Madura, Jeff

Takeovers of privately-held targets have outnumbered takeovers of publiclytraded
targets over the years. This dissertation focuses on takeover activities of privatelyheld
targets and examines several important issues which have never been touched on in
the literature. The first essay examines the factors that determine the choice between a
privately-held target and a publicly-traded target. After the size of the target and the
prevalence of private firms in each industry in each year are controlled for, I find that the
stock bidder tends to target a privately-held firm and the cash bidder tends to target a
publicly-traded firm when pursuing a high-tech target. When acquiring a firm in the same
industry and being inexperienced in takeover activities, the bidder is more likely to target
a publicly-traded firm as opposed to a privately-held firm. The passage of the SarbanesOxley
Act (SOX) also has an affect on the choice of a privately-held target or a publiclytraded
target; everything else being equal, the cash bidder is more likely choose to
acquire a private firm while the stock bidder is less likely to choose a private firm upon
the introduction of SOX. The second essay examines the factors that influence the choice
of stock versus cash payment in takeovers of privately-held targets. Stock is found to be more frequently used among takeovers in which the bidding firm has more debt and less
free cash flow prior to the deal , the target is a high-tech firm, and the target management
is retained in the combined entity. In addition, since the adoption of SOX, cash has been
used more frequently and to greater extent among the sample of takeovers of privatelyheld
targets. The third essay examines the effects of restrictions on resale of stock issued
in takeovers on the bidder's wealth effect and long-run stock price performance. I find
that restrictions on resale of stock are more popular among takeovers of privately-held
targets as compared to takeovers of publicly-traded targets. Restrictions on resale are
found to be positively related to the bidder's announcement abnormal return and
negatively related to the bidder's long-run stock price performance.

Corporate restructuring may be defined as the reorganization of a company with the aim of improving efficiency. This dissertation examines two corporate restructuring activities, namely (i) spinoffs and (ii) mergers and acquisitions. The first essay examines whether poison pill adoptions by impending spinoff subsidiaries is consistent with goal of shareholder wealth maximization. The main implication of my findings is that poison pills do not deter takeovers; not even in environments where takeovers are more likely. Hence, poison pill adoptions may not be motivated by entrenchment. However, since managers' motives are never clear, investors react adversely to poison pill adoptions because of concerns about potential abuse of power by management. Interestingly, the evidence suggests that poison pills have a positive effect on firm value over the longterm. One possible explanation for this finding is that the potential for abuse associated with poison pills promote shareholder activism. Since activist shareholders closely monitor managers, poison pills indirectly enhance firm value. The second essay examines whether spinoff withdrawals are in response to (i) the market reaction to the initial spinoff announcement, (ii) changes in the estimated value of the unit over the spinoff interval, and (iii) changes in expected spinoff gains owing to changes in market conditions within the subsidiary's industry. It takes 7 months to complete an announced spinoff, on average, over which time industry conditions are likely to change. The main implications of my findings are that managers learn from the market and track changes in industry conditions when making spinoff decisions. It appears that managers time spinoffs for periods when the subsidiary's industry valuations are high to fetch a better price in the market for the unit. These practices are consistent with the goal of maximizing shareholders' wealth. The third essay examines whether having outside blockholders with a higher propensity to monitor managers cause variations in (i) abnormal announcement returns, (ii) proportional wealth gains, (iii) takeover premiums, and (iv) payment methods. The evidence supports the view that the types of outside blockholders that targets and bidders have, in relation to their propensity to monitor managers, affect bargaining position. Firms that have outside blockholders with higher propensities to monitor managers experience higher takeover gains because monitoring limits takeover related agency costs. Therefore, acquisitions create agency problems for minority shareholders of the target and bidder firms, when managers are not monitored.

This dissertation analyzes the valuation of bankrupt firms in three essays: (I) The long-run performance of firms emerging from Chapter 11 bankruptcy; (2) An empirical analysis of the performance of equity offerings by prior bankrupt firms; and (3) Do acquisitions ofbankrupt assets benefit the shareholders of the acquiring firms? The first essay examines the long-run performance of firms emerging from Chapter 11 bankruptcy. Once a firm files for Chapter 11 bankruptcy, it has to file a disclosure statement with the bankruptcy court. The statement details the company's current state of affairs and the factors that led to bankruptcy. The company also files a plan of reorganization. The plan details the company's debts and how the company plans to restructure and pay the debts. While operating under Chapter 11, the company makes regular disclosures of operating data to the court. Upon emergence from bankruptcy, the company adopts fresh start reporting whereby its assets are reported at their net realizable values. Hence, the bankruptcy process provides the market with information that is useful in assessing the potential of the finn that is emerging from bankruptcy. As a result, post-bankruptcy, the performance of the firm should match expectation. Indeed, the evidence suggests that there is pricing efficiency after firms emerge from Chapter II bankruptcy and that they seem to perform properly when size, structure and risk are taken into account. The second essay examines the pricing of equity offerings by firms that emerged from Chapter II bankruptcy. In contrast to original IPOs, which are completely new to the market, post-bankruptcy equity offerings are performed by firms that were once publicly traded. Furthermore, while they are operating under Chapter II, the bankruptcy process provides information relevant in assessing the value of the firms upon their emergence from bankruptcy. Hence, there exists less information asymmetry in equity offerings by firms that emerged from bankruptcy compared to original IPOs. The reduced information asymmetry implies that the level of mispricing, if any, should be less in post-bankruptcy equity offerings than in original IPOs. Indeed, the results suggest that post-bankruptcy equity offerings are less underpriced than original IPOs and they are not subject to a reversal in returns in the long-run. The third essay examines the wealth effects of acquisitions of bankrupt assets to the acquiror's shareholders. Bankruptcy can lead to underpriced assets, lower costs of acquiring them and concessions from creditors of the bankrupt firm. These factors increase the net worth of acquiring bankrupt assets. Indeed, the results suggest that firms announcing acquisitions of bankrupt assets experience favorable wealth effects.

By analyzing the information provided by analyst recommendations in the
banking industry, I find that analyst recommendations trigger an immediate impact on
the value of banks (Essay 1), they profitably guide the investment decisions of investors
for periods of up to three months (Essay 2), and they also have an immediate impact on
the values of rival banks (Essay 3). In addition, I find that analysts’ ability to provide
new information depends on the information environment of the bank. The degree of
information asymmetry, the degree of complexity, the risk of the bank, the risk of the
time period, as well as regulatory reforms that affect these characteristics, have a
significant impact on the analyst’s ability to provide new information to the investors.
Specifically, I find that analyst recommendations are more informative when
banks suffer from a high degree of information asymmetry. In addition, regulatory reforms that reduced the information asymmetry of the banking industry also diminished
the analyst’s ability to provide new information. Similarly, I find that analyst
recommendations have a greater impact on the values of the rated and the rival banks
when these banks operate in a risky environment. This result is robust to several
measures of bank risk, period risk, and regulatory events that affected the risk of the
banking industry. However, the results of Essay 2 show that positive recommendations
that occur during riskier periods or after regulatory events that increased the risk of the
banking industry result in lower value for the investors over the following 1-month or 3-
month periods. Lastly, I find that as banks become more complex, analyst
recommendations have a smaller immediate impact on the value of the bank, deliver a
smaller investment value for the investors, and also have a smaller immediate impact on the value of the rival banks.

This study empirically investigates the market reaction to acquisitions of thrift institutions and banks occurring since the passage of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989. The study tests several hypotheses related to characteristics of the acquiring firm, the target firm, and the acquisition. The overall market reaction to the acquisitions is negative. The study also reveals that there are cross-sectional factors which influence the share price response. The results of the empirical tests are relevant to depository institutions contemplating acquisitions, to the Resolution Trust Corporation, and to taxpayers.

This dissertation examines the effect of variables specific to different industries on initial public offerings (IPOs). It has been widely accepted that IPOs perform well in the immediate aftermarket and perform poorly in the subsequent months. The uncertainty surrounding IPOs has been a frequently cited reason for the initial underpricing. The size of the offering, underwriter prestige, the number of uses of gross proceeds, and the level of inside ownership are a few of the variables that have been found to measure the uncertainty of IPOs across industries. The uncertainty of IPOs in different industries may also be affected by variables that are unique to that industry. The level of interest rates and the amount of regulation may affect the performance of existing financial service firms. The uncertainty of IPOs in the financial services industry may also be affected by these variables. This study finds that some financial service firm IPOs are affected by the level of interest rates. Some regulatory changes increase the uncertainty, and therefore the initial returns, of IPOs of financial service firms. The type of ownership structure affects the management of a firm due to differing agency costs. A mutual holding company (MHC) is a mutual company that issues a minority stake to the public. The MHC structure has been common among savings banks and is growing in popularity in the life insurance industry. The lack of takeover possibilities and stockholder control diminishes the risk taking behavior of MHCs in the thrift industry. Savings banks that choose the MHC structure experience lower initial returns without significant long run differences than savings banks that choose to convert to a completely stockholder owned bank. The operating characteristics may also affect the uncertainty of the firm. The internet allows firms to enter into an industry while having completely different operating structure than many of the other competitors. This study finds that firms that have an internet focus have higher initial returns than a matching set of IPOs. The changing environment, due to technology and low barriers to entry, increases the uncertainty of internet firms.

The ongoing political, legal, and economic harmonization within the European Union has lead to a higher degree of integration of national financial markets. The introduction of the single European currency, the euro, eliminated a traditional source of risk to international portfolio investors. In light of these developments, Part I of the empirical analysis had the following objectives: (1) to determine the relative importance of country, sector, and industry factors in explaining individual company's stock return behavior in the wake of the formation of the European Union, (2) to identify the multiple factor model, consisting of country and/or sector and/or industry factors, that was best at explaining European stock returns over the observation period, (3) to discover cross-sectional differences and non-stationarity in the industry portfolio return sensitivity to country, sector, and industry factors, (4) to find out whether the European market had become more independent from the other two major trading areas, the US and the Pacific Rim, over the period 6/1994 to 6/1999, and (5) to quantify industry structure-related changes in portfolio diversification benefits in European stock portfolios. Diversification benefits of country portfolios still outweighed diversification benefits of European industry portfolios. However, evidence was found for a gradual change in the degree of homogeneity within European industries in the wake of the ongoing harmonization of European financial markets. It seems reasonable to assume diversification effects in the future to become even more pronounced for portfolios generated within a country market but across industries. The main objective of Part II, was to determine the valuation effects of merger and acquisition announcements on national rivals (intra-industry effects) and European rivals (inter-country effects). Conducting various cross-sectional return analyses, country and industry-specific sources of intra-industry effects and inter-country effects were identified. With the elimination of foreign exchange rate risks, following the introduction of the single currency on January 1, 1999, cross-border spillover effects have become more pronounced. The hypothesis that the introduction of the euro facilitates the transmission of (private) information across geographic markets boundaries is clearly supported by the findings of the cross-sectional regression analysis.

The primary objectives of this study are to investigate the stock market over- or underreaction of various U.S. stock market indexes, the over- or underreaction of a global stock market index, and the over- or underreaction of various-countries' national stock markets relative to a "global" over- or underreaction. The secondary objectives are to investigate the reasons for the U.S. over- or underreaction and for the relative under- or overreaction of individual countries. For six U.S. stock market indexes, we find a one-day stock market underreaction to highly positive and negative news releases. Over a sixty-day interval, we find strong evidence of a stock market underreaction (overreaction) to positive (negative) news. Cross-sectionally, we find strong evidence that investors are more optimistic the larger the recent runup in the stock market index is. Also, investors are more optimistic in periods of high economic growth, whether they are faced with positive or negative information. Focusing on the MSCI World Indexes denominated in both local currencies and U.S. dollars, we find that investors underreact to both positive and negative news in both the short- and the long-run. The last objective of this study was to investigate the relative under- or overreaction of nineteen individual countries in response to a global under- or overreaction. We find that several countries exhibit a one-day underreaction relative to the MSCI World Index on the day following a very large positive or negative movement in the MSCI World Index. Over a sixty-day interval, several countries overreact relative to the MSCI World Index when positive information is released on a global basis but underreact to the MSCI World Index when negative information is released on a global basis. Cross-sectionally, results reveal evidence consistent with a hypothesis where investors are more optimistic with respect to both positive and negative news when there is a speculative bubble in the foreign stock market. We also find that investors in countries with high economic growth rates tend to be more optimistic than investors in countries with low economic growth rates when faced with positive and negative global news arrivals.

This study documents the nature of the underlying information that caused investor overreaction and under-reaction. While research has documented the existence of market overreaction and under-reaction, it has not comprehensively addressed the underlying information releases that caused the extreme price fluctuations. This study controls for the underlying announcements, and finds that the degrees of overreaction and under-reaction vary according to the underlying information releases. A primary contribution of this dissertation is the finding that undefined events are associated with higher degrees of overreaction than defined events. The Wall Street Journal Index was used to determine if each event had an announcement that coincided with it. Defined events are those for which an underlying announcement was found in the Wall Street Journal Index. For undefined events, no announcement was found. This finding supports the theory of investor overconfidence and biased self-attribution by Daniel, Hirshleifer, and Subrahmanyam (1998). This study analyzes the overreaction and under-reaction phenomenon in three areas: international securities, domestic securities, and foreign currency. The international securities analyzed are American depository receipts and international closed-end funds. The domestic securities analyzed are financial and non-financial stocks. In the foreign currency area, currencies are classified into two types: emerging country currencies and industrial country currencies. In all of these areas, controlling for the underlying announcements is beneficial in understanding market overreaction and under-reaction. Finally, cross-sectional regression equations are employed to relate post-event returns or exchange rate changes to different variables, such as initial price change, pre-event information leakage, size (market value), month of the year (December or January), day of the week, and announcement type. There is a substantial amount of evidence that suggests larger initial price movements and prevent information leakage are associated with higher degrees of overreaction, and that the tendency towards overreaction is stronger for undefined events.

The purpose of this study is to extend the research on mutual fund performance persistence to closed-end funds. Because closed-end funds trade at market prices different from net asset value (NAV) they are used to test both the performance persistence of their NAV and market price returns. While research has assessed the performance persistence of open-end funds, it has not assessed the performance persistence of closed-end funds. Yet, the unique characteristics of closed-end funds allow stronger arguments for their persistence than the arguments previously submitted for open-end funds. The characteristics that can potentially cause closed-end fund return persistence to be different from open-end fund return persistence include investor sentiment, restrictions on liquidity of underlying assets and cash holdings, and performance pressure on fund managers. This study also investigates the NAV and market price return persistence of international closed-end funds. This group of funds is of particular interest because investor sentiment determines a large portion of the market price return. In addition, as some international markets are less efficient due to restricted flow of information, fund managers may have an advantage in portfolio selection. Finally, this study examines cross-sectionally whether the persistence measure is related to the fund characteristics size, goal, management fees, turnover, fund family, fund experience, and the stock exchange a fund is traded on. The results show evidence for NAV and market price performance persistence, which is stronger for past winning than losing funds. NAV return persistence is less for foreign than domestic funds, possibly due to exchange rate fluctuations. However, market price return persistence is greater for foreign than domestic funds, which may indicate that price pressure is affecting foreign funds more than domestic funds. Funds with lower expense ratios, funds that are not members in a fund family, and funds traded on the NYSE show more persistence of strong NAV and market price performance. The results imply that investors should benefit from investing in past winning funds. This is particularly true for foreign funds, funds with lower expense ratios, funds that are not members of a fund family, and funds traded on the NYSE.