Browsing by Subject "Firm value"

In Chapter 1, I document a negative (positive) relationship between changes in large (small) blockholders' ownership and abnormal returns. The evidence in this paper suggests that an increase in the relatively large blockholders' ownership raises the consumption of private benefits while an increase in the relatively small blockholders' ownership constrains large blockholders from expropriating minority shareholders. Moreover, I find an inversely U-shaped relationship between changes in the largest blockholders' ownership and firm value. As large blockholders' ownership and control increase, the negative effect of firm value driven by expropriating minority shareholders starts to exceed the incentive benefits of monitoring by the largest blockholder. I also show that the negative relationship between changes in institutional investors' control and abnormal returns declines as analysts' following increases.

In Chapter 2, I study the role of trading as a governance mechanism. I hypothesize that governance through trading plays a significant monitoring role in practice and that engaging in "voice" and "exit" can be substitutes. I show that abnormal turnover following earnings announcements is significantly higher for firms with large institutional blockholders than for those with small individual

shareholders. For firms with majority institutional ownership, I demonstrate that abnormal trading is higher for firms with multiple blockholders than for those with a single large blockholder and that abnormal trading increases with the number of institutional investors and declines with the percent of stocks owned by the

largest institutional investor. Moreover, this excess trading is driven by mutual fund investors, which are non-interventionist and thus are more likely to engage in "exit" than "voice". I also show that for firms with large institutional blockholders, abnormal trading following public announcements increases with liquidity.

I examine the long-term valuation consequence of over-investment in mergers and acquisitions (M&As) on acquiring firms through the "anticipation effect," in which forward-looking prices embed investors' expectations about the profitability of firms' potential future acquisitions. Using a sample of 1,451 firms with past acquisition activities, I find that their market valuations depend on both the profitability of their past acquisitions and their current free cash flow. Specifically, among firms with positive free cash flow, those with the worse history of value-destroying acquisitions experience lower market valuations. Among firms with negative free cash flow, the history of value-destroying acquisitions is not systematically associated with firm value. In addition, a significant portion of the discount is from lowered valuation of firms' cash holdings. These findings are consistent with investors forming expectations about the profitability of future possible acquisitions based on the realized performance outcomes of firms' past acquisitions and value these firms accordingly based on the likelihood of engaging in future acquisitions. They also provide empirical support for using observed market prices to proxy for investors' expectations about firms' future investment opportunities.