The Stock Market Reaction to Investment Decisions: Evidence from Italy

Based on a study of new investment announcements from 1989 to 1995 by Italian firms listed on the Milan Stock Exchange, we find a positive stock price reaction to new investment decisions. The stock price reaction is larger for joint venture announcements. The market response is also larger for non-state owned companies and when the announcement is released in a period of rising stock prices. The announced investment has no impact on the non-voting shares but increases the voting shares' market price through a significant revaluation of their vote-segment. We find some evidence that new investments lead to management's private benefits rather than towards firm value. This is consistent with the typical Italian corporate governance structure, where a majority shareholder safely controls a listed company while having only a fractional claim on the firm's cash flows.     

Sub-Optimal Acquisition Decisions under a Majority Shareholder System

The high separation of ownership from control achieved through the concurrent use of non-voting shares and stock pyramiding could favor acquisitions made to increase private benefits of the controlling shareholders rather than all shareholders wealth. A standard event study methodology is carried out on three different samples of Italian acquisitions during the 1989–1996 period in order to test this hypothesis. We find evidence that a worse market reaction characterizes acquiring firms with a higher separation of ownership from control, while more value-enhancing transactions are undertaken by those smaller in size and with higher prior-performance. An entrenchment effect seems to determine a significant U-shaped relationship between the market reaction and the ultimate shareholder ownership. When the sample is restricted to acquiring firms with a dual class equity structure we find that non-voting shares report significantly negative excess returns in contrast to significantly higher positive returns for voting shares. Such evidence seems to indicate that the average acquisition has been overpaid, as suggested by the negative market reaction of the non-voting shares, while it was expected to lead to higher private benefits to the majority shareholders, as suggested by the revaluation of the voting shares. Finally, the market reaction to acquisitions made within pyramidal groups seems to indicate that the price is set so as to transfer wealth towards the companies located at the upper levels, where majority shareholders own greater fractions of the companies cash flows.JEL Codes: G34, G14A previous version of this paper was presented at the 1999 EFMA Conference in Paris, 1999 EFA Conference in Helsinki, and 1999 Australasian Banking and Finance Conference in Sydney. We would like to thank for helpful comments and suggestions, in alphabetical order: Lorenzo Caprio, Mara Faccio, Katiuscia Manzoni, Giovanni Siciliano, Sandro Sandri, the two anonymous referees and the editor. We would also like to thank Mara Faccio for providing ownership data. All remaining errors are ours.     

Changes in Management Ownership and the Valuation Effects of Equity Offerings

Seasoned equity issues trigger share price declines, and this is usually interpreted as evidence of signalling. We find that seasoned equity issues also typically result in much lower managerial ownership in U.S. firms. Jensen and Meckling (1976) predict a stock price decline when managerial ownership falls. We conduct several tests to distinguish agency explanations form signalling explanations, and conclude that both effects are present.