The Relation Among Targets' R&D Activities, Acquirers' Returns, and In-Process R&D in the US

Abstract:  Using a sample of 129 mergers and acquisitions (M&As) in the US between publicly traded acquirers and targets in research and development (R&D) intensive industries over the period of 1994-2004 and a size- and industry-matched sample, we examine the relation among targets' R&D activities, the probability of acquirers' writing-off in-process R&D (IPRD), and acquirers' returns around the time of M&A announcements. We find that firms acquiring targets with higher R&D investments tend to write off some of the acquired R&D assets upon the completion of the M&As. We also find that the median cumulative abnormal return during the three days around M&A announcements for acquirers with subsequent IPRD write-offs is −2.73% while the return for acquirers without IPRD write-offs is −0.60%. This suggests that acquirers' stock returns around M&A announcements are much lower when investors expect acquirers to expense IPRD. The results are consistent with our conjecture that acquirers tend to write-off IPRD when they acquire overvalued targets. We also find that IPRD write-offs do not increase earnings or stock returns of acquirers after M&As, which is inconsistent with an earnings management hypothesis.     

The Control and Performance of Joint Ventures

We analyze the control and performance of assets operating in joint ventures (JVs). Control in JVs is determined by the allocation of voting rights and by the contracts that govern the JVs. This hybrid allocation of control seeks to reduce the potential for ex post opportunism. The results suggest that contractual provisions encourage collaboration and improve JV performance when one of the partners accepts a minority position on the board. The analysis also reveals that with the exception of JVs with contractual option provisions, assets operating in our sample of JVs generate higher returns than assets in fully controlled subsidiaries.     

Dividend policy,signaling, and discounts on closed-end funds

We test the predictions of dividend signaling models using closed-end equity funds that adopt explicit policies committing them to pay minimum dividend yields. These policies represent deliberate attempts to reduce share price undervaluation relative to NAV. Funds that adopt minimum dividend policies experience reductions in their share price discounts, trade at smaller discounts than other funds, earn greater excess returns following policy adoption, and their managers survive longer than other managers do. The results are broadly consistent with the predictions of dividend signaling models, and suggest that high quality closed-end funds can reduce undervaluation via dividend policy.     

The Effects of the Reporting of Off‐Balance‐Sheet Investments on EPS Uncertainty,Leverage and Shareholders’ Wealth

The degree of control over operations affects the quality of information provided to investors. Uncertainty about operating performance increases following the first equity method (EM) reporting of off‐balance‐sheet investments, but only when the investments are joint ventures (JVs). Partners in JVs report lower levels of debt. These results are not due to informational deficiencies of the EM, but to the riskier nature of JVs. Long‐run stock performance analysis indicates that investors experience normal risk‐adjusted returns when investing in firms with economically significant off‐balance sheet investments.     

Auditor's Reputation and Equity Offerings: The Case of Arthur Andersen

The certifying and monitoring role of auditors is valuable to clients. By examining the impact of Arthur Andersen's worsening reputation on its clients, we find a 200 basis point more negative reaction to seasoned equity offering (SEO) announcements for firms audited by Andersen. The median firm in our sample loses 31.4 million more than a non-Andersen client. We do not find any unusual underpricing for these SEOs, which suggests that any accounting concerns about the issuers are resolved before the issue dates.     

Chaebol-affiliated analysts: Conflicts of interest and market responses

Some Korean business groups, or chaebols, have a large stake in securities firms that issue analysts’ reports on their member companies. This structure is unique in that industrial companies and securities firms are affiliated and operate within the same group. We investigate the informational content of earnings forecasts, stock recommendations and target prices made by the chaebol-affiliated analysts, using data collected between 2000 and 2008. The chaebol analysts tend to make more optimistic earnings forecasts for the member companies. The mean EPS forecast error (5.36%) of the affiliated analysts for the same chaebol company are significantly larger than that (3.23%) of other chaebol and independent analysts. The chaebol analysts also assign better recommendations by almost one level and set target prices 2.5% higher to the member companies after controlling for company and analyst characteristics. These results are consistent with the hypothesis that chaebol analysts’ reports are biased by conflicts of interest. Stock market reactions do not differ in response to announcements of stock recommendations issued by affiliated vs. non-affiliated analysts. This suggests that capital markets do not recognize the conflicts of interest inherent in chaebol analysts’ reports.     

Does debt market timing increase firm value?

Survey evidence indicates that firm managers try to time debt markets when choosing the maturity of new debt issues, but we do not know whether these strategies increase firm value. This research examines differences in value across nontimers and timers, where timers are defined as firms that follow either a naïve strategy of choosing long-term debt when the term premium is low or a strategy from Baker et al. (2003 Baker, M, Greenwood, R and Wurgler, J. 2003. The maturity of debt issues and predictable variation in bond returns. Journal of Financial Economics, 70: 261–91. [Crossref], [Web of Science ®] , [Google Scholar]) based on the predictability of future excess bond returns. After controlling for various determinants of firm value, the research finds no differences in value across timers and nontimers. It also documents that the timing strategies do not increase firm value and do not affect announcement effects of long-term debt offerings. The results suggest that corporate debt markets are efficient and well integrated with equity markets.     

Do long‐term institutional investors foster corporate innovation?

This article examines the effect of institutional investors’ investment horizons on firms’ innovation activities. We conjecture that the presence of long‐term institutional investors mitigates managerial myopia, prompting firms to generate greater corporate innovation outputs. Using data on patents and patent citations for US firms, we find that institutions’ investment horizons are positively related to the number of patents and patent citations. We also document that long‐term (short‐term) institutional ownership is positively (negatively) related to the innovation outputs. This article makes an additional contribution to the corporate innovation literature by addressing the positive role of long‐term institutional investors.     

Investment barriers and premiums on closed-end country funds

We investigate the cross-sectional relation between investment barriers and premiums on closed-end country funds (CECFs) traded in U.S. markets over the period from 1995 to 2004. We find that funds investing in markets with higher indirect investment barriers as measured by market turnover and country risk have higher premiums. We also document that the relation between the country risk and CECF premium is much stronger after the stock market liberalization. Since investors prefer to invest in emerging markets with high indirect barriers through country funds, they increase the premiums of the funds targeting those countries. In addition, we find that direct investment barriers as measured by the investable weight factor do not explain the large variation in the CECF premiums.