Anand M. Vijh

Dividend clienteles and the information content of dividend changes

Abstract We reason that dividend-yield surprises are perfectly correlated with dividend surprises. If investors with preference for dividends are the marginal investors in high-yield stocks, the price reaction to a dividend change should be larger, the higher the anticipated yield of the stock. An examination of over 8,500 dividend changes shows that price reactions to dividend increases are significantly more positive and to dividend decreases significantly more negative for high-yield stocks. Also, the price reactions to dividend changes are larger and the yield effect is stronger for low-priced and small-firm stocks, perhaps because of greater information content and higher transaction costs.

The Positive Announcement-Period Returns of Equity Carveouts: Asymmetric Information or Divestiture Gains?

Using a sample of 336 carveouts that occurred in the period 198097, this article shows that the announcement-period returns increase with the ratio of subsidiary to nonsubsidiary assets. This finding contradicts the asymmetric information model proposed by Nanda. Additional tests relate the returns to the following divestiture-based explanations proposed by Schipper and Smith and others: refocusing of the parent and subsidiary operations, financing of new and existing projects, reducing the complexity of stock valuation, and enabling an eventual spinoff or third-party acquisition. The combined evidence rejects the asymmetric information hypothesis and supports the divestiture gains hypothesis of carveouts.

Long-term returns from equity carveouts

Using a sample of 628 carveouts during 1981-1995, this paper finds that the newly issued subsidiary stocks do not underperform appropriate benchmarks over a three-year period following the carveout. This result is in striking contrast with the documented poor performance of initial public offerings and seasoned equity offerings. I conjecture that the superior performance of subsidiary stocks arises because the subsidiary and parent firms can focus on fewer business segments after carveout, and because the parent firms continue to own a monitoring position in the subsidiary firms. I test whether the subsidiary stock performance is related to the number of business segments the parent firm has before carveout. The relationship is not always significant, which suggests another possible explanation, that the market may react efficiently to the likely future performance of carveouts.

Ownership structure, agency costs and dividend policy

We find that, at low levels of insider ownership, the markets reaction to dividend increases becomes less positive, and to dividend decreases becomes less negative, as insider ownership increases. The price reaction is larger when insiders control voting on shares they do not own and lower if a family owns a block. The results are .stronger for firms with low values of Tobins Q. Several tests indicate that these cross-sectional results are not a manifestation of the information content hypothesis. Instead, the findings support the hypothesis that dividend increases reduce the agency costs of free cash flow and vice versa.

Stock Merger Activity and Industry Performance

We propose a merger activity variable (MAV) as an alternative to industry merger waves. Unlike discrete merger waves that separate periods of extreme activity from the rest, our continuous MAV captures information in the entire spectrum of stock merger activity. We rank industries by MAV within each quarter and arrange into 12 bucket portfolios. During 1989-2018, prior and subsequent three-year excess portfolio returns are positively and negatively related to bucket numbers and with each other, consistent with a build-up of misvaluation (undervaluation of less merger-active industries and overvaluation of more merger-active industries) followed by a proportional correction. We estimate differences of 4.49% and -3.43% between prior and subsequent annual alphas of most and least merger-active industries. Operating performance results provide further evidence in favor of the misvaluation theory of industry stock merger activity. Such return and operating performance based evidence for entire industries has not been documented before.

What Do Credit Markets Tell Us About the Speed of Adjustment

This article proposes a methodology to infer investors’ expectations about the speed at which firms adjust to their target leverage. We find that in the long run bond and CDS investors expect leverage to converge towards a target as suggested by the tradeoff theory. On average, the credit markets imply a fairly rapid annual speed of adjustment of 26%. However, we also find strong support that in the short run the expected adjustment process implicit in the prices of credit instruments is affected by transaction costs, pecking order, and market timing. Overall, we show that one can learn about capital structure speed of adjustment not just from realized leverage changes, but also from expectations embedded in market prices.