Acquisitions and Regulatory Arbitrage by Captive Finance Companies

Captive finance firms play an important role as financial intermediaries. Yet, they receive little attention in financial research. Recently, finance companies have grown by engaging in acquisition activities. Given their unique characteristics, finance companies may be more capable of extracting gains from acquisitions than other firms. We explain their advantages, and assess the market response and long-term valuation of finance companies that engage in acquisitions. Our results indicate that acquisitions by captive finance firms are wealth enhancing in the short term and the long term. However, the market reacts negatively when flexible captive financing firms acquire highly regulated depository institutions

Acquisitions and Regulatory Arbitrage by Captive Finance Companies

Captive finance firms play an important role as financial intermediaries. Yet, they receive little attention in financial research. Recently, finance companies have grown by engaging in acquisition activities. Given their unique characteristics, finance companies may be more capable of extracting gains from acquisitions than other firms. We explain their advantages, and assess the market response and long-term valuation of finance companies that engage in acquisitions. Our results indicate that acquisitions by captive finance firms are wealth enhancing in the short term and the long term. However, the market reacts negatively when flexible captive financing firms acquire highly regulated depository institutions

Acquisitions and Regulatory Arbitrage by Captive Finance Companies

Captive finance firms play an important role as financial intermediaries. Yet, they receive little attention in financial research. Recently, finance companies have grown by engaging in acquisition activities. Given their unique characteristics, finance companies may be more capable of extracting gains from acquisitions than other firms. We explain their advantages, and assess the market response and long-term valuation of finance companies that engage in acquisitions. Our results indicate that acquisitions by captive finance firms are wealth enhancing in the short term and the long term. However, the market reacts negatively when flexible captive financing firms acquire highly regulated depository institutions

The relationship between CEO nominal salary and firm operating performance

Nominal salary is a symbolic amount that does not represent economically meaningful compensation. In this study, we document that CEO nominal salary is positively related to a firms' operating and stock performance. Our results stay robust when we address endogeneity issues using the Heckman self-selection two-stage regression and propensity score matching approach. The findings of our study render important implications about CEO compensation structure and how it can align manager incentives with shareholder wealth

The wealth effects of mergers and acquisitions by dividend payers

We document a more favorable market reaction to the announcement of mergers and acquisitions (M&As) by dividend-paying acquirers when compared to non-paying acquirers. Dividend-paying acquirers are associated with greater improvements in return on assets post-M&A. Furthermore, dividend-paying acquirers hold higher levels of cash and are more likely to engage in cash financed deals. We infer that an existing dividend payment policy acts as a disciplinary mechanism forcing managers to engage in value-adding M&As, restricting self-motivated empire-building acquisitions. In order to preserve their ability to maintain dividends, dividend paying acquirers seek targets that can contribute to free cash flow

Machine Learning and Algorithmic Pairs Trading in Futures Markets

This study applies machine learning methods to develop a sustainable pairs trading market-neutral investment strategy across multiple futures markets. Cointegrated pairs with similar price trends are identified, and a hedge ratio is determined using an Error Correction Model (ECM) framework and support vector machine algorithm based upon the two-step Engle–Granger method. The study shows that normal backwardation and contango do not consistently characterize futures markets, and an algorithmic pairs trading strategy is effective, given the unique predominant price trends of each futures market. Across multiple futures markets, the pairs trading strategy results in larger risk-adjusted returns and lower exposure to market risk, relative to an appropriate benchmark. Backtesting is employed and results show that the pairs trading strategy may hedge against unexpected negative systemic events, specifically the COVID-19 pandemic, remaining profitable over the period examined

Stock market response to the statement on the purpose of a corporation: A vindication of stakeholder theory

Research question/issue: on August 19, 2019, the Business Roundtable (2019) released a statement signed by 181 chief executive officers (CEOs) of well-known US corporations, in which they pledged “a fundamental commitment” to “deliver value to all” stakeholders. This study examines the stock market reaction to this new statement on the purpose of a corporation. Research findings/insights: based on a sample of 163 publicly listed companies that signed the pledge, the results show that investors react positively to a firm's pledge in the days surrounding the statement release. The consensus among stock market investors was robust, characterized by the low volatility in the share price post-announcement date. The decision by these companies, though intended to maximize the wealth of all stakeholders, rather than shareholders alone, carries an opportunity cost. Specifically, a post-announcement decline in share buybacks by pledge firms relative to control firms is observed, though investors embracing stakeholder theory appear undeterred by the reduction in distributions. Theoretical/academic implications: this study provides empirical support that, in the evolving business environment, companies must emphasize issues that concern customers, employees, non-governmental organizations (NGOs), and the government. Failure to prioritize these issues may engender public backlash, especially in the age of social media. However, the attention to stakeholders is compatible with the focus on shareholder performance. Performance suffers when customers leave, workers feel dissatisfied, NGOs call for boycotts, and governments levy fines. Corporations seeking to increase shareholder wealth will need to fully embrace stakeholder concerns. Practitioner/policy implications: this study shows that adopting a stakeholder perspective unlocked value that would not have been achieved had the focus remained on shareholder primacy. The excess values may derive from greater customer loyalty, improved employee motivation, better supplier relations, supportive financiers, maximizing revenue, minimizing costs, and/or yielding higher profits. Shareholders anticipate greater long-term value from companies emphasizing employees, communities, supply chain, financiers, and shareholders.</p

Firm Investment Efficiency and Auditor Perception of Dividend Policy Changes

This paper examines how auditors assign fees to dividend initiations conditional upon the investment opportunities available to the firm. We examine whether auditors perceive a positive signal arising either from managerial confidence in sustainable future cash flow or from a reduction of risk associated with agency problems due to over-investment. Our results show that a dividend initiation appears to moderate the perceived risk of asset misappropriation, in the sense that initiators with a greater propensity to over-invest exhibit lower audit fees than nonpayers. Further, auditors appear to price the risk of dividend-paying firms, which already mitigate over-investment and discretionary cash flow hazards, higher than for firms that initiate dividends, suggesting that the fee reduction for initiators is also related to the signal of their sustainable cash flows and commitment to reduce discretionary use of liquid funds. We find additional evidence for signaling in that under-invested initiators are assessed lower fees. Both signaling and agency theory support auditors’ lower perceived risks of dividend initiating firms, but the strongest evidence of perceived lower audit risk is in firms with the potential for agency problems

Firm Investment Efficiency and Auditor Perception of Dividend Policy Changes

This paper examines how auditors assign fees to dividend initiations conditional upon the investment opportunities available to the firm. We examine whether auditors perceive a positive signal arising either from managerial confidence in sustainable future cash flow or from a reduction of risk associated with agency problems due to over-investment. Our results show that a dividend initiation appears to moderate the perceived risk of asset misappropriation, in the sense that initiators with a greater propensity to over-invest exhibit lower audit fees than nonpayers. Further, auditors appear to price the risk of dividend-paying firms, which already mitigate over-investment and discretionary cash flow hazards, higher than for firms that initiate dividends, suggesting that the fee reduction for initiators is also related to the signal of their sustainable cash flows and commitment to reduce discretionary use of liquid funds. We find additional evidence for signaling in that under-invested initiators are assessed lower fees. Both signaling and agency theory support auditors’ lower perceived risks of dividend initiating firms, but the strongest evidence of perceived lower audit risk is in firms with the potential for agency problems