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Article

Ali Sheikhbahaei and Syed Shams

This paper investigates the relationship between a firm's susceptibility to a hostile takeover and investors' reactions to a seasoned equity offering (SEO).

Abstract

Purpose

This paper investigates the relationship between a firm's susceptibility to a hostile takeover and investors' reactions to a seasoned equity offering (SEO).

Design/methodology/approach

The study applies ordinary least squares (OLS) with fixed effects regression analyses to a sample of 2,517 observations from US listed companies. Event study methodology was employed to capture market reactions to the announcement of newly issued stocks. To achieve cross-sectional analyses, time variations in takeover laws allowed us to perform the desired tests across two decades of data.

Findings

The results suggest that investors react positively to the announcement of an equity offering when the threat of hostile takeover is higher. The magnitude of positive stock market reactions varies over two decades due to time series variations in takeover laws. Furthermore, the findings show that a higher hostile takeover index (HTI) score reduces investors' concerns about the inefficient usage of proceeds in acquisitions.

Practical implications

The results demonstrate that the corporate takeover legal environment provides an important external governance mechanism through which investors' confidence increases during an SEO event. The study's empirical evidence implies that the extent of external disciplinary mechanism plays a significant role in reducing investors' uncertainty about the misuse of raised capital.

Originality/value

The exogenous fast-evolving legal environment surrounding the takeover market in the United Status allowed our study to bypass the endogeneity concerns in measuring governance strength. From the review of prior literature, this paper appears to be the first to use HTI scores to examine investors' reactions to a corporate announcement.

Details

International Journal of Managerial Finance, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1743-9132

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Book part

Jiachen Yang and Michel W. Lander

In this study we investigated the effects of news reports on acquirer short-term performance. Our focus was on the extent to which key deal characteristics – the type of…

Abstract

In this study we investigated the effects of news reports on acquirer short-term performance. Our focus was on the extent to which key deal characteristics – the type of deal, during a merger wave or not or the presence of a significant premium – are made explicit. Moreover, we looked for the effect of the assessment of the deal characteristics by different key informants: board members, top management team members, and analysts. Configurations derived using the set-theoretic approach suggest that media-transmitted signals form complex interrelations among content and informant. We found that investors react positively to deals that are surrounded by unequivocal signals of synergy potential: they contain explicitly stated deal characteristics as well as deal endorsements from the boards and/or top management of acquirer and target companies. Analysts’ assessments of the deals seem to bear little influence on investor reaction. Meanwhile, investors react negatively to deals with low or absent media coverage as well as deals surrounded by signals of ambiguous synergy potential.

Details

Advances in Mergers and Acquisitions
Type: Book
ISBN: 978-1-78756-136-6

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Article

Hasib Ahmed, M. Kabir Hassan and Blake Rayfield

The purpose of this paper is to analyze whether investors perceive the issuance of sukuk differently than they do in case of conventional bonds, by using event study with…

Abstract

Purpose

The purpose of this paper is to analyze whether investors perceive the issuance of sukuk differently than they do in case of conventional bonds, by using event study with superior data. Then, it analyzes whether financial characteristics of issuers can explain the abnormal return and likelihood of sukuk issuance. Finally, the paper proposes a testable model explaining the investor reaction.

Design/methodology/approach

This paper uses market model event study to assess investor reaction to the issuance of sukuk. Then, linear and logistic regressions are used to test whether financial characteristics of issuers can explain the abnormal return and likelihood of sukuk issuance. To investigate the differences between sukuk issuers and bond issuers, this paper tests the difference in means of issuer characteristics. Finally, the sample is subdivided into good and bad firm prospects according to dividend/earnings ratio and book-to-market ratio. The subdivisions are used to test the proposed model explaining the investor reaction.

Findings

The study finds that a large variety of firms issues sukuk. The event study reports significant negative abnormal returns around the announcement date of sukuk issuance. The study also reveals that the earning prospect of issuer firms affect the investor reaction. Firms with lower earning prospect receive a negative reaction from the investors. Also, smaller, or financially unhealthy firms are more likely to issue sukuk. Smaller and riskier firms issue sukuk, because participation in the market is less constrained. In other words, the risk-sharing nature of sukuk might imply that the firm is not confident about the future prospect. However, if the firm has good earnings prospects, investors react to the issuance of sukuk negatively.

Research limitations/implications

Reliability and availability of data is a hurdle to test the investor reaction model. As more data become available, the models implications can be further tested.

Originality/value

This paper uses the most complete set of data to study sukuk, making it the most selection bias-free and complete study. Moreover, the proposed investor reaction model will enrich the theory.

Details

Managerial Finance, vol. 44 no. 6
Type: Research Article
ISSN: 0307-4358

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Article

Nengzhi (Chris) Yao, Weiwei Zhu and Jiuchang Wei

Signalling theory suggests how “strong” or “weak” the signal quality detected by a receiver (defined as signalling strength) is distorted by noisy factors (defined as…

Abstract

Purpose

Signalling theory suggests how “strong” or “weak” the signal quality detected by a receiver (defined as signalling strength) is distorted by noisy factors (defined as noise). Although corporate cooperation signals are known to lead to receiver reaction, the effects of distortion factors on signal credibility are generally unexplored in signalling process. The paper aims to discuss this issue.

Design/methodology/approach

After analysing 264 contract announcements in 2013–2015 that befall publicly listed firms in China, the authors explore the signalling impact of contract value. the authors also incorporate the signalling noises, namely, signalling environment, external referents and other signallers, into the contracting context and investigate their effects on distorting the relationship between signal strength and receiver reaction.

Findings

Results indicate that firms’ contract-signing announcement conveys an effective signal to investors: the larger the contract scale is, the more investor reaction the firms experience. The signalling effects of contract scale on investor reaction are moderated by the three distorting factors.

Originality/value

The findings contribute to the signalling theory literature on the effects of signalling noise on receivers’ perception of signal observability.

Details

Baltic Journal of Management, vol. 14 no. 2
Type: Research Article
ISSN: 1746-5265

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Article

Trevor C. Chamberlain, Abdul-Rahman Khokhar and Sudipto Sarkar

The purpose of this paper is to offer an alternative approach to measure the cost-benefit tradeoff, by analyzing stockholders’ reactions to the announcement and vote on…

Abstract

Purpose

The purpose of this paper is to offer an alternative approach to measure the cost-benefit tradeoff, by analyzing stockholders’ reactions to the announcement and vote on the proposed rule. More specifically, the authors use event study methodology to investigate the stock price reaction on two key dates; that is, the announcement date and the voting date of the proposed short-term borrowing disclosure regulation, and argue that positive abnormal stock returns indicate that the expected benefits of the regulation outweigh the compliance costs. A negative reaction would indicate that, in the eyes of investors, the costs of compliance exceed the expected benefits.

Design/methodology/approach

The authors use event study analysis and apply the market model to equal-weighted portfolios of 2,450 financial and 3,985 non-financial US firms to calculate mean cumulative abnormal stock returns (MCARs, hereafter) on the announcement and voting dates. Then, the authors conduct mean difference tests on firm-level MCARs across three event windows, that is, (−30,−1), (0,+1) and (+2,+30), to confirm if the MCARs of financial firms are different from those of non-financial firms on both the announcement and the voting dates. Finally, robustness tests are performed with alternate benchmark, using value-weighted portfolios, for the market.

Findings

The authors find that the market reaction is positive and significant at the announcement date and negative and significant at the voting date of the proposed regulation of short-term borrowing disclosure regulation. Overall, the paper documents a positive market reaction, indicating the usefulness of the disclosure from the vantage point of users. Examining and comparing the results for various subsets, including commercial banks and saving institutions, bank holding companies, size quartiles, and exchange listed and OTC registrants, the authors find that a “one-size-fits-all” approach to regulation is undesirable.

Originality/value

This is first empirical study, to best of the authors’ knowledge, to explore stockholder reaction to a proposed, rather than an enforced, Securities and Exchange Commission (SEC) regulation and may contribute to the SEC’s final decision on the rule. Second, given a dissimilar reaction from investors of different firms, the results suggest that the SEC needs to reconsider its one-size-fit-all approach for the proposed rule. Finally, because the proposed disclosure would affect all SEC registrants, the economic implications of the findings are important not only for stockholders, but also for regulators, as they attempt to manage systematic risk and optimize the level of market intervention.

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Article

Chun-Teck Lye, Tuan-Hock Ng, Kwee-Pheng Lim and Chin-Yee Gan

This study uses the unique setting of unusual market activity (UMA) replies to examine the market reaction and the effects of disclosure and investor protection amid…

Abstract

Purpose

This study uses the unique setting of unusual market activity (UMA) replies to examine the market reaction and the effects of disclosure and investor protection amid information uncertainty.

Design/methodology/approach

A total of 1527 hand-collected UMA replies from the interlinked stock exchanges of Indonesia, Malaysia, Thailand and Singapore for the period of 2015–2017 were analysed using event study and Heckman two-step methods with market and matched control firm benchmarks.

Findings

The overall results support the uncertain information hypothesis. The UMA replies with new information were also found to reduce information uncertainty, but not information asymmetry, and they are complementary to investor protection in enhancing abnormal returns. The overall finding suggests that the UMA public query system can be an effective market intervention mechanism in improving information certainty and efficiency.

Research limitations/implications

This study provides insight on the effects of news replies and investor protection on abnormal returns, and support for the uncertain information hypothesis. The finding is useful to policymakers and stock exchanges as they seek to understand how to alleviate investors' anxiety and to create an informationally efficient market. Nevertheless, this study is limited by the extensiveness of the hand-collected UMA replies and also the potential issue of simultaneity-induced endogeneity.

Originality/value

This study uses UMA replies and cross-country data taking into account the effects of market surroundings such as information uncertainty and the level of investor protection on market reaction.

Details

International Journal of Emerging Markets, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1746-8809

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Article

Katarzyna Byrka-Kita, Mateusz Czerwiński, Agnieszka Preś-Perepeczo and Tomasz Wiśniewski

The purpose of this paper is to analyse the market reaction to the appointments of chief executive officers (CEOs) in companies listed on the Warsaw Stock Exchange. The…

Abstract

Purpose

The purpose of this paper is to analyse the market reaction to the appointments of chief executive officers (CEOs) in companies listed on the Warsaw Stock Exchange. The authors focussed on the relationship between the characteristics of a newly appointed CEO and the shareholders’ reactions to the appointment of a CEO.

Design/methodology/approach

To measure shareholder reaction, the authors apply an event study methodology. The determinants of reaction are identified on the basis of multi-regression analysis.

Findings

The results reveal a negative market reaction to all CEO appointments, both new appointments and reappointments. Investor reaction is driven more by the financial condition of the company, the company’s market performance and the free float, than by the characteristics of a newly appointed CEO. Neither the origins and generation (age) nor the gender of a CEO influence share prices. The relationship between the educational background of a CEO and shareholders’ reactions is mixed. Furthermore, the appointment of an inexperienced CEO seems to be preferred by investors.

Research limitations/implications

The study is restricted by certain limitations related to the adopted measures, the single-market research, data gaps and the selection of variables for regression analysis. A further cross-country study including Central and Eastern Europe and/or the transition economies of the Baltic Region is recommended. The relationship between the operating performance of a firm and its internal control mechanisms could be explored.

Practical implications

The findings might influence the decisions made by company owners and supervisory boards when appointing top executives, and might contribute to a better understanding of how CEO appointments can affect shareholder value creation. The results also provide important guidelines for institutions that oversee the financial system.

Originality/value

The findings of this study are expected to the findings are expected to contribute to the literature on the empirical analysis of the shareholder wealth effect, on signalling theory, on the phenomenon of information asymmetry and on corporate governance. The study covers a full economic cycle of the capital market, including the financial crisis and financial bubbles, and it fills a gap in the research regarding emerging markets and transition economies in Europe.

Details

Baltic Journal of Management, vol. 13 no. 4
Type: Research Article
ISSN: 1746-5265

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Article

Alex C. Yen, Tracey J. Riley and Peiyu Liao

The purpose of this paper is to investigate whether investor reactions to accounting narratives are uniform across cultures or if there are predictable systematic…

Abstract

Purpose

The purpose of this paper is to investigate whether investor reactions to accounting narratives are uniform across cultures or if there are predictable systematic culture-based differences, particularly for investors from interdependent cultures, such as in Asia.

Design/methodology/approach

This research paper builds on the experiment conducted in Riley et al. (2014) by collecting data from investors from interdependent cultures and comparing their investment judgments to the “baseline” judgments of the investors from Riley et al. (2014).

Findings

In comparing independent and interdependent culture investors, a culture by construal interaction is observed. Whereas the independent culture investors in Riley et al. (2014) made less favorable investment judgments of a company with a concretely (vs abstractly) written negative narrative, this effect is attenuated for interdependent culture investors.

Research limitations/implications

This study extends the literature on accounting narratives by providing evidence that investors’ culture and linguistic characteristics of accounting narratives “interact,” suggesting that future studies in this area should account for culture as a variable. As for limitations, the independent and interdependent participant data were predominantly collected from different universities, so the differences observed may be due to institutional, not cultural differences. However, the populations are matched on key demographic measures.

Practical implications

The results have practical implications for investor relations professionals and international standard-setting bodies.

Originality/value

This study is believed to be the first to examine how investors’ culture may affect their reactions to the features of accounting narratives.

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Article

Yiwen Li, You-il Park and Jinyoung Wynn

The purpose of this paper is to investigate investor reactions to financial restatements conditional on disclosures of internal control weaknesses under Section 404 of the…

Abstract

Purpose

The purpose of this paper is to investigate investor reactions to financial restatements conditional on disclosures of internal control weaknesses under Section 404 of the Sarbanes-Oxley Act.

Design/methodology/approach

The research uses cumulative abnormal stock returns (CARs) as a proxy for investor reactions. Restatements and internal control reports are available on audit analytics. Multivariate regression analyses were used for testing.

Findings

Using a sample of restating firms whose original misstatements are linked to underlying internal control weaknesses, the research finds that cumulative abnormal returns for firms disclosing internal control weaknesses in a timely manner is negative in a three-day window around the restatement announcements. The finding indicates that restatements with early disclosure of internal control weaknesses provide more persuasive evidence of the ineffectiveness of a firm’s internal control over financial reporting, rather than early disclosure lowering the information asymmetry between a firm and investors.

Research limitations/implications

This study employs CARs to examine the market reaction to restatements conditional on disclosure of internal control weaknesses.

Practical implications

Further study on reactions by creditors who have access to private information on firms could extend the implications of the finding.

Originality/value

The study contributes to the existing research by documenting that early disclosure of material weaknesses in internal control affects investorsreactions to financial restatements.

Details

Journal of Applied Accounting Research, vol. 19 no. 3
Type: Research Article
ISSN: 0967-5426

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Article

Miho Murashima

This paper aims to examine the differences in investorsreactions toward firms’ corporate social responsibility (CSR)-related news announcements between individuals and…

Abstract

Purpose

This paper aims to examine the differences in investorsreactions toward firms’ corporate social responsibility (CSR)-related news announcements between individuals and institutions.

Design/methodology/approach

Analyzed by the short-term event study and ordinary least squares (OLS) methods using a unique CSR data set collected from newspapers in Japan from 2001 to 2016.

Findings

The study finds, first, the different reactions toward CSR-related news announcements among shareholders. Second, the findings indicate that individual investors are more sensitive to CSR-related positive news, whereas institutional investors are more concerned about the negative news, providing one of the reasons for mixed results in the studies on the CSR and financial performance linkage. Those findings indicate that CSR-related news affects investors’ behaviors differently based on their purpose, ability and accessible information.

Practical implications

This study deepens the understanding of the different investing behaviors toward CSR-related announcements by shareholder type. Second, different attitudes among investors require different investor relations (IR) approaches depending on the type. It also provides valuable implications not only for Japanese business managers or policymakers but also for those from countries with a similar stage of market maturity in the CSR context.

Originality/value

This paper is original in two ways. First, to the best of the author’s knowledge, this is the first paper to deepen the understanding of investorsreactions toward CSR-related events through analysis by the main shareholder, which provides some insights into mixed results in the previous studies. Second, the original CSR data set collected from newspapers by the author allows the analysis to use a larger data set than other research, resulting in more robust conclusions.

Details

Corporate Governance: The International Journal of Business in Society, vol. 20 no. 5
Type: Research Article
ISSN: 1472-0701

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