Richard S. Ruback

Tender offers and stockholder returns: An empirical analysis

Abstract This paper provides empirical estimates of the stock market reaction to tender offers, both successful and unsuccessful. The impact of the tender offer on the returns to stockholders of both bidding and target firms is examined. The evidence indicates that for the twelve months prior to the tender offer stockholders of bidding firms earn significant positive abnormal returns. In the month of the offer, only successful bidders earn significant positive abnormal returns. Stockholders of both successful and unsuccessful targe firms earn large positive abnormal returns from tender offers, and most of these returns occur in the month of the offer. For all classes of firms, there is no significant post-offer market reaction. The market reaction to ‘clean-up’ tender offers is also estimated and target stockholders again earn significant positive abnormal returns.

Unionization and Profitability: Evidence from the Capital Market

This paper examines the effect of unionization on the profitability of firms. Abnormal monthly common stock returns for a sample of 253 NYSE-listed firms are estimated for the month in which the union petitions for an election and for the month in which the National Labor Relations Board certifies the election outcome. The results suggest that unionization, on average, is associated with a reduction in equity value. When unions win an election, the average loss associated with the unionization drive is 3.8 percent of equity value. When unions lose an election, there is an average net reduction of 1.3 percent in the equity value of the firm.

Effects of nominal contracting on stock returns

This paper examines the effects of unexpected inflation on the returns to the common stock of companies with different short-term monetary positions, and different long-term monetary positions, and different amounts of nominal tax shields. Unlike most previous studies of the effects of nominal contracting, we distinguish between expected and unexpected inflation in our tests. Surprisingly, over the 1947-79 period there is little evidence that stockholders of net debtor firms benefit from unexpected inflation relative to the stockholders of net creditor firms. We conclude that wealth effects caused by unexpected inflation are not an important factor in explaining the behavior of stock prices.

The effect of discretionary price control decisions on equity values

Abstract The macro literature presents conflicting evidence on the effects of price controls. In this study, the fact that the macro-economic effect of wage and price controls is the aggregation of the micro-economic effects is used to implement a different approach to measure the effects of price controls. The effect of price controls is inferred from examining the impact of discretionary regulatory decisions on the equity values of individual firms during Phase II of Nixons Economic Stabilization Program. The empirical results indicate that violators of the regulations incurred significant abnormal losses that were unrelated to the explicit penalties. This suggests that implicit penalties were imposed on offending firms. The analysis of price increase decisions provides weak evidence that these Price Commission decisions had an impact on equity values.

Downsides and DCF: Valuing Biased Cash Flow Forecasts

The discounted cash flow valuation method relies on expected cash flows. But because they often ignore low‐probability downside events, the forecasts of expected cash flows that are provided by corporate managers and analysts are often excessively optimistic, or upwardly biased. As a result, such forecasts need to be adjusted when used in valuations. Whereas academics generally prefer adjustments of the cash flow forecasts, practitioners typically account for such downsides by increasing t he discount rate above the market‐based cost of capital. This article suggests that the appropriate adjustment to the DCF formula should depend on the nature of the omitted downside. The author shows that when the down side is assumed to be “temporary” — say, a large, weather‐related loss — the appropriate adjustment to the DCF formula is to reduce the forecasts by the expected downside and set the discount rate equal to the market‐based cost of capital. But when the omitted downside scenario is expected to be “permanent” — in the sense that the event reduces all subsequent future cash flows — the appropriate adjustment is to reduce the cash flows and increase the discount rate to reflect the probability that such a downside occurs. By endorsing both of these prescriptions, the author effectively acknowledges that there is a reasonable conceptual basis for both the academic approach of adjusting the forecasted cash flows and the practitioner approach of inflating the discount rate. The appropriate approach depends on the characterization of the omitted downside as either temporary or permanent.

Valuation When Cash Flow Forecasts are Biased

This paper focuses adaptations to the discount cash flow (DCF) method when valuing forecasted cash flows that are biased measures of expected cash flows. I imagine a simple setting where the expected cash flows equal the forecasted cash flows plus an omitted downside. When the omitted downside is temporary, the adjustment is to deflate the forecasts and to set the discount rate equal to the cost of capital. However, when the downside is permanent, the adjustment is to deflate the cash flows and to increase the discount rate so that it includes the cost of capital plus the probability of a downside.