Quarterly publication of the Multinational Finance Society     ISSN 1096-1879

Price and Volume Effects Associated with Changes in the Danish Blue-Chip Index: The KFX Index
(Multinational Finance Journal, 2004, vol. 8, no. 1 & 2, pp. 3–34)

Ken L. Bechmann
Copenhagen Business School, Denmark

This paper considers the effects of changes in the composition of the Danish blue-chip KFX index for the period of 1989-2001. Consistent with the selection criterion used for the index, there is no evidence for a stock price effect at the announcement of a change in the index. However, deleted stocks experience an abnormal return averaging –13% in a six-month period before the deletion and a decrease in trading volume and efficiency of stock prices following the deletion. For added stocks, the average abnormal return is 8% and there is no significant change in trading volume or efficiency. These long-run effects are best explained by the imperfect substitutes hypothesis or the information costs/liquidity hypothesis, suggesting that stocks in the KFX Index are exposed to a higher demand or more attention and a lower cost of trading than stocks outside the index. However, the results do not rule out the possibility that part of the stock price effect is due to the selection criterion used for the KFX Index. All in all, this paper documents that the selection criterion for and the size of an index as well as the size of the related stock market are relevant when explaining the stock market effects of index revisions (JEL: G11, G14).

Keywords: index composition; selection criterion; price and liquidity effects.

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Takeover Prediction Models and Portfolio Strategies: A Multinomial Approach
(Multinational Finance Journal, 2004, vol. 8, no. 1 & 2, pp. 35–72)

Ronan G. Powell
University of New South Wales, Australia

This paper uses a multinomial framework to develop several takeover prediction models. The motivation for this approach lies with Morck, Shleifer and Vishny (1988), who note that separate considerations are appropriate for predicting which firms are subject to hostile (disciplinary) and friendly (synergistic) takeovers in the USA. In a typical binomial setting, in which takeover targets are treated as belonging to one homogenous group, differences between hostile and friendly targets are ignored. This may result in biased takeover probabilities and poor predictive performance. Using UK data, the results from this paper show that the characteristics of hostile and friendly targets do differ, particularly in terms of firm size. The multinomial models also have higher significance and explanatory power when compared to the binomial models. Furthermore, when the models are tested in an investment portfolio setting, the results suggest that a strategy of predicting hostile targets only, beats a benchmark control portfolio of firms of a similar size and market-to-book (JEL G14, G34).

Keywords: multinomial logit, takeover prediction, abnormal returns, size effect

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Performance Consequences of Privatizing Egyptian State-Owned Enterprises: The Effect of Post-Privatization Ownership Structure on Firm Performance
(Multinational Finance Journal, 2004, vol. 8, no. 1 & 2, pp. 73–114)

Mohammed Omran
Arab Academy for Science & Technology, Egypt and Arab Monetary Fund, U.A.E.

This paper evaluates the financial and operating performance of newly privatized Egyptian state-owned enterprises and determines whether such performance differs across firms according to their new ownership structure. The Egyptian privatization program provides unique post-privatization data on different ownership structures. Since most studies do not distinguish between the types of ownership, this paper provides new insight into the impact that post-privatization ownership structure has on firm performance. The study covers 69 firms, which were privatized between 1994 and 1998. For these newly privatized firms, this study documents significant increases in profitability, operating efficiency, capital expenditures, and dividends. Conversely, significant decreases in employment, leverage, and risk are found, although output shows an insignificant decrease following privatization. The empirical results also show that Egyptian state-owned enterprises, which were sold to anchor-investors and employee shareholder associations, seem to outperform other types of privatization, such as minority and majority initial public offerings (JEL: G32, L33).

Keywords: privatization, SOEs, Egypt, and ownership structure.

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Share Price Reaction to Dividend Announcements: Empirical Evidence on the Signaling Model from the Oslo Stock Exchange
(Multinational Finance Journal, 2004, vol.8, no.1 & 2, pp. 115–139)

John Capstaff
University of Strathclyde, U.K.
Audun Klæboe
Nordea Bank, Norway
Andrew P. Marshall
University of Strathclyde, U.K.

This study tests the signaling theory of dividends by investigating the stock price reaction to dividend announcements on the Oslo Stock Exchange (OSE), and subsequent changes in the cash flows of the firms involved. This paper adds to existing evidence by examining the role of dividends in a market where the corporate ownership structure is notably different from the U.S. and the U.K., and where the motivation to use dividends as a signaling mechanism appears to be stronger. The results indicate significant abnormal stock returns are associated with announcements of dividend changes. The results are robust to alternative models of dividend expectations, after controlling for the impact of earnings announcements, and are consistent across sub-periods in the sample. The stock market reaction is most pronounced for large, positive dividend announcements that are followed by permanent cash flow increases. This evidence provides modest support for the signaling theory of dividends in Norway, but it does not support the proposition that corporate ownership structure is an important influence on the use of dividends as a signaling mechanism (JEL: G32; G35).

Keywords: dividend announcements, Oslo stock exchange, signaling.

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