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Two essays in corporate finance
TWO ESSAYS IN CORPORATE FINANCE by Mehmet Engin Akbulut A Dissertation Presented to the FACULTY OF THE GRADUATE SCHOOL UNIVERSITY OF SOUTHERN CALIFORNIA In Partial Fulfillment of the Requirements for the Degree DOCTOR OF PHILOSOPHY (BUSINESS ADMINISTRATION) August 2006 Copyright 2006 Mehmet Engin Akbulut UMI Number: 3238329 3238329 2007 UMI Microform Copyright All rights reserved. This microform edition is protected against unauthorized copying under Title 17, United States Code. ProQuest Information and Learning Company 300 North Zeeb Road P.O. Box 1346 Ann Arbor, MI 48106-1346 by ProQuest Information and Learning Company. ii Dedication For Arif and Havva Akbulut, For Rahşan and Hakan Akbulut iii Acknowledgements First and foremost, I would like to thank my advisor, John Matsusaka, for his constant support, encouragement and motivation during my Ph.D. years. He spent numerous hours in reading my work and guiding me to become a good scholar. I have learned a lot from him and constantly benefited from his valuable comments and suggestions. I am truly indebted to him. I am greatly indebted to my dissertation committee members, Harry DeAngelo and Kevin Murphy for their numerous suggestions and expert guidance. I thank Pedro Matos, Lior Menzly, Micah Officer, Oğuzhan Özbaş and Şelale Tüzel, for many stimulating discussions and suggestions throughout my writing of the dissertation. I thank Ayşe and Selahattin İmrohoroğlu for their friendship and support which started from the very first moment I decided to apply to the Ph.D. program and grew ever since. I thank my fellow classmates Qing Ma and Jianfei Sun for enduring this journey with me and for their empathy and support along the way. One unexpected side benefit of the years I spent as a Ph.D. student is that I made life long friends; Murat, Banu and Sinan Birdal and Şelale and Murat Bayız, whose love, empathy and humor lightened even the darkest of moods and gave me strength to move forward. I consider myself very lucky to have met them and thank them for being with me along the way. iv I thank my father and mother; Arif and Havva Akbulut and my sisters; Rengin and Pelin. There was not a single moment during this time that I did not feel their generous love, understanding, and unwavering support behind me, from thousands of miles away. Their patience had been remarkable, their sacrifice tremendous, and I am glad I was able to make them proud in the end. Finally, I would like to thank my wife Rahşan, for her endless love, patience and unwavering support for all those years. None of this would be possible if it was not for her. v Table of Contents Dedication ii Acknowledgements iii List of Tables vii List of Figures x Abstract xii Chapter 1: Managerial Insider Trading and Opportunism 1 1.1 Introduction 1 1.2 Method and Data 4 1.2.1 Measures of Insider Trading 4 1.2.2 Insider Trading Sample 6 1.2.3 Acquisition Sample 8 1.2.4 Seasoned Equity Offerings Sample 10 1.2.5 Share Repurchase Sample 11 1.2.6 Mean and Median Managerial Trading Around Events 12 1.3 Managerial Opportunism and Abnormal Trading 20 1.3.1 Measuring Abnormal Trading 20 1.3.2 Non-Informational Motives for Trading 21 1.4 Managerial Trading around Stock and Cash Acquisitions, SEOs and Share Repurchases 23 1.4.1 Stock Acquisitions versus Cash Acquisitions 25 1.4.2 SEOs and Share Repurchases 34 1.5 Running for the Exits 41 1.6 Discussion 56 1.7 Conclusion 58 Chapter 2: Market Misvaluation and Merger Activity: What do Managers’ Insider Trades Tell Us? 60 2.1 Introduction 60 2.2 Data and Method 69 2.2.1 Sample Description 69 2.2 Measuring Overvaluation 79 2.3 Empirical Predictions of the Market Misvaluation Theory 83 vi 2.4 Univariate Tests 87 2.5 Multivariate Tests 96 2.5.1 Acquisition and Method of Payment decision 96 2.5.2 Acquirer and Target Announcement Returns 106 2.5.3 Long-Run Abnormal Returns 114 2.5.3.1 Buy-and-Hold Abnormal Returns 114 2.5.3.2 Calendar Time Portfolio Regressions 118 2.5.3.3 Calendar Time Abnormal Returns 121 2.6 More Comprehensive Measures of Trading 124 2.7 Overview of the Main Findings 132 2.8 Conclusion 137 Bibliography 139 vii List of Tables Table 1.1: Insider Trading Sample 7 Table 1.2: Acquisitions Sample 9 Table 1.3: Seasoned Equity Offerings Sample 11 Table 1.4: Share Repurchases Sample 12 Table 1.5: Trading Activity for manager-years with and without Stock and Cash Acquisitions 14 Table 1.6: Trading Activity for manager-years with and without SEOs and Share Repurchases 17 Table 1.7: Abnormal Trading Activity around Stock and Cash Acquisitions using NETPR and CHNG 26 Table 1.8: Abnormal Trading Activity around Stock and Cash Acquisitions using NETDLR and CHNGDLR 29 Table 1.9: Abnormal Trading Activity around Stock and Cash Acquisitions using NETSHROUT and CHNGSHROUT 32 Table 1.10: Abnormal Trading Activity around SEOs and Share Repurchases using NETPR and CHNG 34 Table 1.11: Abnormal Trading Activity around SEOs and Share Repurchases using NETDLR and CHNGDLR 37 Table 1.12: Abnormal Trading Activity around SEOs and Share Repurchases using NETSHROUT and CHNGSHROUT 39 Table 1.13: Changes in managerial holdings for the bottom 5% of the sample sorted by CHNG 50 Table 1.14: Running for the Exits - Stock and Cash Acquisitions 51 viii Table 1.15: Running for the Exits - SEOs and Share Repurchases 54 Table 2.1: Descriptive Statistics – Merger Data 71 Table 2.2: Descriptive Statistics - Insider Trading Data 77 Table 2.3: Mean Acquirer and Target Managerial Trading Activity in the one-year period before the Merger 88 Table 2.4: Mean acquisition characteristics sorted by acquirer’s pre-merger managerial trading activity 90 Table 2.5: Mean acquisition characteristics sorted by target’s pre-merger managerial trading activity 94 Table 2.6: Logistic regression estimates of the likelihood of becoming an acquirer in the current quarter 98 Table 2.7: Logistic regression estimates of the likelihood of becoming a target firm in the current quarter 103 Table 2.8: Ordinary least squares estimates of the relation between prior net purchases of acquirer managers and acquirer’s merger announcement return 107 Table 2.9: Ordinary least squares estimates of the relation between prior net purchases of target managers and the target’s merger announcement return 112 Table 2.10: Acquirer’s post-merger Buy-and-Hold Abnormal Returns (BHARs) 116 Table 2.11: Acquirer’s post-merger Abnormal Returns using Calendar Time Portfolio Regressions (CTPR) Method 119 Table 2.12: Acquirer’s post-merger Abnormal Returns using Calendar Time Abnormal Returns (CTAR) Method 122 Table 2.13: Logistic regression estimates of the likelihood of becoming an acquirer firm in the current quarter 127 ix Table 2.14: Ordinary least squares estimates of the relation between NETPR, CHNG and acquirer’s merger announcement return 130 Table 2.15: Acquirer’s post-merger Abnormal Returns using Calendar Time Abnormal Returns and NETPR 133 Table 2.16: Acquirer’s post-merger Abnormal Returns using Calendar Time Abnormal Returns and CHNG 135 [...]... in total holdings (CHNG): CHNG= ∆ (Share holdings) t + ∆ (Option holdings) t ( Beginning share holdings + Beginning option holdings) t All purchases, sales, share and option holdings are measured in terms of splitadjusted number of shares.8 Measuring trading and change in holdings as a percentage of share and option holdings enables me to capture the economic significance of those trades In order to... I use two alternative measures of insider trading activity.7 The first measure is net open market purchase as a percentage of beginning of the year share and option holdings (NETPR): NETPR= 7 (Open Market Purchases - Open Market Sales)t ( Beginning share holdings + Beginning option holdings)t I thank Kevin Murphy for suggesting these measures 5 The second measure is annual percentage change in total... acquisitions or only share repurchases Studies examining insider trading around important corporate announcements report similar findings.10 However, the decrease in managerial holdings is not as dramatic as the increase in selling; for example the median manager-year with only stock acquisitions sees a decrease in holdings of 1 percent or $100,000, driven mainly by manager-years with multiple stock acquisitions... Before concluding that the changes in trading patterns listed above reflect market timing by informed managers, we have to control for these non-informational motives for trading and measure the abnormal insider trading activity I deal with that in the next section 1.3 Managerial Opportunism and Abnormal Trading In order to understand whether the managers are behaving opportunistically in their personal... trading even after controlling for non-information motives for trading by keeping managerial ownership levels and compensation grants constant I include dummies for bookto-market deciles in the regressions to abstract from any book-to-market related effects Finally there might be industry and time specific reasons affecting insider trading To control for these factors, industry and time dummies are included... attention from the investors, the government and the academicians alike This is not surprising; given insider trading is widely regarded as reflecting the superior information of the insiders about the firm Investors follow it closely hoping to earn abnormal profits Government scrutinizes it vigorously to detect the illegal use of inside information Academicians use it to understand the extent of informational... the market that managers think the firm is undervalued Indeed stock acquisitions4 and seasoned equity offerings5 tend to cluster in times of high stock market valuations, whereas share repurchases6 are more common in times of low market valuations If managers are indeed timing the market in their corporate finance decisions by issuing stock when it is overvalued and repurchasing it when it is undervalued,... should increase their holdings in years when there is a share repurchase My findings point to a two- sided story: On one hand, I find that managers decrease their holdings by 8.5 percent or 7 million dollars in years when there is at least one stock acquisition, by 10 percent or 3.6 million dollars when there is at least one SEO, while they increase their holdings by 7 percent or 2 million dollars in years... beginning of the year and stock and option grants made during the year, all measured in number of shares13, in the regressions Following large increases in stock price, managers will find an increased portion of their personal wealth tied in company stock Therefore they will be more likely to sell stock in order to diversify away from company stock To control for this diversification motive, I include... dissertation examines whether managers engage in opportunistic insider trading by measuring how their net open market purchases and holdings of own company stock change around acquisitions, seasoned equity offerings and share repurchases after controlling for their share and option holdings and non-informational motives for trading On average, managers abnormally increase sales and reduce holdings around . change in total holdings (CHNG): CHNG= t holdings)option Beginning holdings share Beginning( t holdings)Option ( t holdings) (Share + ∆+∆ All purchases, sales, share and option holdings are. while they should increase their holdings in years when there is a share repurchase. My findings point to a two- sided story: On one hand, I find that managers decrease their holdings by 8.5 percent. more common in times of low market valuations. If managers are indeed timing the market in their corporate finance decisions by issuing stock when it is overvalued and repurchasing it when