Henock Louis

Voluntary Disclosure to Influence Investor Reactions to Merger Announcements: An Examination of Conference Calls

We find that bidders are more likely to hold conference calls at merger announcements when the mergers are financed with stock and when the transactions are large. After controlling for endogeneity, we also find that conference calls are associated with more favorable market reactions to merger announcements. A content analysis of merger-related information releases for a limited subsample indicates that the more favorable reaction is related to the fact that, compared to press releases, conference calls provide a greater volume of information and place greater emphasis on forward-looking details. We find no evidence that the superior announcement returns associated with conference calls subsequently reverse or that conference calls are positively associated with pre-merger announcement abnormal accruals. Overall, the results suggest that managers use conference calls around merger announcements to credibly convey favorable private information to the market.

The Cost of Using Bank Mergers as Defensive Mechanisms against Takeover Threats

This study shows that targeted banks that become acquirers generally overpay. The evidence suggests that bank mergers are effective devices against takeovers. Targeted banks that engage in acquisitions are less likely to be taken over than are targeted banks that do not engage in acquisitions. However, such a strategy is costly. I find that market reactions to bank mergers involving recently targeted acquirers are significantly more negative than market reactions to mergers involving nontargeted acquirers. This is consistent with the market perceiving acquisitions by targeted banks as being generally defensive in nature.

Agency Conflicts, Dividend Payout, and the Direct Benefits of Conservative Financial Reporting to Equity-Holders

Dividend payments are generally costly to shareholders. One principal reason for such payments is that they force managers to raise funds in the external capital markets to finance new projects, which presumably reduces their incentives to engage in empire-building activities. We posit that, because accounting conservatism can also mitigate managers’ incentives to engage in value-destroying projects, it could reduce the need for dividend payments and the associated costs. Accordingly, we find that dividend payments decrease with accounting conservatism. This effect holds even after we control for the underlying accounting factors that directly affect dividends, or limit the sample to firms that have no debt covenants pertaining to dividend payouts, indicating that the reason for the conservatism effect transcends the standard debt covenant restriction argument. More importantly, consistent with the agency cost explanation, the evidence also indicates that the conservatism effect increases with potential agency conflicts between managers and shareholders.

The Effect of IFRS on Cross-Border Acquisitions

We examine whether the 2005 mandatory adoption of IFRS is followed by an increase in cross-border acquisitions into the adopting countries and whether the association is driven by IFRS per se or by concurrent enforcement changes. Using the exogeneity of a firm’s listing status to identify the effect of IFRS, we document a significant increase in cross-border acquisitions of listed targets from the adopting countries. We find no evidence that the IFRS effect is driven by those countries that apparently bundled the IFRS adoption with enforcement changes. The evidence also suggests that the IFRS effect is likely due to the fact that many different countries use a common reporting system, as opposed to improvement in reporting quality at individual firms. In particular, we find that the increase in investment flow into the IFRS adopting countries comes mainly from other adopting countries and is significantly stronger when the increase in reporting uniformity associated with IFRS is higher. We also find no evidence that firms that voluntarily adopted IFRS prior to the mandatory adoption were more likely to become cross-border acquisition targets.

Long-Term Growth in Housing Prices and Stock Returns: Long-Term Growth in Housing Prices and Stock Returns

A firms long�?term stock returns are negatively related to past growth in housing prices in the state where the firm is located. The housing price effect is persistent and robust to controlling for the long�?term stock return reversal effect, changes in mortgage interest rates across the states, cyclicality in housing prices and overall local economic conditions. There is no evidence that extant asset pricing models can adequately explain the effect. The study discusses potential explanations for, and the implications of, the cross�?regional housing price effect.

Are Stock-for-Stock Acquirers of Unlisted Targets Really Less Overvalued?

Extant studies often assume that targets’ private ownership mitigates acquirers’ incentives and opportunities to finance acquisitions with inflated stocks. This view stems from the observation that, although the average stock-for-stock acquirer’s merger announcement abnormal return is negative when the target is listed, it is positive when the target is unlisted. Accordingly, extant studies suggest that announcements of stock-for-stock acquisitions of unlisted targets generally convey favorable private information about the acquirers. However, an analysis of stock-for-stock acquirers’ long-term stock performance, abnormal accruals, net operating assets, and insider trading suggests the opposite. Not only are acquirers of unlisted targets generally overvalued, but they also tend to be even more overvalued than acquirers of listed targets.

Long-Term Growth in Housing Prices and Stock Returns

A firm’s long-term stock returns are negatively related to past growth in housing prices in the state where the firm is located. The housing price effect is persistent, and robust to controlling for the long-term stock return reversal effect, changes in mortgage interest rates across the states, cyclicality in housing prices, and overall local economic conditions. There is no evidence that extant asset pricing models can adequately explain the effect. The study discusses potential explanations for, and the implications of, the cross-regional housing price effect.

Abnormal Accruals and Managerial Intent: Evidence from the Timing of Merger Announcements and Completions

We examine the extent to which managers report opportunistically prior to corporate events by analyzing the association between the timing of stock swap announcements and completions and acquirers’ reporting behaviors. Using the timing of merger announcements and completions to infer managerial intent, we show that stock-for-stock acquirers’ reporting behaviors are opportunistic. More specifically, we show that stock-for-stock acquirers that inflate earnings the most tend to announce mergers on Fridays, while distancing some of their earnings management activities from the merger announcement date. The negative association between the post-merger announcement market performance and pre-merger announcement abnormal accruals is more pronounced for Friday announcers than for non-Friday announcers. Furthermore, the differential pre-merger abnormal accruals across Friday and non-Friday announcers are observed mainly when the announcement date is relatively close to the completion date. Overall, the evidence supports the notion that pre-acquisition abnormal accruals are related to deliberate opportunistic managerial decisions.

Stock Liquidity and Corporate Tax Avoidance

We examine the relation between stock liquidity and corporate tax avoidance. Utilizing a quantile regression framework we document the following key results: a) greater stock liquidity is positively (negatively) associated with the lower (upper) tail of the tax avoidance distribution; b) the effect of stock liquidity on both tails of tax avoidance distribution is magnified for firms with higher business uncertainty; and c) the effect of stock liquidity on the lower (upper) tail of tax avoidance distribution is attenuated (magnified) for the financially constrained firms. Our findings are consistent with the positive feedback theories of market microstructure where, by making share prices more informative to managers, greater stock liquidity affects firm’s tax planning.

Insider Selling, Earnings Management, and the 1990s Bubble

Large equity grants, the hallmark of 1990s executive compensation, allegedly contributed to the 1990s stock bubble by making managers especially sensitive to stock performance and leading them to inflate earnings. Regarding these heretofore untested claims, we show that earnings are inflated before insiders sell stock, and both insider selling and earnings management surged during the bubble. Furthermore, a firm’s return over the 30 months after the market’s peak is negatively associated with its cumulative abnormal accruals during the bubble. More specifically, firms in the top quartile of abnormal accruals during the bubble experience an average monthly stock price correction of about –1.44% (i.e., an average cumulative abnormal return of about −35.4%) over the 30 months of the correction period, relative to a benchmark portfolio of firms matched on size, book-to-market, and return momentum. Moreover, the association between abnormal accruals and post-bubble abnormal returns is significantly stronger for firms whose insiders were stock sellers during the bubble than for firms whose insiders were buyers.