Bidder’s Gain: Evidence from Termination Returns*
Tilan Tang(College of Business and Behavioral Science, Clemson University)

In most cases, bidder’s stock returns around merger announcement convey more information than the synergy created from the acquisition. To overcome the interpretation problem, I study the bidder’s return from the perspective of deal termination. Using a hand-collected dataset on terminated merger proposals, I investigate termination returns in deals canceled for reasons unrelated to the bidder’s stand-alone valuation. I find that bidder’s gain varies significantly with the type of target acquired. Further evidence suggests that the liquidity need of private target significantly contributes to the positive gain to the bidder.

*I would like to express my appreciation to Sudipto Dasgupta (the editor), an anonymous referee, Charlie Hadlock, Ted Fee, Long Chen, Thomas Bates, Kathleen Fuller, Kien Dinh Cao, and the participants of the finance seminar at Michigan State University, Clemson University, University of Wyoming, as well as the session participants at the 2009 Financial Management Association Conference, the 2010 Southern Finance Association Conference, and the 2011 Eastern Finance Association Conference for helpful comments and suggestions. All errors and omissions are mine.

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Why Do Firms in Customer?Supplier Relationships Hold More Cash?*
Kee-Hong Bae(Schulich School of Business, York University)
Jin Wang(School of Business and Economics, Wilfrid Laurier University)

A firm is in customer–supplier relationships when its business depends on a small number of major customers/suppliers. In this paper, we provide evidence that relationship-specific investments undertaken by firms in customer–supplier relationships are associated with high cash holdings in these firms. The evidence is consistent with the prediction of Titman’s stakeholder theory that a firm relying on relationship-specific investments maintains a high cash reserve as a cushion to sustain its relationship-specific investments when negative shocks occur. Our findings suggest that relationship-specific investments are important determinants of the precautionary motive to hold cash.

*Bae gratefully acknowledges research support from the Schulich School of Business at York University and the Social Science and Humanities Research Council of Canada. Wang gratefully acknowledges research support from Wilfrid Laurier University and the Social Science and Humanities Research Council of Canada. All errors are our own.

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How Reliable Are the Findings of ‘Foreign’ Investor Studies That Use TIC Data? A Look from the Host Market
Numan Ülkü(University of Otago)
Petar Petrov(American University in Bulgaria)

Empirical literature on foreign investors’ trading in stock markets heavily relies on US Treasury International Capital (TIC) data. Biases in TIC data and the fact that it represents only one source country raise questions on how reliable the conclusions based on TIC data are. Employing novel data of complete foreign flows compiled at destination, we answer these questions. Although the correlations between net flows derived from TIC and destination-compiled data are low, and visible differences exist in some individual country results, TIC findings are not far off in central tendency. Notably, however, net foreign flows’ persistence, positive response to world returns and positive contemporaneous correlation with local returns are more significant than TIC data suggest. Measurement noise in TIC data appears to result in underestimation of these key features.

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Price and Earnings Momentum, Transaction Costs, and an Innovative Practitioner Technique*
Reza Tajaddini(Accounting, Economics and Finance, Faculty of Business and Law, Swinburne University of Technology)
Timothy Falcon Crack(Accountancy and Finance, University of Otago)
Helen Roberts(Accountancy and Finance, University of Otago)

We use an innovative practitioner technique to investigate the interplay between the ex post performance of momentum strategies and transaction costs, rebalancing frequency, turnover constraints, and fund size. We have three interrelated main results: first, the level of and correlation between active returns to price momentum and earnings momentum strategies vary dramatically with these factors; second, strategies that are fearful of ex ante transaction costs generate returns net of transaction costs that are far superior to the net returns of naive strategies; and third, obtaining better traction with the unique elements of each strategy yields a more profitable combined strategy.

*We thank the New Zealand Stock Exchange (NZX) for supplying analyst forecast data, NZSE 40 and NZX 50 index weights and advice about NZX data issues. We thank Scott Chaput and Mark Tippett for helpful conversations. We also thank seminar participants at Otago University; participants at the 25th Australasian Finance and Banking Conference, Sydney, Australia, December 2012; participants at the 17th annual New Zealand Finance Colloquium, Dunedin, New Zealand, February 2013; and anonymous referees. Any errors are our own.

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[Shorter Articles]Convertible Debt: Financing Decisions and Voluntary Conversion under Ambiguity
Elettra Agliardi(Department of Economics, University of Bologna)
Rossella Agliardi(Department of Economics, University of Bologna)
Willem Spanjers(Department of Economics, Kingston University)

This paper integrates ambiguity into a contingent claim model for convertible debt. We study how convertible debt valuation is affected by the ambiguity biases of equity holders and debt holders and provide sensitivity analysis of the bond value to changes in attitude toward ambiguity, firm and bond parameters. Our results, which are summarized into five main predictions, are consistent with recent empirical evidence and offer a possible interpretation of some corporate finance puzzles.

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[Shorter Articles]Stock Market’s Response to Real Output Shocks: Connection Restored but Delayed*
Numan Ülkü(Department of Accountancy and Finance, University of Otago)
Duminda Kuruppuarachchi(Department of Accountancy and Finance, University of Otago)

We propose a vector autoregression with asymmetric leads model to combine the forward-looking, contemporaneous, and delayed responses of the stock market to output news. Using this approach, we document that the stock market’s connection to real output, shown by Binswanger to have been broken since the early 1980s, has been restored after 1998, however, via a delayed response. Subperiods mainly differ in terms of delayed response, portraying an interesting evolution of market participants’ response to macroeconomic information based on the realized persistence of output shocks.

*We thank Dorian Owen for helpful comments.

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