Knowledge that Transforms

Employing a sample of 4271 initial-industry acquisitions across 34 countries from 1989 to 2013, we show that the rival firms which are in the same industry as the target firms exhibit positive cumulative abnormal returns (CARs). In addition, those rivals with higher analyst coverage are associated with higher CARs. The results are robust to the natural experiment based on the exogenous decrease in analyst coverage (i.e., brokerage closure and merger). Careful comparisons of the results show dramatic differences between the United States (U.S.) and non-U.S. subsamples. We further show that a more transparent macro information environment can substitute for the role of financial analysts in determining the rival response. Overall, our findings support the Acquisition Probability Hypothesis.

We contribute to multinationality and real options theories by considering the role of firm heterogeneity in real options awareness for MNCs. We test the joint impact of real options awareness (RO-AWN) and multinationality on firm value using an extensive sample of U.S.-listed international firms over the ten-year period 1996–2005. We show that when a firm's growth options and degree of RO-AWN are considered, multinationality has a significant positive impact on firm value and performance as measured by Tobin's Q, return-on-assets and the 3-year average stock returns. We find that the benefits of multinationality accrue asymmetrically to firms differing in RO-AWN. Managers who are more aware of their corporate real options are able to significantly enhance firm value. Our findings are robust to a range of dataset and measurement specifications, endogeneity issues and controlling for alternative theories of the firm.

We develop a simple model of IPO timing with uncertain aftermarket retail demand. Firms prefer to go public when they expect to exploit sentiment-driven investors' overvaluations by setting offer prices above fundamental value. However, some firms have profitable investment opportunities that require immediate financing. This generates two empirical predictions: (i) the quality of the issuers' investments and (ii) their long-run performance decrease with expected retail demand. Using average IPO first-day returns as a proxy for retail demand, we find strong empirical support for the model. First, following the IPO, issuers in low-underpricing periods become more profitable and have higher investment rates than their peers. In contrast, issuers in high-underpricing periods have similar investment rates as their control firms, but become less profitable. Second, issuers in high-underpricing periods tend to underperform in the long-run, while issuers in low-underpricing periods do not.

This paper examines whether dividend policy is associated with earnings management and whether the relationship varies across countries with wide-ranging degrees of institutional strength and transparency. Based on a sample of 23,429 corporations from 29 countries, we show that dividend payers manage earnings less than dividend non-payers, and that this evidence is stronger in countries with weak investor protection and high opacity. Further, we find that dividend payers manage earnings less when they issue equity following dividend payments, and that this result is more pronounced in countries with weak institutions and low transparency. Overall, our evidence suggests that firms may employ dividend policies associated with less earnings manipulation to mitigate agency concerns and to establish credible reputation, thereby facilitating access to external funds.

We examine the statistical error and efficiency associated with two commonly used event-study techniques when applied to samples of various sizes. Previous research has established that the frequently used Patell (1976) test is not well specified when the event itself creates additional return variance. We find that even under ideal conditions when the event creates no additional variance, the Patell test rejects a true null hypothesis substantially more often than the stated significance level. In contrast, the alternate test of Boehmer et al. (1991) performs well in samples of all sizes and under all conditions we consider.

We examine how firms respond to uncertainty around U.S. tax policy changes, namely the individual level tax rate increases set to take effect on January 1, 2011 and January 1, 2013. We provide evidence that firms time the uncertainty in the tax environment and revise their dividend policy to an expected tax increase. We find that firms are likely to initiate their dividends or intensively increase their existing dividend amount one year before the expected tax increase. In addition, in 2012 when there is much less uncertainty on dividend tax changes than in 2010, firms are less likely to initiate a regular dividend but are more likely to initiate special dividends. The results suggest that firms facing less tax uncertainty are less likely to make long-term commitments on regular dividend payments but are more likely to take advantage of the last-minute low tax benefits by issuing special dividends. Furthermore, the response to the possible elimination of a tax cut was strongest in firms with high levels of tax-affected ownership, supporting the argument that when facing policy uncertainty, firms behave to prepare for the worst scenarios from the viewpoint of the shareholders, which in this case is a tax increase.

We examine the motives for and consequences of 4759 cross-border acquisitions constituting $593 billion of total activity that were led by government-controlled acquirers over the period from 1990 to 2008. Government acquirers are more likely than corporate acquirers to come from autocratic countries with higher levels of foreign currency reserves and more active domestic acquisitions programs, and they are more likely to pursue targets in countries with larger natural resource sectors and more potential to diversify their own industrial structures. When we account for the potential endogeneity of bidder-target matching that arises from a government deal being correlated with such observable or other unobserved characteristics, we find government deals are associated with higher announcement returns for the target firms, a higher probability of engaging in a complete control (100%) transaction, and no higher likelihood of deal failure or withdrawal compared to corporate deals. Policy implications are discussed, especially in light of recent regulatory changes in the U.S. and other countries that seek to restrict foreign acquisitions by government-controlled entities.

We examine the impact of the enactment of the Market Abuse Directive (MAD) and the Prospectus Directive (PD) across 18 EU countries on seasoned equity offerings (SEOs). Using a difference-in-differences methodology, we document a significant reduction in earnings management, improved post-SEO stock return performance, and a decline in the adverse reaction to SEO announcements following the enactment of MAD. We find similar, albeit weaker, results post-PD. The impact is stronger in countries with high ex-ante institutional quality. Our results suggest that the enactment of these directives leads to improvements in information quality, which reduces information asymmetry around SEOs.

Political environment is an important determinant of financial intermediation costs, which eventually affects the external financing patterns of firms. Political gyrations create policy uncertainty, which increases the information risk, weakens the investor demand, and reduces the offer size. This raises the securities' placement costs for the financial intermediaries, who pass on these costs to the issuing firms in the form of higher underwriter spreads. The issuance costs for new equity and debt capital increase, leading to lower leverage. Simultaneous equation analysis of financing, investment, and cash policies reveals that this channel is distinct from previously documented effects of policy uncertainty on corporate outcomes.

There is scant evidence on how risk-taking incentives impact specific firm risks. This has implications for board oversight of managerial risk taking, firms' development of comparative advantage in taking particular risks, and compensation design. We examine this question for exchange rate risk. Using multiple identification strategies, we find that vega increases exchange rate exposure for purely domestic and globally engaged firms. Vega's impact increases with international operations, declines post-SOX, and is robust to firm-level governance. Our results suggest that evidence that exposure reduces firm value can be viewed, in part, as a wealth transfer from shareholders and debt-holders to managers.