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Abstract:
Death spiral convertibles are privately held convertible securities (preferred stock or debentures) with a conversion price that is set at a discount from the average (or sometimes the minimum) of past stock prices in a look-back period. Although, in theory, these securities have the potential to reduce agency costs of debt and problems related to adverse selection, they have been called "death spirals" because of their potential to create dilution and stock price declines. On the basis of all 487 issues announced before August 1998, we find that this bad reputation is indeed justified: an investor who buys the common stock of the issuer loses, on average, 34% of his wealth one year after the issue date. Although our sample period coincides with one of the strongest bull markets in U.S. history, in 85% of the cases one-year post-announcement returns are negative. However, we also find that issuers also experience a significant decline in operating profitability relative to benchmark firms.

Convertibles, financial innovation, anomalies, capital structure

Abstract:
We study the tendency of firms to mimic the repurchase announcements of their industry counterparts. We argue that a firm, by repurchasing its shares, sends a positive signal about itself and a negative one about its competitors. This induces the competing firms to mimic the behavior of the repurchasing firm by repurchasing themselves. By using a broad sample of U.S. firms for the period 1984 to 2002, we show that in concentrated industries, a repurchase announcement lowers the stock price of the other firms in the same industry. The other firms then retaliate by repurchasing themselves in order to undo these negative effects. When repurchases do occur, they are chosen mostly as a strategic reaction to other firms' initiating repurchases and are not motivated by the desire to time the market, i.e. to take advantage of a significantly undervalued stock price. We show that repurchasing firms in more concentrated industries, therefore, experience a lower increase in value in comparison to their less concentrated counterparts in the post-announcement era. Alternative methodologies used to estimate long-term performance confirm that it is only the low concentration firms that outperform the market, their non-repurchasing peers and their more concentrated counterparts by amounts that are economically and statistically significant.

Payout policy, repurchases, product market competition, signaling

Abstract:
We investigate the causes and consequences of 737 privately negotiated share repurchases in the years 1984-2001. In contrast to the negative announcement returns and positive repurchase premiums reported by past research, we find positive announcement returns and premiums that are not significantly different from zero. Only when we investigate the 60 "greenmail" events separately, we find results similar to past research. However, for this sub-sample, we find long-horizon excess return that are comparable to the average 18% repurchase premium, challenging the widely accepted opinion that managers overpay in "greenmail" repurchases. Moreover, we also find that our understanding of the event improves when we split the non-greenmail repurchases according to the price paid. Repurchases at a premium can be modeled as signals, while other repurchases are mere wealth transfers between the corporation and the selling stockholders the extent of which is determined by the relative bargaining power of the seller and the repurchasing firm.

Abstract:
We examine long-run firm performance following open market share repurchase announcements which occurred during the period 1980 to 1990. We find that the average abnormal four-year buy-and-hold return measured after the initial announcement is 12.1 percent. For `value' stocks, companies more likely to be repurchasing shares because of undervaluation, the average abnormal return is 45.3 percent. For repurchases announced by `glamour' stocks where undervaluation is less likely to be an important motive, no positive drift in abnormal returns is observed. Thus, at least with respect to value stocks, the market errs in its initial response and appears to ignore much of the information conveyed through repurchase announcements.

Abstract:
We examine the long-run performance of 1,239 open market share repurchases announced during the period 1980 to 1990. We find that the average excess four-year buy-and-hold return measured after the initial announcement is 12.6 percent. For "value" stocks, companies that are more likely to be making repurchases because of undervaluation, the average excess return is 45 percent. Thus undervaluation appears to be an important motive for repurchasing shares. Furthermore, the market systematically errs in its initial response and ignores much of the signal conveyed through repurchases.

Abstract:
This paper examines the effects of capital structure management and misvaluation on the choice of payment method in mergers and acquisitions. In our sample of 3,269 transactions, we find evidence both for leverage optimization (based on economic fundamentals) and misvaluation as drivers for the decision to pay with cash or stock. We also find evidence that it is difficult to pay with overvalued stock unless it can also be motivated by economic fundamentals. Few acquirers - only 1% of our sample - try to do so and experience strongly negative stock price responses. Paying with cash without fundamental reasons, however, is more common and results in positive long-term abnormal returns, suggesting that these acquirers are undervalued.

Mergers and acquisitions, capital structure, market timing, mispricing

Abstract:
During the 1980s, U.S. firms that announced stock repurchase programs earned favorable long-run returns. Recently, concerns have been raised regarding the robustness of these findings. This comes at a time of explosive worldwide growth in the adoption of repurchase programs. This study provides out-of-sample evidence for 1,060 Canadian repurchase programs announced between 1989 and 1997. As in the U.S., the Canadian stock market seems to discount the information contained in repurchase announcements. Value stocks announcing repurchase programs have particularly favorable returns. Canadian law requires companies to report how many shares they repurchase on a monthly basis. We find that managers are sensitive to mispricing as completion rates are higher in cases where undervaluation may be a more important factor. Moreover, trades are linked to price movements; managers buy more shares when prices fall and reduce their buying when prices rise.

Abstract:
Using recent data, we reject the hypothesis that the buyback anomalies first reported by Lakonishok and Vermaelen (, Journal of Finance 45:455-77) and Ikenberry, Lakonishok, and Vermaelen (, Journal of Financial Economics 39:181-208) have disappeared over time. We find evidence consistent with the hypothesis that open market repurchases are a response to a market overreaction to bad news: significant analyst downgrades, combined with overly pessimistic forecasts of long-term earnings. Stock prices after tender offers are set as if all investors tender their shares, but empirically they do not. Thus, the arbitrage opportunity persists because the market sets prices as if the average, not the marginal investor, determines the stock price.

G14, G35

Abstract:
We examine share repurchase activity in the United Kingdom over a period when the tax and regulatory environment changed drastically. We find that the form and intensity of repurchase activity in the United Kingdom is influenced by the tax consequences for pension funds. We also find that firms announcing share repurchases earn smaller excess returns, both in the short run and the long run, than those earned by firms in the United States. This is because of regulatory provisions in the United Kingdom that make it less likely that the firms can use superior information to buy back shares when their shares are undervalued.

Abstract:
Companies often announce their intention to re-acquire shares via open market transactions. These programs are not firm commitments. By design, they provide managers the flexibility to forego repurchasing stock. Managers concerned with maximizing the wealth of long-term stockholders will tend to engage these programs when they view their shares as undervalued and not repurchase shares otherwise. We model this inherent flexibility as an exchange option whereby the market price of the stock is exchanged for the true value of the stock. Using 892 programs announced in the U.S. between 1980 and 1990, the mean market reaction is 3.42%. To the degree that stock prices deviate from fundamental value from time to time, the magnitude of the typical market reaction would appear to be comparable with that suggested by the model. Moreover, as predicted by the model, announcement returns are positively related to the magnitude of the repurchase and to the return volatility of the stock. Perhaps most interestingly, we also find, as suggested by the model, that announcement returns are negatively related to a proxy for the correlation between the firm's traded price and its "true" price, the difference of which is most fundamental to giving value to the option.

Abstract:
SUBJECT AREAS: Investment banking, private banking, management buyouts, value based strategy.

CASE SETTING: 1994; The Netherlands; Investment bank.

The purpose of this case is to illustrate value based strategy in an investment bank. Specifically, what is the value of entering more fully in the Dutch MBO business? In addition the case allows the student to discuss the value of potential synergies between different business units (Corporate Finance, Corporate Banking and Private Banking) within the context of MBOs. The case illustrates how an investment bank can look at its own businesses employing the same techniques (DCF) its Corporate Finance division normally uses to analyse its customers.The case was developed for a specific bank within the context of a Senior Management programme at INSEAD. The data provided by the various business units have been modified. Many of the comments in the case were actually made during the seminar. The case works well for executives and MBA students with an interest in the investment banking industry.Prior to this case, the instructor may want to use a case that discusses MBOs from the point of view of an investment bank, so that students understand the basic value drivers ofthe MBO business.The case is supplemented with a spreadsheet which shows the sensitivity of the value of the MBO business to various value drivers: the riskiness of the MBO business, market growth, time spent launching a successful deal, loan takeup, market share by value, market share by number of deals, rate of return on equity stakes and any side benefits to the private banking business. These side benefits to private banking are estimated through a separate spreadsheet which values a client in private banking. The value of the client is a function of his wealth, his risk aversion (which determines his portfolio mix between liquidities, bonds and equities), his consumption preferences (which determines the growth in his portfolio), his turnover, his loyalty (which determines the life of the portfolio) and the time spent managing the client's account.

Abstract:
This paper uses a methodology robust to recent criticisms of standard long-horizon event study tests to show that bidders in mergers underperform while bidders in tender offers overperform in the three years after the acquisition. However, the long-term underperformance of acquiring firms in mergers is predominantly caused by the poor post-acquisition performance of low book-to-market "glamour" firms. We interpret this finding as evidence that both the market and the management overextrapolate the bidder's past performance (as reflected in the bidder's book-to-market ratio) when they assess the desirability of an acquisition.

Abstract:
Extant literature on the post acquisition performance of bidders in mergers and tender offers is divided as to whether or not the bidders underperform in the long-term after the acquisition. In addition, standard long-horizon tests used for testing this underperformance have been shown to be biased. We use a methodology robust to these criticisms to show that bidders in mergers underperform while bidders in tender offers overperform in the three years after the acquisition. We also show that the underperformance is not uniform - glamour firms, characterized by low book-to-market ratios, significantly underperform, while value firms significantly outperform control portfolios with the same size and book-to-market ratio. We find that this difference in performance is partly due to hubris on the part of the glamour bidders and partly due to timing - glamour bidders especially in mergers, systematically pay for their acquisitions using their own overvalued shares. We also investigate whether a fixation on EPS maximization on the part of the bidders can lead to subsequent underperformance, but find no evidence consistent with EPS myopia.

Abstract:
The paper analyzes the value creation benefits of the holding form of organization in France by empirically examining the effects of non-controlling stake purchases on target shareholder wealth, operational performance and bidder shareholder returns for a sample of 122 stake purchases in French listed companies. The evidence puts into question the ability of holding companies to create value for the firms they purchase stakes in or their own shareholders, adding to the current debate on the relative role played by large shareholders and the external market for corporate control as ultimate disciplining devices.

Abstract:
The paper analyses the value creation benefits of the holding form of organization in France. For a sample of 122 non-controlling stake purchases in French listed companies, stakes purchased by holding companies generate non- significantly price reactions in target firms, compared to a significant 6.2% on average for other acquirors. Bidder quality affects the abnormal returns and the market appears to properly anticipate further takeover activity. Stake purchases are not accompanied by significant changes in target operational performance. Executive turnover in incumbent managements is smaller when the acquiror is a holding company and no abnormal bidder returns can be detected. The combined evidence questions the ability of holding companies to create value for the firms they control or their own shareholders.