An Analysis of the Decision to Opt Out of Pennsylvania Senate Bill 1310
Vahan Janigian and Emery A. Trahan
Northeastern University
Abstract
Pennsylvania Senate Bill 1310 protects firms from unsolicited takeover bids. It was signed into law on April 27, 1990, and gave firms ninety days to opt out of all or some of its provisions. During the twenty months before the Bill's introduction, firms choosing protection out performed firms opting out of at least one provision. Institutions owned a greater percentage of shares of firms opting out of select provisions of the Bill, indicating that shareholder pressure influenced the opt-out decision. No significant differences are found in share price performance, CEO turnover, or restructurings during the twenty months following the last opt-out date. But firms opting out exhibit superior accounting performance two years after the Bill's enactment.
Detecting Abnormal Returns Using the Market Model with Pre-tested Data
A. Stephen Graham
University of Mississippi
Wendy L. Pirie
Queen's University
William A. Powell
Weber State University
Abstract
The current literature suggests various alternative procedures for increasing the power of tests to detect abnormal returns in event studies. Using randomly constructed portfolios, we simulate events and compare the results of tests using three alternative procedures: traditional, cross-sectional, and cross-sectional with standardized residuals. For each test, we compare results when all observations are included with results when the observations with high trading volume are omitted from the estimation period. The simulation results indicate that both the traditional approach with omitted observations and the cross-sectional approach using standardized residuals with all observations yield approximately the correct test sizes and significantly improve the power of tests to detect abnormal returns. However, the cross-sectional approach using standardized residuals is clearly dominant among the three procedures.
Who Gains from Corporate Asset Sales?
Sudip Datta
Bentley College
Mai E. Iskandar-Datta
University of Massachusetts at Dartmouth
Abstract
This study documents that sell-offs, on average, are firm value enhancing, as both stockholders and bondholders gain from such transactions. Further, it reveals that sell-offs can be wealth redistributing, value destroying, or value enhancing depending on the way the sale proceeds are distributed and the motive underlying the sell-off. The wealth effects on stockholders and bondholders are not always symmetrical. Our results suggest that benefits from the sale of assets that do not strategically fit the firm's core business accrue primarily to stockholders, while benefits from distress-related sell-offs accrue to bondholders. Sell-offs results in wealth transfers between security holders. Restrictive dividend covenants play an important role in protecting bondholders from wealth expropriation. Our analysis suggests that the relative size of the asset sale, the uses of the sale proceeds, and the degree of protection afforded bondholders via a dividend restriction may be relevant in explaining the direction of wealth transfer.
The Costs of Raising Capital
Inmoo Lee, Scott Lochead, Jay Ritter
University of Illinois at Urbana-Champaign
Quanshui Zhao
City University of Hong Kong
Abstract
We report the average cost of raising external debt and equity capital of the U.S. corporations from 1990 to 1994. For initial public offerings(IPOs) of equity, the direct costs average 11.0 percent of the proceeds. For seasoned equity offerings(SEOs), the direct costs average 7.1 percent. For convertible bonds, the direct costs average 3.8 percent. For straight debt issues, the direct cost average 2.2 percent, although they are strongly related to the credit rating of the issue. All classes of securities exhibit economies of scale, although they are less pronounced for straight debt issues. IPOs also incur a substantial indirect cost due to short-run underpricing. Most large equity offers include an international tranche, although debt issues do not.
Trading Patterns of Small and Large Traders Around Stock Split Ex-dates
Lawrence Kryzanowski
Concordia University
Hao Zhang
University of Victoria
Abstract
We investigate the trading patterns of small and large traders around stock split ex-dates. Using the intraday transaction database for the Toronto Stock Exchange during 1983-1989, we find that stock splits are associated with significant changes in trading patterns. Although stock splits appear to have little effect on the trading behavior of large traders(trade value of at least $100,000), they are associated with significant decreases in odd-lot trading and increases in small board-lot trading(trade value of less that $10,000). Although the liquidity premia decrease for all trade sizes, trade direction changes significantly from sell to buy after split ex-dates for all but the large trades, where the change is in the opposite direction. The significant increase in variances after split ex-dates is explained by various microstructure-related variables, and small (large) trades appear to be (de)stabilizing.
Seasoned Equity Offerings for New Investment and the Information Content of Insider Trades
Dana J. Johnson
Wake Forest University
Jan M. Serrano
Stephen F. Austin State University
G. Rodney Thompson
Virginia Polytechnic Institute and State University
Abstract
Significant negative valuation effects are widely acknowledged for firms announcing seasoned equity offerings. This result is consistent with theoretical models linking new equity issues to increased adverse-selection costs, lower management ownership in the firm, misuse of free cash flow, or expectations for earnings declines. Also increasingly evident, insiders trade around corporate announcements. We test the hypothesis that insider trading and announcements of new equity issues serve as joint signals in the market's evaluation of prospective capital investment projects. Our findings are consistent with the hypothesis that insider trading is related to market reaction to announcements of new equity issues.
An Empirical Investigation of Stock Dividends-in-Kind
L. Paige Fields and Michael S. Wilkins
Texas A & M University
Abstract
We investigate share price reactions to announcements of dividends payable in the common stock of corporations different from the issuing firm. We find that firms that declare these dividends(typically investment companies) experience positive abnormal returns upon announcement. We also find that such dividends are more likely to be declared when the shares to be distributed have peaked in value. Consistent with this finding, we document negative announcement-period abnormal returns for firms having their shares distributed. Additional tests reveal that prices respond more negatively when the information signal is strongest, when outside ownership is more dispersed, and when management is more entrenched.
Business Cycles and Stock Market Returns: Evidence Using Industry-based Portfolios
Venkat R. Eleswarapu
University of Auckland
Ashish Tiwari
Augustana College
Abstract
Much evidence has emerged recently that suggests stock returns are predictable. In representative agent consumption-based asset pricing models, asset returns are related to aggregate output and consumptions through changes in the intertemporal marginal rate of substitution. An alternative view is that the amount of variation required in the intertemporal marginal rate of substitution is too large to be rationally explained. We shed further light on this debate by investigating whether the stock returns of certain sectors of the economy can predict future market returns even after controlling for the information contained in the aggregate market index. In the consumption-based models, aggregate output and consumption affect the discount rates of all assets synchronously; no particular sectoral return should have any more predictive ability than the others. We find evidence that the stock returns of five industry-based portfolios have significant information about future market returns that is not in the market index. This stylized empirical result is not consonant with existing models relating output to stock returns.
Adverse Contract Incentives and Investment Banker Reputation: Target Firm Tender Offer Fees
Robyrn M. McLaughlin
Suffolk University
Abstract
I measure the potential economic importance of fee-contract incentives and investment banker reputation as factors that can mitigate conflicts of interest between investment bankers and their target firm clients in tender offers. I find that the fee contracts used between target firms and their investment bankers contain incentives that can create substantial conflicts of interest. Simulated losses from these adverse incentives can be large - up to 16.7 percent of target firm value. I also find, however, that when investment banker reputation capital is included in the simulation, losses are substantially reduced.