June 19, 2014
by Meziane Lasfer
One of the major puzzles in corporate finance is the asymmetric reaction of the market to takeover announcements. For long, stock prices of the target firms tend to increase significantly on the announcement date, while those of the bidders tend to decrease. On average, previous empirical studies show that, while target shareholders see their excess returns amount to about 30%, depending on the timing of the base price relative to the price on the announcement date, those of the bidder are relatively zero if not slightly negative. This raises a question of whether such decisions are value creating or destroying, and whether all the synergies tend to accrue to only the target shareholders. In this blog, I assess whether this is the case of the recent takeover bid by Pfizer of AstraZeneca, and I also address the question of whether this asymmetric reaction is limited to the announcement date or extends to the pre- and post-event period. Continue Reading →
June 13, 2014
by Richard Payne
I’m just returning from a conference on High-Frequency and Algorithmic trading organised by City University of Hong Kong (which has no relation to City University, London). A couple of papers caught my attention.
First, Matthew Baron presented a paper, jointly written with Jonathan Brogaard and Andrei Kirilenko, called “Risk and Return in High Frequency Trading”. This paper uses proprietary CFTC data that allows the researchers to identify high-frequency trading firms and to track their trading activity in the E-mini S&P 500 futures contract. The authors show that the levels of HFT trading revenues and the consistency of those revenues over time are both breathtaking. Continue Reading →
As the dust is now settled, it is appropriate to ask the question of who benefited from Pfizer’s bid intentions of AstraZeneca. Undoubtedly, the various advisers have gained lots of fees, which, so far, are not known as they are not disclosed by the two companies. In terms of investors, the answer to this question lies in the behaviour of stock prices around the financial press reports and the various news announcements. Continue Reading →
May 22, 2014
by Meziane Lasfer
On 20 May 2014, Vodafone reported a total dividend per share of 11p, up 8% from last year. It also stated that it was committed to annual growth in dividends even if they will be uncovered for the next two years. Although this year’s profit are relatively good, it warned that they will be lower in the future, partly because of heavy investments of £7bn network improvement aimed at turning around struggling European operations that lead to a £6.6bn writedown. The stock price went down by more than 5% on the announcement date and by a further 2% the following day.
The Finance theory tells us that dividends act as a signalling device. Clearly, in this context, the theory is not working. Continue Reading →
May 12, 2014
by Richard Payne
Given that I have had to spend a significant amount of time in airports and on airplanes over the last few days, I’ve finally found time to read Michael Lewis’ book on high-frequency trading (HFT), “Flash Boys”. As always with Lewis’ work, it is an excellent read. He’s a great journalist and a great writer. Below I spell out those ideas that I think are most important from the book and offer a few comments on what it does and doesn’t say. Continue Reading →
May 6, 2014
by Andrew Clare
Back in the late 1980s no British dinner party conversation was complete without a discussion about house prices, and in particular an assessment by each participant of the amount of money they had made on their house in the last few weeks. Ever since, and despite the collapse of a couple of property bubbles, the British public remains obssessed and fixated with property prices. So much so that many see residential property as a safer way of making money over the long term than investing in equities and as an alternative to a pension.
Today buy-to-let investing in the UK’s residential property market is common, but has it paid off? Now a new study written by Rob Thomas, Director of Research at Wriglesworth Consultancy, attempts to estimate the performance of buy-to-let investing (not an easy task by any means). Continue Reading →
March 4, 2014
by Thorsten Beck
The recent bankruptcy of the Mt. Gox Bitcoin exchange sheds more doubts on this new virtual currency and strengthens critics that see this simply as another fad. But what is really behind this and other virtual currencies? What does economic theory and economic history tell us? What can we expect for the future? Here are some quick observations; my main take-away: virtual currencies will eventually find their place as alternative payment system and asset class for investors, but will not be a game changer for modern monetary and financial systems. Continue Reading →
February 13, 2014
by Andrew Clare
In Lewis Carrol’s Alice in Wonderland, the eponymous heroine claimed that there was “no use trying to believe in impossible things”. However, the White Queen disagreed: “Why sometimes I’ve believed as many as six impossible things before breakfast.”
If we have learned anything over the last few years of crisis and economic depression it’s that the apparent ‘impossible’ can happen. Here are a few:
- Despite the accolades heaped on the UK’s regulatory financial framework, the UK experienced a run on one of its banks for the first time in 150 years.
- In the US, Lehman Brothers, a blue chip investment bank, deemed too big to fail, failed. RBS, a pre-crisis leviathan of the global banking community, collapsed into a cesspit of its own making, along with most of its competitors.
- The interbank market, arguably one of the most important financial market for the global economy, literally seized up as it became paralysed with fear.
- Previously conservative and cautious central bankers started experimenting with extraordinary monetary measures including the creation of cash, mainly because they couldn’t think of anything else to do.
- US government debt, in the pre-crisis period, the premiere risk free asset class, suffered the humiliation of a ratings downgrade.
- And finally, that Southampton football club could establish themselves in the Premiership. Continue Reading →
February 6, 2014
by Meziane Lasfer
Financial analysts have always played a significant role in advising clients as to whether to buy, hold or sell some shares. For example, yesterday, Deutsche Bank issued a “buy” recommendation and kept its 1,025p target price for Compass group, a UK company, despite the firm’s underperformance relative to the FTSE during the past month due to emerging market concerns. DB argued that Compass has a good ability to deliver strong earnings per share growth, and therefore, its share price is expected to increase from its current value of 907p. The question remains as to whether such forecasts will materialise. This is a topic that has been widely research for a number of years and views on this issue diverge significantly. Overall, the investors may need to think carefully before following such recommendations. Continue Reading →
February 3, 2014
by Giovanni Cespa
While some doubts still linger on the potential implications of HFT for sudden liquidity crises such as the flash-crash, as pointed out in a recent post the debate seems to settle on the fact that the action of ultra-fast trading enhances market liquidity. Is this the final word on this topic? Continue Reading →