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Detecting Abnormal Operating Performance: The Empirical Power and Specification of Test Statistics
Abstract
This research evaluates methods used in event studies that employ accounting-based measures of operating performance. We examine the choice of an accounting-based performance measure, a statistical test, and a model of expected operating performance. We document the impact of these choices on the test statistics designed to detect abnormal operating performance. We find that commonly used research designs yield test statistics that are misspecified in cases where sample firms have performed either unusually well or poorly. In this sampling situation, the test statistics are only well specified when sample firms are matched to control firms of similar pre-event performance.
... By analyzing the abnormal performance (i.e. comparing adopting firms with the control sample), event studies allow the addressing of selection biases stemming from observable firm-specific features and the effect of prior performance (Hill et al., 2018;Podrecca et al., 2022;Barber and Lyon, 1996). As explained in more detail in the following paragraphs, we carefully adopted the guidelines suggested by previous research to avoid any pitfalls in the application of the methodology. ...
... For each BT-adopting firm, and for each performance dimension, a distinct control portfolio of non-BT adopting firms was identified (Hendricks et al., 2007;Podrecca et al., 2022). Consistent with the recommendations of Barber and Lyon (1996) [3], three criteria were considered: industry (control firms should operate in the same first two-digit SIC code industry), size (the total assets of the control firms should be comprised in the 50-200% interval of the BT-adopting firm's total assets in the base year), and performance (control firms' performance should range between 90% and 110% of the BT-adopting firm performance in the base year). If no firm matched, the industry criterion was relaxed to the first one-digit SIC code and then removed (Podrecca et al., 2022;Orzes et al., 2017). ...
... ROA "refers to a firm's ability to make use of its total assets to generate net operating income" (Yiu et al., 2021, p. 3956) and is therefore affected by both the top and the bottom-line of the company (De Jong et al., 2014;Podrecca et al., 2022). Moreover, according to Barber and Lyon (1996), ROA represents the best synthetic indicator of overall operational performance. Three independent variables were included: ...
Purpose-This study analyzes the performance implications of adopting blockchain to support supply chain business processes. The technology holds as many promises as implementation challenges, so interest in its impact on operational performance has grown steadily over the last few years.
Design/methodology/approach-Drawing on transaction cost economics and the contingency theory, we built a set of hypotheses. These were tested through a long-term event study and an ordinary least squares regression involving 130 adopters listed in North America.
Findings-Compared with the control sample, adopters displayed significant abnormal performance in terms of labor productivity, operating cycle and profitability, whereas sales appeared unaffected. Firms in regulated settings and closer to the end customer showed more positive effects. Neither industry-level competition nor the early involvement of a project partner emerged as relevant contextual factors.
Originality/value-This research presents the first extensive analysis of operational performance based on objective measures. In contrast to previous studies and theoretical predictions, the results indicate that blockchain adoption is not associated with sales improvement. This can be explained considering that secure data storage and sharing do not guarantee the factual credibility of recorded data, which needs to be proved to customers in alternative ways. Conversely, improvements in other operational performance dimensions confirm that blockchain can support inter-organizational transactions more efficiently. The results are relevant in times when, following hype, there are signs of disengagement with the technology.
... This tendency leads to an inherent nonrandom self-selection process (Boyd et al., 2019). By comparing ISO 45001 adopters with a control group of similar non-adopting companies, the event study allows to test the effects of standard implementation while avoiding issues related to selection biases and the presence of prior trends (e.g., Barber & Lyon, 1996;Corbett et al., 2005;Lo et al., 2014). ...
... Occupational health and safety management systems usually require from 6 to 18 months to be fully implemented (Yang et al., 2021;Lo et al., 2014); the event period was therefore set as the Barber and Lyon (1996) ...
... The Shapiro-Wilk tests indicated that our data did not follow a normal distribution. Therefore, we assessed whether the abnormal performance (AP) significantly differed from zero using nonparametric tests (Barber & Lyon, 1996;De Jong et al., 2014). In particular, the Wilcoxon signed-rank test (WSR) and the sign test were used, respectively, in case of symmetric and skewed distributions. ...
The aim of this study is to shed light on the relationship between ISO 45001 adoption and firm performance. To explore the issue, we conduct an event study and a weighted least squares regression on a dataset of 157 publicly listed companies-operating in various countries and sectors-that have given public announcement of the attainment of the ISO 45001 certification. The results show that, when compared to non-adopters, ISO 45001-certified companies display better performance in terms of productivity and profitability, while no significant differences emerge for sales. The effects of ISO 45001 adoption are significantly influenced by industry-and company-related contextual factors. The study contributes to the academic literature by developing the first large-scale empirical investigation on the performance implications of ISO 45001. Furthermore, it informs managers that by ensuring healthy and safe workplaces companies can also achieve higher financial performance.
... When investigating the impact of modern slavery allegations on operating performance, we follow the guidance of Barber and Lyon (1996), whose difference-in-difference event study method has been used for operating performance research in the operations management literature (Corbett et al., 2005;Hendricks and Singhal, 1997;Hendricks and Singhal, 2005;Swink and Jacobs, 2012;Chopra and Wu, 2016;Swift et al., 2019). Barber and Lyon (1996) suggest comparing sample firm's performance to another firm's performance as a benchmark and checking whether their expected performances outside of the event are different from their normal expected performances and the difference of their normal performances. ...
... When investigating the impact of modern slavery allegations on operating performance, we follow the guidance of Barber and Lyon (1996), whose difference-in-difference event study method has been used for operating performance research in the operations management literature (Corbett et al., 2005;Hendricks and Singhal, 1997;Hendricks and Singhal, 2005;Swink and Jacobs, 2012;Chopra and Wu, 2016;Swift et al., 2019). Barber and Lyon (1996) suggest comparing sample firm's performance to another firm's performance as a benchmark and checking whether their expected performances outside of the event are different from their normal expected performances and the difference of their normal performances. ...
... To ensure that the performance of the sample firms and control firms were similar before the modern slavery allegation, the difference in their performance was compared between Quarter -8 and Quarter -4 for sales and operating income (Barber and Lyon, 1996;Hendricks and Singhal, 2005;Chopra and Wu, 2016). The results show that there is no significant difference in sales and operating income between the sample firms and the control sets (p > 0.10). ...
Purpose
Modern slavery is a humanitarian problem that affects global supply chains. Given the increasing pressures from legislature, consumers and investors, firms have a growing interest in eliminating forced labor and modern slavery from their supply chains. However, the impact of modern slavery on firm performance has not been shown before. This paper aims to investigate the impact of modern slavery allegations on companies’ operational performance. It also looks at the role of corporate social responsibility (CSR) efforts with respect to modern slavery.
Design/methodology/approach
The authors collect news articles on modern slavery in the global supply chains. The authors use an event study and use a robust matching method to measure the operational impact of modern slavery allegations. The authors also analyze the effects of media coverage and CSR practices on the relationship between allegations and firm performance.
Findings
The results show that modern slavery allegations do have a negative impact on performance, but this impact does not last long. The authors also show that strong CSR practices help firms mitigate the negative effect of these allegations.
Research limitations/implications
Because the issue is hidden, as a result limited data, the research results may lack generalizability. Therefore, researchers are encouraged to retest the proposed propositions in the future.
Practical implications
The paper includes implications for the development of socially responsible supply chains and financial impact.
Originality/value
This paper presents the first empirical research investigating the impact of modern slavery allegations on companies’ operational performance.
... When selecting matching firms, some studies choose control firms based on specific operating performance, firm size and industry, as suggested by Barber and Lyon (1996). However, such an approach has been criticized for failing to control substantial endogeneity. ...
... Financial performance was measured as ROA (ratio of operating income (before depreciation, interest, and taxes) to total assets). We conducted a t-test and a Wilcoxon signed-rank (WSR) test (Barber and Lyon, 1996). Following common practices, we discuss the findings mainly based on the WSR test because compared with a t-test, the WSR test is less affected by outliers (Barber and Lyon, 1996). ...
... We conducted a t-test and a Wilcoxon signed-rank (WSR) test (Barber and Lyon, 1996). Following common practices, we discuss the findings mainly based on the WSR test because compared with a t-test, the WSR test is less affected by outliers (Barber and Lyon, 1996). To show the robustness of our results, we also conducted parametric t-tests for the means of abnormal performance. ...
... Dechow et al. (1995) modified the Jones model by subtracting the change in accounts receivable from the change in revenues to estimate DA, addressing the assumption in the Jones model that revenues are not manipulated for earnings management. Furthermore, Dechow et al. (1998) and Barber and Lyon (1996) revealed that matching earnings management to operational performance measures like return on assets (ROA) provides better explanatory power than including other variables (Dechow et al. 1998;Barber and Lyon 1996). Kothari et al. (2005) suggested adding ROA as a new control variable to the modified Jones model, resulting in the following model 1. ...
... Dechow et al. (1995) modified the Jones model by subtracting the change in accounts receivable from the change in revenues to estimate DA, addressing the assumption in the Jones model that revenues are not manipulated for earnings management. Furthermore, Dechow et al. (1998) and Barber and Lyon (1996) revealed that matching earnings management to operational performance measures like return on assets (ROA) provides better explanatory power than including other variables (Dechow et al. 1998;Barber and Lyon 1996). Kothari et al. (2005) suggested adding ROA as a new control variable to the modified Jones model, resulting in the following model 1. ...
This study investigated how the COVID-19 pandemic impacted earnings management practices within both public and private firms in Korea. Amid active government efforts and policies to overcome the pandemic crisis, we anticipate that the earnings management of public sector managers, prioritizing public benefit as their key sustainability objective, will distinctly differ from those of private sector managers, who are influenced by a different set of pressures and incentives. Empirical analysis revealed a notable decrease in earnings management in the public sector post-COVID-19, with no significant change in the private sector. Our study distinguishes how public and private firms react to identical economic crises, deepening our insight into the ways different organizations handle financial reporting amid government intervention and economic stress. Such differentiation not only broadens our comprehension of strategies for managing earnings but also offers vital perspectives on the dynamics among corporate governance, regulatory environments, and sustainability.
... To further explore whether the positive reactions are consistent with the productivity gains and the amelioration of private benefits of controls, we examine economic consequences following the adoption of ESOP. By employing the method of the performance-based matching group suggested by Barber and Lyon (1996), we find that the introduction of ESOPs results in a discernible reduction in private benefits of control and a concomitant upswing in firms' productivity. More specifically, the gap between cash flow and control rights narrows, and the magnitude of RPTs diminishes subsequent to the adoption of ESOPs. ...
... Throughout this section, we compare adopting firms to a sample of control firms, and we use the performance-based matching method described by Barber and Lyon (1996). It allows us to identify a group of control companies with similar performance from the same industry. ...
Research Issue
We investigate the deliberations of controlling shareholders in assessing the trade‐offs between costs and benefits preceding the adoption of an Employee Stock Ownership Plan (ESOP). Furthermore, we explore the market responses to ESOP announcements and their associations with the private benefits of control. Moreover, our study delves into the modifications in private benefits of control, changes in employment dynamics, and subsequent operating performance subsequent to the implementation of ESOPs.
Research Insights
We conduct our research employing a comprehensive dataset encompassing the adoptions of ESOPs within publicly listed Chinese companies during the period spanning from 2014 to 2020. Our empirical findings reveal that firms characterized by diminished private benefits of control, as indicated by a reduced wedge between control rights and cash flow rights, as well as a lower frequency of related party transactions, are more inclined to consider the adoption of ESOPs, especially when the potential for productivity gains is substantial. These firms also elicit more positive market reactions upon the announcement of their ESOP initiatives. While ESOPs do lead to heightened productivity, the overall enhancement in operating performance remains relatively modest due to the significant cost burden imposed on shareholders by the large unearned employee compensation. Our results suggest that controlling shareholders who partake in fewer private benefits of control are more inclined to forego these entitlements in favor of embracing ESOPs as a strategic mechanism for realizing productivity gains. However, it is imperative to acknowledge that such gains may be considerably offset by substantial increases in employee compensation expenses. Despite the prevalence of short‐lived features in Chinese practice, we lack substantial evidence supporting their inhibitory effects on the increased monitoring and productivity following ESOP adoption.
Academic Implications
This study provides a comprehensive examination of recent ESOPs in the Chinese context, offering insights into the regulatory complexities within the largest emerging market. The research contributes to the existing literature by unveiling the intricate relationship between private benefits of control and the decision to adopt ESOPs, as well as their subsequent implications. Notably, our findings, particularly the observed neutral impact on operating performance, augment the ongoing discourse surrounding the efficacy of ESOPs in augmenting shareholder value.
Policy Implications
This research introduces ESOPs as an innovative mechanism for mitigating private benefits of control, particularly in the context of emerging markets where controlling shareholders tend to accrue significant private benefits of control. The incorporation of performance‐related criteria within the ESOP framework serves as a means to effectively manage the additional compensation associated with these plans, thereby enhancing their overall efficacy.
... The results of existing studies concerning the operating performance in terms of an IPO event indicate that companies' decision to conduct an equity offering usually follows a period of good operating performance, which deteriorates after the offering (Jain & Kini, 1994;Barber & Lyon, 1996;Loughran & Ritter, 1997;Dudycz, 2013;Pastusiak, Bolek, Malaczewski, & Kacprzyk, 2016). Loughran and Ritter (1997) suggest that multiples at the time of the offering do not reflect the deterioration expectation in this performance. ...
... The analyses adopted operational metrics used by other researchers (Barber & Lyon, 1996;Papaioannou et al., 2003), such as operating return on assets, operating return on sales and total asset turnover. I measured operating return on assets as operating income (income before depreciation and taxes) divided by total assets. ...
Purpose
The purpose of this article is to present the results of empirical research concerning the identification of the impact of the transfer of companies from the alternative market to the regulated market of the Warsaw Stock Exchange on their operating and net performance.
Design/methodology/approach
The study was conducted based on the empirical data of the companies that changed the listing place on the Warsaw Stock Exchange. Data regarding the years before the transfer were collected from the prospectuses of companies prepared mandatorily in connection with the transition to the regulated market. Data regarding the years of the event and subsequent years were obtained from companies' annual reports. As in other studies in the analysis, the operational metrics were used (operating return on sale, operating return on assets, total asset turnover), which was further extended to net profitability ratios (net return on ale, net return on asset, net return on equity). The significance analysis was based on the Student's t-test and Wilcoxon’s test.
Findings
The results show that before the transfer from the alternative market to the regulated market, companies improved financial performance. As a result of the change of listing venues, the results already collapsed in the year of the event. The downward trend continued in the following two years, with a noticeable improvement in the third year after the transfer.
Originality/value
The literature lacks such studies based on the Polish market. To the best knowledge of the author, this is one of the first studies in Poland showing the changes in operating and net performance of companies changing the stock listing venues. The research is based on a large group including all companies that have changed listing venues since the beginning of the alternative market in Poland. The article presents an original empirical result that can be used both by managers and investors in their decisions.
... Pour mesurer la variation de la performance opérationnelle, nous construisons un échantillon des entreprises de contrôle en se basant sur le secteur d'activité et la taille. La méthode de sélection des entreprises de contrôle est proposée par Barber et Lyon (1996) ...
... Deals) et dans des bulletins mensuels d'information de l'autorité des marchés financiers (AMF) et réalisées par les entreprises françaises entre 2005 et 2011. Nous éliminons de notre échantillon initial: Les opérations dont le statut déclaré non complété par la base de données Thomson one Banker-Deals subséquemment à l'annonce de l'acquisition ; L'opération dont le code de l'acquéreur et la cible ne sont pas disponibles dans la base de données Datastream ; Les opérations dont l'entreprise acquéreuse appartient à des entreprises financières (codes SIC 6000-6799), en raison de leur comptabilité unique et leurs conditions de normalisation qui les rendent difficiles à comparer avec les entreprises non financières(Barber et Lyon, 1996 ; Sharma et Ho, 2002) ; Les offres publiques de retrait suivies d'un retrait obligatoire, l'offre publique de rachat, l'offre publique de vente et les offres publiques réalisables par garantie de cours ; ...
Cette étude examine empiriquement la relation entre les facteurs explicatifs et la performance opérationnelle à long terme des acquéreurs. Les facteurs étudiés sont le mode de paiement, la taille relative de la cible, q Tobin, la proximité sectorielle, l’attitude hostile, l’acquisition transfrontalière, le niveau d’encaisse et d’endettement pré-acquisition. La plupart de ces facteurs sont examinés pour la première fois dans le contexte français. L’analyse empirique repose sur les acquéreurs français impliqués dans les prises de contrôle durant la période 2005-2011. Nos résultats montrent que seul le niveau d’encaisse a un impact significatif sur la performance opérationnelle post-acquisition. Le niveau de liquidité de l’acquéreur est lié
négativement à la performance, cela donne à penser que les entreprises riche en liquidité sont susceptibles d’être impliqués dans des mauvaises acquisitions. Ce résultat rejoint la théorie de free cash flow de Jensen (1986) et le résultat de Harford (1999).
... The treated and control dyads had to be relatively comparable for the control group to serve as a good benchmark. Prior long-horizon event researchers have utilized a variety of criteria to establish controls, including company size and performance (Barber & Lyon, 1996;. ...
Geopolitical conflicts, particularly economic ones, introduce significant uncertainties into the global supply chain. The impact of these conflicts on cross-border buyer-supplier transactions remains underexplored, as does the capability of global suppliers to mitigate such risks by locking in their foreign buyers. Employing a combined perspective of resource dependence theory and transaction cost economics, we examine a natural experiment to investigate the effects of the 2018 U.S.-China trade war on the transactional relationships between Chinese suppliers and their U.S. buyers. Our study reveals that the trade war generally adversely affected these buyer-supplier transactional relationships, leading to a negative abnormal transaction value in the affected dyads, which amounted to 18.42% of their pre-event level. However, we find that this adverse impact can be attenuated when Chinese suppliers demonstrate superior innovation capabilities, higher corporate social responsibility performance, or fewer local political ties. These findings yield insights for international suppliers and buyers on strategies to maintain buyer-supplier transactions and minimize the detrimental effects on global supply chain relationships during geopolitical conflicts.
... The dependent variable for this study is corporate performance, proxied by four measurements: return on equity (ROE), return on assets (ROA), Tobin's Q, and market-to-book ratio (MTB). These measurements are commonly used by corporate governance scholars such as Gompers et al. (2003), Bhagat and Bolton (2008), Mitton (2004), Barber and Lyon (1996), Kaplan and Zingales (1997), and Donker et al. (2008). ...
The purpose of this study is to examine the relationship between board responsibility and the performance of the company. It is the ultimate responsibility of the board to properly discharge their duty as stipulated by the laws and prohibit any unnecessary actions and decisions that are detrimental to the company (Salin, Ismail, et al., 2019). Board responsibility in this study is proxied by having a clear board function, formation of sustainability policy, directors’ access to information and existence of a board charter. This study uses archival analysis of the annual report of the top 500 publicly listed companies in Malaysia by market capitalisation. This study finds that only sustainability policies had a significant positive relationship with corporate performance which is consistent with many prior empirical findings (Orlitzky et al., 2003). No significant relationship was found between clear board function, directors’ access to information and the existence of a board charter with corporate performance. It can be concluded that board responsibility in terms of sustainability does influence the corporate performance of the company. This paper is relevant as it shows that by adopting a good sustainability policy and strategy, the company can improve overall managing efficiency and create long-term values which enhance the worth of the company.
... As an accounting-based metric, ROA represents a company's net income proportion to its total assets. Barber and Lyon (1996) highlighted ROA's merits in evaluating corporate performance. They reveal that ROA facilitates comparative analysis of one company's performance against others. ...
Gender diversity is increasingly recognized as a critical element in corporate management. However, existing research on its impact on firm performance demonstrates inconsistency in a global context. This study employs 1990 publicly listed Japanese companies from 2006 to 2023 and examines the effect of board gender diversity on firm performance in Japan. Findings from the fixed-effects regression model revealed a significant negative impact of board gender diversity on firm performance. This adverse correlation is more pronounced in smaller firms, those with greater leverage and reduced institutional ownership, and regulated and consumer-focused industries, particularly pre-COVID-19. The detrimental impact of board gender diversity on firm performance is transmitted via corporate social responsibility and firm innovation instead of board independence or CEO duality. Notably, the two-stage least squares estimation addresses potential endogeneity, employing an equal opportunity policy as an instrumental variable. Moreover, the robustness of our results is affirmed via the substitution of return on equity for return on assets as an indicator of firm performance. Lastly, our analysis does not reveal a U-shaped nonlinear relationship between board gender diversity and corporate performance. As Japan progressively promotes women’s participation in corporate governance, this research bears significant implications for corporate leaders, investors, and policymakers in Japan.
... VY (FRY) show that regression-based forecasts are more (less) accurate when the training data are restricted to firms in the same lifecycle (industry) group. BCG, who build on the study by Barber and Lyon (1996), show that forecasts implied by groups of firms that are matched to the subject firm on the basis of profitability and size are more accurate than forecasts generated by the random walk. We address two key unanswered questions within this genre: how do forecasts based on comparable firms perform relative to one another and to alternate approaches? ...
We use a simple k-nearest neighbors algorithm (hereafter, k-NN*) to forecast earnings. k-NN* forecasts of one-, two-, and three-year-ahead earnings are more accurate than those generated by popular extant forecasting approaches. k-NN* forecasts of two- and three-year (one-year)-ahead EPS and aggregate three-year EPS are more (less) accurate than those generated by analysts. The association between the unexpected earnings implied by k-NN* and the contemporaneous market-adjusted return (i.e., the earnings association coefficient (EAC)) is positive and exceeds the EAC on unexpected earnings implied by alternate approaches. A trading strategy that is long (short) firms for which k-NN* predicts positive (negative) earnings growth earns positive risk-adjusted returns that exceed those earned by similar trading strategies that are based on alternate forecasts. The k-NN* algorithm generates an empirically reliable ex ante indicator of forecast accuracy that identifies situations when the k-NN* EAC is larger and the k-NN* trading strategy is more profitable.
Data Availability: Data are available from the public sources described in the text.
JEL Classifications: C21; C53; G17; M41.
... We matched each firm that breached EHS regulations with a control firm identified as having the closest annual sales volume (in the year prior to the breach, t − 1) and in the same industry (two-digit SIC codes) without a breach. The control firm's sales were calipered within a range of 50-200% of the breach firm's sales at t − 1 (Barber & Lyon, 1996). The average sales are not significantly different between the breach and control firms (independent t-test: p > .1), ...
Through the development and usage of an agent-based model, this article investigates firms' adaptive strategies against disruptions in a supply chain network. Viewing supply chain networks as complex adaptive systems, we first construct and analyze a realworld supply chain network among 2,971 firms spanning 90 industry sectors. We then develop an agent-based simulation to show how the model of firms' adaptive behaviors
can leverage competition relationships within a supply chain network. The simulation
also models how disruptions propagate in the supply chain network through cascading
failures. With the simulation, we seek to understand if a firm's adaptive behaviors can
reduce the impact of disruptions in supply chain networks. Therefore, we propose,
evaluate, and analyze two types of adaptive strategies a firm can leverage to reduce the
negative effects of supply chain network disruptions. First, we deploy in our model a
reactive strategy, which restructures the network in response to a disruption event
among first-tier suppliers. Next, we develop and propose proactive strategies, which
are used when a distant disruption is observed but has not yet hit the focal firm. We
discuss the implications related to how and when firms can improve their resilience
against supply disruptions by leveraging adaptive strategies.
... The influence of CG on firm performance is one of the supreme significant current discussions in business areas around the world; dissimilar performance measures such as financial, market, and operational measures were applied to discover the effect of CG on firm performance indicators. Return on Assets (ROA) was the most popular operational measure used (Ahmed & Hamdan, 2015), as it adjusts for firm's size, which shows how a firm is doing compared to others (Barber & Lyon, 1996). On the other hand, to measure a firm's market value, Tobin's Q was the most widespread market indicator (Kiel & Nicholson, 2003), where a score greater than one indicates the firm's prospects of growth and level of investors' confidence (Brahma, Boateng, & Ahmad, 2018). ...
In emerging countries like Oman, the memberships of board of directors for most companies are dominated by males. The number of females sit as board of directors are relatively low since there was no clear regulation to recruit them as board members or even serve at supervisory levels. Hence, this study aims to empirically investigate the effect of females' board of directors on firm performance in Oman, a member of the Gulf Cooperation Council (GCC) countries. The Return on Asset (ROA) and Tobin's Q are used as proxies to measure firm's performance for 63 non-financial firms registered on the Muscat Security Market (MSM) for the periods between 2016 and 2019. This study applied canonical analysis techniques in order to assess and answer the research hypotheses. The findings indicates that the hypotheses are rejected because ROA and Tobin's Q are unrelated to the proportion of females as the board of directors, regardless of whether the firm size or firm age are being controlled. Thus, the results implied that more opportunities, empowerment and skills should be exposed or given to females to sit on the board and hence the number will increase accordingly. Future studies could also look at financial organizations as well in order to evaluate how female board representation affects financial success of the firms.
... Extant literature focuses on different dimensions of peer selection for benchmarking, such as industry membership (e.g., Fama and French 1997), index membership (e.g., Albuquerque 2009), closeness in firm size, and profitability (e.g., Barber and Lyon 1996;Ecker, Francis, Olsson, and Schipper 2013), etc. Others have used more nuanced methods like analyst co-coverage (Ramnath 2002), investor co-search interest (Lee, Ma, and Wang 2015), and product description co-similarity (Hoberg and Phillips 2016) to define peer groups. ...
We propose a pairwise measure of financial statement benchmarking (FSB) that captures the degree of overlap in the financial statement line items reported by two firms. We validate FSB by showing its association with actual peer choices of analysts and corporate boards. We then test the practical implications of FSB in the context of strategic peer selection by these parties. We find that analyst (board) chosen peers with low pairwise FSB are more likely to be strategic selections and that the set of peers assembled by an analyst (board) collectively having low FSB is associated with more optimistic earnings forecasts (higher CEO overpay). We also demonstrate alternative applications of FSB by aggregating the pairwise measure at the firm level and decomposing it into finer financial statement-specific components. Our evidence suggests that FSB can be a relevant tool for those using benchmarking applications, including practitioners and academics.
Data Availability: Data are available from sources identified in the paper.
JEL Classifications: M41.
... We conduct industry-and mean-reversion-adjustments of each measure and capture abnormal performance (Barber and Lyon, 1996) because analyses of performance changes around turnarounds and CEO successions are otherwise notably susceptible to mean reversion (Huson et al., 2004). Specifically, we follow Pérez-González (2006) and first obtain industry-adjusted performance measures (ROE and MTB) by subtracting the median performance of all COMPUSTAT firms in the same two-digit SIC industry and fiscal year. ...
As a well‐studied executive bias, CEO overconfidence usually has negative connotations – although empirical evidence of its performance effects remains inconclusive. By theorizing on CEO overconfidence in a turnaround situation, we propose that CEO overconfidence can either help or hinder turnaround performance, depending on whether the overconfident CEO is the incumbent who steered the firm into dire straits, or a successor hired during decline. Our empirical findings suggest that overconfidence in an incumbent CEO damages turnaround performance; replacing overconfident incumbents improves turnaround performance and overconfident successors hired during decline enhance turnaround performance. Exploratory post‐hoc analyses further suggest that these effects are driven by the divergent ways in which overconfidence biases incumbent and successor CEOs’ assessment of organizational decline. Comprehensive implications for research and practice on CEO overconfidence are discussed.
... We adopted a self-control model to identify the changes in the firm performance of the samples according to their historical performance before the supply chain glitches announcements. The self-control model, which is calculated based on the historical performance of the sample companies themselves, has advantages in controlling development stages, relationship capitals and other industrial-level factors (Barber and Lyon, 1996;Liu et al., 2020b). In one year, these factors are not likely to change significantly. ...
Purpose
This study examines the firm-level financial consequences caused by supply chain disruptions during COVID-19 and explores how firms' supply chain diversification strategies, including diversified suppliers, customers and products, moderate the negative effect on firm performance.
Design/methodology/approach
Based on data drawn from 222 publicly traded firms in China, the authors use event study methodology to estimate the effects of supply chain disruptions on the financial performance of affected firms. Regression analyses are conducted to examine the moderating effects of supply chain diversification.
Findings
Firms affected by supply chain disruptions during COVID-19 experienced a significant decline in shareholder value in two weeks and a subsequent decrease in operating performance in one year. Diversified suppliers, customers and products act as shock absorbers to alleviate the negative effects. Further regression shows a substitution effect between customer and product diversification. Cross-industry comparisons reveal that service firms experienced more loss than manufacturing firms. Customer diversification mitigates the adverse effects of supply chain disruptions for both manufacturing and service firms. Supplier diversification exerts a noteworthy role in manufacturing firms, while product diversification is beneficial for service firms.
Originality/value
The study provides empirical evidence on the magnitude of financial consequences of supply chain disruptions during COVID-19 in both the short term and long term and enriches the current understanding of how to build resilience from the supply chain diversification perspective.
... While nonparametric tests do not make any such assumptions, parametric tests presume that each firm's aberrant returns are normally distributed. Most event studies employ a parametric t-statistics test to examine the relevance of abnormal returns, for example, Barber and Lyon (1996) and Brown and Warner (1985), but nonparametric tests, such as rank tests or sign tests may be used to authenticate results and assess the impact of exceptions (Benkraiem et al., 2009). This investigation uses both parametric and nonparametric test statistics. ...
The effect of COVID-19 on the efficiency of frontier stock markets at the industrial level has received little attention. This study aimed to analyze the Dhaka stock exchange’s immediate market response to the initial COVID-19 announcement at the industry level. An event study approach was used to cross-sectional daily returns of 311 enterprises grouped into seventeen industry groups to determine anomalous returns for a total of 21 trading days divided into seven separate event periods. According to the findings, the average abnormal return and cumulative average abnormal return for the total market return for the event and the subsequent days were both negative and statistically significant. A cross- sectional industrial analysis found that, except for the paper and printing industries, all other sectors produced a considerably abnormal and uniform negative abnormal return. The most substantial negative cumulative average abnormal returns were seen in event windows (0, 0), (0, +1) and (0, +5), which might be attributed to post-announcement drift and inefficient market activity. Furthermore, when comparing the results of the Manufacturing and Non-Manufacturing sectors, the Manufacturing sector had more gloomy outcomes. The COVID-19 epidemic was proven to have negative effects on several industry groups, including those in the pharmaceutical, information technology and telecommunications sectors, which were expected to benefit from the outbreak. This is one of the few empirical studies that investigate the impact of the epidemic on the cross-sectional industry stock return in frontier markets. The results of this research will aid both international and domestic investors in their pursuit of the best possible portfolio composition.
... We chose ROA based on EBITDA as a good approximation of financial firm performance because (i) this measure approximates the ability of a business to generate cashflows (i.e., EBITDA) over its asset base, (ii) EBITDA-based measures reduce the noise that comes with the discretion to apply accounting rules for depreciations and amortizations compared to net income-based measures, and (iii) this measure has been widely used in family firm performance research (e.g., Anderson & Reeb, 2003;Andres, 2008;Graves & Shan, 2013). While ROAs based on EBITDA are less volatile than ROAs based on net income, we further reduced the risk that outliers and data errors would drive the results by winsorizing the ROA measure at the 1st and 99th percentiles (Barber & Lyon, 1996). ...
... The reminder of the paper is organised as follows: Section-2 provides the details of literature review, Section-3 describes the data and methodology, in Section-4 we have represented the descriptive statistics, Section-5 is about data analysis and interpretation and Section-6 we have presented the conclusion. Barber and Lyon (1996) have criticised event studies relating to IPOs and have argued that in the case of IPO firms, performance variables such as ROA give biased results as asset size of firms changes significantly post issuance. According to them, literature has generally ignored this fact while selecting control firms. ...
IPOs are frequently issued by littler, more youthful organizations looking for the funding to grow, yet can likewise be finished by a huge exclusive organization looking to end up traded on an open market. The objective of an IPO may differ from company to company. It may be for expansion of existing activities of the company or setting up of new projects or just to get its existing equity shares listed by diluting the stake of existing equity shareholders through offer for sale or any other object as may be specified by the Company in its offer document. In this paper we analyse post-issue returns of top ten IPOs that have completed at least one year. We found that under-pricing is still present and most of the IPOs provide negative return in the long-run.
... La posibilidad de reversión a la media o de momentum en el valor previsto de las ventas o de los beneficios 8 aconsejan la inclusión de una variable de eficiencia (KOTHARI et al., 2005;LOUIS y ROBINSON, 2005). Por este motivo, se ha introducido en nuestro modelo la rentabilidad del activo (ROA), variable que resulta preferible a otros indicadores de eficiencia operativa o de rendimiento de las acciones (BARBER y LYON, 1996;LYON et al., 1999;IKENBERRY et al., 1995). ...
Este trabajo ha obtenido el 1.er Premio Estudios Financieros 2009 en la modalidad de Contabilidad y Administración de Empresas. En el presente trabajo analizamos cómo la estructura de propiedad y control de las empresas familiares modela las prácticas contables discrecionales. Basándonos en una muestra de empresas de once países europeos, nuestro trabajo destaca la importancia que en ellas adquiere un potencial conflicto de intereses entre los accionistas mayoritarios pertenecientes al núcleo de control y el resto del accionariado. Nuestros resultados ponen de manifiesto que la posibilidad de contestar al control del principal accionista formando coaliciones de control alternativas reduce la gestión del resultado. También encontramos evidencia de que la participación como segundo o tercer accionista de un inversor de naturaleza familiar facilita el establecimiento de acuerdos con el accionista principal para la extracción de beneficios privados, con el consiguiente perjuicio sobre el valor de la empresa y sobre la calidad de la información contable. Asimismo, incluimos el estudio del entorno institucional y legal, si bien en este caso nuestros resultados no permiten afirmar que dicho entorno incida diferenciadamente en la discrecionalidad contable de las empresas familiares.
Purpose
Extending the springboard perspective with the resource dependence theory, the authors posit that cross-border mergers and acquisitions (M&As) are a new channel for emerging economy firms (EEFs) to enhance their technology capabilities. This study aims to examine the impact of cross-border M&As initiated by EEFs on their technology augmentation vis-à-vis matched domestic M&A cases and investigate the factors influencing the difference in post-merger innovation capability.
Design/methodology/approach
This paper estimates the post-acquisition innovation capability of acquirers from emerging economies (EEs) that engage in cross-border M&As. To remove possible selection bias, the authors leverage a difference-in-difference-style approach in combination with a matched sample constructed by pairing each cross-border M&A case with a similar domestic deal. The data set contains 266 cross-border M&As and 266 matched domestic M&A deals between 2003 and 2011, whereby acquirers are based in 6 EEs and targets are in 36 countries consisting of both EEs and advanced economies (AEs).
Findings
The present empirical results show that cross-border M&As engaged by EEFs are an important engine for improving EEFs’ innovation capability through technology augmentation. The main empirical results are as follows. First, compared with matched domestic acquirers with similar characteristics, EE cross-border M&As have a positive effect on innovation capability. Second, the positive effect of the EEFs’ cross-border M&As relative to the matched domestic M&As on innovation capability is driven largely by cross-border M&As with targets in AEs. Third, the increase in post-M&A innovation capability of the EE cross-border acquirers comes mainly from deals where targets are based in countries with relatively superior human capital and innovation capability than those of the acquirers.
Originality/value
To the best of the authors’ knowledge, this study is the first systematic study of whether cross-border M&As serve as an effective channel of technology augmentation for EE acquirers compared to matched domestic acquirers with similar characteristics.
Geopolitical risk can have an impact on investment behavior and rates of return. We explore the time-varying relation between the daily geopolitical risks index (GPRD) and tourism market. We use tourism tokens (TTI) and tourism equity market indices (WHRL) as proxies of the tourism industry. Results from DCC-GARCH analysis depict weak co-movements between GPRD-TTI and GPRD-WHRL pairs. However, concerning time-varying Granger causality, the GPRD-WHRL pair exhibited longer periods of a significant relationship along with bidirectional causality during the Russia-Ukraine war, whereas the COVID-19 pandemic’s effect was weak in both pairs. Spillovers identified through Q-VAR analysis revealed more pronounced effects of GPRD on each variable during both market events, albeit with a more apparent and stronger influence on WHRL. These findings suggest that the cryptocurrency market may not consistently and effectively incorporate geopolitical risk factors, whereas equity markets demonstrate a greater capacity to capture and respond to such risk factors.
The aim of this research is to examine the impact of gender diversity and female leadership position on the firm performance of Indian listed firms participating in mergers and acquisitions (M&A) activities. Available research has focused on a small sample of firms and considered ‘gender diversity’ as the only variable. Bearing this in mind, this study focusses on the leadership positions females hold on corporate board along with gender diversity affecting the firm performance measures for the sample of M&A participating firms, as M&As lead to major restructuring of the board. The ‘gender diversity’ is measured with the number of females present on corporate board as directors, ‘leadership position’ is measured with females holding the position either as Chief Executive Officer (CEO) or Chairperson on the board. The study employs panel data set for Indian non-financial National Stock Exchange listed M&A participating firms for the period 2013–2020. Using a system of GMM dynamic panel estimates, the study analyses the relationship between gender diversity and females’ varied leadership position on the firm performance measures, that is, return on asset, Tobin’s q. The findings reveal that there is a positive association between gender diversity and firm performance measures. Females holding the top leadership positions as either CEO or Chairperson on the board positively impact the firm performance measures. This study adds to the existing literature on gender diversity at the board level and M&A literature in the Indian context.
JEL Codes: G 3, G 34, J 16
Cet article examine la performance des Fusions et Acquisitions au Maroc et analyse l’impact d’une variable économique déterminante non encore testée par la littérature et mesurant la création de richesse par une entreprise, à savoir la valeur ajoutée. L’échantillon, qui contient des entreprises cotées et non cotées, est composé de 136 sociétés (68 firmes initiatrices et 68 entreprises de contrôle), et la période d’étude (2004-2018) est coupée en deux sous-périodes comprenant chacune une vague de F&A différente par ses caractéristiques. D’après les résultats, les entreprises initiatrices d’une F&A enregistrent une détérioration de la performance à long terme au niveau des deux sous-périodes : (2004-2009) et (2010-2018). Aussi, il a été remarqué un impact positif des variables valeur ajoutée, mode organisationnel (qualité de gouvernance), et mode de rapprochement sur la performance post-F&A, et un impact négatif des variables concentration de capital, propriété institutionnelle et mode de paiement.
While there is a wealth of literature on CEO pay and firm performance, there is little literature on pay-for-performance for top management team (TMT) members other than the CEO, and the effects on firm performance. In this paper, the overall effectiveness of pay for performance plans is described. The main strategies implemented by contemporary organizations to increase employee performance are analyzed. The advantages and disadvantages of paying for performance are presented. According to the results, in terms of work where cognitive skills are needed, the disadvantages of this strategy prevail. However, as for work where physical abilities are required, advantages are more. Regarding cognitive skills, certain techniques are presented to make the strategy of paying for performance effective and efficient.
Traditional financial performance metrics have served well throughout the inclusion era, but they are no longer in sync with the skills and competitiveness that organizations are attempting to learn. This study examined the role of intellectual capital disclosure (ICD) in mediating the relationship between financial performance and firm value. The sample consists of 39 firms listed on the Nairobi Securities Exchange (NSE) in Kenya. They represent 67% of firms listed on NSE during the period (2010–2022). Data were extracted from individual companies’ audited annual reports. The study hypotheses were tested on a fixed and random effects model with the aid of the Stata student version. The results reveal that financial performance has a positive and significant effect on firm value. Furthermore, financial performance has a negative effect on ICD. Finally, ICD was found to have a mediating effect on the relationship between financial performance and firm value. The results confirm that intellectual capital disclosure is an important mediator in the relationship between financial performance and firm value; firm managers should use ICD as a winning edge. Additionally, firms with high intellectual capital are likely to engage in voluntary disclosure to legitimize their success.
Purpose
In recent years, the field of financial technology (Fintech) has garnered significant attention due to advancements in technology, evolving consumer preferences and the growing need for financial services that are more accessible and user-friendly. The exponential expansion of Fintech is presenting novel prospects and obstacles for business. This study aims to investigate the relationship between gender diversity on corporate boards and firms’ performance, with a particular focus on the moderating role of Fintech.
Design/methodology/approach
The study sample consisted of financial sector firms listed on the Bahrain Bourse (banks and insurance firms) during the period 2016–2022. The data were gathered primarily from annual reports and the Bahrain Bourse website. The independent variable represents the percentage of female directors on corporate boards while firms’ accounting and market-based performance were measured using return on assets and Tobin’s Q variables. The moderating variable, Fintech, was measured using a checklist developed using the Global Fintech Adoption Index. Fixed effect (FE) regression was used to analyze the study data. An alternative gender diversity measure was used to test the reliability of the main regression analysis.
Findings
The results of the study indicate a positive relationship between gender diversity on corporate boards and financial performance. Additionally, the findings of the study highlighted the positive impact of Fintech practices on firms’ performance. Nevertheless, the impact of Fintech on the relationship between board gender diversity and corporate performance was found to be insignificant.
Research limitations/implications
The study sample included a particular sector in a single country, which may limit the generalizability of the findings. Also, the current study applied FE regression to analyze the data; however, other econometric approaches could be used to overcome the endogeneity issue.
Practical implications
The findings of this study may have implications for policymakers and society, particularly in terms of promoting gender diversity and Fintech innovation.
Originality/value
This study contributes to the existing body of research by examining the potential impact of the percentage of female directors and the utilization of Fintech on firms’ performance in Bahrain. Given the ongoing endeavors to provide advanced Fintech solutions in the financial sector and the increasing focus on enhancing gender diversity in Bahraini corporate boards, this research aims to provide additional evidence in this domain. Moreover, this study stands out as one of the limited number of research endeavors that use Fintech as a moderating variable in the investigation of the impact of female directors on firms’ performance.
Purpose
The devastating acute COVID-19 epidemic crippled the global economy in 2020. Within a month of the COVID-19 epidemic, every industry saw its stock prices plummet the most. Ending the COVID-19 pandemic will need equitable access to safe and effective vaccinations. This study aims to look at the link between COVID-19 vaccination and the stock markets for health and pharmaceutical sector.
Design/methodology/approach
The researchers used a mean-adjusted return model and event research approach to figure out how the first dose of the COVID-19 vaccine affects health and pharmaceutical sector stock market returns.
Findings
The evidence-based outcome indicates that immunisation announcement affects health and pharmaceutical company returns. Furthermore, the study concludes that the health and pharmaceutical industry is inefficient for a short period of time, but after 41 days, the sector absorbs the noisy information.
Originality/value
Since the outbreak, the development of COVID-19 vaccines has been a key focus of shareholders and investors. This study is unique in that it investigates the effect of the first dosage of SARS-CoV-2 vaccination on equity returns in the health and pharmaceutical industries, and it is likely to make a substantial contribution to the capital market literature on event methodology.
Purpose
Quality awards are widely considered symbols of successful quality management. The purpose of this paper is to empirically test the effects of the China Quality Award (CQA) on firms' performance. The study further explores how the benefits due to CQA are affected by contextual factors.
Design/methodology/approach
Using the data of CQA winners from 2001 to 2016, the event study method is applied to analyze the abnormal performance of winners. Furthermore, multiple regression models are proposed to evaluate the effects of contextual factors on the relationship between the award and profitability.
Findings
The findings show that CQA has positive impacts on profitability and fixed asset efficiency but not on labor productivity. Besides, state-owned firms and firms with high innovation intensity obtain more profitability benefits than others.
Originality/value
This is the first study to explain the relationship between quality awards and firm performance from a theoretical perspective, providing new insights into the quality management and performance literature. Furthermore, this study deepens the understanding of the relationship between quality awards and performance and reveals new implications. Some of the contextual factors examined, such as innovation intensity, are considered for the first time in quality award research.
Research Question/Issue
We study the contribution of board characteristics such as independence, size, busyness, and CEO duality, to firm resilience at times of firm‐specific crises.
Research Findings/Insights
Based on manually collected US data, we document that board‐related variables affect the short‐term market reactions around disruptive events. Board independence exacerbates the negative share price effect, whereas the converse is true for director busyness and board size. However, the negative impact of board independence is attenuated in complex firms. We do not find that CEO duality affects market reactions. By contrast, in the long run, we do not observe stable and significant relationships between board‐related variables and firm performance with the exception of a negative impact of board independence.
Theoretical/Academic Implications
Our paper contributes to different strands of the literature. First, it contributes to the literature on the effects of board characteristics by showing how they affect stock price reactions at the time of firm‐specific crises. Second, our results on board attributes provide a new take on the two monitoring and advisory functions of the board. Third, we add to the literature that measures the value of directors. More generally, the paper contributes to the literature on the role of corporate governance, and in particular the board of directors, in crises situations.
Practitioner/Policy Implications
We show that three board‐related attributes affect market reactions at the time of a firm‐specific shock. Board independence exacerbates the negative share price effect of disruptive events, whereas the reverse is true for director busyness and board size. These reactions imply that, in times of crisis, advice‐oriented boards fare better than monitoring‐oriented boards. More specifically, information flows less easily within independent boards. In addition, busy directors and large boards are more talented, respectively more effective in complex situations. However, these results do not hold for industry‐wide shocks.
From 1986 to 1993, the United Shareholders Association (USA) provided a conduit through which small shareholders could unite and attempt to influence the governance of large US corporations. We show that the USA targeted large firms that underperformed the market, that its influence increased from 1990 to 1993, and that USA-Sponsored proposals were more successful when the target firm was a poor performer with high institutional ownership. The announcement of 53 USA-negotiated agreements is associated with an average abnormal return of 0.9% or a total shareholder wealth gain of $1.3 billion, suggesting that USA-sponsored shareholder activism enhanced shareholder value.
We examine the accounting and market performance of reverse leveraged buyouts (i.e., firms making their first public offering after previously completing a leveraged buyout). On average, the accounting performance of these firms is significantly better than their industries at the time of the initial public offering (IPO) and for at least the following four years, though there is some evidence of a decline in performance. Cross-sectional variation in accounting performance subsequent to the IPO is related to changes in the equity ownership of both operating management and other insiders, and is unrelated to changes in leverage. Finally, there is no evidence of abnormal common stock performance after the reverse leveraged buyout.
We study whether the behavior of stock prices, in relation to size and book-to-market-equity (BE/ME), reflects the behavior of earnings. Consistent with rational pricing, high BE/ME signals persistent poor earnings and low BE/ME signals strong earnings. Moreover, stock prices forecast the reversion of earnings growth observed after firms are ranked on size and BE/ME. Finally, there are market, size, and BE/ME factors in earnings like those in returns. The market and size factors in earnings help explain those in returns, but we find no link between BE/ME factors in earnings and returns.
We report that 31% of the firms completing leveraged recapitalizations between 1985 and 1988 subsequently encounter financial distress. Following their recaps, the distressed firms exhibit (1) poor operating performance due largely to industry-wide problems, (2) surprisingly low proceeds from asset sales, and (3) negative stock price reactions to economic and regulatory events associated with the demise of the market for highly-leveraged transactions. The incidence of distress is not related to several characteristics that have previously been linked with poorly-structured deals. We thus attribute the high rate of distress primarily to unexpected macroeconomic and regulatory developments.
Analysis of 187 proxy contests for board seats from the 1979-89 period indicates that the proxy mechanism made a significant contribution to corporate governance in the 1980s by overcoming obstacles to the market for corporate control, by inducing the removal of incumbent management, and by facilitating downsizing at the target companies. Firms that were acquired and/or that replaced senior management following proxy contests experienced a sustained appreciation in shareholder wealth. By contrast, firms that were not acquired or that did not replace senior management, even in cases where dissidents attained seats, suffered a decline in shareholder wealth following proxy contests. Operating income increases following proxy contests, a result which also holds after adjusting for an industry control sample. The post-contest change in operating income is positively related to the changes in shareholder wealth at contest announcement, indicating a direct linkage between valuation effects and corporate operating performance:
This paper examines accounting earnings and the associated accrual and cash flow components in the years surrounding an initial public offering (IPO) to study the incentives and opportunities for firms to manage earnings when going public. We identify firm and offering characteristics that may be related to the amount of earnings management in IPO firms. We find that age and ownership retention by original entrepreneurs are significantly negatively related to industry-adjusted discretionary accounting accruals. In addition, we find that net income and cash flow from operations increase in the fiscal year prior to the IPO, and decline significantly in the year of the IPO. Net income continues to decline subsequently but not cash flows. Discretionary working capital and total accruals in the year of the IPO are negatively related to future cash flows and the change in net income between the pre-and post-IPO period. Taken together, the evidence is consistent with a scenario where firms either time an IPO immediately after a year of unusually high cash flow or boost cash flows right before the IPO, and then use accounting accruals to sustain reported net income in the year of the IPO. Thus, the evidence is consistent with the IPO firm attempting to manage investor perceptions with discretionary accruals.
We examine the operating performance and stock of companies that make an initial public offering of common stock. In the year before offerings, operating performance is quite favorable, but following offerings operating performance declines and market-adjusted stock returns are negative. We find a positive correlation between the changes in operatingperformance and the post-offering stock returns, which supports the idea that initial public offering are timed to exploit investors' overly optimistic assessments of future performance. After offerings the operating performance of established companies is similar to the performance of industry-matched firms, but the operating performance of start-up companies is below the performance of comparison firms. The performance of start-up companies appears to reflect the early stages of expansion.
This paper presents evidence on changes in operating results for a sample of 76 large management buyouts of public companies completed between 1980 and 1986. In the three years after the buyout, these companies experience increases in operating income (before depreciation), decreases in capital expenditures, and increases in net cash flow. Consistent with the operating changes, the mean and median increases in market value (adjusted for market returns) are 96% and 77% from two months before the buyout announcement to the post-buyout sale. The evidence suggests the operating changes are due to improved incentives rather than layoffs or managerial exploitation of shareholders through inside information.
Differences between SIC codes assigned to companies by COMPUSTAT and CRSP are examined. Large differences are observed at two-, three-, and four-digit levels. Correlations of intra-industry monthly stock returns are larger, and variances of intra-industry financial ratios are smaller for industries based on COMPUSTAT codes. Replication of a portion of Freeman and Tse (1992) produces significant results using COMPUSTAT codes, consistent with the original research, but insignificant results for CRSP codes.
Dual-class recapitalizations and leveraged buyouts have similar effects on ownership of corporate voting rights but very different effects on ownership of residual claims. We predict that firms with greater growth opportunities, lower agency costs, and lower tax liability are more likely to consolidate control through dual-class recapitalizations. We find strong support for the growth hypothesis and weaker support for the other hypotheses. These results increase our understanding of the causes of change in organizational form by illustrating that the method and effects of consolidating corporate control are systematically related to firm attributes.
Managers typically increase their voting power following the creation of two classes of common stock and the adoption of an employee stock ownership plan. These changes can worsen managers' incentives and lead to a decline in performance. Alternatively, two classes of stock and ESOPs can allow managers to adopt value-maximizing policies that would not be possible in the face of takeover pressure. We find that these events are followed by below normal operating income. However, we find no reliable evidence that the increase in managers' voting power and the resulting divergence between managers' voting power and ownership of equity claims is related to subsequent operating performance.
This paper examines properties of daily stock returns and how the particular characteristics of these data affect event study methodologies. Daily data generally present few difficulties for event studies. Standard procedures are typically well-specified even when special daily data characteristics are ignored. However, recognition of autocorrelation in daily excess returns and changes in their variance conditional on an event can sometimes be advantageous. In addition, tests ignoring cross-sectional dependence can be well-specified and have higher power than tests which account for potential dependence.
This paper examines properties of daily stock returns and how the particular characteristics of these data can affect event study methodologies. We find no evidence that either nonnormality in the time-series of daily excess returns or bias in OLS estimates of Market Model parameters affect the specification or power of tests for abnormal performance. However, under plausible conditions, both autocorrelation in excess returns and changes in the variance of daily returns conditional on an event can affect the tests; simple procedures to deal with these issues are sometimes quite useful. We also show that taking into account dependence in the cross-section of the daily excess returns can be harmful, resulting in tests with relatively low power and which are no better specified than those which assume independence.
Previously issued as WP#1913-89 in series.
Although industrial classifications are an important part of financial research, few researchers explicitly recognize the data base they use in classifying industrial structure. There are substantial differences, however, in primary SIC codes for firms on Compustat and CRSP. Over 36% of the classifications disagree at the two-digit level and nearly 80% disagree at the four-digit level. Thus, research results and significance levels based on industry comparisons could differ depending on the source of SIC codes, irrespective of the underlying economics of the problem being analyzed. This research analyzes the impact of industrial classification on financial research. Using approximately 10,000 firms jointly covered by Compustat and CRSP, we simulate a typical research experiment. Specifically, we: 1) examine the extent of agreement between commonly used industrial classifications, 2) examine how SIC codes change over time, and 3) test the specification and power of alternate industrial classifications in typical financial research. Our results document dramatic differences in industrial classifications and analyze the impact of these differences upon statistical inference in finance.
This article investigates the change in operating performance of firms as they make the transition from private to public ownership. A significant decline in operating performance subsequent to the initial public offering (IPO) is found. Additionally, there is a significant positive relation between post-IPO operating performance and equity retention by the original entrepreneurs but no relation between post-IPO operating performance and the level of initial underpricing. Postissue declines in the market-to-book ratio, price/earnings ratio, and earnings per share are also documented. Copyright 1994 by American Finance Association.
Firms that initiate dividend payments have positive earnings changes both before and after the dividend policy change, while those omitting dividend payments have negative earnings changes. Subsequent earnings changes are positively related to the dividend announcement return, and stock price reactions at subsequent earnings announcements are smaller than usual, suggesting that these earnings changes are partially anticipated at the dividend announcement. The results indicate that investors interpret announcements of dividend initiations and omissions as managers' forecasts of future earnings changes.
We examine the impact of highly leveraged transactions on managerial discretion over investment policy using a sample of 39 proposed leveraged recapitalizations. We find significant decreases in undistributed cash flow, capital expenditures, and total assets following completed recapitalizations. The reductions in investment are significantly correlated with the cumulative abnormal returns earned by the shareholders of the recapitalizing firms. Moreover, we find evidence of poor investment decisions on the part of the sample firms in the years leading up to the recapitalizations. The overall results are consistent with the hypothesis that increased debt plays a valuable role in limiting managerial discretion.
Announcements of stock repurchase tender offers are examined as a source of information to the market on the firm's future earnings prospects and market risk level. We find positive average earnings surprises and equity systematic risk reductions following tender offers but not, in most instances, preceding them. We find positive stock price reactions to tender offer announcements to be positively correlated with earnings surprises over the concurrent and subsequent two years, and negatively correlated with changes in equity and firm market risk. Finally, stock price reactions to quarterly earnings announcements are more strongly correlated with time-series based earnings surprises in the year prior to the tender offer than during the subsequent year, consistent with tender offer announcements conveying earnings information to the market.
The authors study whether the behavior of stock prices, in relation to size and book-to-market equity (BE/ME), reflects the behavior of earnings. Consistent with rational pricing, high BE/ME signals persistent poor earnings and low BE/ME signals strong earnings. Moreover, stock prices forecast the reversion of earnings growth observed after firms are ranked on size and BE/ME. Finally, there are market, size, and BE/ME factors in earnings like those in returns. The market and size factors in earnings help explain those in returns but the authors find no link between BE/ME factors in earnings and returns. Copyright 1995 by American Finance Association.
The authors investigate the transition from private to public ownership of companies that had previously been subject to leveraged buyouts. They show that the information asymmetry problem firms face when they go to public markets for equity, as well as behavioral and debt overhang effects, will produce a pattern in which superior performance before an offering should be expected, with disappointing performance subsequently. The authors find empirical evidence of this phenomenon by studying sixty-two reverse leveraged buyouts that went public between 1983 and 1987. The market appears to anticipate this pattern. Copyright 1993 by American Finance Association.
: Recent studies have documented that firms conducting seasoned equity offerings have inordinately low stock returns during the five years after the offering, following a sharp run-up in the year prior to the offering. This paper documents that the operating performance of issuing firms shows substantial improvement prior to the offering, but then deteriorates. The multiples at the time of the offering, however, do not reflect an expectation of deteriorating performance. Issuing firms are disproportionately high-growth firms, but issuers have much lower subsequent stock returns thannonissuers with the same growth rate. The Operating Performance of Firms Conducting Seasoned Equity Offerings Several recent empirical studies have documented the poor stock market performance of firms conducting seasoned equity offerings (SEOs) in the United States and other countries. 1 Loughran and Ritter (1995) report that the average raw return for issuing firms is only 7 percent per year during th...
The impact of industry classifications on financial research, Working paper (Ohio State University The effect of management buyouts on operating performance
- Kathleen M Kahle
- A Ralph
- Walkling
Kahle, Kathleen M. and Ralph A. Walkling, 1995, The impact of industry classifications on financial research, Working paper (Ohio State University, Kaplan, Steven, 1989, The effect of management buyouts on operating performance Journal of Financial Economics 24, 217-254
The financial buyouts, Working paper (The Wharton School The post-issue operating performance of IPO firms
- Holthausen
- David Robert
- Larcker
- Bharat A Jain
- Omesh
Holthausen, Robert and David Larcker, 1994, The financial buyouts, Working paper (The Wharton School, Philadelphia, Jain, Bharat A. and Omesh Kini, 1994, The post-issue operating performance of IPO firms, Journal of Finance 49, 169991726
Size and book-to-market returns
- Eugene F Fama
- Kenneth
- French
Fama, Eugene F. and Kenneth French, 1995, Size and book-to-market returns, Journal of Finance 50, 131-155
Earnings information omissions
- Healy
- Krishna Paul
- Palepu
Healy, Paul and Krishna Palepu, 1988, Earnings information omissions, Journal of Financial Economics 21, 149-176
Earnings and stock splits, The Accounting Review 64 Using daily stock returns: The case of event studies
- Asquith
- Paul Paul
- Healy
Asquith, Paul, Paul Healy, and Krishna Palepu, 1989, Earnings and stock splits, The Accounting Review 64, 3877403. Brown, Stephen J. and Jerold B. Warner, 1985, Using daily stock returns: The case of event studies, Journal of Financial Economics 14, 205-258.
The reverse LB0 decision and firm perfor-mance: Theory and evidence Managerial discretion, organization structure, and corporate performance: A study of leveraged recapitalizations Causes of financial distress following leveraged recapital-izations
- Degeorge
- Richard Francois
- David J Zeckhauser Denis
- K Diane
- David J Denis Denis
- K Diane
- Denis
DeGeorge, Francois and Richard Zeckhauser, 1993, The reverse LB0 decision and firm perfor-mance: Theory and evidence, Journal of Finance 48, 132331348. Denis, David J. and Diane K. Denis, 1993, Managerial discretion, organization structure, and corporate performance: A study of leveraged recapitalizations, Journal of Accounting and Economics 16, 2099236. Denis, David J. and Diane K. Denis, 1995, Causes of financial distress following leveraged recapital-izations, Journal of Financial Economics 37, 129-158.
Earnings management in seasoned equity offerings, Working paper
- Siew Teoh
- Ivo Hong
- T J Welch
- Wong
Teoh, Siew Hong, Ivo Welch, and T.J. Wong, 1995, Earnings management in seasoned equity offerings, Working paper (University of Michigan, Ann Arbor, MI).
Which takeovers are profitable-strategic or financial?, Working paper (Massachusetts Institute of Technology
- Paul Healy
- Krishna Palepu
- Richard Ruback
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- Kaplan