Share classes, families and asset purchases: Canadian evidence

Purpose The purpose of this paper is to test if relative asset purchase values (RAPVs) differ between single- and dual-class purchasers (not) differentiated by family ownership for Canadian firms. Design/methodology/approach The paper uses multivariate regressions and 2SLS estimations of simultaneous equations models with both continuous and dichotomous endogenous variables. Data on share structures and family involvements are hand collected. Findings RAPVs for dual-class purchasers are significantly different (larger) than their single-class counterparts only for family-controlled samples. Larger RAPVs for dual-class purchases are associated with higher degrees of dual-class structures, higher family ownerships and with boards with no more than one family member. Research limitations/implications RAPV is important because of its common use as a primary determinant of the wealth effects of M&As, its use as an exchange-rate proxy in two-stage regressions used to determine the amount of abnormal returns attributable to short selling activity around M&A announcements, and its use as a channel for conveying information about deal complexity, seller’s bargaining power, additional monitoring benefits from purchase and/or greater challenges in incorporating a purchase into existing assets. Larger sample size would facilitate more differentiated examinations. Practical implications Findings imply that dual-class share structures assist family shareholders in elevating their control over corporate decisions involving asset purchases. Social implications This paper furthers the authors’ knowledge about the effects of agency issues on corporate decisions. Originality/value It provides an extension and robustness test of the US evidence for asset purchases by providing evidence for Canada given its greater preponderance of families as the ultimate controlling shareholders, restricted or subordinated voting shares issued and pyramidal structures.

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What values more? Agency costs or accrual quality

Journal of Financial Reporting and Accounting ◽

10.1108/jfra-10-2015-0088 ◽

2017 ◽

Vol 15 (1) ◽

pp. 22-38 ◽

Cited By ~ 1

Author(s):

Jagjit S. Saini ◽

Onur Arugaslan ◽

James DeMello

Keyword(s):

Ownership Structure ◽

Agency Costs ◽

Single Class ◽

Accrual Quality ◽

Content Type ◽

Earnings Response Coefficients ◽

Earnings Informativeness ◽

Earnings Response ◽

Dual Class

Purpose The purpose of this paper is to examine what is weighted more by the investors when valuing a dual-class firm’s stock – greater agency costs or better accrual quality of the dual-class firm in contrast to the single-class firm. Design/methodology/approach Using the financial data of firms issuing multiple classes of stock (hereafter dual-class firms) and firms issuing single class of stock (hereafter single-class firms), the authors measure the effect of firm’s ownership structure (dual class versus single class) on the earnings response coefficients (ERCs) of prior, current and future period earnings. Findings The authors find that investors care more about agency costs than the quality of accruals in evaluating the earnings of dual-class firms. Specifically, the authors find that current annual returns of the firm are negatively associated with dual-class ownership structure and that earnings informativeness and predictability are decreasing in dual-class ownership of the firm as reflected in decreasing ERCs. Originality/value This study adds to prior literature on dual-class ownership which reports greater agency costs and better accrual quality at dual-class firms in contrast to single-class firms. This study contributes to the literature on earnings informativeness and predictability by evaluating the effect of ownership structure on the ERCs of the firm. Investors should be careful when valuing a dual-class firm and should consider agency costs in addition to accrual quality of reported earnings at such firms.

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The effect of corporate governance mechanisms on European Mergers and Acquisitions

Corporate Governance ◽

10.1108/cg-05-2018-0166 ◽

2018 ◽

Vol 18 (5) ◽

pp. 965-986 ◽

Cited By ~ 1

Author(s):

Ioannis Tampakoudis ◽

Michail Nerantzidis ◽

Demetres Soubeniotis ◽

Apostolos Soutsas

Keyword(s):

Corporate Governance ◽

Mergers And Acquisitions ◽

Economic Impact ◽

Abnormal Returns ◽

Voting Rights ◽

Shareholder Wealth ◽

Wealth Effects ◽

Board Size ◽

Content Type ◽

Acquiring Firms

Purpose The purpose of this study is twofold: First, to assess the economic impact of Mergers and Acquisitions (M&As) on European acquiring firms from the beginning of the sixth merger wave onward. And second, to investigate the effect of CG mechanisms such as board size, voting rights and anti-takeover provisions (ATPs) on acquirers’ gains, along with a set of control variables. Design/methodology/approach For the purpose of the study, the authors use a sample of 349 completed M&As across all business sectors between European firms from 01/01/2003 to 31/12/2017. Abnormal returns are estimated by applying an event study methodology, and the effects of CG mechanisms are assessed with univariate and multivariate cross-sectional regressions. Findings The authors present evidence that acquirers realize significant positive excess returns upon the announcement of M&As. The authors find past profitability to be a strong indicator of value creation, while most of the traditional firm-specific and deal variables fail to interpret the results. The authors’ analysis indicates that the examined CG measures have a significant effect on acquirer’s gains. More specifically, the authors find that boards in excess of eight directors are negatively related to announcement-period abnormal returns. In contrast, the wealth effects for acquiring firms are positively related to shareholders’ voting rights and/or to the number of ATPs. The estimated coefficients of all three CG mechanisms are statistically significant across alternative model specifications. Research limitations/implications A clear implication is that the existence of certain CG mechanisms leads to value-enhancing strategic decisions for European acquirers. In terms of policy direction, the authors’ findings assist practitioners and/or national and transnational institutions in perceiving the efficacy of certain CG practices. Practical implications This study indicates that Corporate Governance Statements (CGSs) fail to provide adequate information to investors to understand in-depth the CG mechanisms that companies apply. Thus, the authors recommend that CGSs should provide not only narrative information but also information that may generate value for shareholders and other stakeholders as well. Such information should be qualitative and/or quantitative in nature and be made available to market participants to support their decision-making. Originality/value To the authors knowledge, this is the first study that investigates the effect of CG on the economic impact of M&As for European acquirers, using three widely examined CG mechanisms, namely, the board size, the voting rights and the ATPs. The authors’ empirical findings form the basis for further examination of the linkage between M&As and CG, with the intention of establishing the appropriate CG framework that will ensure shareholder wealth creation. This line of research could produce new insights in the field, allowing investors and policymakers to appreciate the benefits of effective CG.

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The impact of divestitures on shareholder wealth – The DACH case

European Journal of Management and Business Economics ◽

10.1108/ejmbe-08-2019-0133 ◽

2020 ◽

Vol ahead-of-print (ahead-of-print) ◽

Author(s):

Nils Teschner ◽

Herbert Paul

Keyword(s):

Positive Impact ◽

Relative Size ◽

Abnormal Returns ◽

Shareholder Wealth ◽

Wealth Effects ◽

Wealth Creation ◽

Publicly Traded ◽

Content Type ◽

Publicly Traded Companies ◽

The Impact

PurposeThe 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/approachThis 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.FindingsThe 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/valueThis 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.

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The wealth effects of accelerated stock repurchases

Managerial Finance ◽

10.1108/mf-07-2013-0192 ◽

2014 ◽

Vol 40 (5) ◽

pp. 434-453

Author(s):

Ken C. Yook ◽

Partha Gangopadhyay

Keyword(s):

Abnormal Returns ◽

Wealth Effect ◽

Wealth Effects ◽

Open Market ◽

Stock Repurchase ◽

Content Type ◽

Number Of Factors ◽

The Press ◽

Completion Date ◽

Sampling Problems

Purpose – The wealth effect of accelerated stock repurchase (ASR) documented by previous studies is not as large as the authors would have expected. The authors believe that there are potentially important sampling problems in the previous studies, which make the results less reliable. Identifying a number of factors that can possibly affect the announcement-period returns, the purpose of this paper is to reexamine the wealth effect of ASRs. Design/methodology/approach – The paper identifies a number of factors that can possibly affect the announcement-period returns to ASRs which include: whether an ASR announcement in the press is the initiation date or the completion date of the ASR; the size of the ASR program; whether an ASR is part of an open market repurchase (OMR) program; the frequency of ASR announcements by a firm; whether other corporate news is announced simultaneously with an ASR. The paper partitions the ASR sample into three groups, and then examines the wealth effect of these groups. Findings – The empirical results show that the market reacts differently to the announcement of ASR in these three groups. The three-day announcement-period CAR (t=−1, +1) is 3.59 percent for the high-wealth-effect group, 2.01 percent for the medium-wealth-effect group, and 1.48 percent for the low-wealth-effect group. The paper also identifies the size of the ASR program, whether the ASR is announced simultaneously with an OMR or not, and the frequency of ASR announcements are the most important determinants of the announcement-period abnormal returns. Originality/value – These findings suggest that the weaker wealth effects of ASRs that have been documented in previous studies are due to sampling related issues.

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Does the revolving door swing both ways? The value of political connections to US firms

Managerial Finance ◽

10.1108/mf-08-2014-0215 ◽

2015 ◽

Vol 41 (10) ◽

pp. 1002-1031 ◽

Cited By ~ 8

Author(s):

Reza Houston ◽

Stephen Ferris

Keyword(s):

Government Regulation ◽

Abnormal Returns ◽

Revolving Door ◽

Wealth Effects ◽

Political Connections ◽

Corporate Boards ◽

Public Office ◽

Content Type ◽

For Profit ◽

Political Office

Purpose – The purpose of this paper is to analyze the value of corporate political connections resulting from the revolving door of employment between political office and the for-profit corporation. The authors test whether there is value to firms from political connections provided by the appointment of former politicians to corporate boards or management teams. The authors also test to see if passage through the door in the other direction, from the corporate world to public office, generates value for firms. Do firms whose former employees gain public office earn excess returns following their appointment or election to these positions? Design/methodology/approach – The methodology used in this study focusses on an empirical analysis of the political connections of US firms over the sample period 1996-2011. The analysis emphasizes the wealth effects associated with the announcement of hiring former politicians to corporate boards or the gaining of political office by former corporate employees. Findings – The authors find that politicians becoming corporate directors is 2.5 times more common than corporate executives gaining public office. The authors determine that industries with extensive government regulation most often hire former politicians. The authors find that the office held by former politicians matters. The authors find that longevity in a cabinet position is important while formal Congressional or Senate leadership positions are not. Surprisingly, the authors determine the longer politicians are out of office, the more value they are able to provide to the firm. Finally, the authors discover that firms which hire former politicians have significantly positive long-term abnormal returns, but firms whose managers enter politics do not. Originality/value – This study is highly original in its examination of political connections resulting from door swing in both directions. Further, the analysis of longevity, time out of office, and position held adds to the contributions made by this study.

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Earnings informativeness in dual-class firms

Review of Accounting and Finance ◽

10.1108/raf-09-2017-0178 ◽

2019 ◽

Vol 18 (3) ◽

pp. 399-431 ◽

Cited By ~ 1

Author(s):

Olesya Lobanova ◽

Abhijit Barua ◽

Suchismita Mishra ◽

Arun J. Prakash

Keyword(s):

Empirical Support ◽

Information Environment ◽

Forecast Errors ◽

Single Class ◽

Forecast Dispersion ◽

Content Type ◽

Bid Ask Spread ◽

Earnings Informativeness ◽

Dual Class

Purpose The purpose of this study is to explain the poor informativeness of earnings in dual-class firms by examining the quality of earnings and the information environment. Design/methodology/approach The earnings informativeness, earnings quality and information environment of dual-class firms are compared with a matched sample of single-class firms. The authors have performed the returns-earnings association tests, examine the quality of earnings by using proxies for discretionary accruals, and examine the information environment by employing four empirical constructs: the analyst forecast dispersion, absolute forecast errors, Amihud’s (2002) illiquidity measure, and the bid-ask spread. Findings The results show that the quality of earnings is better while the quality of the information environment is worse in dual-class firms compared to single-class firms. Overall, the results suggest that an inferior information environment is a plausible explanation for the low informativeness of dual-class firms’ earnings. Research limitations/implications The results provide empirical support for Dechow et al. (2010) that the use of the earnings-returns association measure to draw conclusions about the quality of earnings is not appropriate in the presence of a poor information environment. Originality/value This is the first study to empirically show that low earnings informativeness in dual-class firms can be explained by the inferior quality of the information environment.

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A review of the literature on dual-class firms

Managerial Finance ◽

10.1108/mf-10-2018-0505 ◽

2019 ◽

Vol 45 (9) ◽

pp. 1199-1218

Author(s):

Ashrafee Tanvir Hossain ◽

Lawrence Kryzanowski

Keyword(s):

Ownership Structure ◽

Relevant Literature ◽

Future Research ◽

Single Class ◽

Content Type ◽

Managerial Entrenchment ◽

External Monitoring ◽

Trade Offs ◽

Managerial Talent ◽

Dual Class

Purpose The purpose of this paper is to critically review the relevant literature from the perspective of dual-class firms and to provide suggestions for future research on dual-class firms, and on methodological issues that should be addressed in such research. Design/methodology/approach The research design consists of three parts: an introduction to dual-class firms (motivations for; firm life cycle effects) in Part 1; concerns with firms with such share class structures (valuation; governance; accounting and corporate policy issues) in Part 2; and some solutions or ways to accommodate the trade-offs involved with such share class structures (retention arguments; index/exchange exclusions; contractual provisions; external monitoring) in Part 3. Throughout the paper, the authors provide some critiques of existing studies, particularly from a methodological perspective, the authors’ opinion on the state of the literature and suggestions for future areas of research. Findings While motivations for the use of dual-class voting structures include flexibility so that the idiosyncratic vision of their entrepreneurs/founders can be pursued in a less encumbered fashion, greater innovation and long-term managerial orientation, there are many possible costs (e.g. underinvestment and managerial entrenchment) to this ownership structure. Nevertheless, the authors believe that such firms should have provisions in place that facilitate a reversion to a single-class structure longer term when such firms have become more mature, less dependent on the idiosyncratic vision of the entrepreneurs/founders at IPO and have attracted more managerial talent. Originality/value The literature arrives at no consensus on the benefits/drawbacks of this type of share ownership structure which means that many topics of research require further academic examination. The authors provide suggested directions for such future enquiries.

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Stock price movements and trading behaviors around merger and acquisition announcements

International Journal of Managerial Finance ◽

10.1108/ijmf-07-2018-0204 ◽

2019 ◽

Vol 15 (4) ◽

pp. 593-610 ◽

Cited By ~ 2

Author(s):

Jin Young Yang ◽

Reuben Segara ◽

Jingwei Feng

Keyword(s):

Stock Price ◽

Abnormal Returns ◽

Wealth Effects ◽

Individual Investors ◽

Cross Sectional ◽

Foreign Investors ◽

Content Type ◽

Announcement Date ◽

Target Firms ◽

Price Movements

Purpose The purpose of this paper is to examine the relationship between price movements of target firms’ stocks and behaviors of local individual, local institutional and foreign investors in trading target firms’ stocks around mergers and acquisitions announcements in Korea. Design/methodology/approach This study uses event study methodology and cross-sectional regressions for abnormal returns. Findings Results reveal that the average abnormal return becomes significantly positive three days prior to the announcement date and becomes insignificant after the announcement date. Results also show that local individual investors tend to sell more intensely prior to announcements for target firms with larger wealth effects. In contrast, foreign investors tend to buy target stocks with larger wealth effects more intensely prior to the announcement date, and then they sell them more intensely in the post-announcement period. Originality/value This paper provides evidence that foreign investors are able to identify target stocks with large wealth effects prior to the announcement date and they realize short-term profits by selling them following the announcement.

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Share Structure And Wealth Effects Of Corporate Takeovers

Journal of Applied Business Research (JABR) ◽

10.19030/jabr.v28i4.7046 ◽

2012 ◽

Vol 28 (4) ◽

pp. 633

Author(s):

Onur Arugaslan ◽

Jim DeMello ◽

Devrim Yaman

Keyword(s):

Stock Price ◽

Abnormal Returns ◽

Wealth Effects ◽

Font Size ◽

Target Firm ◽

Corporate Takeovers ◽

Tender Offers ◽

Negative Results ◽

Announcement Returns ◽

Dual Class

In this study we examine the stock price effects of corporate takeovers by dual class firms and unified firms. Our sample consists of 852 firms that were bidders in takeovers between 1993 and 2009. Our univariate and OLS regression results show that both dual class firms and unified firms obtain insignificant returns for various takeover announcement periods. The average and median returns for these two groups are similar to each other. We also identify several factors that the literature suggests should affect the bidder announcement returns in takeovers. Our results indicate that smaller firms in our sample and firms that pay for the acquisition in cash obtain higher abnormal returns when they announce the takeover. In addition, we find that the factors we identify have different influences on the announcement returns of dual class and unified firms. Specifically, unified firms that engage in tender offers and larger firms obtain more positive announcement returns compared to dual class firms whereas unified firms obtain more negative results when the target firm is a public firm.

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Dual-class firms’ choice of performance measures in CEO stock compensation contracts

Review of Accounting and Finance ◽

10.1108/raf-09-2016-0133 ◽

2018 ◽

Vol 17 (4) ◽

pp. 540-562

Author(s):

Ji Li ◽

Yuhchang Hwang

Keyword(s):

Performance Measures ◽

Stock Ownership ◽

Control Group ◽

Class Structure ◽

Short Term ◽

Single Class ◽

Compensation Contracts ◽

Content Type ◽

Dual Class ◽

Stock Compensation

Purpose The purpose of this paper is to provide new evidence on the choice of performance measures used in dual-class firms to incentivize CEOs. Design/methodology/approach This paper uses coarsened exact matching and propensity score matching to match the dual-class firm sample with a control group of single-class firms. This study uses matching estimators to provide an analysis of how a dual-class structure affects the design of performance measures in performance-based stock awards. In addition, regression models are used to investigate the effect of a dual-class structure on performance measure choices. Findings This paper finds that market-based metrics are less likely to be used by dual-class firms relative to single-class firms. In addition, peer-based measures are much less common for dual-class than single-class firms. This study also finds that the length of the CEO’s performance evaluation period does not differ between dual-class and single-class firms. Research limitations/implications This paper attempts to investigate the choice of performance measures to find out the extent to which the board of directors focuses CEO efforts on firms’ long-term versus short-term objectives. Practical implications The findings reveal the relationships between the dual-class stock structure and the contractual features of CEO performance-based stock awards, provide empirical evidence for the company’s compensation committee and provide implications for the evolving practices of performance measures regarding CEO stock compensation. The findings are also useful to regulators, compensation consultants and firms pursuing efficient design of executive compensation. Originality/value This paper is among the first to study the determinants of compensation contracts. Second, prior literature seldom controls for CEO stock ownership, but this study matches dual-class firms to a control group of single-class firms that are similar in terms of CEO stock ownership and other important firm characteristics. Finally, these findings suggest that dual-class firms shield their executives from short-term market pressures and design stock compensation contracts that deemphasize volatile stock prices.

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