Wolfgang Bessler

The stock-market reaction to dividend cuts and omissions by commercial banks

Abstract We postulate that the announcement effect of dividend reductions should be more severe for banks than for nondashfinancial firms because bank customers may avoid financially weak institutions and discontinue the relationship when negative information is released. To test our hypothesis we investigate a total of 81 dividend reductions by 56 commercial banks listed on the NYSE, AMEX and NASDAQ for the period 1974–1991. We find significant abnormal returns of −8.02% for the two-day event window and − 11.46% for a two-week period. These negative valuation effects are stronger than those reported in studies for dividend reductions of nondashfinancial firms and for other negative bank announcements. We also explore the relationship between abnormal returns and specific bank characteristics cross-sectionally and find a stronger reaction for larger banks.

The long-run performance of initial public offerings in Germany

Purpose - The objective of this study is to investigate the long-run performance of initial public offerings (IPOs) in Germany for the period from 1977 to 1995. The paper studies why some IPO firms have substantial positive and others have substantial negative long-run buy-and-hold abnormal returns. Design/methodology/approach - The paper approaches this problem by differentiating the abnormal return patterns by the following criteria: benchmark, year of going public, security design, money raised, market value and magnitude of underpricing. Findings - The empirical findings suggest that the subsequent financing activity in the equity market is the most important factor for determining the future performance of an IPO. This variable separates the out-performers from the under-performers. Thus, only successful firms have the opportunity to raise additional funds in the equity market through a seasoned equity offering. Research limitations/implications - Future research should concentrate on investigating whether the introduction of new stock market segments in Germany has changed the long-run performance of IPOs. Practical implications - The results suggest that firms with a superior performance have the opportunity to raise additional equity whereas the poor performers do not get a second chance to sell equity to the public. This means that firms have to earn at least their cost of capital in order to receive additional funding. Originality/value - Compared to other research, this study explains the significant difference in long-run performance between two groups of IPOs based on the future financing decision. This finding offers new insights to both academics and practitioners alike.

Agency Problems and the Performance of Venture-backed IPOs in Germany: Exit Strategies, Lock-up Periods, and Bank Ownership

Abstract The agency problems for initial public offerings are well documented in the literature. The objective of this research is to investigate the potential conflicts of interest for the ‘Neuer Markt’ in Germany. Of special interest are venture-backed IPOs and those in which banks acted as venture capitalist, underwriter, and provided analyst recommendations. High initial returns and outperformance are observed over the first 6 months of trading, which decreases significantly over the subsequent 18 months. The individual performance depends on the VCs underwriter and bank affiliation, exit behaviour, and lock-up commitment. Venture capitalists, and especially banks, timed their exit well. This indicates some serious agency problems in the German IPO market.

The stock market reaction to cross-border acquisitions of financial services firms: an analysis of Canadian banks

Abstract In 1998, two pairs of the largest Canadian banks proposed combining their activities in order to become internationally more competitive. The Canadian governments disapproval of these mergers prevented the banks from growing through consolidation within the domestic banking industry. Subsequently, between January 1998 and June 2001, Canadian banks engaged in 26 cross-border and 17 domestic acquisitions of other financial services firms. In this paper, we investigate the stock market reactions to these merger announcements. Our findings indicate that foreign acquisitions in the wealth management and retail banking sectors created value, while foreign acquisitions in the insurance sector did not. The opposite was true of domestic acquisitions. This result raises questions about the effect of the initial regulatory decision for the efficiency of the Canadian financial system.

Conditional Performance Evaluation for German Mutual Equity Funds

We investigate the conditional performance of a sample of German equity mutual funds over the period from 1994 to 2003 using both the beta-pricing approach and the stochastic discount factor (SDF) framework. On average, mutual funds cannot generate excess returns relative to their benchmark that are large enough to cover their total expenses. Compared to unconditional alphas, fund performance sharply deteriorates when we measure conditional alphas. Given that stock returns are to some extent predictable based on publicly available information, conditional performance evaluation raises the benchmark for active fund managers because it gives them no credit for exploiting readily available information. Underperformance is more pronounced in the SDF framework than in beta-pricing models. The fund performance measures derived from alternative model specifications differ depending on the number of primitive assets taken to calibrate the SDF as well as the number of instrument variables used to scale assets and/or factors.

Conflicts of Interest and Research Quality of Affiliated Analysts in the German Universal Banking System: Evidence from IPO Underwriting

The quality of equity research by financial analysts is a prerequisite for an efficient capital market. This study investigates the quality of earnings forecasts and stock recommendations for initial public offerings (IPOs) in Germany. The empirical study includes 12,605 earnings forecasts and 6,209 stock recommendations of individual analysts for the time period from 1997 to 2004. The focus of this study is on analysing the potential conflicts of interest that arise when the analyst is affiliated with the underwriter of an IPO. In a universal banking system these conflicts of interest are usually more pronounced and therefore interesting to investigate. The empirical findings for the German financial market suggest that earnings forecasts and stock recommendations of the analysts belonging to the lead-underwriter are on average inaccurate and biased, indicating some conflicts of interest. Moreover, the stock recommendations of the analysts that are affiliated with the lead-underwriter are often too optimistic resulting in a significant long-run underperformance for the investor. In contrast, unaffiliated analysts provide better earnings forecasts and stock recommendations that result in a superior performance for the investor.

The Returns to Hedge Fund Activism in Germany

Recent regulatory changes in the German financial system shifted corporate control activities from universal banks to other capital market participants. Particularly hedge funds took advantage of the resulting control vacuum by acquiring stakes in weakly governed and less profitable firms. We document that, on average, hedge funds increased shareholder value in the short‐ and long‐run. However, more aggressive hedge funds generated only initially higher returns and their outperformance quickly reversed, whereas non‐aggressive hedge funds ultimately outperformed their aggressive peers. These findings suggest that aggressive hedge funds attempt to expropriate the target firms shareholders by exiting at temporarily increased share prices.

Bank risk factors and changing risk exposures: Capital market evidence before and during the financial crisis

We analyze the capital market assessment of bank risk factors in Europe and the United States for the 1990–2011 period. The focus is on bank stock returns in a multi-factor framework that includes interest rate risk and market risk as well as credit risk, real estate risk, sovereign risk, and foreign exchange risk. Our findings indicate that bank risk exposures are multi-dimensional and time-varying but well reflected in bank stock returns. Dynamic beta exposures and time-varying variance shares accompany structural changes in the banking industry and the recent financial crisis. During the last two decades, interest rate risk has changed but credit risk still represents a major factor for explaining bank stock returns. For the recent financial crisis we provide evidence of a change in the capital markets assessment of bank risk exposures with a significant revaluation of real estate and sovereign risks. Overall, our factor model offers a parsimonious approach for modeling the risk dynamics in the banking industry and provides evidence for the capital markets ability to assess bank risk exposures.

Managing interest-rate risk in banking institutions

Abstract This paper develops and employs a multiperiod goal programming model to examine the normative effects of changing interest rates on the rearrangements of depository bank balance sheets and associated profits. A two-stage state preference framework allows a dynamic interpretation of the models prescribed decisions as well as a natural incorporation of profit sensitivity to interest-rate risk. The model includes on- and off-the-balance-sheet decision variables. Experimental results indicate that constraining the latter decision can seriously curtail the banks ability to achieve its profit objectives.

Capacity effects and winner fund performance: the relevance and interactions of fund size and family characteristics

This study analyzes the existence of capacity effects and performance persistence for US equity mutual funds for the period from 1992 to 2007. We focus on winner funds and distinguish between capacity effects from both size and inflows and explore their interactions with two measures of family size, i.e. family total net assets under management (family TNA) and the number of funds at the family level (family breadth). The differentiation of family size allows us to analyze competing effects at the family level such as economies of scale as well as organizational complexity costs and conflicts of interest. Our empirical results confirm diseconomies of scale at the winner fund level and indicate that only small winner funds with low inflows significantly outperform the four-factor benchmark on a net return basis. There are no universal benefits from economies of scale at the family level, but our findings suggest the existence of conflicts of interest in families offering a relatively large number of funds. Small winner funds in families offering a small number of funds significantly outperform while economies of scale only materialize among extremely small winner funds. We provide detailed robustness checks for our empirical results. Overall, simply conditioning on fund size is not sufficient for selecting future outperforming funds. The results indicate that fund investors may earn positive abnormal returns when combining information on fund size with information on fund flows or fund family affiliations in their asset allocation decisions.