perfect capital markets, neither reverse nor direct splits influence shareholder wealth. In pract... more perfect capital markets, neither reverse nor direct splits influence shareholder wealth. In practice, however, market imperfections such as transactions costs and information asymmetries can be cited in defending splits as management tools. In their seminal article, Fama, Fisher, Jensen, and Roll [2] analyze the impact of direct splits on stockholder returns. Their conclusion, which has been corroborated in subsequent studies, is that direct splits, per se, have no effect on shareholder wealth.
This study examines the stock market's reaction to public announcements of corporate strategic in... more This study examines the stock market's reaction to public announcements of corporate strategic investment decisions. It includes a wide variety of strategic decisions: formation of joint ventures, research and development projects, major capital expenditures, and divers$cation into new products andlor markets. Three alternative hypotheses concerning the stock market's reaction to announcements of these decisions are tested. The Shareholder Value Maximization hypothesis predicts a positive reaction to corporate investments because the stock market rewards managers for developing strategies that increase shareholder wealth. The Rational Expectations hypothesis predicts no stock price reaction because investors expect managers to undertake periodic investments in order to maintain their firms' competitive fitness. The Institutional Investors hypothesis predicts a negative reaction to announcements of corporate investments. The U.S. capital markets are dominated by institutional investors who, in pursuit of superior quarterly performance, tnay disdain longterm investments because they reduce short-term earnings. Analysis of 767 strategic investment decisions announced by 248 companies in 102 industries indicates that the stock market's reaction to strategic investments conforms most closely to the predictions of the Shareholder Value Maximization hypothesis. This overall finding holds for investtnents of wrying size and duration. The implications of a positive reaction by the stock market 10 investment announcements are drawn for corporate strategy research and management practice. quarterly earnings was the cause (Wall Street Journal, 1986). Are American managers forced to manage for the short-term in order to meet the demands of Wall Street? In other words, do they make longterm investments that increase the satisfaction of all their firms' stakeholders, or do they merely take actions that result in short-run profitability in order to please securities analysts? This distinction has been drawn very clearly in the business press. Some writers have claimed that the stock market forces managers to take a shortrun view in their decision-making (e.g. Business Week, 1984; Drucker, 1986; Pennar, 1986). Conversely, others have maintained that managers can develop long-run strategies for their companies that will be rewarded by the stock market (e.g. Hector, 1988). However, to date,
We investigate the value created through spinoffs over the 1965-1988 period by measuring the stoc... more We investigate the value created through spinoffs over the 1965-1988 period by measuring the stock returns of spinoffs, their parent firms, and parent-spinoff combinations for periods of up to three years following the spinoffs. We find significantly positive abnormal returns for spinoffs, their parents, and the spinoff-parent combinations. Both the spinoffs and parents experience an unusually high incidence of takeovers and the abnormal performance is limited to firms involved in takeover activity. These findings suggest that spinoffs provide a low-cost method of transferring control of corporate assets to bidders who will create greater value.
1. We define a pure spinoff as a tax-free, pro-rata distribution of shares of a wholly-owned subs... more 1. We define a pure spinoff as a tax-free, pro-rata distribution of shares of a wholly-owned subsidiary to shareholders. Partial spinoffs, where the parent retains a proportion of the shares of the subsidiary, are actually more common than pure spinoffs. 2. See James Miles and James Rosenfeld, "An Empirical Analysis of the Effects of Spin-off Announcements on Shareholder Wealth,"
Page 1. Value Creation from Equity Carve-Outs Heather M. Hulburt, James A. Miles, and J. Randall ... more Page 1. Value Creation from Equity Carve-Outs Heather M. Hulburt, James A. Miles, and J. Randall Woolridge* Using a large sample of equity carve-out events during the 1980s and 1990s, we find that rivals of carve-out parent ...
Read this book - and know what a stock is worth before you invest. Wall Street veterans know that... more Read this book - and know what a stock is worth before you invest. Wall Street veterans know that the key to beating the stock market is to find, and buy, stocks trading at a discount to their true net worth. Yet, as recent events have proven, using the wrong valuation approach can be disastrous, often more dangerous than no approach at all."Streetsmart Guide to Valuing a Stock, Second Edition", introduces you to a simple and powerful valuation model that will help you calculate the true value of any stock and pay pennies on the dollar for some of today's most valuable companies. Anchoring stock valuation by using 10 proven principles of finance to help you intelligently manage your investments, this latest addition to McGraw-Hill's popular "Streetsmart" series will: show you the secrets to buying undervalued stocks and selling overvalued stocks; guide you in managing the risk of investing in stocks; demystify the often-confusing steps in the stock valuat...
This paper examines the common stock valuation and liquidity effects of firms being added to and ... more This paper examines the common stock valuation and liquidity effects of firms being added to and deleted from the S&P 500 Index. Three potential pricing and trading volume hypotheses are discussed and tested—an Information Content Hypothesis (ICH), a Price Pressure Hypothesis (PPH), and a Liquidity Cost Hypothesis (LCH). The empirical findings indicate that firms being added to (deleted from) the S&P 500 Index over the 1977 to 1983 period experience positive (negative) abnormal common stock returns on the day following the addition. An analysis of common stock liquidity around additions to the Index reveals that while relative trading activity increases in the month of addition, it actually declines in subsequent months. The valuation and liquidity results are consistent to some degree with both the PPH and the LCH and are most likely due to index fund managers adjusting their holdings to reflect changes in the Index.
Examination of performance over 1993–2002 indicates that average quarterly and cumulative returns... more Examination of performance over 1993–2002 indicates that average quarterly and cumulative returns of stocks recommended by brokerage firms are slightly below the returns of the S&P 500. And recommended stock returns are more volatile. Stocks recommended by top-tier brokerage firms perform more poorly than those recommended by mid-tier or regional firms. There is considerable variability across recommendations of individual brokerage firms. The stock recommendations of Merrill Lynch and Raymond James show the best results among top-tier and mid-tier or regional brokerage firms. On a risk-adjusted basis, only stocks recommended by three of the ten brokerage firms with a full ten years of data outperformed the S&P 500.
This study analyzes stock dividends as signals from managers. It is argued that in the presence o... more This study analyzes stock dividends as signals from managers. It is argued that in the presence of information asymmetries between managers and investors, stock dividends provide a relatively inexpensive and unambiguous signalling device. Based on an examination of the daily returns around 317 stock dividend announcements, it is concluded that these announcements are interpreted by investors as signals from managers. Further analysis also indicates that stock dividend size is positively related to announcement day returns.
Many recipients of stock dividends look upon them as distributions of corporate earnings and usua... more Many recipients of stock dividends look upon them as distributions of corporate earnings and usually in an amount equivalent to the fair value of the additional shares received. Furthermore, it is to be presumed that such views of recipients are materially strengthened in those instances, which are by far the most numerous, where the issuances are so small in comparison with the shares previously outstanding that they do not have any apparent effect upon the share market price and, consequently, the market value of the shares previously held remains substantially unchanged.
ABSTRACT I modify the uniform-price auction rules in allowing the seller to ration bidders. This ... more ABSTRACT I modify the uniform-price auction rules in allowing the seller to ration bidders. This allows me to provide a strategic foundation for underpricing when the seller has an interest in ownership dispersion. Moreover, many of the so-called "collusive-seeming" equilibria disappear.
In this study, the open empirical question as to whether or not dividends contain information is ... more In this study, the open empirical question as to whether or not dividends contain information is investigated. The study involves 200 stocks and 376 dividend announcements over the 1971 to 1977 period; measures of unexpected dividends are related to measures of abnormal returns for dividend changing stocks. This study is important for three reasons: A tested ex ante dividend expectational model is used; The analysis is centered on daily, as opposed to monthly, returns; and, The influence of earnings on stock price is controlled explicitly. The evidence indicates that abnormal stock returns vary in sign with unexpected dividends. The results are consistent with the hypothesis that dividends contain information.
This paper focuses on shareholder reaction to growth-motivated dividend cuts and omissions. The r... more This paper focuses on shareholder reaction to growth-motivated dividend cuts and omissions. The results reveal that although growth announcements mitigate the capital loss induced by dividend decreases, the stockmarket response to growth-oriented dividend cuts is still strongly negative. However, the capital loss suffered by investors is significantly reduced when dividend cuts are accompanied with stock dividends. Two potential explanations of the results are explored: (1) shareholders find the immediate benefits of stock dividends more attractive than the potentially higher future rewards of investment opportunities; and (2) shareholders overreact to dividend announcements. Analysis of the performance of the firms for two years following the dividend cut indicates weak support for the overreaction hypothesis. Each period represents 20 trading days. Column 1 : Market-adjusted returns. Column 2: Risk-adjusted returns. The market model used for measuring beta and alpha: Average beta = 1.01 769. Average alpha = 0.0001 1. Each period represents 20 trading days. Column 1 : Market-adjusted returns. Column 2: Risk-adjusted returns. The market model used for measuring beta and alpha. Average beta =0.87166. Average alpha =0.00008.
Exchangeable debt is convertible into the common stock of a target firm in which the issuing firm... more Exchangeable debt is convertible into the common stock of a target firm in which the issuing firm has an ownership position. It signifies a potential change in the issuing firm's asset composition through the divestiture of the ownership stake in the target firm. We find that announcements of exchangeable debt offers are associated with insignificant abnormal returns for the shareholders of issuing firms. The target firm's share price declines, however, when an exchangeable debt offer is announced. This result is consistent with the offer's potential to reduce the ownership concentration of the target firm's common stock.
perfect capital markets, neither reverse nor direct splits influence shareholder wealth. In pract... more perfect capital markets, neither reverse nor direct splits influence shareholder wealth. In practice, however, market imperfections such as transactions costs and information asymmetries can be cited in defending splits as management tools. In their seminal article, Fama, Fisher, Jensen, and Roll [2] analyze the impact of direct splits on stockholder returns. Their conclusion, which has been corroborated in subsequent studies, is that direct splits, per se, have no effect on shareholder wealth.
This study examines the stock market's reaction to public announcements of corporate strategic in... more This study examines the stock market's reaction to public announcements of corporate strategic investment decisions. It includes a wide variety of strategic decisions: formation of joint ventures, research and development projects, major capital expenditures, and divers$cation into new products andlor markets. Three alternative hypotheses concerning the stock market's reaction to announcements of these decisions are tested. The Shareholder Value Maximization hypothesis predicts a positive reaction to corporate investments because the stock market rewards managers for developing strategies that increase shareholder wealth. The Rational Expectations hypothesis predicts no stock price reaction because investors expect managers to undertake periodic investments in order to maintain their firms' competitive fitness. The Institutional Investors hypothesis predicts a negative reaction to announcements of corporate investments. The U.S. capital markets are dominated by institutional investors who, in pursuit of superior quarterly performance, tnay disdain longterm investments because they reduce short-term earnings. Analysis of 767 strategic investment decisions announced by 248 companies in 102 industries indicates that the stock market's reaction to strategic investments conforms most closely to the predictions of the Shareholder Value Maximization hypothesis. This overall finding holds for investtnents of wrying size and duration. The implications of a positive reaction by the stock market 10 investment announcements are drawn for corporate strategy research and management practice. quarterly earnings was the cause (Wall Street Journal, 1986). Are American managers forced to manage for the short-term in order to meet the demands of Wall Street? In other words, do they make longterm investments that increase the satisfaction of all their firms' stakeholders, or do they merely take actions that result in short-run profitability in order to please securities analysts? This distinction has been drawn very clearly in the business press. Some writers have claimed that the stock market forces managers to take a shortrun view in their decision-making (e.g. Business Week, 1984; Drucker, 1986; Pennar, 1986). Conversely, others have maintained that managers can develop long-run strategies for their companies that will be rewarded by the stock market (e.g. Hector, 1988). However, to date,
We investigate the value created through spinoffs over the 1965-1988 period by measuring the stoc... more We investigate the value created through spinoffs over the 1965-1988 period by measuring the stock returns of spinoffs, their parent firms, and parent-spinoff combinations for periods of up to three years following the spinoffs. We find significantly positive abnormal returns for spinoffs, their parents, and the spinoff-parent combinations. Both the spinoffs and parents experience an unusually high incidence of takeovers and the abnormal performance is limited to firms involved in takeover activity. These findings suggest that spinoffs provide a low-cost method of transferring control of corporate assets to bidders who will create greater value.
1. We define a pure spinoff as a tax-free, pro-rata distribution of shares of a wholly-owned subs... more 1. We define a pure spinoff as a tax-free, pro-rata distribution of shares of a wholly-owned subsidiary to shareholders. Partial spinoffs, where the parent retains a proportion of the shares of the subsidiary, are actually more common than pure spinoffs. 2. See James Miles and James Rosenfeld, "An Empirical Analysis of the Effects of Spin-off Announcements on Shareholder Wealth,"
Page 1. Value Creation from Equity Carve-Outs Heather M. Hulburt, James A. Miles, and J. Randall ... more Page 1. Value Creation from Equity Carve-Outs Heather M. Hulburt, James A. Miles, and J. Randall Woolridge* Using a large sample of equity carve-out events during the 1980s and 1990s, we find that rivals of carve-out parent ...
Read this book - and know what a stock is worth before you invest. Wall Street veterans know that... more Read this book - and know what a stock is worth before you invest. Wall Street veterans know that the key to beating the stock market is to find, and buy, stocks trading at a discount to their true net worth. Yet, as recent events have proven, using the wrong valuation approach can be disastrous, often more dangerous than no approach at all."Streetsmart Guide to Valuing a Stock, Second Edition", introduces you to a simple and powerful valuation model that will help you calculate the true value of any stock and pay pennies on the dollar for some of today's most valuable companies. Anchoring stock valuation by using 10 proven principles of finance to help you intelligently manage your investments, this latest addition to McGraw-Hill's popular "Streetsmart" series will: show you the secrets to buying undervalued stocks and selling overvalued stocks; guide you in managing the risk of investing in stocks; demystify the often-confusing steps in the stock valuat...
This paper examines the common stock valuation and liquidity effects of firms being added to and ... more This paper examines the common stock valuation and liquidity effects of firms being added to and deleted from the S&P 500 Index. Three potential pricing and trading volume hypotheses are discussed and tested—an Information Content Hypothesis (ICH), a Price Pressure Hypothesis (PPH), and a Liquidity Cost Hypothesis (LCH). The empirical findings indicate that firms being added to (deleted from) the S&P 500 Index over the 1977 to 1983 period experience positive (negative) abnormal common stock returns on the day following the addition. An analysis of common stock liquidity around additions to the Index reveals that while relative trading activity increases in the month of addition, it actually declines in subsequent months. The valuation and liquidity results are consistent to some degree with both the PPH and the LCH and are most likely due to index fund managers adjusting their holdings to reflect changes in the Index.
Examination of performance over 1993–2002 indicates that average quarterly and cumulative returns... more Examination of performance over 1993–2002 indicates that average quarterly and cumulative returns of stocks recommended by brokerage firms are slightly below the returns of the S&P 500. And recommended stock returns are more volatile. Stocks recommended by top-tier brokerage firms perform more poorly than those recommended by mid-tier or regional firms. There is considerable variability across recommendations of individual brokerage firms. The stock recommendations of Merrill Lynch and Raymond James show the best results among top-tier and mid-tier or regional brokerage firms. On a risk-adjusted basis, only stocks recommended by three of the ten brokerage firms with a full ten years of data outperformed the S&P 500.
This study analyzes stock dividends as signals from managers. It is argued that in the presence o... more This study analyzes stock dividends as signals from managers. It is argued that in the presence of information asymmetries between managers and investors, stock dividends provide a relatively inexpensive and unambiguous signalling device. Based on an examination of the daily returns around 317 stock dividend announcements, it is concluded that these announcements are interpreted by investors as signals from managers. Further analysis also indicates that stock dividend size is positively related to announcement day returns.
Many recipients of stock dividends look upon them as distributions of corporate earnings and usua... more Many recipients of stock dividends look upon them as distributions of corporate earnings and usually in an amount equivalent to the fair value of the additional shares received. Furthermore, it is to be presumed that such views of recipients are materially strengthened in those instances, which are by far the most numerous, where the issuances are so small in comparison with the shares previously outstanding that they do not have any apparent effect upon the share market price and, consequently, the market value of the shares previously held remains substantially unchanged.
ABSTRACT I modify the uniform-price auction rules in allowing the seller to ration bidders. This ... more ABSTRACT I modify the uniform-price auction rules in allowing the seller to ration bidders. This allows me to provide a strategic foundation for underpricing when the seller has an interest in ownership dispersion. Moreover, many of the so-called "collusive-seeming" equilibria disappear.
In this study, the open empirical question as to whether or not dividends contain information is ... more In this study, the open empirical question as to whether or not dividends contain information is investigated. The study involves 200 stocks and 376 dividend announcements over the 1971 to 1977 period; measures of unexpected dividends are related to measures of abnormal returns for dividend changing stocks. This study is important for three reasons: A tested ex ante dividend expectational model is used; The analysis is centered on daily, as opposed to monthly, returns; and, The influence of earnings on stock price is controlled explicitly. The evidence indicates that abnormal stock returns vary in sign with unexpected dividends. The results are consistent with the hypothesis that dividends contain information.
This paper focuses on shareholder reaction to growth-motivated dividend cuts and omissions. The r... more This paper focuses on shareholder reaction to growth-motivated dividend cuts and omissions. The results reveal that although growth announcements mitigate the capital loss induced by dividend decreases, the stockmarket response to growth-oriented dividend cuts is still strongly negative. However, the capital loss suffered by investors is significantly reduced when dividend cuts are accompanied with stock dividends. Two potential explanations of the results are explored: (1) shareholders find the immediate benefits of stock dividends more attractive than the potentially higher future rewards of investment opportunities; and (2) shareholders overreact to dividend announcements. Analysis of the performance of the firms for two years following the dividend cut indicates weak support for the overreaction hypothesis. Each period represents 20 trading days. Column 1 : Market-adjusted returns. Column 2: Risk-adjusted returns. The market model used for measuring beta and alpha: Average beta = 1.01 769. Average alpha = 0.0001 1. Each period represents 20 trading days. Column 1 : Market-adjusted returns. Column 2: Risk-adjusted returns. The market model used for measuring beta and alpha. Average beta =0.87166. Average alpha =0.00008.
Exchangeable debt is convertible into the common stock of a target firm in which the issuing firm... more Exchangeable debt is convertible into the common stock of a target firm in which the issuing firm has an ownership position. It signifies a potential change in the issuing firm's asset composition through the divestiture of the ownership stake in the target firm. We find that announcements of exchangeable debt offers are associated with insignificant abnormal returns for the shareholders of issuing firms. The target firm's share price declines, however, when an exchangeable debt offer is announced. This result is consistent with the offer's potential to reduce the ownership concentration of the target firm's common stock.
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