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In management circles, the pharmaceutical industry is referred to as a “high-risk industry”, as it takes a very long time to develop a drug and success is difficult to assess.1 This perception is borne out by practical examples. Thus, for example, the in-house early warning system at pharmaceutical company Bayer was ignored in 2001 in connection with the anticholesterolemic Lipobay, which was associated with 100 deaths. Following the withdrawal of the drug, the company’s stock market valuation fell by €5.6 billion on a single day and lawsuits have been filed against it to date in over 14,000 cases.2 As well as the high risks associated with research and development projects, there are also major opportunities. Huge profits can be made from the successful development and marketing of pharmaceutical products. The American company Amgen achieved sales in excess of 3.5 billion euros within the space of a few years for just two drugs, Epogen and Neupogen.3

This paper analyzes return patterns and determinants at the Oslo Stock Exchange (OSE) in the period 1980--2006. We find that a three-factor model containing the market, a size factor and a liquidity factor provides a reasonable fit for the cross-section of Norwegian stock returns. As expected, oil prices significantly affect cash flows of most industry sectors at the OSE. Oil is, however, not a priced risk factor in the Norwegian stock market. As the case in many other countries, we find that macroeconomic variables affect stock prices, but since we find only weak evidence of these variables being priced in the market, the most reasonable channel for these effects is through company cash flows.

Prior studies have documented a positive relationship between R&D intensity, large increases in R&D and future stock returns (R&D intensity and large R&D increase effects). We examine whether the two effects are different from each other or they reflect the same phenomenon. Using equally-weighted returns, the two effects are incremental to each other. In addition, the R&D intensity effect is much stronger than the large R&D increase effect. However, the R&D intensity effect shows up only in micro stocks while the large R&D increase effect shows up in all size groups (micro, small and large stocks). Using value-weighted returns, the R&D intensity effect is again present only in micro stocks while the large R&D increase effect is present in all size groups. These results suggest that the large R&D increase effect is indeed a significant anomaly while the R&D intensity effect apparently exists because the costs of trading micro stocks are high. These results are robust across different methods of analysis and after controlling for other well-documented stock market anomalies.

Most prior event studies find that the announcement of a new alliance is accompanied by a positive stock market response for the partners. This result has usually been interpreted as evidence for the prevailing view that alliances are effective vehicles for partners to acquire or access new skills and thus become stronger competitors. However, partners should also earn positive abnormal returns if alliances are used to shape competitive interactions, attenuating competitive intensity industry-wide. In this study we disentangle these different mechanisms by examining how alliance announcements affect the stock market's evaluation of allying firms' rivals: If an alliance is expected to make partner firms more competitive, this should lead to negative abnormal returns for partners' rivals; if an alliance is expected to facilitate a reduction in competitive intensity, this should lead to positive abnormal returns for rivals. Results from an event study analysis of R&D alliances in the telecommunications and electronics industries during 1996-2004 provide evidence consistent with competition attenuation in some alliances. Our research thus challenges the increasingly narrow focus on learning and resource accumulation through alliances, and calls for broader consideration of the roles and effects of collaboration, both for individual firms and for industry structure.

PurposeThis paper aims to study the stock market reaction to sporting results of European listed football clubs. Specifically, it tries to examine the impact of the sporting results on the stock market valuation in terms of abnormal returns and trading volume around the dates of matches.Design/methodology/approachThis paper undertakes an event study around the dates of 745 matches played by European listed football clubs.FindingsThe empirical analysis shows that the sporting results of listed football clubs affect both the abnormal returns and the trading volume around the dates of matches. The movement (positive or negative) and the time when the impact occurs (before or after the match) differ according to the nature of the result (defeat, draw or win) and the match venue (home or away). Findings in this study imply that the success of investments in listed football clubs requires a regular follow‐up of their sporting performances.Originality/valueThis paper is one of the first to take into consideration the nature of sporting results (defeat, draw or win) according to the match venue (home or away) in order to study the market reaction in terms of both abnormal returns and trading volume. Unlike some previous studies, it is not limited to studying a single specific context but considers listed football clubs from all over Europe.

Bank regulators in the United States and other major industrial nations have agreed on a framework for regulating bank capital, proposing that all banking organizations maintain common equity and perpetual preferred capital equal to 4 percent of risk-adjusted assets. This proposal raises important questions about the effect of different capital definitions on banking organizations. This article examines the stock market valuation effects of banks' issuing securities that are considered regulatory capital over the 1982–1986 period. The results are consistent with Myers and Majluf's securities overvaluation hypothesis.

Share-price responses to 95 announcements of increased research and development (R & D) spending are significantly positive on average, even when the announcement occurs in the face of an earnings decline. High-technology firms that announce increases in R & D spending experience positive abnormal returns on average, whereas announcements by low-technology firms are associated with negative abnormal returns. Further, in our cross-sectional analyses we find that higher R & D intensity than the industry average leads to larger stock-price increases only for firms in high-technology industries.

Considering that the ownership structure of Japanese corporations has changed dramatically in the 1990s, this paper address a series of questions related to these changes: Why is cross-shareholding, which has been in place for almost three decades, now beginning to unwind (and what are the mechanisms of the unwinding)? What explains the increasing diversity in the patterns of cross-shareholding among Japanese firms? Lastly, what are the implications of the changing ownership structure on firm performance? Using detailed and comprehensive data on ownership structure including individual cross-shareholding relationships and other variables (Tobin's q) developed by Nissai Life Insurance Research Institute and Waseda University, we highlight the determinants of the choice between holding or selling shares for both banks and firms. We show that profitable firms with easy access to capital markets and high foreign ownership prior to the banking crisis have tended to unwind cross-shareholdings, while low-profit firms with difficulty accessing capital markets and low foreign ownership in the early 1990s have tended to keep their cross-shareholding relationships with banks. We also show that high intuitional shareholding and, somewhat surprisingly, block shareholding by corporations have positive effects on firm performance, while bank ownership has had a consistently negative effect on firm performance since the mid-1980s. We use these findings to address some policy implications and to provide some perspectives on the future of the ownership structure of Japanese firms.

Does an acquirer with extensive acquisition experience outperform an acquirer with little or no acquisition experience? Does an acquirer with varied growth mode experience (i.e. a company undertaking not only acquisitions but also joint ventures) outperform a company that has very homogeneous experience (i.e. a company growing exclusively through acquisitions)? The main purpose of our article is to examine these two questions in-depth and to attempt to provide some answers. The questions led us to analyze the valuation effect of the acquirer's experience for 291 French acquisitions in the United States. The results were mixed with regard to the relationship between acquisition performance, acquisition experience and heterogeneous experience. On the one hand we found no relationship between the acquisition performance and heterogeneous experience of French acquirers, which is not consistent with the literature on stock market valuation of homogeneous “experience trajectories” [Singh, H., Zollo, M., 1998. The impact of knowledge codification, experience trajectories and integration strategies on the performance of corporate acquisitions. Working Paper INSEAD, 98,62,SM.]. On the other hand, our findings indicate that the relationship between the acquisition performance and acquisition experience of French acquirers follows a curvilinear (inverted U-shaped) distribution.

This paper studies the stock market valuation of mergers and acquisitions in the Greek banking sector, from 1995 to 2002, using the standard event study methodology. The results suggest that the targets' shareholders earned significant abnormal returns upon the announcement of both horizontal and diversifying deals. On the other hand, the bidders' shareholders had significant losses in cases of horizontal and zero effects in diversifying deals. Although mergers and acquisitions in the Greek banking sector were not value-enhancing, they can be rationalised under the prism of its recent deregulation. Mergers and acquisitions helped the bidders to increase their market share along with asset value and abstain from being acquired in the short-run. For the targets, mergers and acquisitions were perceived as vehicles to ensure their survival in the European market.

This paper provides evidence of merger timing induced by investors’ overoptimism. We distinguish between hot and cold merger markets and examine the movements of bidding firms’ stock prices, around, before and after mergers announcements. Our results provide strong evidence that mergers are driven by stock market valuation and that these events occur during periods when investors are highly overoptimistic and react irrationally to a merger announcement. We find evidence that bidders’ managers are aware of the overvaluation of their firms and act rationally by timing their mergers and paying with stock. The market can however, correct itself when merger results start to appear.

This paper sets out some simple, closed-form formulae to estimate the level of the prospective equity premium. The formulae are based on a comparison of the firm's cost of capital with the market discount rate. Calibration of the models over long time periods indicates that, in aggregate, firms have achieved a return on their investments that is below the market discount rate. This result is robust to differing time periods, model specifications, and return calculations. It is also consistent with existing evidence that: (a) in aggregate, investment and stock returns are negatively correlated; (b) stocks with high investment suffer low subsequent returns; (c) firms raising capital suffer low subsequent returns; and (d) firms returning capital to shareholders achieve high subsequent returns. Alternative explanations of this main result are also discussed, including the possibility that the earnings of firms, and hence the funds available for investment, have been overstated due to inflation or other factors. I also use the models to estimate annual levels of the prospective equity premium since 1949. This analysis indicates that the premium over long-term Treasuries has been low since the early-1980s.

In this paper we study the determinants of investment decisions at the firm level with heterogeneous capital goods. We exploit a newly developed panel dataset of small and medium-sized firms which allows us to distinguish between purchases, sales, and net acquisitions of capital goods. We distinguish between equipment and structures and test the assumption of convex adjustment costs. Since our firms are mostly unlisted, the standard Q model based on stock market valuation is no longer appropriate. Instead, we use the fundamental Q approach proposed by Abel and Blanchard (1986) and Gilchrist and Himmelberg (1995) and extend it to the case of several capital inputs. The results show that the standard convex costs model fits very well equipment and but not structures. We find evidence for non-convexities in the case of structures.

International audience; This study examines the stock market valuation in terms of expected gains of mergers and acquisitions (M&As) amongst banks that were announced from 1991 to 2001 in 13 European markets. We classify M&As according to activity, geographic specialisation or diversification. A Bivariate GARCH model is used to estimate abnormal returns taking beta variability into account. Our results document that there is, on average, a positive and significant increase in value for the group of targets' banks. Moreover, we find that on average there is a positive and significant market reaction for the two types of transactions: cross-product diversification and geographic specialisation.

This paper investigates the stock market response to R&D expenditures in 11 industrial countries to provide an international comparison of the value relevance of the R&D expenditures in different business and macro-economic environments. The results indicate that there is a significantly positive connection between stock prices and the R&D expenditures in most of the countries even after controlling for the industry effect and the financial structure of the firm. The valuation impact of accounting losses is revealed to be different from that of profits.

Discounted cash flow is the main tool for valuing projects and companies. Real options techniques can augment valuation. The case of Netscape is used to demonstrate this. We begin with a defensive cash flow scenario. On top of this, we superimpose a number of real options valuations. Some experts would dispute our methodology because it is not built upon market-priced risk. Nonetheless, it provides an approximate valuation. We prefer equity valuation using various methodologies, including real options where appropriate, to arrive at a range of value. But we cannot, using financial logic, justify the high Netscape flotation price.

This paper examines the stock market valuation of mergers in the insurance industry between 1996 and 2000 in Europe and in the US. We form a sample of 56 deals in which the acquiring company is listed. Our data reveal that insurance companies mergers enhance value for bidder shareholders. Over the event window (-20,+2) their abnormal return is 3.65%. The abnormal returns for acquiring firms are larger the greater the relative size of deal value. We also find that mergers occurring between insurance companies located in the same European country are not valued positively by the market, while cross-border deals appear to increase shareholder’s wealth. The analysis of a sub-sample of simultaneously listed bidders and targets reveals that the combined insurance companies experience significantly positive abnormal returns − over the event window (-20,+2) shareholders gain 5.27% − and consistent with previous findings, target shareholders substantially increase their wealth.

We examine whether stock prices fully reflect the value of firms? intangible assets, focusing on research and development (R&D). Since intangible assets are not reported on financial statements under current U.S. accounting standards and R&D spending is expensed, the valuation problem may be especially challenging. Nonetheless we find that historically the stock returns of firms doing R&D on average matches the returns on firms with no R&D. For companies engaged in R&D, high R&D intensity has a distinctive effect on returns for two groups of stocks. Within the set of growth stocks, R&D-intensive stocks tend to out-perform stocks with little or no R&D. Companies with high R&D relative to equity market value (who tend to have poor past returns) show strong signs of mis-pricing. In both cases the market apparently fails to give sufficient credit for firms? R&D investments. Our exploratory investigation of the effects of advertising on returns yields similar results. We also provide evidence that R&D intensity is positively associated with return volatility, everything else equal. Insofar as the association reflects investors? lack of information about firms? R&D activity, increased accounting disclosure may be beneficial.

Record low dividend yields and record high market-to-book ratios in recent months have led many market watchers to conclude that these indicators now behave differently from how they have in the past. This paper examines the relationship between traditional market indicators and stock performance, and then addresses two popular claims that the meaning of these indicators has changed in recent years. The first is that dividend yields are permanently lower now than in the past because firms have increased their use of share repurchases as a tax-advantaged substitute for dividends. The second claim is that the implementation of Financial Accounting Standard (FAS) 106 for retiree health liabilities has seriously depressed the reported book values of many companies since the early 1990s, artificially raising their market-to-book ratios. We conclude that, even after adjusting for these factors, the current level of market indicators is a cause for concern.

Agrarian co-operatives, in contrast to limited companies, cannot be listed on the Stock Market. Therefore, there is no mechanism such as the Stock Exchange rate to assign them a value. To correct this situation an analogical-stock market valuation model has emerged, which postulates that general markets behave as organized stock markets. The main consequence of this is the possibility of employing stock market information (generally more abundant and of higher quality that those from non stock-exchange companies) to valuate those which are not listed on the Stock Market, although by their nature they could be, or those which by their legal nature could never be quoted, such as the agrarian co-operatives. In the presen t work this methodology, specifically dynamic models, is applied to the valuation of wine co-operatives within the Appellation of Origin Alicante (Spain), calculating also the complementary merger value, trying to judge the convenience of an hypothetic association among them. Las cooperativas agrarias, al contrario que las sociedades anónimas, no tienen la posibilidad de cotizar en Bolsa. Por tanto, no existe un mecanismo como sería el Mercado de Valores que les asigne un valor. Para paliar esta eficiencia surge la valoración analógico-bursátil, que postula que el mercado general de empresas se comporta de manera análoga a los mercados de acciones organizados. La consecuencia más importante que se puede extraer es la posibilidad de emplear la información del mercado bursátil (que naturalmente es de una abundancia y calidad mayores que el de las empresas no cotizadas) para valorar empresas que no cotizan en la Bolsa de Valores, aunque por su naturaleza así pudieran hacerlo o también para valorar empresas que nunca podrían cotizar en Bolsa porque su naturaleza jurídica así se lo impide, tal es el caso de las cooperativas agrarias. En el presente trabajo se aplica esta metodología, específicamente los modelos dinámicos, a la valoración de las bodegas cooperativas amparadas por la Denominación de Origen Alicante (España), calculando también su valor complementario de fusión, en un intento de juzgar la conveniencia de una hipotética unión entre las mismas.

Centocor, a Malvern, Pa.-based biopharmaceutical company, has emerged as a possible takeover target of Johnson & Johnson. Although talks are supposedly ongoing, neither company will comment. But if true, Centocor will not come cheap. Its stock market valuation now exceeds $3 billion. Centocor, created in 1979, ranks among the world's top 10 biopharmaceutical firms. In 1998, it had revenues of $338 million—94% from product sales—and net earnings of $17.2 million, excluding special charges. In the first quarter of this year, product sales grew 105% to $100 million and net income increased sixfold to $10.1 million, compared with the first quarter of 1998. Only in the past two years has the company been profitable. It spent most of the 1980s struggling through the product development process, although a diagnostics business (sold in late 1998) helped support it. Now Centocor has three successful products—ReoPro, a monoclonal antibody that prevents blood clots during angioplasty and other coronary procedures; ...

Does weakness in the banking sector adversely affect the real economy? If so, how large is the effect? In this article, the author answers these questions for Japan in 1991-92. He tests whether a firm's investment is sensitive to the financial health of its main bank, controlling for stock market valuation and cash flow. Investment is lower by 30 percent at firms that have one of the lowest-rated banks as their main bank. Because the weakest banks deal with few firms, the estimated effect of the problems in the banking sector on the Japanese economy during this period is small. Copyright 1995 by University of Chicago Press.

This paper empirically explores the dynamic interactions among research and development, capital investment, and the stock market performance of 191 firms in science-based industries during the period 1973-81. Using a framework based on dynamic factor analysis, the authors test asymmetric specifications of the dynamics between R&D and investment. The data indicate that R&D Granger-causes investment, but that investment does not Granger-cause R&D. The authors discuss interpretations of this causal ordering, characterize the stylized facts of the movements over time of R&D and investment, and measure the stock market valuation of these movements. Copyright 1989 by University of Chicago Press.