly different from the variation of mean industry effect across industries. The analysis of the individual rivals finds that the same rival-specific variables are significant and in the same direction as the analysis of the industry-specific variables. In addition, the valuation effects of individual rivals are also inversely related to their previous performance. Overall, the results suggest that industry-specific and rival firm-specific characteristics that reflect a higher probability of a takeover are important in explaining acquisition gains and motivation.     

Does Regulation Fair Disclosure Reduce the Information Quality of Managerial Guidance?

We examine an effect of Regulation Fair Disclosure (Reg FD) on voluntary public managerial guidance information quality. Results suggest that the information quality of public guidance has not deteriorated after Reg FD. We also examine separately the effect of Reg FD on information efficiency before earnings releases for firms that provide public managerial guidance and those that do not. We find that when we control for the impact of Reg FD on firm characteristics, information efficiency deteriorates for firms that do not provide public guidance and for new guiders, while it does not change for firms that continue issuing public guidance after Reg FD.     

Profit Warnings and Timing

We find that profit‐warning announcements elicit a strong negative market response that is not sensitive to timing the warning in advance of the earnings announcement. Share prices begin to adjust about five days before a profit warning, and the market response is not complete until about five days after the warning. The accumulated response over the 11‐day period ending five days after the announcement is ?21.7%. The profit warning effect over the two‐day announcement period is 32 times the valuation effect upon subsequent release of the actual earnings. There is no evidence of a reversal after this period, and therefore no sign that the market response is excessive.