Balasingham Balachandran

Managerial share ownership and operating performance: Do independent and executive directors have different incentives?

We investigate the relationship between managerial share ownership (MSO) and earnings as a measure of operating performance in Australia. To mitigate potential earnings management, we also use discretionary accrual adjusted earnings as an alternative measure of performance. We document a negative relation between MSO and performance followed by a positive relation. We suggest that these unique results are an artefact of certain Australian institutional features and imply that the ownership–performance relation is context-specific, with the wider corporate governance systems influencing the theorised incentive effects. We also posit that executive directors and independent directors have different ownership–performance incentives. Our results are consistent with this proposition and suggest that independent directors may be immune to the theorised incentive alignment or entrenchment effects associated with share ownership.

Rights offerings, subscription period, shareholder takeup and liquidity

We examine the role of shareholder takeup in rights offerings on the subscription period price reaction and liquidity. Our results indicate that takeup information is reflected in price adjustments over the subscription period and that quality-related information disclosed on the rights announcement date further impacts prices in this period. Higher shareholder takeup improves liquidity. We do find some evidence of inefficiencies in the adjustment process over the subscription period that, in part, is consistent with a model where markets are characterized by overconfident investors and that also articulates with takeup information arriving in the market.

Analysis of price reactions to interim dividend reductions — a note

Price reactions to interim dividend reductions are empirically analysed. Initial interim dividend reductions lead to a more strongly negative price reaction than for interim dividend reductions following an earlier final dividend reduction. When the subsequent interim dividend reduction is reduced proportionately more than the preceding final dividend reduction, the price reaction is stronger than when the proportionate reduction is less. The magnitude of price reactions to interim dividend reductions is found to be statistically significantly related to the size of the dividend reduction, the gearing ratio, the industrial classification, the incidence of a prior dividend cut and the actual change in interim earnings.

The Issuance of Warrants in Rights Offerings: Agency Costs and Signaling Effects

We examine the issuance choice across rights issues of equity, unit offerings, and standalone warrants and investigate the market reactions to these issue types. We find that agency costs, growth opportunities, and current funding needs relative to assets in place are prime drivers of the type of equity issuance choice. Managers use quality signals such as underpricing, underwriting status, and the proportion of funds raised by exercising warrants in determining the features of the warrant issue. Furthermore, we document that the market reacts more favorably to standalone warrants issues than units and equity during the rights offering period.The Australian financial market is unique in enabling firms to raise new capital via right offerings of standalone warrants in seasoned equity offerings. As such, it provides an ideal environment for examining the validity of the Chemmanur and Fulghieris (1997) signaling model for warrant inclusion in seasoned equity offerings via rights offerings by analyzing across unit offerings, standalone warrants and standalone equity. We provide empirical evidence in support of their models predictions regarding the issuance of warrants to existing shareholders. The quality dimension contained in the signals is associated with a more favorable stock price reaction, ceteris paribus.

Special Dividend Announcements: Signaling or Free Cash Flow Hypothesis‘ Evidence from UK Firms

We examine the impact of special dividend announcements for UK firms over the period 1989-2007. We find that the market reacts positively to the announcement of these dividends, but that the reaction is stronger for firms with lower growth opportunities (low Tobin’s q). For lower-growth firms, we do not find any evidence that the firm is using a special dividend to signal future cash flow performance. Rather, it appears that these firms are using a special dividend to distribute cash that is surplus to its needs, consistent with agency theory. For special dividend issuing firms with higher growth opportunities (high Tobin’s q), we find evidence that such firms subsequently enjoy improved cash flow performances (for both the fiscal year-end immediately after, and the fiscal year following, the announcement date), thereby supporting a signaling hypothesis for special dividends. Overall, our findings offer support for both the free cash flow hypothesis and the signaling hypothesis. That is, managers use special dividends to signal future cash flow performance for firms with high growth opportunities, while using special dividend to reduce agency costs for firms with low growth opportunities.

Powerful CEOs and Stock Price Crash Risk

We find that firms with powerful CEOs lead to stock price crash. The effects of earnings management, tax avoidance, CFO option incentives and CEO overconfidence on crash are more pronounced for firms with powerful CEOs. The effect of CEO pay slice on crash risk is more pronounced for firms with powerful founder CEOs. The takeover index, a proxy for corporate governance, mitigates stock price crash for firms with non-powerful CEOs. Product market competition does not attenuate the impact of CEO power on crash. Our findings provide new insights on the importance of CEO power in driving stock price crash risk.

Long-Term Price Reaction to Dividend Reduction in an Imputation Environment – Evidence from Australia

This article empirically investigates the information content and signalling power of decreases and omissions of cash dividend payments in an imputation tax environment. Consistent with prior literature We find significantly negative long term abnormal returns subsequent to dividend reductions, with some support for less negative long term abnormal returns arising in the case of unfranked dividend reductions Overall, our study shows conclusively that dividend reductions in Australia constitute a strong signal regarding the future prospects of the firm and, as such, our results are at variance with the results obtained in the U.S. The tax system in Australia differs from that in the U.S. and we do find some evidence of differential tax effects across the franking status of dividends.

Insider Ownership, Life Cycle Theory and Dividend Policy in an Imputation Tax Environment

Firms are more likely to pay dividends with higher payout ratios in an imputation environment. Insider ownership is positively related to the decision to pay dividends and dividend payout irrespective of imputation credits available. Firms with higher foreign institutional ownership are less likely to pay dividends. The impact of profitability and earned/contributed capital mix on the decision to pay dividends is stronger for firms following a traditional tax system, while the impact on profitability on dividend payout is stronger for firms within an imputation tax system. The study demonstrates the significance of the imputation tax system upon dividend policy.

Dividend Initiations, Information Content and Informed Trading in the Options Market

We find that informed trading in the option market prior to dividend initiation is negatively related to announcement period price reactions. This relation is more prevalent among firms with abnormal trading in call options, higher stock price runup, and higher option liquidity. We also find improvements in stock liquidity following dividend initiation. The improvement in stock liquidity is positively related to the increase in institutional investors’ holdings, and negatively related to the relative size of the dividend initiation payment and preannouncement option trading. We further find positive abnormal earnings following dividend initiation. Overall, these findings indicate that dividend initiation conveys information regarding sustainable future earnings and improvements in liquidity, and informed traders are active in the option market prior to dividend initiation.

Tax-Induced Earnings Management within a Dividend Imputation System

This study examines whether, under a full dividend imputation system, companies defer income until tax changes beneficial to shareholders take effect. Using a sample of Australian listed companies, we find that companies manage earnings downwards via discretionary current accruals in the year preceding a reduction in personal income tax rates, and in the year preceding a change in the tax status of superannuation funds, which reverse the first year both changes operate in unison. We also examine whether such earnings management is a function of a company’s ownership structure and dividend payout policy. We find a company’s earnings management varies according to the proportion of shares held by superannuation funds, consistent with superannuation funds, as an investor-type, benefiting most from income deferral. We also find income deferral is more likely for dividend-paying firms, consistent with the deferral of dividends and the deferral of income being alternative ways to exploit shareholder-level tax changes to enhance shareholder wealth. Our results are informative of the likely behavior of companies should recent recommendations for reduced personal tax rates be implemented.