Thanh Ngo

Impact of ETF inception on the valuation and trading of component stocks

While exchange-traded funds (ETFs) are being created at a rapid rate, there is very limited research on how they affect the component stocks that they contain. We find that in response to the inception of ETFs, there are positive and significant valuation effects on the dominant component stocks (defined as the 10 largest stocks in each ETF). The variation in the valuation effects is associated with stock-specific characteristics, such as relatively low liquidity and the size of the ETF in which the component stock is contained. The characteristics of the component stocks that experience more favourable valuation effects at the inception of ETFs also lead to a more pronounced increase in their trading volume following their ETFs inception. The increase in trading volume is especially pronounced for those component stocks that are relatively small, have relatively low levels of liquidity, and are contained within relatively large ETFs.

How accounting fraud has changed merger valuation

The accounting fraud of Enron and other firms prompted acquirers to be more diligent before investing in companies. The fraud also led to the creation of the Sarbanes–Oxley Act (SOX), which contains provisions that require more due diligence for firms that pursue mergers. We document significant changes in the behaviour and valuation of mergers since SOX. Acquirers rely more heavily on financial and legal advisors, while targets rely more heavily on financial advisors. The total premium (which includes the targets stock price run up) that acquirers pay for targets is significantly lower since SOX. The long-term stock price performance following mergers is more favourable (or less unfavourable) since SOX, regardless of the horizon used to measure long-term stock price performance. Whether the more conservative pursuit of targets by acquirers is voluntary or forced by SOX provisions, acquirer decision making has improved since the accounting fraud.

The market response to corporate scandals involving CEOs

This article examines corporate scandals of both a financial and nonfinancial nature between 1993 and 2011 which is expressly linked to a firm’s CEO. Findings suggest that in the short run, investors react adversely to such events and that recalcitrant CEOs end up costing their shareholders dearly. Such scandals are more likely to occur among large firms, firms with insiders on the board and where the value of options granted to a firm’s managers is substantial. However, firms with more cash flows are less likely to be mired in such scandals, and their stock returns are less likely to be affected. There is an increase in stock price volatility of affected firms in the days following the announcement of the scandal. A point of respite for investors is the damage being confined to the short run. The stock price performance of the firms affected by the scandals matches the performance of control firms in the long run post-announcement. However, the operating performance of the sample firms is better than their matched counterparts in the years after the scandal. We contribute to the extant literature by considering corporate scandal events that are the doings of a firm’s CEO and not necessarily financially motivated.

The wealth effects of acquiring foreign government-owned corporations: evidence from US-listed acquirers in cross-border mergers and acquisitions

We study the short- and long-term effects of acquiring targets that are government owned, which we refer to as Government-Owned Corporations (GOCs). Our sample of acquirers consists of US-listed public corporations, while the targets are GOCs based outside the US. In comparison to acquisitions of non-GOCs, we find that the wealth effects of acquiring GOCs are more favourable. We also find that GOC targets located in countries with poorer governance characteristics positively impact the shareholders’ wealth of the acquirer. Our evidence suggests that acquirers of foreign GOCs exploit target country governance imperfections to their advantage.

The Impact of Mispricing and Asymmetric Information on the Price Discount of Private Placements of Common Stock

The price discount on privately placed stock is large and can vary substantially among firms. While earlier studies attribute price discounts on privately placed stock to illiquidity and costs of gathering information, we offer a more complete explanation. We find that firms exhibiting higher overvaluation have significantly larger price discounts in private stock sales. We also find that higher levels of asymmetric information about the issuing firm and about the stock market environment at the time of the private placement cause more pronounced discounts in the offer price. Our analysis also shows that post-issue abnormal returns following private placements are higher when discounts are less pronounced.

A multi-country analysis of the 2007–2009 financial crisis: empirical results from discrete and continuous time models

In this article, we provide empirical evidence of the recent financial crisis over 2007–2009 using discrete time multivariate GARCH (MGARCH) models and continuous time modelling approaches. Using daily data for 14 countries, we investigate the return and volatility spillovers among the US and other international markets. The MGARCH results reveal positive return spillovers from the US to a number of markets, and volatility transmission is verified. The US market is prone to return and volatility transmission from a limited number of markets. The continuous time analysis finds evidence of feedback effects in some cases. Evidence shows that spillover effects intensified during the financial crisis.

Tax Calendar Effects in the Municipal Bond Market: Tax‐Loss Selling and Cherry Picking by Investors and Market Timing by Fund Managers

Examining municipal bond returns, bond fund flows and buying activities by fund managers over the period 1990–2009, we find evidence of tax calendar‐related rational opportunistic trading patterns by fund investors and fund managers. Specifically, fund shareholders conduct tax‐loss selling in December and re‐invest in January. In April, June, and September, fund investors rationally cherry pick to sell their shares of short‐term bond funds instead of their shares of long‐term bond funds to raise cash to pay estimated taxes. Unlike fund shareholders, fund managers adopt a contrarian strategy of buying in December and selling in January.

Real activities manipulation by bidders prior to mergers and acquisitions

Purpose - This study aims to examine the ability of investors to process signs of real activities manipulations at bidder firms in the quarters leading to the announcement of a merger. It further provides a supplementary explanation for the post-merger underperformance puzzle. Design/methodology/approach - Examining a sample of cash-only, stock swap and mixed mergers completed between 1980 and 2011, it was found that bidder firms increase the use of real activities manipulation in the quarters leading up to the merger announcements. Using average abnormal stock return method, it is shown that the short-term positive effect of real activities manipulation on share prices is stronger than accrual-based earnings management. Findings - While bidders are able to escape investors’ scrutiny in the short run, it is not the case in the long run. It was found that bidders’ long-run stock performance, measured by matched buy-and-hold stock returns, is inversely related to their pre-announcement level of earnings management. This paper contributes to the literature on earnings management by considering how real activities manipulations affect stock prices in mergers and acquisitions. Originality/value - This study tests whether real activities manipulation, in addition to accrual-based earnings management, explains the underperformance puzzle of the acquiring firms in M&As. Zang (

Institutional ownership and the spillover effects of shareholder activism

Research question/issue: This study examines the spillover effects of institutional activism on non-targeted firms, which share the same ownership and size characteristics as targeted firms. Research findings/insights: We document that institutional activism leads to a significant spillover effect at non-targeted firms, which share the same ownership and size characteristics as the targeted firms. The portfolios of matching non-targeted firms experience a significant positive wealth effect on announcement of shareholder activism campaigns at a targeted firm. Managers of the matching on-targeted firms respond to the activism threats by reducing agency costs (i.e. reducing cash balance and increasing dividend payment) and by improving operating performance (i.e. improving profitability ratios and cutting down on capital and operating expenditure). We further show that shareholder activism impacts not only stock returns but also stock risk. Theoretical/academic implications: First, we study the effects of institutional activism using a new database, i.e. the Thomson Reuters shareholder activism intelligence (TRSAI), which allows us to study the effects of various types of activist investors beyond hedge funds. We highlight that the positive externalities of shareholder activism depend on institutional ownership. The higher the proportion of institutional shareholdings, the larger is the wealth effect and the decline in risk measures. However, the volatility in institutional shareholdings produces an opposite effect. Practitioner/policy implications: Our study highlights that the threat of activism as a potent force in disciplining companies extends well beyond targeted firms.

Real earnings management activities prior to bond issuance

We examine real activities manipulation by firms prior to their debt issuances and how such manipulation activities affect bond yield spreads. We find that bond-issuing firms increase their real activities manipulation in the five quarters leading to a bond issuance. We document an inverse association between yield spread and pre-issue real activities manipulation, i.e., firms engaged in abnormally high levels of real activities manipulation are associated with subsequent lower cost of debt.