Emery A. Trahan

Financial characteristics of acquiring firms and their relation to the wealth effects of acquisition announcements

This paper examines the sources of value to acquiring firms to expand the understanding of mergers and acquisitions. The firmspecific rationale that motivate firms to acquire other firms are examined, along with how these rationale impact the shareholder wealth of acquiring firms when the acquisitions are announced. A logit regression model is utilized to compare financial characteristics of acquiring firms to those of non-acquiring firms. The relation of these characteristics to the shareholder wealth effects experienced by acquiring firms when they announce acquisitions is also examined. The results support hypotheses that firm size and cash-flow payout impact the decision to acquire. Capital structure, management performance, and cash-flow payout are related to the wealth effects of acquisition announcements. Better fitting models result when industry effects are controlled by measuring firm characteristics as relative deviations from industry values.

How Mad Is Mad Money? Jim Cramer as aStock Picker and Portfolio Manager

This article examines a widely popular and controversial source of investment advice: buy and sell recommendations made by Jim Cramer on his popular nightly Mad Money show on CNBC. The results show that Cramer’s recommendations impact share prices of the companies that he mentions. The effects are short-lived and reverse for buy recommendations, although they persist for sell recommendations. Returns for a portfolio of Cramer recommendations are significantly different from zero for some subperiods. Factor analysis suggests that these returns are driven by beta exposure, smaller stocks, growth-oriented stocks, and momentum effects. Overall performance is average after adjusting for factor exposures. Further analysis indicates a significant cluster of new or updated analysts’ ratings of stocks just before and just after a Cramer recommendation. The results provide insights into the performance of a popular but controversial market pundit and should be of interest to followers and detractors seeking to develop an active, or alpha-generating, investment strategy.

Active Investing in Strategic Acquirers Using an EVA Style Analysis

Employing an EVA style classification, this article examines whether active investors such as hedge funds can develop an alpha-generating strategy by classifying acquisitions based on the pre-acquisition style quadrant of the acquirers. Over the period 1990–2007, the announcement evidence suggests that acquisitions across all EVA style quadrants generate negative risk-adjusted returns, wherein the potential for economic gains from shorting acquirers is greater for pre-classified wealth destroyers than it is for wealth creators. The article also finds evidence of continuing negative returns following the acquisition announcement for wealth destroyers, while for wealth creators the post-acquisition announcement effects are mixed. Moreover, the potential for longing gains on target firms is significant at the announcement and shows continuing positive gains after the acquisition announcement across EVA styles. These results support the view that investment strategies involving acquisitions should be linked to the fundamentals of wealth creation.

Structuring more‐effective executive severance contracts

Explains why executive severance contracts contingent on a change in control (i.e. golden parachutes) have developed and reviews previous relevant research. Develops a mathematical model of their effects on shareholder wealth and uses it to determine an optimal contract which aligns the interests of shareholders and managers (i.e. where marginal benefit to shareholders equals marginal cost of the contract). Points out that these contracts alone do not guarantee that managers will aim to maximize shareholders wealth: they should form only part of a package of compensation agreements to align their interests.

The EVA Style Approach to Tactical Asset Allocation

We refine tactical asset allocation (TAA) by arguing that the equity style component of a TAA strategy should distinguish between—and rotate among—predefined value creators and value destroyers in the marketplace. We assess equity style in the context of an economic profit approach to securities analysis and active portfolio management. We illustrate TAA in the context of an economic value added style analysis, and we demonstrate both the macroeconomic aspects and cyclicality of economic profit and its equity rotational implications for TAA. We conclude with a look at some well-known value creators and value destroyers, as well as known market anomalies that can also drive an economic profit approach to TAA and active portfolio management.

Information Effects of Changes to Analysts’ Recommendations: Morningstar Star Ratings Changes for Stocks

We study the nature and impact of ratings changes for individual stocks provided to investors by Morningstar, Inc. Morningstar’s recommendations follow negative momentum for upgrades and positive momentum for downgrades. When ratings change, upgraded stocks experience positive abnormal returns, while downgraded stocks experience negative abnormal returns. Morningstar recommendations not only impact stock prices at announcement, but statistically significant abnormal returns occur over the following 30 trading days. Additional variables tracked by Morningstar, such as economic moat and uncertainty, explain variation in abnormal returns associated with ratings change announcements. Overall, the results suggest that Morningstar analysts provide valuable information to investors.