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Article
Publication date: 3 May 2019

Souhir Neifar and Sebastian Utz

The purpose of this paper is to examine the influence of earnings management (EM) and tax aggressiveness (TA) on shareholder wealth and on stock price crash risk (SPCR) of…

Abstract

Purpose

The purpose of this paper is to examine the influence of earnings management (EM) and tax aggressiveness (TA) on shareholder wealth and on stock price crash risk (SPCR) of German companies.

Design/methodology/approach

The sample comprises 820 firm-year observations of 188 non-financial companies listed on German stock exchanges from 2008 to 2014. The authors apply generalized least square panel regression to overcome autocorrelation and heteroscedasticity problems.

Findings

EM and TA are not related in terms of affecting shareholder wealth and SPCR. EM has no impact on shareholder wealth but significantly affects SPCR. TA has a significant positive effect on shareholder wealth but no impact on SPCR. Thus, EM practices applied within German companies are non-opportunistic, as they do not affect shareholder wealth and decrease SPCR. TA practices are also non-opportunistic, as they increase shareholder wealth and do not affect SPCR.

Research limitations/implications

This study provides insights that can improve managers’ accounting choices (EM vs TA) and alleviate investor concerns about the effect of managers’ manipulation strategies. Considering other variables affecting TA, such as discretionary book tax differences, may add further insights into this discussion. The analysis of and comparison with other markets may shed more light on the validity and generalizability of the results.

Practical implications

This study recommends that investors must take into consideration the accounting variables to ensure better investment decisions and highlight the importance of CEO choices on market reaction.

Originality/value

The investigation of the mutual impact of EM and TA on shareholder wealth and SPCR is novel, and so too is the analysis of whether EM and TA are complementary or substitute for each other in this relationship.

Details

Journal of Applied Accounting Research, vol. 20 no. 1
Type: Research Article
ISSN: 0967-5426

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Article
Publication date: 16 July 2010

K. Ramakrishnan

Research on mergers has made considerable progress over the last 50 years and has produced a vast body of literature, especially in the developed markets of the world…

Abstract

Purpose

Research on mergers has made considerable progress over the last 50 years and has produced a vast body of literature, especially in the developed markets of the world. Little is known about the effect of announcements of mergers on shareholder wealth in the Indian context. Also unknown is the apparent influence of the market for corporate control on such wealth effects. The purpose of this paper is to fill gaps in this knowledge.

Design/methodology/approach

The study uses a standard event study method and statistically analyses share price and other secondary data.

Findings

It was found that the acquired firm shareholders enjoy significant wealth gains of 11.6 per cent in a 21‐day event window period, whereas the acquiring and combined firm shareholders do not do so. Mergers that do not see transfer of corporate control bestow significant wealth gains of 21.1 per cent on announcement on the target firm shareholders, whereas those where such a transfer takes place do not witness such gains.

Research limitations/implications

One of the limitations of the study is the period. This study, a part of research covering a larger gamut of issues, necessitated the restriction of the time to the seven‐year 1996‐2002 timeline. The sample size of 34 usable, finally merged pairs of firms may appear limited, though several studies of this genre have used smaller sample sizes. However, the findings obtained are of value. The study points towards further research using a longer period that might help one to understand longitudinal variations in merger announcement effects on shareholder wealth. It also encourages future studies on several other factors which influence such effects.

Practical implications

The redistribution of shareholder wealth on merger announcement in India seems to be following a pattern similar to that found in many other studies, though the quantum of gains to the target shareholders is larger. Managers may also have to factor‐in the impact of the transfer of corporate control from the acquired to the acquiring firm on their assessment of shareholder wealth effects before announcing mergers.

Originality/value

The paper simultaneously adds to knowledge about wealth effects on merger announcement and the influence of the market for corporate control on this effect, in the Indian context.

Details

Management Research Review, vol. 33 no. 8
Type: Research Article
ISSN: 2040-8269

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Article
Publication date: 1 February 1993

Richard Dobbins

Sees the objective of teaching financial management to be to helpmanagers and potential managers to make sensible investment andfinancing decisions. Acknowledges that…

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5163

Abstract

Sees the objective of teaching financial management to be to help managers and potential managers to make sensible investment and financing decisions. Acknowledges that financial theory teaches that investment and financing decisions should be based on cash flow and risk. Provides information on payback period; return on capital employed, earnings per share effect, working capital, profit planning, standard costing, financial statement planning and ratio analysis. Seeks to combine the practical rules of thumb of the traditionalists with the ideas of the financial theorists to form a balanced approach to practical financial management for MBA students, financial managers and undergraduates.

Details

Management Decision, vol. 31 no. 2
Type: Research Article
ISSN: 0025-1747

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Article
Publication date: 1 May 1999

Denis B. Kilroy

Suggests that in many companies that have adopted value‐based management, there is a need to shift the focus of management attention from the measurement of value, to the…

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2952

Abstract

Suggests that in many companies that have adopted value‐based management, there is a need to shift the focus of management attention from the measurement of value, to the creation of wealth. Argues that shareholder wealth creation is a creative endeavour on the part of the management and employees of a business – and that wealth will only be created for shareholders if management delivers financial performance that exceeds market expectations. This requires the successful implementation of higher value strategies developed from new ideas – not simply the adoption of value‐based measurement and incentive systems.

Details

Management Decision, vol. 37 no. 4
Type: Research Article
ISSN: 0025-1747

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Article
Publication date: 15 March 2011

Bikram Jit Singh Mann and Reena Kohli

This paper seeks to compare target shareholders' wealth gains in domestic and cross‐border acquisitions in India. Two existing schools of thought namely, the industrial…

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3204

Abstract

Purpose

This paper seeks to compare target shareholders' wealth gains in domestic and cross‐border acquisitions in India. Two existing schools of thought namely, the industrial organizational theory and bid‐specific factors theory have been compared to identify which of these two theories affect the target shareholders' announcement wealth gains in India.

Design/methodology/approach

Standard event study methodology has been applied to compute the announcement returns for domestic and cross‐border acquisitions. Cross‐border effect is calculated to compare the value creation in the two sets of acquisitions. Furthermore, cross‐sectional regression analysis is conducted to capture the impact of bid‐related features on target shareholder's value creation.

Findings

The results indicate that both domestic and cross‐border acquisitions have created value for the target company shareholders on the announcement. Nonetheless, the analysis of cross‐border effect as well as regression analysis makes it evident that value creation is higher for domestic acquisitions as compared to cross‐border acquisitions due to the influence of various bid‐specific factors. Thus, in India, bid‐related variables are the fundamental drivers of the target's announcement wealth gains irrespective of the nationality of the acquirer.

Originality/value

The paper extends the discussion on the target's wealth creation in domestic and cross‐border acquisitions by segregating the existing literature into two schools of thoughts namely, the industrial organizational school and bid‐specific factors school in an emerging economy like India. Moreover, various reasons specific to Indian mergers and acquisitions have been forwarded to explain the subdued market reaction to cross‐border acquisitions.

Details

International Journal of Commerce and Management, vol. 21 no. 1
Type: Research Article
ISSN: 1056-9219

Keywords

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Article
Publication date: 9 July 2020

Nils Teschner and Herbert Paul

The purpose of this research is to study the impact of divestitures on shareholder wealth. This study covers selloffs of publicly traded companies in Germany, Austria and…

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1624

Abstract

Purpose

The purpose of this research is to study the impact of divestitures on shareholder wealth. This study covers selloffs of publicly traded companies in Germany, Austria and Switzerland (DACH region) during the period 2002–2018. It aims to understand the overall effect of selloffs on shareholder wealth as well as the impact of important influencing factors.

Design/methodology/approach

This study is part of capital market studies which investigate shareholder wealth effects (abnormal returns) using event study methodology. To determine the significance of abnormal returns, a standardized cross-sectional test as suggested by Boehmer et al. (1991) was applied. The sample consists of 393 selloffs of publicly traded companies with a deal value of at least EUR 10m.

Findings

The findings confirm the overall positive impact of selloffs on shareholder wealth. The average abnormal return on the announcement day of the sample companies amounts to 1.33%. The type of buyer, the relative size of the transaction as well as the financial situation of the seller in particular seem to influence abnormal returns positively.

Originality/value

This study investigates shareholder wealth creation through selloffs in the DACH region, a largely neglected region in divestiture research, but now very relevant due to increasing pressure of active foreign investors. Sophisticated statistical methods were used to generate robust findings, which are in line with the results of similar studies for the US and the UK.

Details

European Journal of Management and Business Economics, vol. 30 no. 1
Type: Research Article
ISSN: 2444-8451

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Article
Publication date: 15 February 2013

Salar Ghahramani

The purpose of this paper is to examine the propensity of sovereign wealth funds (SWFs) for shareholder activism and their potential impact on corporate governance.

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938

Abstract

Purpose

The purpose of this paper is to examine the propensity of sovereign wealth funds (SWFs) for shareholder activism and their potential impact on corporate governance.

Design/methodology/approach

The study highlights the relationships between SWFs and corporate governance and also applies eight antecedents/determinants of institutional activism to analyze whether SWFs have a predisposition for shareholder activism.

Findings

The study only finds two instances of SWF activism. Additionally, it finds that despite their mostly passive investments, SWFs possess a natural tendency toward shareholder activism. Some are more likely to engage in activism than others, however. SWFs with a higher proportion of their assets invested in equities, those with portfolios fully or partially constructed to emulate the broader financial markets through indexing, and those that depend less on external fund managers are the likeliest candidates for activism. The study also finds that the regulatory environment can curb the natural SWF inclination for activist behavior.

Research limitations/implications

Due to the lack of transparency within the SWF universe, this study largely depends on the limited data available for sovereign wealth funds.

Practical implications

Given the growing importance of SWFs, managers, directors, and policymakers must assess SWF activism, its influence on corporate governance, and its implications for public policy deliberations.

Originality/value

This project, to the best of the author's knowledge, is the first study that applies tested financial models to SWFs in order to determine if they have inherent activist tendencies.

Details

Corporate Governance: The international journal of business in society, vol. 13 no. 1
Type: Research Article
ISSN: 1472-0701

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Article
Publication date: 1 June 1991

Robert L Conn, Karen E. Lahey and Michael Lahey

This paper extends the merger pricing model associated with Larson‐Gonedes to the general question: how well does the premium developed from the pricing model forecast the…

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342

Abstract

This paper extends the merger pricing model associated with Larson‐Gonedes to the general question: how well does the premium developed from the pricing model forecast the securities market reaction of the actual merger? Based on a sample of 91 common stock mergers, shareholders in participating firms incur wealth losses about half the time but the magnitude of the gains outweighs the losses such that statistically significant gains are reported for both buyers and sellers. Removal of market wide price movements further increases the gains to shareholders. However, the premium consistently overstates the gain obtained by acquired firms and bears no systematic relationship to the gains registered by shareholders of acquiring firms. Financial analyses of mergers have focused almost exclusively on mergers as “events” with resultant measurements in abnormal returns surrounding the merger announcement/consummation to shareholders, and occasionally bondholders, in both buying and selling firms. Recent reviews of these studies by Halpern (1983), Jensen and Ruback (1983), and especially Roll (1986) stress the tentativeness of the findings and the ambiguity of their interpretation. The common feature of all this analysis has been on the ex post valuation of the merger event by the securities market from an informational content perspective. Alternatively, these studies have evaluated indirectly whether the price premium paid in an acquisition exceeds, equals, or is less than the market's valuation of the net present value of the merger, and how the spoils/losses are distributed between acquirers and acquirees. But never is the bid premium itself determined and then compared to the market's reaction upon public announcement. As Roll argues, the merger process involves three steps: “First, the bidding firm identifies a potential target firm; second, a ‘valuation’ of the equity of the target is undertaken…; third, the ‘value’ is compared to current market price… If value exceeds price, a bid is made…” Roil (1986, p. 198). This paper links the price premium offered in mergers to the market's reaction to the news of the merger, or alternatively, it compares Roll's steps two and three. The merger pricing model used is the exchange ratio determination model developed by Larson and Gonedes (1969) and applied to mergers by Conn and Nielsen (1977). The pricing model, commonly cited in finance texts (eg. Copeland and Weston (1988, pp. 757–763), has the advantage of being deterministic and thus provides a direct measure of the bid premium subject to a pareto optimal wealth constraint for shareholders in both buying and selling firms. The principal question this paper asks is: Does the price premium provide a consistent, unbiased forecast of the market's reaction? This is an important question from both the bidding firms' and target firms' perspectives for several reasons. First, the terms of the negotiated merger may signal important information to the securities market regarding the degree of agency costs in the merging firms. For example, an excessively high negotiated price for the target may indicate either the bidder has inept management or management insulated from shareholder interests. Thus, the terms of a merger may reflect not only the participants' expectations regarding the merger itself, but also be influenced by existing — although previously unknown — agency costs. The signalling information contained in merger announcement may obviously mask the expectational information, creating ambiguity in interpretation of market reaction. Second, distribution of the market reaction for buyers and sellers is important not only to participating firms' shareholders, but also to the effectiveness of the market for corporate control. A perfectly competitive merger market assures that merger premiums equal the expected value of the increased market values of merging firms. Thus, divergences between premiums and subsequent market reactions may have important implications for assessing the degree of competitiveness in the merger market, and hence, the effectiveness of mergers as a disciplinary force in the market for corporate control. Finally, the adequacy of ex ante merger pricing models remains an unexplored issue. Using an improved methodology, the Larson and Gonedes (LG) model is expanded to adjust for market wide movements in PE ratios; thus, merger specific influences on wealth positions are more clearly focused upon in contrast to the earlier work by Conn and Nielsen (1977). The earlier finding by Conn and Nielsen that approximately one half of mergers sampled in the 1960s failed to meet the pareto wealth constraint for participating firms is therefore re‐examined with an improved methodology and more recent sample of mergers occurring through 1979. The paper is organised as follows. Section I reviews and critiques the Larson‐Gonedes merger pricing model. Section II describes the empirical methodology and sample. Section III presents the empirical results and Section IV concludes with a summary.

Details

Managerial Finance, vol. 17 no. 6
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 17 May 2021

Eswaran Velayutham and Vijayakumaran Ratnam

This paper aims to examine the relationship between corporate social responsibility (CSR) and shareholder wealth arising from announcement returns of security issuance…

Abstract

Purpose

This paper aims to examine the relationship between corporate social responsibility (CSR) and shareholder wealth arising from announcement returns of security issuance from a frontier market. It also explores the role of business group affiliation (BGA) on this relationship.

Design/methodology/approach

The study uses short-term scenarios to examine the link between CSR and shareholder wealth using the event study methodology which helps us mitigate the reverse causality problems related to studies of the relationship between CSR and firm value. Abnormal returns surrounding the security issue announcements were generated using the market model.

Findings

This paper finds that security issuers with high CSR scores are associated with higher shareholder value. However, this paper finds that CSR activities of security issuers with BGA are value-destroying which is consistent with the agency perspective of CSR.

Research limitations/implications

This study is limited to only one nascent market, namely the Colombo Stock Exchange.

Originality/value

This study documents that CSR and BGA are important determinants, among others, of stock price reactions to security offerings in emerging markets.

Details

Social Responsibility Journal, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1747-1117

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Article
Publication date: 18 September 2019

Ousmanou Alim

The purpose of this paper is to examine the impact of employee ownership (EO) on the creation of shareholderswealth in companies in Cameroon.

Abstract

Purpose

The purpose of this paper is to examine the impact of employee ownership (EO) on the creation of shareholderswealth in companies in Cameroon.

Design/methodology/approach

The methodological approach adopted is hypothetical-deductive. The sample includes 89 companies, of which 31 practiced EO policy for at least ten years. Information used come from secondary data collected over the period 2008–2013 at the National Statistical Institute of Cameroon. These data were analyzed through a time series cross-sectional regression, corrected for any latent heteroskedasticity and serial auto-correlation.

Findings

The paper finds that the average level for participation of employee in the capital is 7.4 percent and the average wealth creation of shareholders is 26 percent of invested equity. However, this average rate of creation of shareholderswealth is higher in companies with EO (45 percent) than in conventional firms (16 percent). For the results of model estimates, the percentage of capital held by employees affect positively and significantly at 1 percent the return on equity. This study concludes that EO is a lever for creation of shareholderswealth in companies in Cameroon.

Practical implications

Findings of this research can serve as framework for reflection by politicians, managers and business leaders as they will have a strategic management tool capable of improving the social climate in companies and also promoting shareholderswealth creation. It is a formula that would allow them combining economic and social realities of organizations.

Originality/value

No similar review has been done before in Africa in general and Cameroon in particular. Study was carried out in a context where financial market is not developed.

Details

Journal of Participation and Employee Ownership, vol. 2 no. 2
Type: Research Article
ISSN: 2514-7641

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