Knowledge that Transforms

I examine the capital expenditures of a sample of 700 takeover targets and firms that went private over the period 1972–1987. For the complete sample, I do not find evidence that takeover targets increase their capital expenditures over the four-year period before the acquisition or that they overinvest in capital expenditures relative to several benchmarks. Subsample results provide some evidence of overinvestment in oil and gas firms and large firms. There is no evidence of overinvestment, however, for firms acquired in a hostile takeover or firms that went private. In general, these results are not consistent with the conjecture that takeovers are motivated by the need to reduce excess investment in capital expenditures in target firms.

Journal Article Asset Prices in Dynamic Production Economies with Time-Varying Risk Get access Vasanttilak Naik Vasanttilak Naik University of British Columbia Address correspondence to V. Naik, 2053 Main Mall, Faculty of Commerce and Business Administration, University of British Columbia, Vancouver, B.C., Canada V6T 1Z2. Search for other works by this author on: Oxford Academic Google Scholar The Review of Financial Studies, Volume 7, Issue 4, October 1994, Pages 781–801, https://doi.org/10.1093/rfs/7.4.781 Published: 26 May 2015

I present a methodology that uses the mixed jump diffusion model for stock returns to estimate the separate effects of information surprises and strategic trading around corporate events. Using simulation techniques, I show that for events with multiple announcements spread over a long time, the estimators derived from the mixed jump-diffusion model are more powerful compared to the traditional cumulative abnormal return estimators. The new methodology is used to study the separate effects of information surprises and strategic trading associated with block holdings and subsequent targeted repurchases. I find that for more than 93 percent of the firms in our sample the mixed jump-diffusion model is statistically superior to the pure diffusion model in describing stock returns. More important, I find a statistically significant negative effect due to trading while the average effect around announcements is statistically insignificant. In contrast, the standard cumulative abnormal return is not statistically different from zero.

Program trading and intraday changes in the S&P 500 Index are correlated. Futures prices and, to a lesser extent, cash prices lead program trades. Index arbitrage trades are followed by an immediate change in the cash index, which ultimately reverses slightly. No reversal follows nonarbitrage trades. The cumulative index changes associated with buy-and-sell trades and with arbitrage and nonarbitrage trades all are similar. Price decompositions suggest that the results are not due to microstructure effects. Program trades in this 1989–1990 sample do not seem to have created major short-term liquidity problems. The results are stable within the sample.

Cross-bolding occurs when listed corporations own securities issued by other corporations. We analyze the effect of cross-holdings on market capitalization and return measures as well as implications for econometric testing of asset pricing theories. We show that cross-holdings generally distort standard market return and risk measures. The magnitudes of such distortions are calculated for simulated economies by using a variety of cross-holding patterns. In addition, cross-holdings are shown to induce nonstationarity in the covariance matrix of security returns. We examine the effect of this nonstationarity for estimating efficient frontiers and factor structures. We also discuss the implications for risk-return estimates in equilibrium asset pricing models.

In a model with asymmetric information and external equity financing, it is impossible to achieve socially optimal investment because of renegotiation possibilities. The contractual solution suggested by Dybvig and Zender (1991) is not dynamically consistent--the manager's contract would be renegotiated, resulting in inefficient investment. Moreover, no other compensation contract that would induce the manager to invest efficiently survives renegotiation. Contracts that pay the manager based on the stock price, while producing suboptimal investment as in Myers and Majluf (1984), are robust to renegotiation. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Prior analyses of prices of the NYSE and other exchanges find that transitory price volatility is greater at the open of trading than at the close. We extend this line of research by using 40 years of hourly Dow Jones 65 composite price index data to estimate transitory volatility throughout the trading day. Our results indicate that transitory volatility steadily declines during the trading day. We find a similar intraday decline in transitory volatility for a 2½-year sample of the individual firms in the Dow Jones 30 Industrials Index. The results are consistent with the hypothesis that trading aids price formation and do not support the argument that particular trading mechanisms are the source of greater volatility at the open of trading.

We propose alternative generalized method of moments (GMM) tests that are analytically solvable in many econometric models, yielding in particular analytical GMM tests for asset pricing models with time-varying risk premiums. We also provide simulation evidence showing that the proposed tests have good finite sample properties and that their asymptotic distribution is reliable for the sample size commonly used. We apply our tests to study the number of latent factors in the predictable variations of the returns on portfolios grouped by industries. Using data from October 1941 to September 1986 and two sets of instrumental variables, we find that the tests reject a one-factor model but not a two-factor one.

We propose that it is precisely because firms’ repurchases of their own stock through tender offers are associated with large stock-price increases that repurchases are unattractive as a means of distributing cash. As a result, firms distribute some cash in the form of dividends—despite the tax disadvantage—and carry the rest to future periods. However, when their stock is sufficiently undervalued, firms distribute all accumulated cash through stock repurchases. We show that dividends are smoothed and are positively related both to earnings innovations and to previous period’s dividends. Also, the stock-price reaction to a repurchase announcement, of a given size, is increasing in the previous period’s dividends.

I examine the capital expenditures of a sample of 700 takeover targets and firms that went private over the period 1972–1987. For the complete sample, I do not find evidence that takeover targets increase their capital expenditures over the four-year period before the acquisition or that they overinvest in capital expenditures relative to several benchmarks. Subsample results provide some evidence of overinvestment in oil and gas firms and large firms. There is no evidence of overinvestment, however, for firms acquired in a hostile takeover or firms that went private. In general, these results are not consistent with the conjecture that takeovers are motivated by the need to reduce excess investment in capital expenditures in target firms.