Abnormal return

Abstract: We study shareholder returns for firms that acquired five or more public, private, and0or subsidiary targets within a short time period. Since the same bidder chooses different types of targets and methods of payment, any variation in returns must be due to the characteristics of the target and the bid. Results indicate bidder shareholders gain when buying a private firm or subsidiary but lose when purchasing a public firm. Further, the return is greater the larger the target and if the bidder offers stock. These results are consistent with a liquidity discount, and tax and control effects in this market. Takeovers are one of the most important events in corporate finance, both for a firm and the economy. Extensive research has shown that shareholders in target firms gain significantly and that wealth is created at the announcement of takeovers ~i.e., combined bidder and target returns are positive!. However, we know much less about the effects of takeovers on the shareholders of acquiring firms. Evidence suggests that these shareholders earn, on average, a zero abnormal return at the acquisition’s announcement, though there is tremendous variation in these returns. Researchers have been unable to successfully explain much of this variation, partially because the announcement of a takeover reveals information about numerous things. For example, Grinblatt and Titman ~2002, p. 708! state that the stock return at the time of the bid cannot be completely attributed to the expected effect of the acquisition on profitability, arguing that, “the stock returns of the bidder at the time of the announcement of the bid may tell us more about how the market is reassessing the bidder’s business than it does about the

Abstract: The acquisition behavior of cash-rich firms is examined for evidence of free cash flow-related behavior. A model of cash management is developed and used to identify a sample of cash-rich firms. The model provides a benchmark "normal" level of cash reserves based on industry characteristics and dynamic cash management over time. Cash-rich firms are found to be more likely to begin acquisitions, increase current acquisition spending, and engage in large acquisitions than the rest of the population of firms. In a multivariate setting, cash- richness is a strong predictor of acquisition likelihood, even controlling for sales growth and stock price performance. Additional tests support the free cash flow hypothesis over a hypothesis in which managers optimally stockpile cash before an acquisition. Among cash- rich firms, the decision to spend the cash on an acquisition rather than pay it out is strongly related to how well the agency conflict between managers and owners is controlled. Further, the abnormal return from an acquisition announcement is decreasing in the deviation of a firm's cash reserves from its predicted optimal level. Cash-rich firms are more likely to make diversifying acquisitions and their targets are less likely to attract other bidders. Overall, the evidence supports the explanatory power of the free cash flow hypothesis for the investment decisions of cash-rich firms.

Abstract: Since September, 1976, stocks newly included into the Standard and Poor's 500 Index have earned a significant positive abnormal return at the announcement of the inclusion. This return does not disappear for at least ten days after the inclusion. The returns are positively related to measures of buying by index funds, consistent with the hypothesis that demand curves for stocks slope down. The returns are not related to S & P's bond ratings, which is inconsistent with a plausible version of the hypothesis that inclusion is a certification of the quality of the stock.