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Employing 63,464 firm-year observations of 8876 companies in 22 countries from 2000 to 2013, we conduct a series of multiple regression analyses that reveal a significantly positive relationship between board gender diversity and dividend payouts. The empirical results confirm that board gender diversity facilitates corporate governance and consequently promotes dividend payouts. We also show that a good institutional environment may weaken the effect of board gender diversity on dividend payouts. Institutional ownership is positively associated with board gender diversity and that corporate dividend payouts increase when female senior executives have shareholdings. The findings of our analysis are robust after controlling for potential endogeneity concerns.

PurposeWhen major reallocations of the firm’s assets are strategically necessary, the corporation’s decision system is perhaps put to its severest test. This paper aims to argue that a relevant balance in the corporate governance structure is highly important to assure those strategic decisions taken are successful and economically beneficial to shareholders’ wealth.Design/methodology/approachThis study examines US firms making major acquisitions resulting in large losses or large gains and identify weaknesses and strengths in their respective governance structures.FindingsFirms making large loss acquisitions demonstrate a balance in the corporate governance structure that heavily favors the CEO. Firms making large gain acquisitions present a more efficient balance in the configuration their corporate governance dynamics. Finally, the authors present evidence that making a major acquisition triggers rebalancing of the corporate governance dynamics to increase the effectiveness of monitoring the implementation of the acquisition. The authors find firms making large loss acquisitions make more extensive changes in the professional expertise on their boards.Originality/valueThis study provides a broad understanding of the role of corporate governance by examining overall governance dynamics and offers how one corporate governance structure does not fit all firms, at all times, in all circumstances. Instead, timely imbalances within the configurations of corporate governance dynamics over the major strategic acquisition process can be consistent with the goal of increasing shareholders’ wealth.

To gain better understanding about the impact of different types of institutional investors on the informational efficiency of stock markets, we examine investment in one group of underperforming firms: firms with strong labor unions. While publicly available, information about unionization is hard to obtain and understand. We find that hedge funds avoid investing in firms with strong unions, but passive investors invest more in these firms. When unionization becomes stronger (weaker), investment by hedge funds declines (increases). When firms are excluded from the S&P 500 index, reducing passive-investor interest, stock-price declines are larger for firms with strong unions.

Purpose When major reallocations of the firm’s assets are necessary, a balance in the corporate governance structure favoring the CEO can be a necessary condition for planning and initiating major strategic moves. The purpose of this paper is to examine firms making major acquisitions to identify corporate governance elements that are particular to undertaking major strategic initiatives. Design/methodology/approach The authors test the proposition that firms making major strategic acquisitions will exhibit a corporate governance structure that is different in a number of its governance elements from firms making other acquisition decisions. The authors categorize the elements of corporate governance structures into CEO characteristics, internal monitoring, external monitoring and CEO compensation. Findings The authors find the propensity of acquiring firms to make major strategic acquisitions is abetted by the CEO’s attributes and compensation, by the structure of the audit committee and compensation committee, and by the firm’s prior financial performance. Originality/value The analysis of firms making major acquisitions presents the corporate governance dynamics of an environment that is conducive to strategic risk taking.

Using a strategic merger sample that covers the period from 1985 to 2011, we find that the acquirer’s stock price firm-specific information, the new information created by investors about the value of firm fundamentals, increases the positive sensitivity of strategic merger investment to the acquirer’s Q; the target’s stock price firm-specific information increases the negative sensitivity of merger investment to the target’s Q. These results suggest that managers learn from financial markets in identifying strategic merger investment opportunities by transferring assets from poorly managed firms to well managed firms. In addition, the target’s stock price firm-specific information itself increases the acquisition size, indicating that informed acquirer managers are more likely to take out large merger investment. Last but not the least, stock price informativeness increases merger synergies and post-merger performance, suggesting that informed managers make better merger investment that increases shareholder value. Our study contributes to the recent increasing stream of studies on managerial learning from the market.

Previous studies on the choice of stock payment in M&A mainly focus on managerial private information. This study shows that managers also learn new firm-specific information from financial markets in making this decision. The acquirer's stock price firm-specific information increases the stock-payment-to-Q sensitivity. The target's stock price firm-specific information decreases the stock payment probability. Further analyses on deal and firm characteristics as well as shareholder wealth in stock mergers support the managerial learning argument. Overall, this study highlights a new set of information that affects the form of merger payment in mergers and acquisitions.

Companies have collected billions in premiums from privately sold put options written on their own stock. It is puzzling that counterparties, investment banks, would agree to make such transactions with better-informed companies which have extraordinary ability to time the market as documented by Jenter et al. (2011). To resolve this puzzle, we develop a model that shows that investment banks, by offering to buy put options from better-informed parties, receive private information about issuing companies. Our model also incorporates the practice of firms (such as Microsoft) of sometimes repurchasing their own put options and thus providing additional private information to investment banks. Empirically, we find support for our theory from an abnormal 9% increase in the stock prices and a 40% increase in the trading volumes around the put sales. Examination of 13D filings reveals that trading by upper management insiders cannot completely account for the change in volume.

Chen, Goldstein, and Jiang (2007) first present direct evidence that managers learn from the market in internal capital investment decisions. This paper extends the research to merger investment. We report that stock price firm-specific information increases the sensitivity of merger investment to Tobin's Q. This relation is not driven by a particular subsample and is robust to diverse measures of stock price informativeness. It also holds when we control for related variables. Firms with more informative stock prices achieve better post-merger operating performance. Overall, these results suggest that managers learn new information from financial markets in making merger investment decisions.

We examine whether discretionary accruals of firms obtaining substantial external financing can be explained by managerial manipulation or managerial overoptimism. Insider trading patterns and press releases around equity and debt financing suggest that managers are more optimistic about their firms around debt financing. Consistent with earlier studies, we find that discretionary current accruals peak when firms obtain equity financing. However, we also find that discretionary accruals peak when firms obtain debt financing. Moreover, discretionary accruals are higher for firms that rely on debt rather than on equity financing. The results are robust to controlling for firm characteristics, excluding small and distressed firms, and using alternative measures of discretionary accruals. These findings support the hypothesis that managerial overoptimism distorts financial statements of firms obtaining external financing.

Using a sample of companies that restated their earnings over the period 1997–2002, this study finds that the probability of voluntary as opposed to forced restatements is positively related to the independence of both the board of directors and the audit committee. Following both voluntary and forced earnings restatements, companies increase the proportion of independent directors on both the board and the audit committee; three years after restatements, both types of restating companies attain similar levels of director independence. Moreover, the study finds comparable postrestatement long-run stock performance for all restating and matched companies, which suggests that postrestatement enhancements to internal control systems help restore companies’ blemished reputations.

We use the chain of events from the fall of the Berlin Wall to the reunification of Germany to examine how capital market participants respond to momentous and unprecedented events. Our examination measures the impact of these events on analysts’ forecasts for the earnings of West German firms. Our results show a significant decrease in analysts’ ability to accurately forecast earnings. Contrary to the public’s euphoria, the sense of the market was generally negative about the implications of unification for West German firms. This negative sentiment was spread across most of the broad sectors, but within those sectors the results were significantly positive for select groups of industries. It appears that, in the face of this extraordinary event, financial analysts were detached from the emotions it engendered and were discriminating in their assessment of its impact.

We reexamine investor tendency to overweight recent experiences when predicting future performance of firms by examining a sample of firms making private equity placements. Our findings are consistent with the projection argument that investors use the recent experiences of other firms to predict the success of placing firms. Specifically, we find that the placements preceded by a larger number of recently very successful firms are associated with the significantly more favorable market reaction to the placement announcement and significantly poorer post-placement stock price performance.

We find that debt downgrades of money center banks elicit negative stock price responses in nondowngraded money center banks. Stock prices of larger regional banks also react to these downgrades. Although downgrades of regional banks evoke negative stock price responses for regional banks in the same geographic region, the importance of geographic region as a factor determining the extent of intra-industry reactions has diminished since 1989. Our results indicate that the merger and expansion activities triggered by interstate banking have blurred differences between regional and money center banks as interstate banking activity has moved towards nationwide banking

Outlines previous research on the effects of bond rating changes on the share prices of US banks, noting opposing views on whether they contain new information. Examines revisions in analysts’ earnings forecasts for downgraded and non‐downgraded banks (separating regional banks from large money centres) to test the value of this information using 1981‐1991 data on 14 downgrades of money centre banks; and explains the methodology used. Shows that downgrades affected forecasts for the downgraded banks and other money centre banks but not for regional banks. Concludes that bond rating agencies assist market discipline by providing useful information on risk.

Companies collected billions in premiums from peculiarly structured put options written on their own stock, while almost all of these puts expired worthless quarter after quarter. Buyers of these options, primarily investment banks, lost money as a result. Although these losses might seem puzzling, we model how by offering to buy put options from better informed parties, investment banks receive private information about the issuing company. Empirically, we find a 12% increase in the stock prices and a 40% increase in the trading volumes around the put sales, indicating indeed that investment banks, the bankers personally or their clients may have acted on information obtained from these transactions.

This paper investigates the role of private placements of common stock as a source of bank capital. Our results show that information asymmetry problems that typically attend new offers of bank equity are mitigated in the private placement process. Moreover buyers of privately placed common stock seem to provide a quality certification of capital deficient bank holding companies. Our evidence is also consistent with the notion that buyers of privately placed common stock provide a monitoring service that aligns the interest of the bank's managers and shareholders. Finally, we find no evidence that private placements are predominately motivated by incumbent management's attempts to sell equity to a friendly buyer at the expense of the bank's current shareholders.

This paper tests the proposition that split announcements are informative signals that play a greater information role for widely held firms. We present evidence for an inverse relationship between managerial ownership and the magnitude of stock split-induced abnormal returns. After controlling for industry and firm size, we find that splitting firms have lower managerial ownership, on average, than nonsplitting firms. We also find no evidence that managers trade on inside information prior to announcing splits.

This study investigates the extent to which information inferred by investors from initial announcements of corporate security offerings affects share prices in the capital markets. The empirical tests measure the response in the common stock prices of both firms announcing a security offering and non-announcing firms operating in the same industry. Small but significantly negative abnormal returns are shown by industry shares upon initial announcements of common stock, convertible debt, and straight debt public offerings. Such an industry response indicates that share prices incorporate an inside assessment of factors relevant to the valuation of an industry subset of firms. RESEARCH INTO THE VALUATION effects of corporate security offerings to the public indicate that announcements of these financing events can convey new information to investors. Significant negative share price reactions have been documented for offering announcements of common stock and securities convertible into common stock. Response to offering announcements of nonconvertible securities is typically negative but not statistically significant. Researchers generally agree that these reactions reflect more than the direct effects of the financing on the issuing firm's cash flows. Rather the announcement of an impending public offering seems to communicate unfavorable inside information about the announcing firm's value.1 Several studies provide theoretical underpinning for this interpretation. Miller and Rock (1985) present a model in which unanticipated security sales indicate that earnings are lower than expected. Myers and Majluf (1984) argue that managers have incentive to exploit their inside information

This study examines whether changes in the ratings of bank debt have any information content. Bank holding companies are monitored both by bank regulators and by debt rating agencies, leading to the view that duplication of effort may render superfluous the monitoring service of rating agencies. However, our results show that downgrades of bank debt are associated with statistically significant wealth losses, irrespective of whether the rating change is across rating classes or within a rating class. Moreover, the results hold even when observations with potentially confounding events are removed from the sample. These results suggest that rating agencies provide valuable information to the capital market regarding the risk exposure of bank holding companies.

This paper investigates the extent to which institutional ownership of equity affects the market's response to announcements of new issues of common stock. We find that the absolute magnitude of the share price reaction is negatively related to the level of institutional ownership in the announcing firm. These results are consistent with the argument that the information acquisition activities of institutional investors reduce preannouncement information asymmetries between managers and the capital market.

This study investigates the impact of Pennsylvania Senate Bill 1310 on the share prices of Pennsylvania corporations. Considered the most severe of the second-generation antitakeover laws, the statute limits the ability of shareholders to challenge management through the proxy process and eliminates the traditional fiduciary obligation of directors to promote shareholders' interests. We find that PA SB1310 significantly decreased share values, and estimate the loss to shareholders of Pennsylvania firms at $4 billion. However, firms with antitakeover charter amendments already in place were less affected, and firms that exempted themselves from PA SB1310 recovered a portion of shareholders' wealth.

In this study the role of private placements of debt in the capital acquisition decision of public utilities is investigated. Whereas public offerings are sales of securities through financial intermediaries to the public-at-large, private placements are direct sales of securities by an issuing corporation to a limited number of institutional investors. In contrast to the negative stock price reactions typically found for public security sales, private placements are associated with significant positive abnormal returns in the shares of the issuing public utilities. Also, larger private placements appear to elicit a more favorable market response. Results are consistent with reduced information asymmetries and increased monitoring of the issuing firm resulting from the private placement.

This article examines the effect of pollution control revenue bond offerings on public utility common stock prices. These securities provide a unique case in which public utilities were permitted to issue a limited quantity of debt offerings investors an income stream exempt from federal taxes with the proceeds from the issue targeted for a specific capital investment. Significant negative stock price effects are reported around the announcement of these securities. However, the stock price response to pollution control revenue bond sales is more favorable than that reported in earlier studies for straight debt offerings used to finance a utility's investment program.

This study explores the strategic interaction between large institutional investors and firms that issue put options written on their own stock. The firms experience large positive abnormal annual returns after they sell put options. The vast majority of issued put options expire without being exercised, and the buyers of these options, which are predominantly investment banks, lose money. We propose a model that gives a rationale why an uninformed party, an investment bank will trade in put options with an informed party, the issuing firm, although the expected profits from this trade are negative. The model shows how trading with an informed party can be profitable because the bank can acquire valuable information and afterwards earn abnormal returns on trades in other securities of the same firm. Finally, we outline several predictions from the model, and propose empirical tests to establish our proposition that an investment bank can legally acquire private information and trade profitably on it.

Using a sample of companies charged with government, financial reporting, or stakeholder fraud or regulatory violation in the United States during the 1978–2001 period, this study found that after the accusation of fraud, companies increased the proportion of outsider directors on their boards of directors and on the monitoring committees of the boards. Furthermore, the results show comparable long-run stock price and operating performance between companies charged with fraud and a matching sample of companies not accused of fraud. Collectively, these results suggest that improvements in internal control systems following accusations of fraud help repair a company’s damaged reputation and reinstate confidence in the company.

Using all available 385,342 initiations, upgrades, and downgrades of equity analysts’ recommendations between 1980 and 2008 from First Call, we explore both the short-term and long-term market reactions following those announcements. We found significant positive/negative announcement abnormal returns following upgrades/downgrades. However, we only found significant drift following downgrades. We found that initiations with neutral rating were also followed by significant negative abnormal returns, suggesting that investors adjust for the positive rating bias in initiations. We also found significant drift for initiations with sell or strong sell. Investors still underestimate the negative information contained in initiation with bad ratings. Overall, our evidences support the argument that analysts’ recommendations have investment values, but suggest the market under-reacts to negative rating initiations or downgrades.

We investigate the impact of Focus Listing by the Council of Institutional Investors on targeting poorly performing firms. Post-listing stock returns for the targeted firms differ insignificantly from those of a suitable benchmark group. Institutional investors increase their holdings of targeted firms, but not by more than those of the benchmark firms. Similarly, though analysts revise earnings forecasts up for Focus Listed firms, they do so well after the listing event and positive revisions are no greater than the benchmark group. Moreover, there appears to be little difference between Focus List and benchmark firms in the incidence of post-listing events such as mergers and stock repurchases. Overall, we find very little evidence of the efficacy of shareholder activism. List of underperforming firms. The CII is an organization of over 120 public and private pension funds. The total assets of its member funds exceed $1 trillion. The objective of the organization is to encourage member funds, as major shareholders, to take an active role in protecting plan assets. The CII's Focus List encourages members to direct their activism toward the boards of directors and managers of listed firms for the purpose of inducing them to make changes necessary to improve firm performance. By targeting selected firms for the collective attention of member funds, the list could enhance the effectiveness of their shareholder activism efforts. Our study examines the effectiveness of the coordinated shareholder activism produced by the CII Focus List.

The Effect of Proposition 103 on Insurers: Evidence from the Capital Market Introduction On November 8, 1988, California voters passed an insurance-reform ballot initiative known as Proposition 103. In essence, the initiative was a populist response to rising automobile insurance premiums in a state where property-liability insurance rates were already among the highest in the nation. Proposition 103's most controversial provision mandates a minimum 20 percent reduction in property-liability insurance premiums from their November 1987 levels. An exemption from the rate cut and any future rate increases were to be permitted only if an insurer was substantially threatened by insolvency. On May 4, 1989, the California Supreme Court upheld the constitutionality of the rate rollback but overturned the insolvency provision and ruled that insurers were entitled to an adequate return. Comments in the financial press indicate that Proposition 103 has evoked a considerable debate about its effect on the property-liability insurance industry. Opponents of Proposition 103 have deemed it to be one of the most expensive political defeats any American industry has faced. This view is based on several features of Proposition 103 (see Gross, 1989; and Schmitt and Steptoe, 1988). First, the 20 percent rollback in premiums is estimated to produce an annual loss of $6 billion for the insurance industry. Second, revenues earned by the property-liability industry are further reduced because Proposition 103 introduces more competition into the insurance market by allowing Califoria banks to act as insurance brokers or agents. Third, because of the proposition, the insurance industry is no longer exempt from the state's antitrust laws. This would effectively curtail the widespread practice of exchanging and pooling actuarial and other data. Insurers contend that exchanging information is useful in setting accurate and fair rates. Moreover, they argue that removal of the exemption threatens the soundness of medium-size companies which depend on pooled actuarial data to make sound estimates of risk. An alternative view expressed by some groups is that the regulatory changes instituted by Proposition 103 may ultimately benefit the insurance industry. For example, some industry experts argue that by injecting the adequate return standard into Proposition 103, the decision rendered by the state high court is favorable to insurers in California. As most California auto insurers claim to be earning little or no return in the state (see Hill and Celis, 1989), the adequate return standard provides a loophole that may largely negate the 20 percent rate reduction provision. Moreover, some observers believe that under Proposition 103 insurance rates will increase rather than fall if insurers can demonstrate that their current rate structure deprives them of an adequate return. (1) According to Standard and Poor's, the adequate return clause was a positive development for insurance firms operating in California. Indeed, as a result of the court decision, the rating agency removed two large California insurers, Safeco and Allstate, from its credit-watch list (see Schmitt and Wells, 1989). While the debate on the effects of Proposition 103 on the insurance industry continues, no empirical evidence has been presented on how the California initiative affected the shareholders of property-liability insurers. This study examines share price reactions of property-liability insurers around key dates surrounding Proposition 103. The findings indicate that Proposition 103 is viewed by the capital market as an unfavorable development for insurers. Data and Research Methods A preliminary sample of firms most likely to be affected by the consequences of Proposition 103 is identified from the list of "The Two Hundred Largest American Property-Casualty Companies" published in Best's Key Rating Guide (1988) (2) and from articles discussing the California initiative in the Wall Street Journal (WSJ). …