Ronan Powell

MODELLING TAKEOVER LIKELIHOOD

This paper employs a multinomial logit model in an attempt to better understand the motives behind takeovers. The results from the multinomial logit models show that the characteristics of hostile and friendly targets differ significantly and that these differences also vary depending on the time period under investigation. The results give some support to the disciplining role of the hostile takeover. Furthermore, conclusions based on a simple binomial logit model are likely to be misleading and result in incorrect inferences regarding the characteristics of firms subject to takeover.

Takeover Prediction and Portfolio Performance: A Note

This paper empirically tests whether it is possible to generate abnormal returns from investing in a portfolio of predicted successful takeover targets. Portfolios are formed on the basis of predictions from models similar to those estimated by Palepu (1986). However, unlike Palepu (1986), the portfolios in this paper are formed using a decision rule that results in smaller portfolios with higher average takeover probabilities. This provides a stronger test of whether share prices reflect future takeover probabilities. The results show that while the models have significant explanatory power, the portfolios fail to beat the return on the market over a 12-month holding-period. Copyright Blackwell Publishers Ltd 2001.

Excess Cash Holdings and Shareholder Value

We examine the determinants of corporate cash holdings in Australia and the impact on shareholder wealth of holding excess cash. Our results show that a trade-off model best explains the level of a firm’s cash holdings in Australia. We find that ‘transitory’ excess cash firms earn significantly higher risk-adjusted returns compared to ‘persistent’ excess cash firms, suggesting that the market penalises firms who hoard cash. The marginal value of cash also declines with larger cash balances, and the longer firms hold on to excess cash. The results are consistent with agency costs associated with persistence in excess cash holdings.

Are Corporate Restructuring Events Driven by Common Factors? Implications for Takeover Prediction

The paper shows that variables commonly used in takeover prediction models also help to explain the likelihood of several other restructuring events, including divestitures, bankruptcies and significant employee layoffs. This finding helps to explain the larger misclassification errors in binomial takeover prediction models commonly used in prior research. The results show that modelling takeover prediction models in a binomial setting is likely to lead to misspecification in the parameter estimates and, further, result in erroneous conclusions about the determinants of takeover likelihood. The paper shows that controlling for other restructuring events by using a multinomial framework results in consistently lower misclassification errors in out-of-sample prediction tests, when compared to the benchmark of a typical binomial model. Copyright 2007 The Authors Journal compilation (c) 2007 Blackwell Publishing Ltd.

Identifying the Sources of Gains From Takeovers

In the research literature on UK take-overs there seems to be an appar-ent conundrum. First, it appears that, in general, the market anticipatesoverall equity cash flow gains from a take-over in the sense that theshare price of the acquiree firm typically increases relative to someappropriately market-adjusted benchmark over the period of time fromthe announcement of the take-over to the date when the take-over offeris declared unconditional while the share price of the acquirer firm doesnot decrease over the same period of time

A Comparison of Error Rates for EVA, Residual Income, GAAP-Earnings, and Other Metrics Using a Long-Window Valuation Approach

Predictability and variability are two measures commonly used in the empirical literature to gauge the quality of earnings and hence, decision usefulness to investors. We adopt both measures to investigate empirically the relative quality of Stern Stewarts measure of economic value added (EVA) compared to GAAP (generally accepted accounting principles) earnings, residual income, cash flows and other mandated metrics in the USA and UK. We proxy for accounting quality by applying a long-window methodology to obtain hindsight valuation errors based on the difference between ex ante market value and discounted ex post metrics. Decision usefulness, in terms of ease of forecasting, is proxied by differences in valuation errors between the benchmark and alternative accounting methods. Contrary to the Biddle et al. (Journal of Accounting and Economics, 24, pp. 301–336, 1997) finding that mandated earnings were superior to EVA and residual income, we find that EVA and other residual income metrics consistently give rise to lower average valuation errors and thus have higher predictability across a variety of windows and terminal dates. Further, on the basis of our second measure of accounting quality, the variability of valuation errors, EVA performs best in the USA and third in the UK. The results strongly indicate that differences between residual income constructs, including EVA, are generally small but that earnings quality will be improved by recognition of a cost of equity capital in measuring reported income.

Internal Restructuring and Firm Survival

We examine the impact of two common methods of internal restructuring, layoffs and divestitures on the survival of a sample of UK firms. Using a Poisson regression model, we find that divestitures improve survival likelihood by reducing the probability and speed of market exit via takeover or bankruptcy, whereas layoffs increase the probability and speed of market exit via bankruptcy. Surprisingly, classifying firms into financially distressed and healthy groups, we find that distressed firms are less likely to restructure. Furthermore, while divestitures improve survival likelihood in both groups, layoff firms are less likely to survive, irrespective of whether they are distressed or healthy. Our findings are consistent with event studies that examine the market reaction to layoffs and divestiture decisions, and so provide some support for the view that the market correctly values the consequences of these restructuring actions on firm survival. The results are robust to several econometric and modeling issues, including controlling for potential self‐selection bias.

The market response to information quality shocks: the case of Enron

Relying on the market to provide incentives that would bring about optimal information quality is potentially a cost effective alternative to regulatory oversight. However, this depends on the ability of the market to recognize and price this attribute. In this article, we gain insights into the disciplinary role of the market by examining its response to Enron-related accounting scandals. We report evidence that information quality was in decline, leading upto the Enron-related scandals, but that the market was not sensitive to this decline. We confirm, however, that there was an abrupt decline in perceived information quality post-Enron. Furthermore, using an ex-ante methodology we provide strong evidence that auditor reputations were differentially affected by the scandals. We also find evidence that the Enron-related scandals adversely affected the market risk premium implying that information quality is part of systematic risk. Our results indicate that the market was operating effectively in recognizing lower quality information through an auditor reputation effect prior to the Sarbanes-Oxley Act. This calls into question the need for regulation to address the perceived deficit in information quality.

The Impact of Economic Nationalism in Europe on the Returns to Rivals of Crossborder M&A Bids

We examine the wealth effects of economic nationalism on domestic and foreign rivals using a novel sample of government blocked EU cross-border takeover bids. Regressions show a significantly larger net contagion effect of 0.73% (€31m) on bid announcement for domestic rivals relative to foreign. Government intervention results in larger negative returns, which become even more negative at bid resolution, especially for domestic rivals. Domestic rivals lose significantly more (€23m) over the whole bid period, likely consistent with lower future takeover likelihood. We show that economic nationalism has a significant cost, which is not only confined to the EU blocking country.

Measuring the Effectiveness of Australia's Statutory-Backed Continuous Disclosure Policy on ‘Innovative’ Investment Disclosures

We examine the impact of the introduction in 1994 (and subsequent amendments) of the statutory-backed continuous disclosure policy (SBCDP) in Australia. Our analysis measures impact by focusing on the investment disclosure propensity, and investment announcement abnormal returns of more innovative investments, defined as disclosures of R&D and IT expenditures. We also examine CAPEX investment disclosures as a benchmark in which to compare R&D and IT disclosures. Using regression models to control for typical characteristics (i.e., firm, industry, macroeconomic and time) that are correlated with investment likelihood, we find that post SBCDP adoption in 1994, firms were less likely to disclose any investment type. We do, however, find a significant increase in disclosure likelihood after the adoption in 2003 of stronger non-disclosure legislation, and tougher penalties. Nevertheless, compared to CAPEX disclosures, firms are still less likely to disclose R&D investments, even after the adoption of tougher penalties in 2003. We interpret this finding as evidence of firms unwilling to forego competitive advantages, which likely arise with R&D investments. We also find some evidence of increased announcement returns post SBCDP adoption, but only for CAPEX investments. The abnormal returns to R&D investments appear to be uncorrelated with changes in regulation, and remain fairly constant over the sample period.