Gopala K. Vasudevan

The Operating Performance of Seasoned Equity Issuers: Free Cash Flow and Post-Issue Performance

We examine changes in operating performance for a large sample of industrial firms conducting seasoned equity offerings (SEOs). Our sample of SEO firms has significant improvements in operating performance prior to the issue. The SEO firms experience a sharp, statistically significant decrease in profitability following the SEO in both industry-adjusted and unadjusted comparisons. We find that the decline in profitability is greater for firms that have higher free cash flow, and that SEO firms that invest in new fixed assets perform better than SEO firms that do not.

Investment Banker Reputation and the Performance of Seasoned Equity Issues

We study the relation between investment banker reputation and announcement-period returns and between banker reputation and three-year post-issue holding-period returns for firms that conducted seasoned equity offerings (SEOs) between 1980 and 1994. We find a positive relation overall between investment banker reputation and announcement-period returns but no significant relation between investment banker reputation and long-run post-issue stock price performance. We also design an empirical model to predict the prestige of the issuer’s underwriter. We find that announcement-period returns are significantly related to banker prestige for issuers with high levels of information asymmetry that go against type to use a high-prestige investment banker.

Operating Performance and Free Cash Flow of Asset Buyers

We examine a sample of 552 firms that announce asset purchases. We find that the announcement period returns are negatively related to the amount of free cash flow for buyers with fewer growth opportunities. Compared to the year prior to the purchase, the mean long-run operating performance of asset buyers worsens in each of the three years following the transaction. Operating performance changes are negatively related to the amount of free cash flow, and the relationship is stronger for buyers with fewer growth opportunities. We also find that buyer firms experience a decline in the return on assets and asset turnover ratios. These findings are consistent with Jensen’s (1986) free cash flow theory.

Does overvaluation of bidder stock drive acquisitions? The case of public and private targets

We test the implications of the misvaluation hypothesis (Shleifer and Vishny, 2003) for a large sample of acquirers of private and public target firms. Consistent with the misvaluation hypothesis we find that acquirers are overvalued. The overvaluation is higher for stock acquisitions of private targets. We find that the announcement period returns are lower for firms that are overvalued at the time of acquisition. Announcement period returns are lower for larger acquisitions of public targets and higher for larger acquisitions of private targets. We also examine the factors that determine stock as the method of payment. Consistent with the misvaluation hypothesis we find that firms that have higher valuation measures at the time of acquisition tend to use stock. Acquirers of public targets tend to use stock more frequently.

The Ex‐Dividend Day Behaviour of REITs: Tax or Market Microstructure Effects

We examine the importance of the tax and microstructure theories in explaining the ex‐dividend day behaviour of US REIT stock prices in three tick size regimes − the 1/8th, 1/16th, and decimal eras. We present a new theory that shows how the tax and microstructure effects interact to produce the observed ex‐dividend day behaviour. Our theory also shows why in an era of a large tick size, as in the 1/8th era, the tax effects fail to get detected and the observed ex‐dividend day behaviour could be misinterpreted as resulting solely from the microstructure effects.