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 15, 2014
by Thorsten Beck
In previous blog entries I have discussed both the contributions to growth and social welfare that the financial system can make and the damage that too much finance, especially connected to excessive lending to households and enterprises, can do to economies. Where does this leave policy makers in terms of encouraging financial deepening or putting on the brakes? This policy trade-off is behind the concept of a financial possibility frontier that I have developed with several colleagues over recent years (see for example here and here). Comparing a country’s financial sector to where this frontier lies allows analysts not only to take a financial system’s temperature but also to design adequate policies in terms of faster speed or applying the brakes. 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 →
April 30, 2014
by Peter Hahn
As news spread of Pfizer’s initial approach to AstraZeneca in January 2014 offering a 30% premium I couldn’t resist taking a look at the movement of AZ shares and there was quite an increase in price in January. Just the market? Sudden excitement over AZ? The lack of an AZ board announcement will certainly be questioned, but it looks like a dead certainty that many a regulator and lawyer will be very busy.
April 28, 2014
by Meziane Lasfer
Over the last few years a number of companies are issuing a special category of bonds referred to as Hybrid Bonds. These bonds are like normal bonds in the sense that the interest paid by the issuer is tax deductible. However, unlike normal bonds which mature after a number of years, hybrid bonds are, like equity, perpetual. In general hybrid securities have some characteristics of debt and some of equity, but they are most known as, for example, convertible bonds which convert into equity at maturity debt, or preference shares which, like debt, have fixed yield, but, like equity, preference dividend is not tax deductible. Continue Reading →
April 7, 2014
by Andrew Clare
Last Thursday the ECB president, Mario Draghi, announced that the ECB would be in favour of radical measures to stave off the zombie-like state of deflation, including Quantitative Easing (QE). The bond markets greeted this news enthusiastically. The yields on bonds in the prephiery of the Eurozone fell in anticpation of the prospect of being able to sell these toxic instruments to a buyer with potentially infinite resources.
In this respect then the announcment had a beneficial impact on the Euozone’s financial climate, and at a notional cost of zero too. In financial terms at least, it cost the ECB President nothing to utter these words, just as it cost him nothing when he told the world that the ECB would do “whaterever it takes” to support the Euro and the Eurozone.
There are two points worth pondering. Continue Reading →
March 26, 2014
by Anthony Neuberger
The distinction between savings and pensions has eroded over the years, and the process has accelerated with the recent Budget. Surely the time has now arrived to recognise that savings are savings – a vehicle that allows people to shift income from good times to bad times – and to do away with artificial distinctions based on how the savings may be used. Continue Reading →