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Two essays on the informativeness of stock prices : perspectives from M&A and the cross-listing of American depository receipts

Authors Gao, Ning
Issue Date 2005
Summary Essay 1: Cancelled Acquisitions, Market Information, and Corporate Governance We find that the decision by a potential acquirer to complete or cancel an announced acquisition proposal is sensitive to new information generated after the announcement of the acquisition. Both the acquirer and target's cumulative abnormal returns (CAR) over different windows after the announcement date predict the probability of completion of the acquisition. We partition the sample into two sub-samples based on whether or not the same individual holds the positions of both the CEO and the Chairman of the board in the acquiring firm, and compare the above results. Consistent with the arguments of Samuelson and Rosenthal (1986), in both sub-samples, target CARs predict the completion probability. However, the acquirer CARs are positively related to the completion probability only for the sub-sample in which different individuals hold the positions of CEO and board Chairman. These latter results are consistent with the view that when the same individual holds both positions, the board is less effective in monitoring the CEO, and managerial objectives are likely to drive acquisition activity (Lang, Stulz and Walkling (1991), Morck, Shleifer and Vishny (1990)). Deal cancellations also have significant impact on subsequent disciplinary events - but only for firms without independent leadership structure. This suggests that cancellations represent a more fundamental change in the way the company is governed for these firms, and are possibly imposed on management. JEL Classification Code: G34 Keywords: Mergers and Acquisitions, Board, Governance, Leadership Essay 2: Information Disclosure and the Intertemporal Pattern of Stock Return Synchronicity: Evidence from ADR Cross-Listings A growing literature is using stock return synchronicity, or the R2 from a market model regression, as an inverse measure of the extent to which firm-specific information is reflected in stock prices. In this paper, we argue that the relationship between R2 and the informativeness of stock prices is more complicated than has been assumed. In efficient markets, stock prices should be informative about future events: consequently, more informative stock prices should be associated with less 'surprise', and hence less idiosyncratic return variation and higher R2. In general, how the R2 is related to the information environment may well depend on the nature of information arrival, as well as how durable the information is. For example, if an improvement of the information environment is associated with substantial new information, the R2 should be higher in the aftermath of this informational event. Subsequently, however, the R2 may fall as the information becomes less relevant and new information is impounded in stock prices. The cross listing of American Depository Receipt (ADR) reflects such an improvement in the firm-level information environment. We document that the R2 is significantly higher for ADR firms than for matched non-ADR firms in the first year after the cross listing. Over the next three years, the R2 of the ADR firms drop to a level below that of the non-ADR firms. Beyond four years, the differences in the R2 between the ADR and the non-ADR firms become insignificant. Further, consistent with Morck, Yeung and Yu (2000), the dynamic effects of ADR on R2 are mainly driven by firms from countries with better property rights. JEL Classification Code: G14, G39
Note Thesis (Ph.D.)--Hong Kong University of Science and Technology, 2005
Language English
Format Thesis
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