Journal of Financial Economics

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Diversification's effect on firm value

Philip G. Berger, Eli Ofek

Journal of Financial Economics > 1995 > 37 > 1 > 39-65

We estimate diversification's effect on firm value by imputing stand-alone values for individual business segments. Comparing the sum of these stand-alone values to the firm's actual value implies a 13% to 15% average value loss from diversification during 1986-1991. The value loss is smaller when the segments of the diversified firm are in the same two-digit SIC code. We find that overinvestment...

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Asset sales, firm performance, and the agency costs of managerial discretion

Larry Lang, Annette Poulsen, René Stulz

Journal of Financial Economics > 1995 > 37 > 1 > 3-37

We argue that management sells assets when doing so provides the cheapest funds to pursue its objectives rather than for operating efficiency reasons alone. This hypothesis suggests that (1) firms selling assets have high leverage and/or poor performance, (2) a successful asset sale is good news, and (3) the stock market discounts asset sale proceeds retained by the selling firm. In support of this...

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Asset sales and increase in focus

Kose John, Eli Ofek

Journal of Financial Economics > 1995 > 37 > 1 > 105-126

We find that asset sales lead to an improvement in the operating performance of the seller's remaining assets in each of the three years following the asset sale. The improvement in performance occurs primarily in firms that increase their focus; this change in operating performance is positively related to the seller's stock return at the divestiture announcement. The announcement stock returns...

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A comparison of the information conveyed by equity carve-outs, spin-offs, and asset sell-offs

Myron B. Slovin, Marie E. Sushka, Steven R. Ferraro

Journal of Financial Economics > 1995 > 37 > 1 > 89-104

We examine valuation effects on firms in the same industry as entities that are the subject of carve-outs (initial public offerings of subsidiary equity), spin-offs, and asset sell-offs. Share price reactions for rivals are negative in response to equity carve-outs. In comparison, rival stock returns are positive for spin-offs and normal for asset sell-offs, restructuring actions that do not entail...

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Corporate focus and stock returns

Robert Comment, Gregg A. Jarrell

Journal of Financial Economics > 1995 > 37 > 1 > 67-87

Greater corporate focus is consistent with shareholder wealth maximization. Diseconomies of scope in the 1980s are confirmed by a trend towards focus or specialization, a positive relation between stock returns and focus increases, and the failure of diversified firms to exploit financial economies of scope (coinsurance of debt or reliance on internal capital markets). Large focused firms were less...

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Causes of financial distress following leveraged recapitalizations

David J. Denis, Diane K. Denis

Journal of Financial Economics > 1995 > 37 > 2 > 129-157

We report that 31% of the firms completing leveraged recapitalizations between 1985 and 1988 subsequently encounter financial distress. Following their recaps, the distressed firms exhibit (1) poor operating performance due largely to industry-wide problems, (2) surprisingly low proceeds from asset sales, and (3) negative stock price reactions to economic and regulatory events associated with the...

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Increased debt and industry product markets An empirical analysis

Gordon M. Phillips

Journal of Financial Economics > 1995 > 37 > 2 > 189-238

This paper tests for changes in firms' production and pricing decisions in four industries in which firms have sharply increased their financial leverage. The analysis of product price and quantity data shows that industry product market decisions are associated with capital structure. In three industries, output is negatively associated with the average industry debt ratio. In the one industry...

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Evidence on the strategic allocation of initial public offerings

Kathleen Weiss Hanley, William J. Wilhelm

Journal of Financial Economics > 1995 > 37 > 2 > 239-257

The evidence reported in this paper suggests that institutional investors capture a large fraction of the short-run profits associated with IPOs. The favored status enjoyed by institutional investors in underpriced offerings appears, however, to carry a quid pro quo expectation that they will participate in less-attractive issues as well. This finding conforms with the Benveniste and Spindt (1989)...

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CEO turnover and the firm's investment decisions

Michael S. Weisbach

Journal of Financial Economics > 1995 > 37 > 2 > 159-188

This paper examines the relation between management turnover and divestitures of recently acquired divisions. The empirical results indicate that at the time of a management change, there is an increased probability of divesting an acquisition at a loss or one considered unprofitable by the press. The probability increases by about the same amount regardless of whether the change is an apparent...

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Stock returns and volatility A firm-level analysis

Gregory R. Duffee

Journal of Financial Economics > 1995 > 37 > 3 > 399-420

It has been previously documented that individual firms' stock return volatility rises after stock prices fall. This paper finds that this statistical relation is largely due to a positive contemporaneous relation between firm stock returns and firm stock return volatility. This positive relation is strongest for both small firms and firms with little financial leverage. At the aggregate level,...

article

The Nestle crash

Claudio Loderer, Andreas Jacobs

Journal of Financial Economics > 1995 > 37 > 3 > 315-339

On November 17, 1988, the board of directors of Nestle AG decided to allow foreign investors to hold Nestle registered stock, reversing a longstanding practice. This decision had a tremendous impact on the prices of the firm's three classes of common stock, as well as on the prices of several other corporations traded on the Zurich stock exchange. These price changes can be explained by the hypothesis...

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Closed-end fund premia and returns Implications for financial market equilibrium

Jeffrey Pontiff

Journal of Financial Economics > 1995 > 37 > 3 > 341-370

This paper examines the relation between closed-end fund premia and returns. Additional evidence is provided on Thompson's (1978) finding that fund premia are negatively correlated with future returns. Funds with 20% discounts have expected twelve-month returns that are 6% greater than nondiscounted funds. This correlation is attributed to premium mean-reversion, not to anticipated future portfolio...

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Does the market react differently to domestic and foreign takeover announcements? Evidence from the U.S. chemical and retail industries

Kathryn L. Dewenter

Journal of Financial Economics > 1995 > 37 > 3 > 421-441

This paper examines shareholder wealth gains from domestic and foreign takeover announcements in the U.S. chemical and retail industries. Contrary to results in several recent papers, these data indicate there is no significant difference in within industry mean takeover premia levels. There is evidence, though, that the sensitivity of takeover premia levels to standard transaction characteristics...

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Anatomy of the trading process Empirical evidence on the behavior of institutional traders

Donald B. Keim, Ananth Madhavan

Journal of Financial Economics > 1995 > 37 > 3 > 371-398

This paper examines the behavior of institutional traders. We use unique data on the equity transactions of 21 institutions of differing investment styles which provide a detailed account of the anatomy of the trading process. The data include information on the number of days needed to fill an order and types of order placement strategies employed. We analyze the motivations for trade, the determinants...

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Incentives, downsizing, and value creation at General Dynamics

Jay Dial, Kevin J. Murphy

Journal of Financial Economics > 1995 > 37 > 3 > 261-314

In 1991, defense contractor General Dynamics engaged a new management team which adopted an explicit corporate objective of creating shareholder value. The company tied executive compensation to shareholder wealth creation, and subsequently implemented a strategy that included downsizing, restructuring, and exit. Paying large executive cash bonuses amid layoffs ignited controversy. However, by...

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Problems in measuring portfolio performance An application to contrarian investment strategies

Ray Ball, S.P. Kothari, Jay Shanken

Journal of Financial Economics > 1995 > 38 > 1 > 79-107

We document problems in measuring raw and abnormal five-year contrarian portfolio returns. Loser stocks are low-priced and exhibit skewed return distributions. Their 163% mean return is due largely to their lowest-price quartile position. A $18th price increase reduces the mean by 25%, highlighting their sensitivity to microstructure/liquidity effects. Long positions in low-priced loser stocks...

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Firm performance, corporate governance, and top executive turnover in Japan

Jun-Koo Kang, Anil Shivdasani

Journal of Financial Economics > 1995 > 38 > 1 > 29-58

We examine the role of corporate governance mechanisms during top executive turnover in Japanese corporations. Consistent with evidence from U.S. data, the likelihood of nonroutine turnover is significantly related to industry-adjusted return on assets, excess stock returns, and negative operating income, but is not related to industry performance. The sensitivity of nonroutine turnover to earnings...

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Multifactor models do not explain deviations from the CAPM

A. Craig MacKinlay

Journal of Financial Economics > 1995 > 38 > 1 > 3-28

A number of studies have presented evidence rejecting the validity of the Sharpe-Lintner capital asset pricing model (CAPM). Possible alternatives include risk-based models, such as multifactor asset pricing models, or nonrisk-based models which address biases in empirical methodology, the existence of market frictions, or the presence of irrational investors. Distinguishing between the alternatives...

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The use of warrants as underwriter compensation in initial public offerings

Craig G. Dunbar

Journal of Financial Economics > 1995 > 38 > 1 > 59-78

Previous research suggests that offering costs are higher when warrants are used to compensate underwriters. This finding potentially arises from a failure to account for self-selection in estimating offering cost relations. Using methods that account for self-selection, I find that underpricing and total offering costs are reduced for firms using warrants as underwriter compensation, consistent...

article

Firm failure and managerial labor markets Evidence from Texas banking

Albert A. Cannella, Donald R. Fraser, D. Scott Lee

Journal of Financial Economics > 1995 > 38 > 2 > 185-210

We study the managerial labor market's ability to discriminate between good and bad managerial performance. Using a sample of failed and nonfailed Texas banks, we find that the context of job loss affects the manager's ability to regain comparable employment. Managers associated with banks that failed for reasons arguably beyond the managers' control were twice as likely to regain comparable banking...

INFONA - science communication portal

Journal of Financial Economics

Diversification's effect on firm value

Asset sales, firm performance, and the agency costs of managerial discretion

Asset sales and increase in focus

A comparison of the information conveyed by equity carve-outs, spin-offs, and asset sell-offs

Corporate focus and stock returns

Causes of financial distress following leveraged recapitalizations

Increased debt and industry product markets An empirical analysis

Evidence on the strategic allocation of initial public offerings

CEO turnover and the firm's investment decisions

Stock returns and volatility A firm-level analysis

The Nestle crash

Closed-end fund premia and returns Implications for financial market equilibrium

Does the market react differently to domestic and foreign takeover announcements? Evidence from the U.S. chemical and retail industries

Anatomy of the trading process Empirical evidence on the behavior of institutional traders

Incentives, downsizing, and value creation at General Dynamics

Problems in measuring portfolio performance An application to contrarian investment strategies

Firm performance, corporate governance, and top executive turnover in Japan

Multifactor models do not explain deviations from the CAPM

The use of warrants as underwriter compensation in initial public offerings

Firm failure and managerial labor markets Evidence from Texas banking

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