Abstracts of Volume 41, Number 3, August 2006
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abstracts
The
Importance of Board Quality in the Event of a CEO Death
Kenneth A. Borokhovich, Kelly R.
Brunarski, Maura S. Donahue, Yvette S. Harman
Market
Reaction to Changes in the S&P SmallCap 600 Index
S. Gowri Shankar, James M. Miller
Corporate Governance and Asset Sales: The Effect of
Internal and External Control Mechanisms
Robert C. Hanson, Moon H. Song
Information Content of Business Methods Patents
Brian Boscaljon, Greg Filbeck, Tim
Smaby
IPO
Placement Risk and the Number of Co-Managers
Wallace N. Davidson III, Biao Xie,
Weihong Xu
Effect of Governance Characteristics on the State of the
Firm after an Initial Public Offering
Shelly W. Howton
Institutional Ownership and Return Reversals Following
Short-term Return Consistency
Boyce D. Watkins
Erratum: Noninterest Income and Financial Performance at
U.S. Commercial Banks
Robert DeYoung and Tara Rice
The Importance of Board Quality in
the Event of a CEO Death
Kenneth A. Borokhovich, Kelly R.
Brunarski, Maura S. Donahue, Yvette S. Harman
We examine board quality and executive replacement decisions
around deaths of senior executives. Stock-price
reactions to executive deaths are positively related to
board independence. Controlling for such factors as the
deceased’s stockholdings, outside blockholdings, board
size and whether the deceased was a founder, board
independence is the most significant factor explaining
abnormal returns. Board independence is particularly
important when there is no apparent successor and firm
performance is poor. The results are consistent with
independent boards being reluctant to discipline poorly
performing incumbent managers, but nevertheless using
the opportunity of an executive death to improve the
quality of management.
Keywords: Executive deaths, board
composition, board size, corporate governance,
managerial succession, CEO turnover, firm performance
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Market Reaction to Changes in the S&P SmallCap 600 Index
S. Gowri Shankar, James M. Miller
Firms added to (deleted from) the S&P 600 index experience a
significant price increase (decrease) at announcement.
Firms that newly enter (exit) the S&P universe
experience a larger price increase (decrease) than firms
that move between S&P indexes. Trading volumes are
higher after the announcement and institutional
ownership increases (decreases) following index
additions (deletions). However, the price and volume
effects are temporary and are fully reversed within 60
days, in contrast to the permanent effects reported for
S&P 500 changes. Our results support the temporary price
pressure hypothesis and are similar to results reported
for Russell 2000 index changes.
Keywords: S&P SmallCap 600 index,
Standard and Poor’s 600, stock-market index changes,
index reconstitution, price pressure, institutional
ownership
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Corporate Governance and Asset Sales: The Effect of Internal
and External Control Mechanisms
Robert C. Hanson, Moon H. Song
We investigate firms that sell assets to determine whether
corporate governance mechanisms are effective at
controlling agency problems. Our evidence shows that
these firms have lower managerial ownership and are more
likely to make unrelated acquisitions, suggesting weak
internal controls. Analysis of insider trading activity
shows that, on average, net buying in-creases before the
asset sale and shareholders benefit more when this
occurs. Results suggest that how managers reach a given
level of ownership provides more information about
incentive alignment than just the level of ownership.
Our results also highlight the dynamic nature of
corporate restructuring as firms acquire and then sell
assets.
Keywords: Asset sales,
divestitures, managerial ownership, board structure,
insider trading
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Information Content of Business Methods Patents
Brian Boscaljon, Greg Filbeck, Tim
Smaby
We examine the market reaction to business method patents
granted to publicly-traded firms. Our findings suggest
that the State Street decision represents a turning
point not only for the growth in the number of business
method patent filings, but also in the market’s
awareness and perception of value creation for the
filing firms. The granting of a business method patent
evokes a positive average stock-price reaction,
especially in the post-State Street period.
Cross-sectional differences in abnormal returns depend
on the type of patent granted. The market reaction also
differs based on industry classification.
Keywords: business method patents,
patents, patent quality, patent reform, business
methods, market reaction, event study, State Street
decision
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IPO Placement Risk and the Number of Co-Managers
Wallace N. Davidson III, Biao Xie,
Weihong Xu
Previous studies show that co-managers mainly affect IPO
aftermarket activities. We investigate the role of
co-managers in IPO premarket activities. We argue that
co-managers help reduce IPO placement risk and
hypothesize that IPO issuers hire more co-managers when
placement risk is higher. We find the number of
co-managers is positively associated with three proxies
for placement risk. IPOs with more price uncertainty and
high-tech IPOs hire more co-managers, while IPOs in
regulated industries hire fewer co-managers. We also
find larger IPOs, recent IPOs, and IPOs with more
reputable lead underwriters hire more co-managers.
Keywords: initial public offering,
placement risk, co-manager, underwriter, pre-market,
book building
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Effect of Governance Characteristics on the State of the Firm
after an Initial Public Offering
Shelly W. Howton
I examine firm characteristics available to investors at a
firm’s initial public offering date to determine whether
they predict the firm’s survival, acquisition, or
failure. Firms survive more often than they are acquired
when they are venture-backed, the chief executive
officer is the original founder and an outside
blockholder is present. The presence of an outside
director does not increase the probability of survival.
Firms that are more likely to survive than fail include
large firms and those with longer board tenure.
Keywords: initial public offering,
corporate governance
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Institutional Ownership and Return Reversals Following
Short-term Return Consistency
Boyce D. Watkins
Securities with consistently strong positive (negative)
returns during the previous two weeks have future
returns that are higher (lower) than those that do not.
The results hold for various robustness checks,
including those involving firm size, share turnover,
past return levels, and bid-ask bounce. The returns to
short horizon consistency trading strategies are
reliable through time and are both economically and
statistically significant. There is also some evidence
that longer periods of consistency lead to greater
risk-adjusted profits. Most surprising is that this
effect holds only for those firms with high
institutional ownership.
Keywords: consistency, asset
pricing, institutional investing, market efficiency
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Erratum: Noninterest Income and Financial Performance at U.S.
Commercial Banks
Robert DeYoung and Tara Rice
Table 7 (page 123) in our article is incorrect. The corrected
table appears in the erratum, along with corrected text
(page 123) and several necessary corrections to the
summary statistics in Table 2 (pages 115-116). The
corrections do not materially alter our findings or our
conclusions.
Full text of erratum
Original article: DeYoung, Robert
and Tara Rice, 2004. Noninterest Income and Financial
Performance at U.S. Commercial Banks, The Financial
Review 39, 101-127. Full text of original article
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