Knowledge that Transforms

The mean return computational method has a substantial effect on the estimated small firm premium. The buy-and-hold method, which best mimics actual investment experience, produces an estimated small-firm premium only one-half as large as the arithmetic and re-balanced methods which are often used in empirical studies. Similar biases can be expected in mean returns when securities are classified by any variable related to trading volume.

This paper investigates the rationale behind interfirm tender offers by examining the returns realized by the stockholders of firms that were the targets of unsuccessful tender offers and firms that have made unsuccessful offers. Our results suggest that the permanent positive revaluation of the unsuccessful target shares [documented by Dodd and Ruback (1977) and Bradley (1980)] is due primarily to the emergence of and/or the anticipation of another bid that would ultimately result in the transfer of control of the target resources. We also find that the rejection of a tender offer has differential effects on the share prices of the unsuccessful bidding firms depending upon whether the tender offer process results in a change in the control of target resources. On the basis of these results we conclude that acquisitions via tender offers are attempts by bidding firms to exploit potential synergies, not simply superior information regarding the ‘true’ value of the target resources.

This paper performs lower boundary condition tests based on rational pricing of call options and an implied standard deviation test based on the bid/ask prices of options. These efficiency tests attempt to closely approximate conditions in the option markets to avoid the pitfalls indicated by Phillips and Smith (1980). The tests use transactions data and account for the effects of stock and option bid/ask prices, simultaneity of stock and option prices, depth of market, execution lag and transaction costs. The small and relatively infrequent profits due to market mispricing disappear in the lower boundary tests when transaction costs are taken into account. Frequent violations of the tighter boundary conditions in the implied standard deviation test are reported, but the estimated profits cannot be unambiguously attributed to option market inefficiency.

This paper is concerned with the size-related anomalies in stock returns reported by Banz (1981) and Reinganum (1981). They showed that small firms have tended to yield returns greater than those predicted by the traditional CAPM. We find that the size effect is linear in the logarithm of size, but reject the hypothesis that the ex ante excess return attributable to size is stable through time. We briefly analyze the Seemingly Unrelated Regression Model (SURM) and a two-step procedure as two alternative estimators of the size effect. Due to the instability of the effect, we find that the estimates are sensitive to the time period studied.

This paper examines the wealth impact of share repurchases that restrict participation to a particular sub-set of a firm's stockholders. Repurchases at a premium from insiders and small shareholders increase the wealth of non-participating stockholders and are therefore consistent with the shareholders' interest hypothesis. However, privately negotiated repurchases of single blocks from stockholders unaffiliated with the firm reduce the wealth of non-participating stockholders. In contrast to the evidence for general repurchases, no positive wealth effect offsets the significant repurchase premium paid to the selling stockholder. Indeed, the wealth loss to non-participating stockholders is significantly greater than the premium paid. This evidence is inconsistent with the shareholders' interest hypothesis and supports the hypothesis that managers in their self-interest use single block repurchases to eliminate threats to their control over the firm's resources.

This paper tests the hypothesis that horizontal mergers generate positive abnormal returns to stockholders of the bidder and target firms because they increase the probability of successful collusion among rival producers. Under the collusion hypothesis, rivals of the merging firms benefit from the merger since successful collusion limits output and raises product prices and/or lower factor prices. This proposition is tested on a large sample of horizontal mergers in mining and manufacturing industries, including mergers challenged by the government with violating antitrust laws, and a ‘control’ sample of vertical mergers taking place in the same industries. While we find that the antitrust law enforcement agencies systematically select relatively profitable mergers for prosecution, there is little evidence indicating that the mergers would have had collusive, anticompetitive effects.

Several studies of mergers and tender offers examine the changes in the value of ownership claims associated with corporate acquisitions and use the observed value changes to address the degree of competition in the market for corporate acquisitions. These studies conclude that the takeover market is competitive on the basis of the abnormal stock price changes of bidding firms, the time series behavior of the market value of target firms, and the proportion of gains that accrue to target and bidding firms. Unfortunately, none of these tests are sufficient to conclude that the takeover market is competitive. A competitive acquisition market implies that the potential gain to unsuccessful bidders at the successful offer price is nonpositive. This implication is tested using data on tender offers in which there are multiple bidders. The results appear to be consistent with competition in the market for corporate acquisitions.