Non-public contracts, cash flows and firm value: the case of Lockheed

2014 ◽  
Vol 13 (3) ◽  
pp. 274-290
Author(s):  
Shreesh Deshpande ◽  
Vijay Jog
Keyword(s):  
Firm Value ◽  
Stock Price ◽  
Public Information ◽  
Cash Flows ◽  
Content Type ◽  
Market Participants ◽  
Stock Price Reaction ◽  
Public Contracts ◽  
The Government ◽  
Material Information

Purpose – This study aims to examine a large, non-disclosed production contract awarded to Lockheed Corp. in the context of a trade-off between a contractually required non-disclosure clause and the need (as a publicly traded firm) to disclose material information to its shareholders. This production contract generated significant cash flows to the firm as evidenced by growth in its earnings. However, the existence of the production contract and its contribution to Lockheed’s earnings, was not disclosed by the firm to shareholders and potential investors while the production contract was being executed. Design/methodology/approach – The authors examine the market reaction to several key contract events which were not disclosed at the time they occurred, in compliance with the contractually required non-disclosure clause. Findings – A statistically significant stock price reaction around the time of the award of this non-public contract, indicative of trading by some capital market participants using non-public information was documented. Originality/value – Because similar large non-public contracts funded by the government are common in the industrial economy, we conclude by discussing implications for organizational structure, firm’s cost of capital, equity-based compensation and market efficiency.

Beyond earnings: do EBITDA reporting and governance matter for market participants?

2017 ◽  
Vol 43 (2) ◽  
pp. 193-211 ◽  
Author(s):  
Denis Cormier ◽  
Samira Demaria ◽  
Michel Magnan
Keyword(s):  
Corporate Governance ◽  
Information Asymmetry ◽  
Stock Price ◽  
Value Relevance ◽  
Earnings Quality ◽  
Predictive Ability ◽  
Cash Flows ◽  
Content Type ◽  
Market Participants ◽  
The Impact

Purpose The purpose of this paper is to investigate whether formally disclosing an earnings before interests, taxes, depreciation, and amortization (EBITDA) number reduces the information asymmetry between managers and investors beyond the release of GAAP earnings. The paper also assess if EBITDA disclosure enhances the value relevance and the predictive ability of earnings. Design/methodology/approach The authors explore the interface between GAAP and non-GAAP reporting as well as the impact of corporate governance on the quality of non-GAAP measures. Findings Results suggest that EBITDA reporting is associated with greater analyst following and with less information asymmetry. The authors also document that EBITDA reporting enhances the positive relationship between earnings and stock pricing as well as future cash flows. Moreover, it appears that corporate governance substitutes for EBITDA reporting for stock markets. Hence, EBITDA helps market participants to better assess earnings valuation when a firm’s governance is weak. Inversely, when governance is strong, releasing EBITDA information has a much smaller impact on the earnings-stock price relation. Originality/value The authors revisit the issue of how corporate governance relates with earnings quality by considering the potentially confounding effect of EBITDA reporting; it appears that such reporting substitutes for governance in moderating the relation between governance and earnings quality.

In government we trust: rise and fall of Canadian business income trust conversions

2009 ◽  
Vol 35 (9) ◽  
pp. 784-802 ◽  
Author(s):  
Lawrence Kryzanowski ◽  
Ying Lu
Keyword(s):  
Firm Value ◽  
Abnormal Returns ◽  
Cash Flows ◽  
Market Impact ◽  
Cross Sectional ◽  
Content Type ◽  
Trust Level ◽  
Business Income ◽  
The Government ◽  
Income Trusts

PurposeThe purpose of this paper is to assess the market impact of announcements that publicly traded limited liability firms would convert to business income trusts, and to test the robustness of the tax motive as the primary determinant of any conversion announcement effects by estimating the market impact of the announcement by the Canadian Federal Government that the corporate income of Canadian income trusts would be taxed at the trust level.Design/methodology/approachEvent‐study methodology (including various tests of robustness) is used to examine the market impacts of the initial conversion announcement and the announcement that the corporate income of Canadian income trusts would be taxed at the trust level. Cross‐sectional regressions are used to identify the determinants of the market effect associated with income trust conversion announcements.FindingsThe paper finds that the market‐ and risk‐adjusted abnormal returns (ARs) are positive and very significant on the announcement dates and not significant on the conversion effective dates. The price discovery process is not as smooth for the Canadian government's announcement after the market close on Halloween day 2006, that it would tax income trusts at the trust level. While the ARs are negative and very significant on the first and second trading days after the announcement, much of the second day ARs are reversed in the subsequent two days. Furthermore, negative and significant ARs precede the government announcement. The market impact of trust conversion announcements is primarily related to the tax savings associated with such conversions and more weakly related to potential agency problems associated with free cash flows.Research limitations/implicationsThe research indicates the importance of any taxation changes associated with changes in organization form on firm value. It also identifies the potential for informational leakage associated with government decisions.Originality/valueThe paper highlights the importance of taxes and tax changes and organization form changes on firm valuation.

Comparing the informativeness of sustainability disclosures versus ESG disclosure ratings

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Li Li Eng ◽  
Mahelet Fikru ◽  
Thanyaluk Vichitsarawong
Keyword(s):  
Information Content ◽  
Firm Value ◽  
Stock Price ◽  
Market Value ◽  
Content Type ◽  
Company Valuation ◽  
Incremental Information ◽  
The Impact ◽  
Different Sources ◽  
Practical Implications

Purpose The purpose of this paper is to examine the impact of sustainability disclosures and disclosure ratings on firm value. This paper compares the informativeness of sustainability disclosures in company reports versus environmental, social and governance (ESG) disclosure ratings. The authors examine the extent to which they provide incremental information. Design/methodology/approach The sample consists of panel data from over 2,600 publicly-listed non-financial US companies for the period 2014–2018. The authors obtain sustainability disclosures from Sustainability Accounting Standards Board (SASB) Navigator and ESG disclosure scores from Bloomberg. The authors regress market value and/or stock price on sustainability disclosures and ESG scores to evaluate information content. Findings ESG scores are positively associated with market value and price. Sustainability disclosures in the form of metrics and company-tailored narratives provide incremental information content on market value and/or price. Boilerplate disclosures reduce market value and price. Sustainability disclosures and ESG scores provide incremental information, suggesting that it would be beneficial to harmonize standards for reporting sustainability disclosures. Research limitations/implications The limitation is that the authors have only considered sustainability disclosures for a sample of US companies from two sources – SASB Navigator and Bloomberg. Practical implications The paper provides some evidence that may be pertinent to the debate on whether to harmonize the guidance on reporting sustainability issues. Social implications The paper provides evidence on the benefits to firms for reporting sustainability issues. Originality/value This paper is among the first to analyze company sustainability disclosures obtained from two different sources – SASB Navigator and ESG disclosure ratings – and compare them for relevance for company valuation. With SASB Navigator, the authors obtain further refinement into the nature of the information provided in the sustainability disclosures, that is, boilerplate, company-tailored or metrics disclosures.

Dividend policy and probability of extreme returns

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Mohammed Bouaddi ◽  
Omar Farooq ◽  
Neveen Ahmed
Keyword(s):  
Stock Returns ◽  
Stock Price ◽  
Dividend Policy ◽  
Actual State ◽  
Content Type ◽  
Market Participants ◽  
Dividend Payments ◽  
Ex Post ◽  
Ex Ante ◽  
The Future

PurposeThis study examines the effect of dividend policy on the ex ante probability of stock price crash and the ex ante probability stock price jump.Design/methodology/approachWe use the data of publicly listed non-financial firms from France and the ex ante measures of crash and jump probabilities (based on the Flexible Quadrants Copulas) to test our hypothesis during the period between 1997 and 2019.FindingsOur results show that dividend payments are negatively associated with the ex ante probability of crash and positively associated with the ex ante probability of jump. Our results are robust across various sub-samples and across different proxies of dividend policy. Our findings also hold when we use ex-post measures of crash and jump probabilities.Originality/valueUnlike prior literature, we use ex ante measures of crash and jump probabilities. The main advantage of this forward looking measure is that it allows for more flexibility by modeling the dependence between market returns and stock returns as functions of their actual state. Our measure is also consistent with the behavior of investors and market participants in a way that the market participants do not know the future outcome with certainty, but rather they are anticipating the future.

Stock market reaction to cash dividends: evidence from the Nigerian stock market

2019 ◽  
Vol 45 (3) ◽  
pp. 366-380
Author(s):  
Friday Kennedy Ozo ◽  
Thankom Gopinath Arun
Keyword(s):  
Stock Market ◽  
Event Study ◽  
Stock Price ◽  
Abnormal Returns ◽  
Cash Dividend ◽  
Content Type ◽  
Price Reaction ◽  
Stock Market Reaction ◽  
Dividend Announcements ◽  
Stock Price Reaction

PurposeVery little is known about the effect of dividend announcements on stock prices in Nigeria, despite the country’s unique institutional environment. The purpose of this paper is, therefore, to provide empirical evidence on this issue by investigating the stock price reaction to cash dividends by companies listed on the Nigerian Stock Exchange.Design/methodology/approachStandard event study methodology, using the market model, is employed to determine the abnormal returns surrounding the cash dividend announcement date. Abnormal returns are also calculated employing the market-adjusted return model as a robustness check and to test the sensitivity of the results toβestimation. The authors also examine the interaction between cash dividends and earnings by estimating a regression model where announcement abnormal returns are a function of both dividend changes and earnings changes relative to stock price.FindingsThe study find support for the signaling hypothesis: dividend increases are associated with positive stock price reaction, while dividend decreases are associated with negative stock price reaction. Companies that do not change their dividends experience insignificant positive abnormal returns. The results also suggest that both dividends and earnings are informative, but dividends contain information beyond that contained in earnings.Research limitations/implicationsThe sample for the study includes only cash dividend announcements occurring without other corporate events (such as interim dividends, stock splits, stock dividends, and mergers and acquisitions) during the event study period. The small firm-year observations may limit the validity of generalizations from these conclusions.Practical implicationsThe findings are useful to researchers, practitioners and investors interested in companies listed on the Nigerian stock market for their proper strategic decision making. In particular, the results can be used to encourage transparency and good governance practices in the Nigerian stock market.Originality/valueThis paper adds to the very limited research on the stock market reaction to cash dividend announcements in Nigeria; it is the first of its kind employing a unique cash dividends data.

Revenue Manipulation and Restatements by Loss Firms

2008 ◽  
Vol 27 (2) ◽  
pp. 1-29 ◽  
Author(s):  
Jeffrey L. Callen ◽  
Sean W. G. Robb ◽  
Dan Segal
Keyword(s):  
Firm Value ◽  
Cash Flows ◽  
Positive Relation ◽  
Credit Policy ◽  
Accounts Receivable ◽  
Market Participants ◽  
Ex Ante ◽  
Value Loss ◽  
History Of ◽  
Loss Firms

SUMMARY: This paper investigates the relation between the extent of a firm’s past and expected future losses or negative cash flows and the ex ante probability that it will manipulate revenues. When a firm has a string of losses or negative cash flows, traditional valuation models do not yield reliable estimates of firm value, and traditional price-earnings ratios are not meaningful. Evidence suggests that market participants tend to value loss firms on the basis of the level and growth in revenues, rather than cash flows and earnings, thereby motivating these firms to overstate revenue. In fact, empirical results indicate that there is a positive relation between the number of years that firms exhibit and/or anticipate losses or negative cash flows and investment in receivables after controlling for credit policy. We further show that the ex ante likelihood that firms manipulate revenue in violation of GAAP is positively associated with the history of past and expected future losses or negative cash flows, as well as with the investment in accounts receivable (adjusted for credit policy). Our results suggest another indicator of manipulation that may be used by auditors and regulators in identifying firms that are more likely to overstate revenues.

Political connections and firm value: an analysis of listed firms in Sri Lanka

2016 ◽  
Vol 28 (1) ◽  
pp. 92-106 ◽  
Author(s):  
Henk Berkman ◽  
Vidura Galpoththage
Keyword(s):  
Sri Lanka ◽  
Firm Value ◽  
Public Perception ◽  
Convincing Evidence ◽  
Political Connections ◽  
Political Connection ◽  
Content Type ◽  
Political Events ◽  
The Government ◽  
The Impact

Purpose – The purpose of this study is to use a portfolio-time-series approach to examine the impact of five important political events on the value of politically connected firms in Sri Lanka. Design/methodology/approach – This study examines five major political events to test if political connections affect market value of listed companies in Sri Lanka. Results show that despite numerous news articles and public perception suggesting otherwise, there is no convincing evidence which indicate that political connections increase firm value in Sri Lanka. Findings – The empirical results provide no evidence that political connections increase firm value in Sri Lanka. Further tests indicate that the government is not biased towards politically connected firms when granting major projects. The authors also fail to find a relation between Tobin’s Q and the level of political connection after including several common control variables. Originality/value – This study contributes to the literature on the value of political connections by using a robust event study methodology and a novel setting: Sri Lanka in the period around the end of the civil war.

CFOs’ views on corporate financing decisions

2016 ◽  
Vol 8 (4) ◽  
pp. 331-358
Author(s):  
Weerakoon Banda Yatiwelle Koralalage
Keyword(s):  
Sri Lanka ◽  
Interest Rates ◽  
Firm Value ◽  
Emerging Market ◽  
Foreign Debt ◽  
Cash Flows ◽  
Chief Financial Officers ◽  
Corporate Financing ◽  
Content Type ◽  
Developed Markets

Purpose The purpose of this paper is to examine the managerial views on the corporate financing practices of firms in the emerging market of Sri Lanka. Design/methodology/approach A survey approach was employed using chief financial officers (CFOs) from the top non-financial firms listed on the Colombo Stock Exchange. Findings CFOs’ views on corporate financing practices are not fully consistent with the theory: financial hierarchy appears to be more important and firms are less leveraged. Most Sri Lankan CFOs perceive some policy factors as important and theoretically support: volatility of earnings and cash flows, tax advantages of interest deductibility, transaction costs, timing of interest rates, low foreign interest rates and debt equity targets. These factors are high priority in emerging markets but either not important at all or less important in developed markets. Matching debt maturity with the life of assets is equally important in both markets. Most CFOs adhere their financing to the local debt market, while a few firms use foreign debt. CFOs are concerned about earnings per share (EPS) dilution, providing a natural hedge in foreign debt issues, credit ratings, under/overvaluation of stocks and corporate control, whereas they are significantly important in developed markets. Age and education mostly explain the differences. Research limitations/implications The study is restricted to large companies in a relatively smaller market. Hence, sample size is relatively small, even though it shows a higher response rate. Practical implications The study offers insights for corporate financing decision-makers that could impact on firm value through a shift in emphasis toward capital structure theories. Originality/value The paper focuses on corporate financing practices in Sri Lanka in search of emerging market features that could mitigate the gap in the emerging market literature through survey evidence.

scholarly journals Confining value from neural networks

2019 ◽  
Vol 45 (10/11) ◽  
pp. 1433-1457 ◽  
Author(s):  
Ioannis Anagnostopoulos ◽  
Anas Rizeq
Keyword(s):  
Neural Networks ◽  
Firm Value ◽  
Stock Price ◽  
Predictive Accuracy ◽  
Target Identification ◽  
Methodological Approach ◽  
Market Uncertainty ◽  
Content Type ◽  
Financial Variables ◽  
Price Bubbles

Purpose This study provides valuable insights to managers aiming to increase the effectiveness of their diversification and growth portfolios. The purpose of this paper is to examine the value of utilizing a neural networks (NNs) approach using mergers and acquisition (M&A) data confined in the US technology domain. Design/methodology/approach Using data from Bloomberg for the period 2000–2016, the results confirm that an NN approach provides more explanation between financial variables in the model than a traditional regression model where the NN approach of this study is then compared with linear classifier, logistic regression. The empirical results show that NN is a promising method of evaluating M&A takeover targets in terms of their predictive accuracy and adaptability. Findings The findings emphasize the value alternative methodologies provide in high-technology industries in order to achieve the screening and explorative performance objectives, given the technological complexity, market uncertainty and the divergent skill sets required for breakthrough innovations in these sectors. Research limitations/implications NN methods do not provide for a fuller analysis of significance for each of the autonomous variables in the model as traditional regression methods do. The generalization breadth of this study is limited within a specific sector (technology) in a specific country (USA) covering a specific period (2000–2016). Practical implications Investors value firms before investing in them to identify their true stock price; yet, technology firms pose a great valuation challenge to investors and analysts alike as the latest information technology stock price bubbles, Silicon Valley and as the recent stratospheric rise of financial technology companies have also demonstrated. Social implications Numerous studies have shown that M&As are more often than not destroy value rather than create it. More than 50 percent of all M&As lead to a decline in relative total shareholder return after one year. Hence, effective target identification must be built on the foundation of a credible strategy that identifies the most promising market segments for growth, assesses whether organic or acquisitive growth is the best way forward and defines the commercial and financial hurdles for potential deals. Originality/value Technology firm value is directly dependent on growth, consequently most of the value will originate from future customers or products not from current assets that makes it challenging for investors to measure a firm’s beta (risk) where the value of a technology is only known after its commercialization to the market. A differentiated methodological approach used is the use of NNs, machine learning and data mining to predict bankruptcy or takeover targets.

Corporate Social Responsibility and the Market Reaction to Negative Events: Evidence from Inadvertent and Fraudulent Restatement Announcements

2020 ◽  
pp. 0000-0000
Author(s):  
Eli Bartov ◽  
Antonio Marra ◽  
Francesco Momente
Keyword(s):  
Stock Returns ◽  
Firm Value ◽  
Stock Price ◽  
Explanatory Power ◽  
Negative Events ◽  
Cross Sectional ◽  
Price Response ◽  
Market Participants ◽  
Company Value ◽  
Corporate Social

We advance a theory asserting that CSR performance may exacerbate, not necessarily moderate, a company's negative stock-price response to negative events. In testing this theory, we hypothesize and find that CSR performance alleviates (magnifies) the immediate negative stock-price response to inadvertent (fraudulent) restatement announcements, and that these findings are robust to specifications that consider alternative CSR measures and a multitude of control variables shown by prior research to have explanatory power for the cross sectional variation in stock returns. Overall, using restatement announcements as a channel through which CSR performance may affect company value, we show, in contrast to prior research, that depending on management conduct leading to the restatement, a company's CSR performance may destroy, not necessarily enhance, firm value. Our findings may, thus, inform researchers, market participants, and regulators.

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