Pre-Acquisition Characteristics of the Acquirers

Existing empirical literature has extensively analyzed post-acquisition performance of the acquirers to evaluate success of the takeover. The academic literature tends to agree that target shareholders benefit from takeovers; however takeovers benefits for acquiring firm’s shareholders have been questioned. A majority of empirical literature indicate acquisition announcements are associated with a decrease in acquiring shareholder’s wealth. While pre-acquisition characteristics of takeover targets have been extensively analyzed, empirical literature has not directly and comprehensively analyzed pre-acquisition financial and operating characteristics of the acquiring firms. In this paper, I examine pre-acquisition operating performance and governance characteristics of acquirers. Results suggest that bidders are large firms compared to their industry peers. I also find that bidders are characterized by low insider ownership, high institutional holding and high leverage, indicating higher outside monitoring of the managers. Bidders in general report superior operating performance as indicated by higher return on equity and lower operating expenses. Consistent with existing research, I found that the takeover announcement period abnormal returns are negative for bidders irrespective of their operating performance and governance characteristics

Tracking Errors of Exchange Traded Funds and Index Funds

Exchange traded funds (ETF) are one of the recent financial innovations widely viewed as significantly better investments than mutual funds given their lower fee structure and tax efficiency. Individual investors are increasingly using ETFs tracking most popular stock indices to achieve their investment goals. In some cases, investors are using these ETFs to replace index mutual funds in their long-term portfolios. Thus, it is important to compare the performance of widely held ETFs and index funds in terms of their ability to consistently track the underlying index. Another interesting research question is whether tracking errors of these two investment vehicles exhibit significant differences in the periods associated with high degree of uncertainty and volatility. Recent extreme volatility in the financial market provides a perfect setting to empirically test tracking efficiency of index ETFs and corresponding index mutual funds. In this paper we compare ETFs and Index funds performance during the period 2007-2012. This period has seen a significant increase in the ETFs both in terms of total net assets and total number of ETFs. We document a significant improvement in tracking ability of all the ETFs during the six year period. Our results suggests that for index funds perform relatively better than the corresponding ETFs in tracking large-cap and broad-market indices. In contrast, ETFs exhibit lower tracking errors compared to corresponding index funds for mid-cap indices, small-cap indices and for narrower indices tracking a segment of large-cap markets. These results support empirical and theoretical predictions in Guedj and Huang (2008). They argue that ETFs are better suited for narrower and less liquid underlying indexes. This is due to the “in kind redemption” feature of ETFs, which help them avoid flow-induced trading costs. Our results also document significant increase in tracking errors for both ETFs and index funds when market volatility is high, however their relative performance do not change. The volatility of daily returns for ETFs is lower than the volatility of daily returns of their underlying index and that of corresponding index funds during the entire sample period

Financial Contagion and Market Liquidity: Evidence from the Asian Crisis

Models of financial crisis and contagion predict that an economic crisis turns into a crisis of market liquidity in the presence of borrowing constraints, information asymmetry and risk aversion. Based on the firm-level data on a sample of exposed and unexposed US stocks to the Asian currency crisis, we find a significant increase (decrease) in the crisis period bid-ask spreads (depth) and their volatilities for both the groups. While our results underscore the imprints of flight to quality, we detect little causal patterns in liquidity innovations. An important implication of our findings, as evidenced by the recent crisis, is that regulatory response to enhance liquidity during a crisis should not be limited to the industries and markets directly exposed to the crisis. Finally, we find that the deterioration in market liquidity provides a partial explanation for the crisis-induced abnormal returns

Interpreting Financial Results

The article discusses three accounting changes issued by the Financial Accounting Standards Board (FSAB). The Statement of Financial Accounting Standards (SFAS) No. 158 Employers\u27 Accounting for Defined Benefit Pension and Other Retirement Plans and the SFAS No. 160 Noncontrolling Interests in Consolidated Financial Statements are mentioned. Financial Interpretation 48 Accounting for Uncertainty in Income Taxes, an Interpretation of FSAB Statement No. 109 is mentioned. The takeaway? Financial analysts, investors, and creditors need to carefully interpret ratios and measures, including debt to equity, liabilities to equity, and return on equity. Financial ratios used in loan covenants should be clearly designed and defined, and, in some cases, equity may be more meaningfully defined as adjusted for certain changes in other comprehensive income

Intra-industry Effects of Takeovers: A Study of the Operating Performance of Rival Firms

This paper investigates whether the managers of industry rivals act to mitigate their agency exposure and improve operating performance when one of the firms in the industry is subject to a takeover attempt. The results indicate that rival firms in general decrease free cashflows, improve operating performance, reduce capital expenditures, and increase leverage in response to a control threat within the industry. In particular, rival firms with potentially higher agency costs i.e., fewer investment opportunities and high cash or high free cashflows exhibit a higher reduction in cash levels and free cashflows subsequent to a control threat in their industry. These results are consistent with the inefficient management hypothesis, which suggests poorly performing firms are more likely to be the target of a takeover attempt and the acquisition probability hypothesis proposed by Song and Walkling (2000), which states that rivals of initial targets earn abnormal returns because of an increased probability that they themselves will be targets. These results lend support to the argument that takeovers act as an effective external control mechanism for managers and that they have industry wide effects

Spring Update: Dear Faculty

A message is forthcoming from the Coronavirus Planning Team regarding the plans for our return for the spring semester. We are planning a phased-in move-in process that will heavily emphasize mandatory testing

Takeovers and Agency Problems: A Reexamination of the Pre-Acquisition Operating Performance of Targets

Both the issue of agency problems in corporate takeovers and the role of takeovers as an external control mechanism have been addressed extensively in previously published empirical literature. This existing literature suggests that removal of inefficient management to improve operating performance is one of the key underlying motives for takeovers. However, the results of the analyses of the pre-acquisition operating performance of targets have not been conclusive concerning the efficacy of this motivation to improve underperformance in target firms. I propose that the existing research fails to adequately account for other factors that may also act as control mechanisms, such as managerial ownership, institutional holdings and leverage, which should also be considered when analyzing the pre-acquisition operating performance of targets. These alternative means of controlling agency problems may prevent managers from wasting resources. In this paper, I have sought to contribute to the debate on the inefficient management hypothesis. I do so by examining the pre-acquisition operating performance of targets in the presence of alternative control mechanisms such as insider holdings, institutional holdings and leverage. I have also investigated whether the takeover announcement abnormal returns are higher for targets with poor performance and potentially higher agency costs. I found that target firms are characterized by higher operating expenses compared to control firms. The results of my analysis suggest that targets with entrenched managers and low external monitoring have significantly higher operating expenses. I also found weak evidence that the announcement period abnormal returns are higher for targets with poor operating performance

Essays on market liquidity, agency costs and takeovers

The first essay investigates dynamic interaction between financial liquidity and market liquidity when investors liquidate their portfolios due to margin calls, increased risk aversion, and information asymmetry in an economic crisis. I use firm level data to examine changes in the stock market liquidity of exposed and unexposed firms to the Asian crisis. Results indicate a significant increase in the crisis period bid-ask spreads and decrease in quoted depth for both exposed and unexposed firms, particularly the more liquid or less risky firms during the pre-crisis period. The drop in crisis period market liquidity seems to be attributable to an increase in margin-induced sales, risk aversion, and both the asymmetric information and fixed costs of trading. These findings suggest that the widely documented contagion in stock returns is associated with a contagion in market liquidity during the Asian crisis. The second essay investigates the issues of excessive expenses and inefficient asset utilization by the managers of acquiring firms and takeover targets. There is evidence that targets in general have higher operating expenses. Also, for targets with fewer investment opportunities, excess funds and weak alternative control mechanisms like insider holdings, equity-based compensation and external monitoring by blockholders and debt holders, the pre-acquisition asset turnover is significantly lower. Further, abnormal returns are higher for targets with potentially severe agency problems with few investment opportunities, excess funds and low internal and external control mechanism. However, there is little evidence of poor operating performance by bidders with high agency exposure. The final essay analyzes whether the managers of rivals act to mitigate their agency exposure in response to a takeover attempt in the industry. Results indicate that rival firms in general decrease free cash flows, reduce capital expenditures and increase leverage. Evidence suggests that rival firms with few investment opportunities and high cash or high free cash flows reduce cash levels and free cash flows subsequent to a control threat in their industry. There is weak evidence that the announcement period abnormal returns are higher for rivals with fewer investment opportunities and high cash levels. These findings support the argument that takeovers act as an effective external control mechanism for managers and that they have industry wide effects.

Teaching the Catholic Intellectual Tradition through an Experiential Learning Program

A Catholic University has a specific mission of preserving, transmitting and developing the Catholic Intellectual Tradition. This paper proposes an experiential learning program to support this mission of the catholic universities. This program aims to provide integrated and practical learning of fundamental moral values of catholic intellectual tradition and issues related to social justice while developing the critical and analytical thinking through exposure to real world problems, their possible solutions and a personal reflection. In this paper, we use a microfinance program in an underdeveloped country as the premise for the experiential learning program specifically for business students. Moreover, the proposed program has a clearly defined 5-step module with flexibility to adapt to different academic discipline