Roman Kräussl

Do markets love misery? Stock prices and corporate philanthropic disaster response

While companies have emerged as very proactive donors in the wake of recent major disasters like Hurricane Katrina, it remains unclear whether that corporate generosity generates benefits to firms themselves. The literature on strategic philanthropy suggests that such philanthropic behavior may be valuable because it can generate direct and indirect benefits to the firm, yet it is not known whether investors interpret donations in this way. We develop hypotheses linking the strategic character of donations to positive abnormal returns. Using event study methodology, we investigate stock market reactions to corporate donation announcements by 108 US firms made in response to Hurricane Katrina. We then use regression analysis to examine if our hypothesized predictors are associated with positive abnormal returns. Our results show that overall, corporate donations were linked to neither positive nor negative abnormal returns. We do, however, see that a number of factors moderate the relationship between donation announcements and abnormal stock returns. Implications for theory and practice are discussed.

A Survey of the Venture Capital Industry in Central and Eastern Europe

Publisher Summary This chapter focuses on the venture capital (VC) industry of the eight former communist countries in the Central- and East-European (CEE) region, which became EU member states in May 2004. It discusses the current state of the VC industry in the CEE region and compares it with the emerging VC industry in Western Europe and the well-developed VC environment in the United States. The analysis indicates the importance of an integrated European equity market and the importance of a mature VC industry. Further financial integration may improve exit channels for VC and reallocate talent and human capital. For providing an outlook on the VC industry of these particular countries, a qualitative scenario analysis is conducted. It shows that the VC industry is developing quickly but some political-cultural aspects like the heritage of communism can make this process even less rapid than in Western Europe. Instead of the supply of sufficient VC, the demand for VC is the main back holding factor as there is hardly any entrepreneurial spirit in these former communist countries. The chapter concludes by offering some advice on how to alter this situation. The CEE countries need a regulatory environment that encourages entrepreneurial activities by providing consistent corporate and tax laws, efficient procedures for the set-up of new companies, and a public administration that sees itself as a service to entrepreneurs rather than a burden. They need to create an attractive environment for researchers, enabling interesting research results and a high number of patents. To achieve these goals, an intensive cooperation between universities and the economy has to be established.

Size Does Matter - Firm Size and the Gains from Acquisitions on the Dutch Market

Based on a sample of 269 M&A transactions that involved a Dutch buy-side over the years 1980 to 2003, this study presents evidence of a significant size effect on the Dutch market. Small companies earn about 2.45% larger returns than large companies over the three-day event window around the announcement of an acquisition. Our empirical findings prove that the size effect holds over a number of different time periods and exists independent of (i) the method of payment, (ii) the organizational form of the target company, (iii) the nature of the deal, (iv) the geographic scope and (v) the mode of acquisition.

SOCIAL IRRESPONSIBILITY, FIRM VALUE AND PHILANTHROPY: THE CORPORATE RESPONSE TO HURRICANE KATRINA.

Our paper explores strategic motivations for corporate charity in response to humanitarian crises. We find that the stock prices of U.S. firms with reputations for irresponsibility were most negati...

Reliability and Relevance of Fair Values: Private Equity Investments and Investee Fundamentals

We directly test the reliability and relevance of investee fair values reported by listed private equity funds (LPEs). In our setting, disaggregated fair value measurements are observable for funds’ investees; and investee accounting fundamentals are also publicly disclosed. We find that LPE fair value measurements reflect equity book value and net income in a manner consistent with stock market pricing of listed companies. However, LPE fair value measurements appear to distinguish between Level 1 and Level 3 inputs – they reflect investee net income to a lesser extent for Level 3 inputs. Further evidence based on the stock market pricing of LPE funds indicates that the discretion exercised by LPE fund managers when determining investee valuations is perceived as reliable.

Democratizing Art Markets: Fractional Ownership and the Securitization of Art

Using unique historical sales data from the Leo Castelli Gallery, we introduce a novel model of evaluating art market returns using first-sale prices alongside auction results. We create a sample portfolio to analyze what would have happened if the artists Jasper Johns and Robert Rauschenberg had retained 10% equity in the work they sold through their dealer in the years 1958 to 1963, which was the start-up phase of the artists’ careers. We find that this retained-equity portfolio would have performed from 2.8 up to 140.8 times better (Rauschenberg) and from 24.9 up to 986.8 times better (Johns) than the S&P 500 over the same period. Modeling equity portfolios for artists changes the fundamental structure of art markets. Because the fractional equity is a property right under the Coase theorem, this system introduces a secondary market for shares in artwork. These shares could trade using a technology such as the blockchain and would allow more democratic and diversifiable access to investment in art markets. Our framework extends to other creative industries in which early-stage work is difficult to value.

Single Stock Call Options as Lottery Tickets

This paper investigates whether the overpricing of out-of-the money single stock calls can be explained by Tversky and Kahnemans (1992) cumulative prospect theory (CPT). We argue that these options are overpriced because investors overweight small probability events and overpay for such positively skewed securities, i.e., characteristics of lottery tickets. We match a set of subjective density functions derived from risk-neutral densities, including CPT with the empirical probability distribution of U.S. equity returns. We find that overweighting of small probabilities embedded in CPT explains on average the richness of out-of-the money single stock calls better than other utility functions. The degree that agents overweight small probability events is, however, strongly timevarying and has a horizon effect, which implies that it is less pronounced in options of longer maturity. We also find that time-variation in overweighting of small probabilities is strongly explained by market sentiment, as in Baker and Wurgler (2006).

The Winner's Curse on Art Markets

We investigate the effect of overreaction in the fine art market. Using a unique sample of auction prices of modern prints, we define an overvalued (undervalued) print as a print that was bought for a price above (below) its high (low) auction pricing estimate. Based on the overreaction hypothesis, we predict that overvalued (undervalued) prints generate a negative (positive) excess return at a subsequent sale. Our empirical findings confirm our expectations. We report that prints that were bought for a price 10 percent above (below) its high (low) pricing estimate generate a positive (negative) excess return of 12 percent (17 percent) after controlling for the general price movement on the prints market. The price correction for overvalued (undervalued) prints is more pronounced during recessions (expansions).

Investor beliefs and relative content in the news media

We investigate the effect of the tone of news on investor stock price expectations and beliefs. In an experimental study we ask subjects to estimate a future stock price for twelve real listed companies. As additional information we provide them with historical stock prices and extracts from real newspaper articles. We propose a way to manipulate the tone of news extracts without distorting its content. Subjects in different treatment groups read news items that are written either in positive or negative tone for each stock. We find that subjects tend to predict a significantly higher (lower) return for stocks after reading positive (negative) tone news. The effect is especially pronounced for stocks with poor past performance. Subjects are more likely to be optimistic (pessimistic) about the economy and to buy (sell) stocks after reading positive (negative) than negative (positive) tone news. Our results show that the news media might affect not only how investors perceive information, but also what they do in response to it.

Toward a Pecking Order Theory of Strategic Resource Deployment

A premise of the capabilities perspective in strategy is that firm-specific capabilities allow some firms to be unusually adept at exploiting growth opportunities. Since few firms have the capacity to internally generate the quantity or variety of strategic resources needed to exploit growth opportunities, the ability to externally acquire complementary resources is critical to the acquisition of competitive advantage. However, the external sourcing of resources exposes the firms strategic resources to risks of expropriation. We argue this threat gives capable firms incentive to use internally generated strategic resources to pursue growth opportunities before turning to external sources. A pecking order theory of strategic resource deployment is implied. Data from a 22-year sample of cross-border investment partnership decisions made by U.S.-based venture capital firms lend support to our theory.