Jeffry M. Netter

What do returns to acquiring firms tell us? Evidence from firms that make many acquisitions

We study shareholder returns for firms that acquired five or more public, private, and/or subsidiary targets within a short time period. Since the same bidder chooses different types of targets and methods of payment, any variation in returns must be due to the characteristics of the target and the bid. Results indicate bidder shareholders gain when buying a private firm or subsidiary but lose when purchasing a public firm. Further, the return is greater the larger the target and if the bidder offers stock. These results are consistent with a liquidity discount, and tax and control effects in this market.

Determinants of contractual relations between shareholders and bondholders: investment opportunities and restrictive covenants

Abstract We evaluate the costs and benefits of restrictive covenants in bonds issued in 1989 and 1996. Our results indicate that firms with growth opportunities are more likely to seek to preserve flexibility in future financing activities by not including dividend or debt issuance restrictions in their bond contracts. We do not find, however, that the use of other restrictive covenants is significantly lower for firms with high investment opportunities. Instead, the use of these other covenants is primarily driven by the issuing firms likelihood of financial distress. Our results emphasize that contractual relations between firms and bondholders reflect the specific needs of the contracting parties.

Implications of Data Screens on Merger and Acquisition Analysis: A Large Sample Study of Mergers and Acquisitions from 1992 to 2009

We analyze a comprehensive set of mergers and acquisitions from SDC data from 1992 through 2009. We do not impose common restrictions such as excluding private bidders, small targets, or deals without a deal value. We show a broader scope of mergers and acquisitions activity than that implied in the literature, which generally oversamples larger deals involving public firms. Further, some of our results differ from the extant literature. For example, the finding that mergers occur in waves is attenuated with a greater presence of smaller and/or non-public firms. Also, acquirers gain in most takeovers despite a threefold decline over the sample period in acquirer returns. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

Consolidating corporate control*1: Dual-class recapitalizations versus leveraged buyouts

Abstract Dual-class recapitalizations and leveraged buyouts have similar effects on ownership of corporate voting rights but very different effects on ownership of residual claims. We predict that firms with greater growth opportunities, lower agency costs, and lower tax liability are more likely to consolidate control through dual-class recapitalizations. We find strong support for the growth hypothesis and weaker support for the other hypotheses. These results increase our understanding of the causes of change in organizational form by illustrating that the method and effects of consolidating corporate control are systematically related to firm attributes.

Stock-Repurchase Announcements and Insider Transactions after the October 1987 Stock Market Crash

0 The stock market crash on Monday, October 19, 1987 ignited an unprecedented rush by firms to announce open-market stock-repurchase programs. During the two weeks following the crash, almost 600 publicly traded firms announced these programs. In contrast, only 350 firms had announced open-market repurchase programs from January 1, 1987 to the crash date, while 250 firms announced stock-repurchase programs in November 1987 [6]. This study examines the stock-price movements of firms that announced repurchases in the two-week period immediately after the crash. The empirical results show that the stock prices of these firms had declined abnormally during the crash period prior to their repurchase announcements. The repurchase announcements generated stock-price rebounds in the period following the announcement. Overall, the results support the argument that the repurchase announcements had a positive impact on the stock market, consistent with the findings on the effects of stock-repurchase announcements in the Division of Market Regulation SEC Report [6].1 Much of the research on this paper was completed while Jeffry Netter was Senior Research Scholar at the SEC. The authors thank Janis

The Long-Run Return to Investors in Share Issue Privatizations

We examine the long-run returns earned by domestic, international, and US investors who purchase shares at the first open-market price in 158 share issue privatizations (SIPs) from 33 countries during the period 1981-1997. We compute one-, three-, and five-year net returns for domestic, international, and US market indexes, and industry-matched comparison samples. We find statistically significant positive net returns for the 158 unseasoned SIPs for all holding periods and compared with all benchmarks. Our findings contrast with the patterns reported in previous research for equity offerings of private firms in the US and other countries.

Triggering the 1987 stock market crash: Antitakeover provisions in the proposed house ways and means tax bill?

Abstract We present evidence that a tax bill containing antitakeover provisions proposed by the U.S. House Ways and Means Committee on October 13, 1987 and approved by the Committee on October 15 was the fundamental economic event causing the greater than 10% decline in the stock market on October 14–16, which arguably triggered the October 19 crash. The bill, which eventually passed without most of the antitakeover provisions, would have limited the deductibility of interest on debt incurred to finance corporate takeovers, leveraged buyouts and recapitalizations, and imposed other restrictions on hostile takeovers.

Bank Privatization in Developing and Developed Countries: Cross-Sectional Evidence on the Impact of Economic and Political Factors

We examine how political, institutional, and economic factors are related to a countrys decision to privatize state-owned banks. Using a comprehensive panel of 101 countries from 1982 to 2000, we find that the determinants of this decision differ markedly between OECD and non-OECD nations. Political factors significantly affect the likelihood of bank privatization only in developing countries. Specifically, in non-OECD countries, a bank privatization is more likely the more accountable the government is to its people. In contrast, none of our political variables affects the bank privatization decision in developed countries. Economic factors (such as the quality of the nations banking sector) are significant determinants of bank privatization in both OECD and non-OECD nations.

Can Managers Use Discretionary Accruals to Ease Financial Constraints? Evidence from Discretionary Accruals Prior to Investment

Despite a large literature on discretionary accruals, how the use of discretionary accruals impacts corporate financial decisions is not well understood. We hypothesize that a financially constrained firm with valuable projects can use discretionary accruals to credibly signal positive prospects, enabling it to raise capital to make the investments. We examine a large panel of firms during 1987 to 2009 and find that financially constrained firms with good investment opportunities have significantly higher discretionary accruals prior to investment compared to their unconstrained counterparts. Constrained high-accrual firms have higher earnings-announcement returns than constrained low-accrual firms, obtain more equity and debt financing, and invest in projects that appear to improve performance. These results provide supporting evidence that the use of discretionary accruals can help constrained firms with valuable projects ease those constraints and increase firm value.The evidence suggests that firms do manage earnings, but how earnings management impacts corporate financial decisions is not well understood. We hypothesize that if a firm is financially constrained but has positive NPV projects, it can use earnings management to signal positive prospects, enabling it to raise capital to make investments. In this the situation, earnings management corrects“ ” the market misvaluation of the firm’s investment prospects. Using abnormal accruals to detect earnings management, weempirical ly evaluate our hypotheses with a large panel of firms 1987during to 2009. We find that financially constrained firms have significantly higher discretionary accruals in the two quarters prior to investment compared to unconstrained firms. onstrained high-accrual firms have higher Cearnings-announcement returns than constrained low-accrual firms, obtain more equity and debt financing, and invest in positive NPV projects. Thus, we find support for the hypothesis that earnings management can be consistent with firm value maximization.

Operational Risk in Financial Service Providers and the Proposed Basel Capital Accord: An Overview

The 1988 Basel Accord and the proposed revisions to the Accord represent some of the most significant international regulations impacting the financial decisions of firms, in this case, financial services firms, in recent years. The revisions to the Accord incorporate operational risk into the capital, supervisory and market requirements. In our review of the issues in this area, we provide insight into the workings of an important international regulation. We also present suggestions for further research in this area that will become feasible when data on the impact of the new regulations become available after the proposed implementation in 2006.