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Showing papers in "European Financial Management in 2004"


Journal ArticleDOI
TL;DR: In this paper, the authors investigate whether differences in the quality of firm-level corporate governance also help to explain firm performance in a cross-section of companies within a single jurisdiction.
Abstract: Recent empirical work shows evidence for higher valuation of firms in countries with a better legal environment. We investigate whether differences in the quality of firmlevel corporate governance also help to explain firm performance in a cross-section of companies within a single jurisdiction. Constructing a broad corporate governance rating (CGR) for German public firms, we document a positive relationship between governance practices and firm valuation. There is also evidence that expected stock returns are negatively correlated with firm-level corporate governance, if dividend yields are used as proxies for the cost of capital. An investment strategy that bought high-CGR firms and shorted low-CGR firms earned abnormal returns of around 12% on an annual basis during the sample period.

398 citations


Journal ArticleDOI
TL;DR: In this article, the determinants of corporate cash holdings in EMU countries were investigated and it was shown that cash holdings are positively affected by the investment opportunity set and cash flows and negatively affected by asset's liquidity, leverage and size.
Abstract: This paper investigates the determinants of corporate cash holdings in EMU countries. Our results suggest that cash holdings are positively affected by the investment opportunity set and cash flows and negatively affected by asset’s liquidity, leverage and size. Bank debt and cash holdings are negatively related, which supports that a close relationship with banks allows the firm to hold less cash for precautionary reasons. Firms in countries with superior investor protection and concentrated ownership hold less cash, supporting the role of managerial discretion agency costs in explaining cash levels. Capital markets development has a negative impact on cash levels, contrary to the agency view.

397 citations


Journal ArticleDOI
TL;DR: In this paper, the authors analyzed the short-term wealth effects of large intra-European takeover bids and found that a high market-to-book ratio of the target leads to a higher bid premium, but triggers a negative price reaction for the bidding firm.
Abstract: This paper analyses the short-term wealth effects of large intra-European takeover bids. We find announcement effects of 9% for the target firms compared to a statistically significant announcement effect of only 0.7% for the bidders. The type of takeover bid has a large impact on the short-term wealth effects with hostile takeovers triggering substantially larger price reactions than friendly operations. When a UK firm is involved, the abnormal returns are higher than those of bids involving both a Continental European target and bidder. There is strong evidence that the means of payment in an offer has an impact on the share price. A high market-to-book ratio of the target leads to a higher bid premium, but triggers a negative price reaction for the bidding firm. We also investigate whether the predominant reason for takeovers is synergies, agency problems or managerial hubris. Our results suggest that synergies are the prime motivation for bids and that targets and bidders share the wealth gains.

393 citations


Journal ArticleDOI
TL;DR: In this paper, the authors look at the value generated to shareholders by the announcement of mergers and acquisitions involving firms in the European Union over the period 1998-2000 and find that mergers in industries that had previously been under government control or that are still heavily regulated generate lower value than M&A announcements in unregulated industries.
Abstract: This paper looks at the value generated to shareholders by the announcement of mergers and acquisitions involving firms in the European Union over the period 1998–2000. Cumulative abnormal shareholder returns due to the announcement of a merger reflect a revision of the expected value resulting from future synergies or wealth redistribution among stakeholders. Target firm shareholders receive on average a statistically significant cumulative abnormal return of 9% in a onemonth window centred on the announcement date. Acquirers’ cumulative abnormal returns are null on average. When distinguishing in terms of the geographical and sectoral dimensions of the merger deals, our main finding is that mergers in industries that had previously been under government control or that are still heavily regulated generate lower value than M&A announcements in unregulated industries. This low value creation in regulated industries becomes significantly negative when the merger involves two firms from different countries and is primarily due to the lower positive return that shareholders of the target firm enjoy upon the announcement of the merger. This evidence is consistent with the existence of obstacles (such as cultural, legal, or transaction barriers) to the successful conclusion of this type of transaction, which lessen the probability of the merger actually being completed as announced and, therefore, reduce its expected value.

255 citations


Journal ArticleDOI
TL;DR: In this article, the authors studied 98 large M&As of European bidding banks from 1985 to 2000 in order to investigate drivers of excess returns to the shareholders of the targets, the bidders, and to the combined entity of the bidder and the target.
Abstract: We study 98 large M&As of European bidding banks from 1985to 2000 in order to investigate drivers of excess returns to the shareholders of the targets, the bidders, and to the combined entity of the bidder and the target. Our findings show that many of 13 drivers identified mostly from prior, US-focused research have significant explanatory power, indicating that the stock market reaction to M&A announcements of European bidding banks can be at least partly forecast. Our results are largely consistent with the US-experience and confirm the preference of stock markets for focused transactions and against diversification. Moreover, we find that less active bidders create more value than more active/experienced bidders. This stands in contrast to some US research and may indicate that managers of frequent European bidding banks may be motivated by other objectives than creating shareholder value.

212 citations


Journal ArticleDOI
TL;DR: In this article, the authors explain why project finance in general and why large projects in particular merit separate academic research and instruction, and present significant opportunities to study the relationship among structural attributes (i.e., high leverage, contractual details, and concentrated equity ownership), managerial incentives, and asset values, as well as improve current practice in this rapidly growing field of finance.
Abstract: Despite the fact that more than $200 billion of capital investment was financed through project companies in 2001, an amount that grew at a compound annual rate of almost 20% during the 1990s, there has been very little academic research on project finance. The purpose of this article is to explain why project finance in general and why large projects in particular merit separate academic research and instruction. In short, there are significant opportunities to study the relationship among structural attributes (i.e., high leverage, contractual details, and concentrated equity ownership), managerial incentives, and asset values, as well as improve current practice in this rapidly growing field of finance.

168 citations


Journal ArticleDOI
TL;DR: The problem of stock overvaluation has been discussed extensively in the finance literature as discussed by the authors, and the consequences of stock price becoming overvalued have been discussed for a long time in the literature.
Abstract: 1. The current malaise in corporate finance My intention today is to provide a way to understand some of what’s currently happening in the world of finance and corporate governance at this time (June 2002). Few if any of us have discussed with our students the consequences of a company’s stock price becoming overvalued. Indeed I know of nowhere in the finance literature where the problems associated with overvaluation are discussed. We talked for a long time in the 1980s about the effects of under-valuation, and I will have a little to say about that below. But as things have progressed over the last half-dozen years overvaluation has come increasingly to occupy my thoughts. Indeed, understanding the incentive and organisational effects of stock overvaluation will help us understand much about the current malaise in corporate finance and corporate governance that surrounds the events at Enron, WorldCom, Xerox, and many other companies. I will review this situation briefly, and then move on to consider the agency costs of undervalued and overvalued equity. For the most part I’m going to concentrate on the latter, and examine the necessity for managers to manage stock prices down in situations where they become substantially overvalued, and the requirement for us to have new language to enable managers and boards to deal with these issues. I will conclude by considering how we solve this, where we go from here, and what’s likely to happen? In most crises like the current one what we usually get from governmental reaction is bad regulation and bad laws. However, in preparing this address I found myself fairly optimistic that things are more likely to move in the right direction. Yet, there is a danger that with the frenzy that is going on now as the result of WorldCom’s announcement earlier this week of its $3.8 billion accounting blunder, Enron’s cooking the books and today’s announcement by Xerox of its $3 billion ‘accounting error’, we may be off and running again to generate damaging regulatory actions. We are all aware of the trillions of dollars of losses that have occurred in the technology, telecom, and dot.com boom and busts, not to mention many bankruptcies,

144 citations


Journal ArticleDOI
Jo Danbolt1
TL;DR: In this paper, the abnormal returns to target shareholders in cross-border and domestic acquisitions of UK companies were analysed, and no evidence for the level of abnormal returns associated with market access or exchange rate effects, and only limited support for an international diversification effect.
Abstract: We analyse the abnormal returns to target shareholders in cross-border and domestic acquisitions of UK companies. The cross-border effect during the bid month is small (0.84%), although cross-border targets gain significantly more than domestic targets during the months surrounding the bid. We find no evidence for the level of abnormal returns in cross-border acquisitions to be associated with market access or exchange rate effects, and only limited support for an international diversification effect. However, the cross-border effect appears to be associated with significant payment effects, and there is no significant residual cross-border effect once various bid characteristics are controlled for.

114 citations


Journal ArticleDOI
TL;DR: The authors examined the impact of political uncertainty on financial crises using a panel of twenty-two emerging markets and found that eight out of nine of the financial crises happened during the periods of political election and transition.
Abstract: This paper examines the impact of political uncertainty on financial crises using a panel of twenty-two emerging markets. By examining political election cycles, we find that eight out of nine of the financial crises happened during the periods of political election and transition. Using a combination of probit and switching regression analysis, we find that there is a significant relationship between political election and financial crisis after controlling for differences in economic and financial conditions. We observe increased market volatility during political election and transition periods. Our results suggest that political uncertainty could be a major contributing factor to financial crisis. Thus, politics does matter in emerging markets. Since the odds of financial crisis tend to be much larger during the political election periods, institutonal investors should take that into account when making emerging market investment during those time periods.

102 citations


Journal ArticleDOI
TL;DR: This article explored the ability of portfolio and foreign direct investment flows to track movements in the euro and the yen against the dollar and found that portfolio flows from the euro area into US stocks, possibly reflecting differences in expected productivity growth, track movements of the euro against the US dollar closely.
Abstract: This paper explores the ability of portfolio and foreign direct investment flows to track movements in the euro and the yen against the dollar. Net portfolio flows from the euro area into US stocks – possibly reflecting differences in expected productivity growth – track movements in the euro against the dollar closely. Net FDI flows, which capture the recent burst in cross-border M&A activity, appear less important in tracking movements in the euro-dollar rate, possibly because many M&A transactions consist of share swaps. Movements in the yen versus the dollar remain more closely tied to conventional variables such as the current account and interest differential.

89 citations


Journal ArticleDOI
TL;DR: In this article, the authors survey European managers to gain some insights into motivations of convertible issuance and find that a majority of firms issue convertibles as "delayed equity" and as "debt sweetener".
Abstract: We survey European managers to gain some insights into motivations of convertible issuance. Our analysis shows that a majority of firms issue convertibles as ‘delayed equity’ and as ‘debt sweetener’. Managers also use convertibles to avoid short-term equity dilution and to signal firm's future growth opportunities. We document a large cross-sectional variation across firms in rationales for issuing convertibles and find mixed support for most theoretical models. Our evidence suggests that the popularity of convertibles is driven primarily by their versatility in adjusting their design to fit the financing needs of individual firms, and by their increased demand among institutional investors.

Journal ArticleDOI
TL;DR: In this article, the authors find evidence that bank-managed and older funds charge higher expenses but investors are not compensated for paying higher expenses with higher risk-adjusted returns, suggesting a potential agency problem.
Abstract: A tremendous amount of research examines US mutual funds, but fund markets also thrive in other countries. However, research about these fast growing markets is lacking. This study addresses Finnish funds. Fast growth of the Finnish fund industry, strong bank dominance in the industry and recent EU membership make it an interesting market to examine. The Finnish fund market is also of particular interest since it had the fastest growth among the EU countries during 1996–2000. We find evidence that bank-managed and older funds charge higher expenses but investors are not compensated for paying higher expenses with higher risk-adjusted returns, suggesting a potential agency problem. Overall, Finnish fund expenses have decreased over time, consistent with EU membership reducing market segmentation and generating competition.

Journal ArticleDOI
TL;DR: In this paper, the authors examine the proposition that small investor sentiment, measured by the change in the discount/premium on closed-end funds, is an important factor in stock returns.
Abstract: In this paper we examine the proposition that small investor sentiment, measured by the change in the discount/premium on closed-end funds, is an important factor in stock returns. We conduct an out-of-sample test of the investor sentiment hypothesis in a market environment that is more likely to be prone to investor sentiment than the USA. We fail to provide supporting evidence for the claim of Lee et al. (1991) that investor sentiment affects the risk of common stocks. Consistent with Elton et al. (1998), who show that investor sentiment does not enter the return generating process, our tests do not detect investor sentiment in a capital market that is more susceptible to small investor sentiment. Our results provide additional support against the claim that investor sentiment represents an independent and systematic asset pricing risk.

Journal ArticleDOI
TL;DR: In this paper, the authors argue that when individuals care about their consumption relative to that of their neighbours, a home bias emerges, that is investors overweight domestic stocks in their portfolios, and demonstrate that globalization mitigates the home bias, and derive a modified international CAPM.
Abstract: We argue that when individuals care about their consumption relative to that of their neighbours, a home bias emerges, that is investors overweight domestic stocks in their portfolios. Domestic stocks are preferred because they also serve the objective of mimicking the economic fortunes and welfare of the investor’s neighbours, countrymen, and social reference group. We also demonstrate that globalization mitigates the home bias, and derive a modified international CAPM.

Journal ArticleDOI
TL;DR: In this article, the relative performance effects of single and multiple acquirers were examined empirically and they found little difference between them and they did find that for single acquirers short and long run performance declines significantly with each subsequent acquisition and this pattern is robust to controlling for bid characteristics that are known to impact takeover performance.
Abstract: We examine empirically the relative performance effects of single and multiple acquirers. We find little difference between them. However, we do find that for multiple acquirers short and long run performance declines significantly with each subsequent acquisition. We find that this pattern is robust to controlling for bid characteristics that are known to impact takeover performance. We test various hypotheses and find that the decline only occurs for acquirers whose first acquisitions are successful. For acquirers whose first acquisition is unsuccessful, the bid order effect is positive. These results are consistent with a hubris effect, mean reversion effect, or diminishing returns effect for successful first acquirers and with some learning effects for unsuccessful first acquirers.

Journal ArticleDOI
TL;DR: In this paper, the authors investigated the nature of the US and UK stock market comovement and found that excess return innovations are decomposed into news about future dividends, real interest rates, and excess returns.
Abstract: US and UK stock returns are highly positively correlated over the period 1918–99. Using VAR-based variance decompositions, we investigate the nature of this comovement. Excess return innovations are decomposed into news about future dividends, real interest rates, and excess returns. We find that the latter news component is the most important in explaining stock return volatility in both the USA and the UK and that stock return news is highly correlated across countries. This is evidence against Beltratti and Shiller’s (1993) finding that the comovement of US and UK stock markets can be explained in terms of a simple present value model. We interpret the comovement as indicating that equity premia in the two countries are hit by common real shocks.

Journal ArticleDOI
TL;DR: In this article, the determinants of changes in corporate ownership and firm failure were investigated, taking into account different types of sellers and buyers of control blocks, and they found that firms are more likely to fail or to be sold when performance is poor, financial pressure is high, and firm size is small.
Abstract: This study investigates the determinants of changes in corporate ownership and firm failure, taking into account different types of sellers and buyers of control blocks. For a large panel of German corporations we find that firms are more likely to fail or to be sold when performance is poor, financial pressure is high, and firm size is small. Cross ownership deters control changes, and ownership concentration has a non-linear impact on the likelihood of control transfer. In contrast to corporate shareholders, private shareholders tend to sell control blocks when financial pressure increases.

Journal ArticleDOI
TL;DR: In this article, the authors studied how the use of alternative valuation methodologies affects investment performance for a sample of 53 German venture capitalists and found that the majority of investment managers use discounted cash flow (DCF) techniques, but only a minority appears to use a discount rate related to the cost of capital.
Abstract: This paper studies how the use of alternative valuation methodologies affects investment performance for a sample of 53 German venture capitalists. We measure investment performance by the amount of investments they need to write off and by the number of companies they take public. We find that a significant number of investment managers use discounted cash flow (DCF) techniques, but only a minority appears to use a discount rate related to the cost of capital. The majority applies DCF using subjective discount rates. We present evidence that the use of DCF is correlated with superior investment performance only if applied in conjunction with an objectifiable discount rate. Also, funds that invest with a longer horizon perform better. The use of multiples is not significantly correlated with investment performance. We conclude that a focus on fundamental values confers an advantage.

Journal ArticleDOI
TL;DR: This article investigated the empirical relationship between accounting-based measures of performance and the degree of multinational diversification for a set of European chemical industry firms and found that for these firms, the extent of diversification is strongly related to superior financial performance.
Abstract: We investigate the empirical relationship between accounting based measures of performance and the degree of multinational diversification for a set of European chemical industry firms. We find that for these firms, the degree of multinational diversification is strongly related to superior financial performance. The results hold for each of the three sample years. The findings suggest that multinational firms outperform purely domestic and exporting firms. The results provide strong support for gains from multinational diversification. The results indicate that while greater European unification may have eroded potential benefits of exploiting international capital and product market imperfections, the benefits of firm specific economies of scope and scale as well as managerial and financial synergies are still realised through exports.

Journal ArticleDOI
TL;DR: In this paper, the authors investigate the effect of takeovers on workers' employment prospects and wages in the UK for the years 1987-1995 and find no support for the breach of trust hypothesis and rather suggest shareholders and workers in the post-acquisition joint entity are locked in a form of "equal misery" following the execution of the takeover.
Abstract: This paper investigates the effects of takeovers on workers’ employment prospects and wages in the UK for the years 1987–1995. We address directly the idea that takeovers involve a ‘breach of trust’ with employees. Our results provide no support for the breach of trust hypothesis and rather suggest shareholders and workers in the post-acquisition joint entity are locked in a form of ‘equal misery’ following the execution of the takeover. There already an exist a wide range of event studies documenting the effect of takeovers on shareholders and a smaller number of studies discussing the impact of takeovers on employees. The contribution of the present study is to relate the separate effects of acquisition on these two groups to each other. By doing so we seek to test directly the proposition that takeovers reallocate rents from workers to target shareholders, via the bid-premia paid on acquisition.

Journal ArticleDOI
TL;DR: In this article, an affine term structure model for the pre-EMU period linking the German yield curve with the Bundesbank monetary policy is presented. And the German monetary policy and its implied yield curve are reprojected onto the EMU period, and the reprojected yield curve differs significantly from the observed one.
Abstract: We develop a benchmark against which the effects of ECB monetary policy on the German bond market can be evaluated. We first estimate an affine term structure model for the pre-EMU period linking the German yield curve with the Bundesbank monetary policy. The German monetary policy and its implied yield curve are then reprojected onto the EMU period. The reprojected yield curve differs significantly from the observed one. Short-term interest rates during the EMU period are significantly lower than they would have been in case the Bundesbank were still in charge of monetary policy. Furthermore, yield spreads increased substantially during the EMU period.

Journal ArticleDOI
TL;DR: In this article, the authors analyzed the cost of capital of firms with foreign equity listings and found that the difference in the size of the difference between international and domestic asset pricing models is substantial for firms with international listings, as these are often large multinationals with a strong international orientation.
Abstract: This paper analyses the cost of capital of firms with foreign equity listings. Our purpose is to shed light on the question whether international and domestic asset pricing models yield a different estimate of the cost of capital for cross-listed stocks. We distinguish between (i) the multifactor ICAPM of Solnik (1979) and Sercu (1980) including both the global market portfolio and exchange rate risk premia and (ii) the single factor domestic CAPM. We test for the significance of the cost of capital differential in a sample of 336 cross-listed stocks from nine countries in the period 1980–99. Our hypothesis is that the cost of capital differential is substantial for firms with international listings, as these are often large multinationals with a strong international orientation. We find that the asset pricing models yield a significantly different estimate of the cost of capital for only 12% of the cross-listed companies. The size of the cost of capital differential is around 50 basis points for the US, 80 basis points for the UK and 100 basis points for France.

Journal ArticleDOI
TL;DR: In this paper, the authors used the implied volatilities from foreign exchange option prices and the results of no-arbitrage theory to estimate foreign exchange risk premia under the assumption of no arbitrage and showed that the risk premium is driven by the difference between investors' market prices of risk in the two currencies.
Abstract: This paper uses implied volatilities from foreign exchange option prices and the results of no-arbitrage theory to estimate foreign exchange risk premia. In particular, under the assumption of no-arbitrage, the foreign exchange risk premium is driven by the difference between investors’ market prices of risk in the two currencies. In an international economy with three currencies, sterling, US dollar and Deutschemark, we can use the information on implied volatilities of the three cross rates to derive estimates of implied or ex ante market prices of risk and of foreign exchange risk premia. The foreign exchange risk premia estimates are then compared to survey-based risk premia.

Journal ArticleDOI
TL;DR: In this paper, the authors study one-year post-listing prices and returns to equity issuing ADRs that listed in the US between January 1991 and October 2000 and find that the premium to foreign equity issuers is greater if the US listing attracts liquidity and if US returns have a lower correlation with the local country index.
Abstract: We study one-year post-listing prices and returns to equity issuing ADRs that listed in the US between January 1991 and October 2000. ADRs from countries that impose restrictions on capital flows are priced at a premium to their home market ordinaries. While the mean premium for the full sample is statistically indistinguishable from zero, after an adjustment for asynchronous trading, the magnitude of the premium to ADRs from restricted markets is 11.33% at the 300-day post listing interval, which is statistically significant. In the short run (30 days) following listing, the magnitude of the premium is larger for ADRs with larger excess demand from US investors. At the longer 300-day horizon, Nasdaq listed ADRs earn a larger premium than their NYSE/AMEX listed counterparts. Time-series regressions and two-stage cross-sectional regressions establish that the premium to foreign equity issuers is greater if the US listing attracts liquidity and if US returns have a lower correlation with the local country index.

Journal ArticleDOI
TL;DR: In this article, the authors developed the "component value at risk" (VaR) framework for companies to identify the multi-dimensional downside risk profile as perceived by shareholders, which decomposes the risk into components that are attributable to each of the underlying risk factors.
Abstract: Multinational companies face increasing risks arising from external risk factors, e.g. exchange rates, interest rates and commodity prices, which they have learned to hedge using derivatives. However, despite increasing disclosure requirements, a firm’s net risk profile may not be transparent to shareholders. We develop the ‘Component Value-at-Risk (VaR)’ framework for companies to identify the multi-dimensional downside risk profile as perceived by shareholders. This framework allows for decomposing downside risk into components that are attributable to each of the underlying risk factors. The firm can compare this perceived VaR, including its composition and dynamics, to an internal VaR based on net exposures as it is known to the company. Any differences may lead to surprises at times of earnings announcements and thus constitute a litigation threat to the firm. It may reduce this information asymmetry through targeted communication efforts.