Ken C. Yook

Larger Return to Cash Acquisitions: Signaling Effect or Leverage Effect?

This article investigates the signaling theory and the benefit of debt theory to explain higher returns for bidders offering cash rather than stock, using Standard and Poors debt rating reviews and changes. Results imply that cash acquisitions and stock acquisitions have different sources of value creation. Benefit of debt seems to be the main source of value in cash acquisitions, whereas the synergy effect outweighs the leverage effect in stock takeovers. Although stock appears to be used for the most unsuccessful acquisitions, this study does not find convincing evidence that cash is used for good acquisitions.

MVA and the Cross-Section of Expected Stock Returns

The authors examine the cross–section of expected stock returns between 1985 and 1994 and find a strong negative relationship between market value added per share (MVA) and average returns. When the joint effect of MVA, firm size, and the ratio of price–to–book value is examined, the explanatory power of size and the price–to–book value for the cross–section of average returns is substantially diminished, but MVA is still strongly related to returns. These results suggest three possibilities: that MVA is serving as a proxy for a risk factor that affects equilibrium expected returns, that current poor performance will be reversed in the future as the mean–reverting hypothesis suggests, or that low MVA firms are relatively underpriced.

Jensen, Myers-Majluf, free cash flow and the returns to bidders

Previous research has shown that returns to bidders are significantly negative for stock acquisitions and insignificant although slightly positive for cash acquisitions. Two theories (Jensen and Myers-Majluf) would predict positive returns to bidders in cash acquisitions which use up excess cash flow and slack. This paper investigates bidder returns using these theories and the Lang, Stulz, and Walkling proxy for free cash flow. It finds that cash bidders that have low q and sizable free cash flow and that reinvest a high percentage of this free cash flow have significant positive returns as Jensens theory predicts. It finds no evidence supporting the Myers- Majluf theory. Cash bidders without Lang, Stulz, and Walkling free cash flow have returns that are negative and essentially indistinguishable from those of stock bidders.

The Curious Year-to-Year Performance of Buyout Fund Returns: Another Mark- to-Market Problem?

Buyout funds are essentially leveraged portfolios of a certain kind of U.S. company—that is, a small-cap, low-tech, nonfinancial, nonutility, generator of consistent earnings before interest, taxes, depreciation, and amortization with moderate cyclicality. These characteristics enable lenders to provide high debt levels with a reasonable expectation of repayment. Recent academic studies have raised doubts regarding the alpha of buyout fund returns against mimicking publicly traded portfolios, and buyout investors have sometimes responded that lower returns are offset by the funds’ lower volatility relative to public stocks. Regarding the volatility of such returns, several studies have used a cash-flow-only estimation (CFOE) approach to calculate risk, as an alternative to relying on (1) actual cash flows paid to limited partners and (2) the asset valuations of unsold investments as determined by buyout fund general partners. These studies have suggested that buyout funds’ reported return volatility is understated relative to times-series public market equity returns. This study uses a methodology other than CFOE to evaluate buyout fund return volatility. The authors use a publicly traded mimicking portfolio, adjusted for buyout-type leverage, to measure risk, and conclude that buyout fund returns are more volatile than public equity market returns.

The Relative Performances of Large Buyout Fund Groups

Investors tend to concentrate their buyout fund commitments in the large fund groups. These groups, or families, manage multiple individual buyout funds. Due to their size and their number of funds, many investors consider the large fund families to be the “winners” in the buyout industry. However, as a group, since 1990, they have not been outstanding performers, and their median performance results were only slightly above average. Over the last ten years (i.e., 2005 vintage), their quartile performance has been only average. The authors’ conclusions pose several questions as to why investors favor large fund families over smaller groups.

An Analysis of Returns of Moderately Aged Buyout Funds with Low Residual Values

In this article, the authors conduct a study dedicated principally to moderately aged leveraged buyout funds that have had the opportunity for multiple portfolio company liquidations, or have been fully liquidated. Examining 186 funds in the vintage years from 2000 to 2007 with complete cash flow data from the Preqin database, they find that 61% of funds beat the S&P 500 Index plus 3% (a common benchmark), and 39% did not. Funds originated during the boom years (2005 to 2007) are less successful, with 41% beating the benchmark to date, and 59% falling short. Thus, they find that funds from the earlier vintage years have better performance, relative to broad equity market benchmarks, than those from later years. The later vintage year funds have larger RVPIs than the early vintage year funds, most of which had been fully liquidated. In addition, the authors find that larger funds tend to perform better than small funds, and moderately-liquidated funds tend to have worse results than mostly-liquidated funds. Lastly, in examining a group of fund families with three or more funds, they find no strong evidence of consistency.

Practical Applications of The Relative Performances of Large Buyout Fund Groups

The Relative Performances of Large Buyout Fund Groups , published in the Winter 2016 issue of The Journal of Private Equity , shows that the buyout funds managed by the world’s largest private equity houses did not deliver top quartile results in the period 1994–2007. Authors Jeffrey Hooke and Ken Yook of John Hopkins Carey Business School conclude that average returns were only slightly above the median and that, as a group, these funds did not significantly outperform those run by smaller firms.

The wealth effects of accelerated stock repurchases

Purpose - – The wealth effect of accelerated stock repurchase (ASR) documented by previous studies is not as large as the authors would have expected. The authors believe that there are potentially important sampling problems in the previous studies, which make the results less reliable. Identifying a number of factors that can possibly affect the announcement-period returns, the purpose of this paper is to reexamine the wealth effect of ASRs. Design/methodology/approach - – The paper identifies a number of factors that can possibly affect the announcement-period returns to ASRs which include: whether an ASR announcement in the press is the initiation date or the completion date of the ASR; the size of the ASR program; whether an ASR is part of an open market repurchase (OMR) program; the frequency of ASR announcements by a firm; whether other corporate news is announced simultaneously with an ASR. The paper partitions the ASR sample into three groups, and then examines the wealth effect of these groups. Findings - – The empirical results show that the market reacts differently to the announcement of ASR in these three groups. The three-day announcement-period CAR ( Originality/value - – These findings suggest that the weaker wealth effects of ASRs that have been documented in previous studies are due to sampling related issues.

Insider response to credit watch placements

An examination of insider trading before and after the announcement of Credit Watch placements sheds new light on the study of both bond rating changes and insider trading. This paper utilizes Credit Watch placements classified by 11 indentifiable trigger events for the years 1981‐1990. We find significant insider purchases before positive implication placements, but no sales before negative implication placements. Among individual trigger events, we observe significant insider purchases before and after placements due to improved operating performance, bidding on a firm with a higher debt rating and firms increasing their debt‐to‐equity ratios. Significant insider purchases are found before placements due to purchasing assets. Significant insider sales are found before and after placements due to poor operating performance.