Cass Finance Blog

June 19, 2014
by Meziane Lasfer

A tale of two cities: Who trades in takeovers?

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 →

Who benfits in takeovers?

June 12, 2014 by Meziane Lasfer | 0 comments

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

Is Vodafone right to keep its dividends despite a decrease in its earnings?

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 →

April 28, 2014
by Meziane Lasfer

Why do companies issue hybrid bonds?

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 3, 2014
by Thorsten Beck

Friday links

A recent presentation by Lord Turner, former head of FSA, at Cass a few weeks ago, relating new technological trends, income inequality, low interest rates and overexpansion of the financial system.

An interesting paper on crowd-funding and how it depends on securities laws.

Is finance in the genes?  This paper on Financial Development and Genetic Diversity argues that yes.

Next week will see a conference on Corporate Governance in Banks: Five Years After the Walker Review, organized by our colleague and follow-blogger Peter Hahn.  We will make sure to report on it.

February 12, 2014
by Thorsten Beck

When Arm’s Length is Too Far…

In the wake of the global financial crisis policy makers’ attention has focused on lending to small and medium-sized enterprises (SMEs) as these firms were among the most affected borrowers when the credit cycle turned.   In the UK, policy makers have put a lot of pressure on banks to increase or at least not reduce lending to SMEs, often seen as the backbone of the economy. But what is the best way for banks to reach out to SMEs?  While the traditional literature has focused on relationship lending as the prime lending tool for SMEs, recent evidence has shown that transaction-based or arms-length lending – using hard information and hard assets as collateral – can be more cost-effective and allows larger and non-local banks to lend to SMEs.  In recent research (with Hans Degryse, Ralph de Haas and Neeltje van Horen), we gauge how these different lending techniques co-vary with firms’ financing constraints over the business cycle. We find evidence that while relationship and transaction-based lending is as effective during good times, relationship-based lending seems to be more effective during downturns.  Continue Reading →

February 6, 2014
by Meziane Lasfer

Should investors believe financial analysts recommendations?

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 →

January 27, 2014
by Jose Luis Peydro
1 Comment

Low monetary policy rates and the search for yield

Andrew Clare argued last week that equity markets still rally despite of US tapering because the Fed promised to keep low monetary policy rates for long. Many commentators have also suggested that low levels of monetary rates induced an excessive softening of lending standards in the run-up to the 2007-08 financial crisis and are now creating another credit and asset price bubble in e.g. emerging markets. What are the effects of monetary rates for bank risk-taking? Continue Reading →

December 6, 2013
by Thorsten Beck

Friday links

SUERF, The European Money and Finance Forum, has just published an interesting book on 50 Years of Money and Finance: Lessons and Challenges, with interesting chapters on, among others, global imbalances, shadow banking, financial regulation in a globalized world, and bank business models.

The European Investment Bank just came out with a thick report on Investment and investment finance in Europe, with lots of interesting chapters.

And for friends of cross-country data who have been looking for data on household and enterprise credit across countries, the BIS has published a new interesting dataset.

Coming up next week: more on shadow banking, and: did bad finance theory lead to bad financial architecture?  Stay tuned.

December 3, 2013
by Meziane Lasfer

Should investors worry about companies that delist from the London Alternative Market (AIM)?

Companies that list on the AIM are usually small, young and high growth. The main advantage of AIM is its relatively low regulation and the ability of firms to get quotation when they have less than three years of age. However, in recent years a large number of these firms delist. Some of them do so to “move up the ladder”, i.e., to join the Main market, others delist through takeovers, breach of regulation (usually loss of NOMADs), while others do so at the request of the company. There are contrasting differences across these forms.  In particular, firms that transfer to the main market are usually very good: they have high profitability, high growth and generate significant positive excess returns before and on the announcement dates. The worst are firms that delist voluntarily, i.e., “at the request of the company”. These, together with those that breach the regulation, generate significant negative stock returns, thus they destroy value. Thus, while, for the first sample the delisting is good and measures the success of AIM, the remaining last two forms signal the failure of AIM and the shareholders should worry about them. Continue Reading →

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