Contributions published at Corporate Finance Theory (Michel Habib)

This thesis studies the effects of two Swiss Referendums ”Accession of Switzerland to the European Economic Area” (6.12.1992) and ”Against Mass Immigration” (09.02.2014) on the Swiss Stock Market to understand investors’ expectations about keeping or increasing political and economic distance between Switzerland and Europe. The results of both the referendums were, according to the polls, unexpected. For the 1992 referendum, the outcome of the study suggests that keeping an independence from Europe is an advantage for Swiss companies. The results of the 2014 referendum did not have a significant impact on the Swiss stock market as whole. However, by considering SPI firms that export machine tools or in general products that need to pass a conformity test before being exported, it has been found a slight negative return compared to the market. Stock prices movements were not affected by currency fluctuations.

Managerial investment decisions put shareholder capital at risk. Shareholders respond either (i) by preserving the manager's discretion to choose among projects but decreasing the power of his (her) incentives, thereby decreasing the manager's gains from choosing risky projects, or (ii) by imposing a constraint on the type of project that the manager can undertake. We show that capital exposure-the extent to which managerial decisions put shareholder capital at risk-plays a central role in favoring the imposition of a constraint over the granting of discretion. We extend our analysis to consider other determinants of the choice between discretion and constraint.

Existing literature indicates that markets react positively to the announcement of stock splits even though a stock split does not change the fundamental value of a firm. However, to this day, the debate about the cause continues. Consequently, this thesis examines whether liquidity has an impact on the positive market reaction. The event study approach is used to find a significant positive reaction to the announcement of stock splits by Swiss companies. Furthermore, multiple linear regression modeling using two different liquidity measures could not clearly determine whether the cause of the positive market reaction is the improved liquidity.

This bachelor thesis covers the stock price reaction at the announcement of a spin-off. First, the previous academic research about the stock price reaction at the announcement of a spin-ff are discussed. These research showed mainly a positive reaction. Then, several theroires are discussed why a spin-off generate value. Later, the short and long term stock price reaction are analyzed at the announcement of a spin-off in the USA from 2000 to 2016. Finally, two theories were analysed why the reaction is positive. By separating the two companies, negative synergies are reduced. This elimination is stronger when the two companies work in different industries. Furthermore, academic research has argued that the positive reaction is driven by a higher takeover probability. The methodology of Greenwood and Schor (2009) is used to test this theory. This thesis is unique because the older academic research had used a matching approach to calculate the abnormal returns. Here, a market-risk model is used for the calculation. Furthermore, the past academic analyses used the data mainly before 2003, and this thesis used more recent data from 2000 to 2016.

This study examines the long-term performance of firms participating in strategic alliances or joint ventures for the event period of 2011 to 2016. Four specific industries are analyzed, namely the pharmaceutical, the aircraft, the machinery and the retail industry. The empirical results find that three out of four industry-specific cross-sectional buy-and-hold returns (BHARs) are statistically significant, with the BHAR for the pharmaceutical industry being the only positive one. This implies that heterogeneity in strategic alliances and joint ventures between industries is prominent and in addition, that pharmaceutical firms utmost benefit from such business combinations.

Recent years have seen increased interest in responsible investing (Kaiser 2020). Environmental, Social and Governance (ESG) criteria enable evaluation of ESG concerns in the investment context. This thesis provides a framework for integrating assets qualifying as ESG investments into existing portfolios, by selecting specific criteria and identifying their according thresholds, based on research and exemplified on EUROFIMA’s portfolio, in line with their strategic ESG ambitions. The data used for this analysis was limited to data provided by EUROFIMA and Sustainalytics, a data provider for ESG ratings, and basic publicly available data. To automate the process, an ESG Dashboard has been developed, able to integrate ESG data on existing portfolios and highlight its impact.

Using search engine results as an indicator, this paper explores a new method to identify window guidance event. Narrative approach and bank mortgage rate are added to complete the identification of a window guidance event in March 2017. An event study is conducted to study the market reaction to window guidance. Empirical results show that the market does not necessarily agree with the signal that window guidance delivers. In the event identified, the abnormal return is higher for the banks that have higher mortgage size increase when window guidance intends to cool the market down. Other side findings include that the market might react in a delayed and long-lasting manner to window guidance, which might be due to the asymmetry information between the market and the words or deeds of window guidance.

COVID-19 pandemic is the worst epidemic disease outbreak since 1969. Not only does it claim numerous lives, but also disrupt the very foundation of the modern society. On March 2020, the rapid spread of coronavirus and the lockdowns around the world caused a wild turbulence on the financial markets. In particular, the US stock market, which is considered to be the most liquid and, hence, one of the most efficient ones, experienced one of the worst declines in its history. Indeed, numerous studies suggest the negative impact of various disasters on the stock market returns. For instance, Kaplanski and Levi (2010) discovered the negative relationship between aviation disasters and stock market returns. The reason for that is that aviation disasters can affect investor mood, or sentiment, which in turn impacts their financial decisions. At the same time, since the beginning of the COVID-19 pandemic, the amount of literature studying the impact of novel coronavirus on financial sector has been steadily growing. All of these new works further confirmed the negative impact of COVID-19, based on two main reasons: changes in expected future cash flows of the companies and negative investor sentiment. As it is clear, that the government efforts to contain the virus have a negative impact on businesses, we prefer to focus on the investor sentiment. Pharmaceutical industry was chosen as a focus of this work, as it is one of the obvious beneficiates during EDOs, as the demand for medical equipment, drugs, and, most importantly for the vaccines, increases drastically. Vaccines are particularly important, as they potentially can lead to huge cash flows for a company. However, the vaccine development is costly, and technologically advanced, as well as their use case is usually limited to only one disease (Hinman et al., 2006). Therefore, not all the companies can participate in the vaccine development race. At the same time, Humerman and Regev (2001) and Donadelli et al. (2016) discover that investor sentiment can spill over to other stocks as well, so other pharmaceutical companies, which are not engaged in developing a vaccine, can also benefit from overall investor sentiment. To study the influence of epidemic disease outbreaks on stock market returns, we study all EDOs that happened in recent past, namely SARS, H1N1, MERS, Ebola, and COVID-19. In this work, the stock market data on 91 pharmaceutical companies is used for the period from 02.02.2002 to 31.08.2020. Then 4 portfolios are constructed, namely value weighted (VW), equally weighted (EW), and 2 portfolios consisting of 10 smallest and 10 biggest companies based on market values. After that, two commonly used methods are employed to study the influence of diseaserelated news (DRNs) on the returns of 4 portfolios: an event study and a regression-based approach. Overall, our findings confirm the results of existing studies (Donadelli et al., 2016, Wang, Yang and Chen, 2012) that epidemic disease outbreaks positively influence the stock price returns of pharmaceutical companies. First, by applying the event study approach, we find that diseaserelated news (DRNs) lead to positive abnormal returns of small pharmaceutical companies. Using the regression-based approach, we confirm our findings. We discover that DRNs have a positive impact on stock prices, with the effect being stronger for the smaller companies. Although the potential reward is high, smaller pharmaceutical firms have a lesser chance to engage into the development of the vaccine, as the process is costly and technologically advanced (Hinman et al., 2007). Therefore we argue that the abnormal returns are caused by positive investor sentiment by overall optimism around vaccine development. In addition to the previous works in this field, our study provides further insights into the stock price behaviour of the pharmaceutical companies during EDOs. Our results indicate that the effect of DRNs is the strongest on the 2nd and 3rd days after the official announcements and that effect is persistent over 1 trading week after DRNs are being released. Moreover, we conclude that the abnormal returns are caused not by fundamental factors but rather driven by positive investor sentiment. Finally, we study the effect of fundamental factors, such as liquidity, leverage, R&D spending, profitability and relative valuation of the companies, on their stock market returns. The results indicate, that while normally the fundamental factors contribute to the stock price returns, their influence is not statistically significant on the event days. Hence, the returns are influenced by something else, namely by positive investor sentiment. The findings are of particular importance to the financial firms that are involved in asset management, as they give an opportunity to generate extra returns, as well as provide new ways of hedging during EDOs. The work also contributes to the behavioural theory, exploring the movement and reaction of stock market prices to new information releases.

During the 2000s commodity price boom a growing attention was paid to the mining industry. Mergers and acquisitions activity was increasing and some of the mining companies diversified their operations. Various academic works find mixed evidence on the value effects of corporate diversification strategy. This thesis focuses on diversifying mergers and acquisitions in the mining industry that were announced during 1990-2019 and applies an event study methodology. The results of this study show that M&A announcement wealth effects for target shareholders are, on average, positive and significant, while insignificant for acquirer shareholders. Combined abnormal returns are positive and significant. Market reaction is similar for diversifying and non-diversifying deals, which indicates that it does not view one type of the deal more negatively than another.

Mergers and acquisitions have long been viewed by companies as financial and strategic tool to grow, improve and transform business. The increasing complexity of the business environment and the slowdown in economic growth of the last two decades aided the explosion of M&A activity with its value reaching five trillion dollars globally in 2015 – five times the number observed at the turn of the century. Biopharmaceuticals is one of the leading industries by both M&A volume and value with over 1000 deals together valued at USD 400-500 billion made yearly. The majority of these deals in the last decade were sought after because of diminishing return on productivity which fell from 10.1% in 2010 to 1.9% in 2018 (Deloitte, 2018). Acquisitions are done by pharmaceutical companies seeking to gain access to products and technologies owned by established pharmaceutical and smaller biotech companies, as well as grow revenues by increasing their market share in the traditional markets and expanding their business into the high-growth market, particularly emerging markets where growing prosperity allows for higher sales at lower costs. Despite pharma’s active engagement in M&A, the trend is relatively new for the industry. Pharmaceuticals survived as a fragmented industry for almost a century, only joining for the fifth global M&A wave in 1980s. After having enjoyed decades of market power and stable growth in revenues, the industry was disrupted in 1984 with the introduction of Hatch-Waxman Act that gave easier market access to generic drugs. As those cheaper substitutes to the previously irreplaceable and highly lucrative blockbusters grew to occupy 88% of the market, pharmaceutical companies had to find new sources of revenue generation in their pipelines. However, as drug discovery process grew in its complexity, and increased demands from FDA for safety and efficacy increased the costs of R&D, innovation was also put under strain. As a response to the increasingly stringent conditions, large number of cash-rich pharmaceutical giants turned to mergers. Consolidation allowed companies to cut infrastructure costs, gain operational synergies and accelerate the pace of innovation through knowledge transfer. These mergers were also welcomed by the markets and brought shareholders additional value (Long and Ravencraft, 2001). As a result, by 2002 ten largest pharmaceutical companies that used to account for 20% of industry sales in 1985 grew to occupy 48% of the market (Danzon, Epstein, Nicholson, 2007). 4 The advantages these mergers offered, however, did not solve the fundamental problem – that of diminishing return to R&D. Back in 1970-80s, while pharma was enjoying its prosperity that serendipity research and small molecule products offered, a new field in the healthcare sector was emerging – biotechnology. University funding fostered research and rise of venture capital firms in the 1970s allowed scientists to take their ideas outside the lab and develop them into a viable product. This gave rise to biologics – a new type of drug that rapidly grew in popularity replacing the conventional chemical-based pharmaceutical products. To remain competitive, pharma started partnering up with these new research-intensive firms. Such collaborations were profitable for both parties: pharmaceutical companies could expand their traditional product portfolio and fresh-out-of-university biotechs received the necessary platform and resources to push their research beyond the scope of the lab. Innovation did not only shift between industry sectors, but also geography. More and more pharmaceutical companies acquire foreign targets to grow revenues and lower production costs. The past decade has seen pharmaceutical giants turning to the emerging markets. BRICS and MIST countries, while risky, provide pharmaceuticals with opportunity to lock in potentially large customers, as they are expected to generate 40% of global pharma sales in 2025 (EvaluatePharma, 2019). As pharmas’ M&A strategies has been adapting to the dynamic environment of the past decade, the question remains open whether these strategies pay off. This study builds on the prior research of value creation of M&A in the biopharmaceutical industry and aims to understand if acquision of small innovative biotechnology companies and expansion to the emerging markets create more value to pharma shareholders than acquisition of other traditional pharmaceutical companies in the developed markets. This paper is structured in the following way: first section describes the industry development and M&A trends, second section provides an overview of the existing literature, third section contains details about the data and methodology and the last section presents study results and their analysis.

With the rise of Chinese overseas mergers and acquisitions (M&A) in the past 20 years, the world has shed more light on China in this field. However, there have been many emerging myths about Chinese overseas M&A in terms of the motivations, the intervention of the Chinese government, whether target firms would benefit from such M&As, etc. This paper uses an event study and tries to come up with a judgement about those myths by combining the evidence from acquiring and target companies with that from both of their competitors. The final evidence shows that the market might have expected that the target firms would benefit from the overseas M&As undertaken by the Chinese firms, while more specifically the market might have not really paid attention to the Chinese overseas M&As until Year 2008. In addition, there could have been no negative market expectation for the targets if the acquirors had relevance to the government, and the market might have had comparatively significant expectation for China’s overseas M&As if the target companies did not have high technology involved. On the other side, the evidence suggests that the market could have never expected the targets’ competitive companies to have potential benefits over the news of China’s overseas M&As. Instead, targets’ competitors show significantly negative abnormal performance around the announcement date, which shows only negative competitive effect. Lastly, the acquirors did not show significant empirical results throughout the event study, failing to justify whether the motivations of the Chinese firms could have been for the firm-wide benefit or for the industry-wide one through the overseas M&A during 2000-2018 by comparing the results from the acquirors’ competitors.

Since the emergence of distributed ledger technology along with cryptocurrencies, central banks and financial authorities have shown a growing interest in implementing DLT infrastructure within their financial systems. An additional event further motivated central banks to conduct research on the topic: the rise of the stablecoin, a nonvolatile cryptocurrency threatening the monetary sovereignty of fiat currencies. Based on projects led by central banks, monetary authorities, and tech companies, as well as research conducted in academia, this master’s thesis explores the different ways one central bank might design a central bank digital currency (CBDC) and the benefits arising from it, both for the financial industry and society (businesses and individuals). Components such as the country’s characteristics, cash use trends within a jurisdiction, the wholesale payment process of the central bank, financial inclusion, and the threat of stablecoin are taken into account to address the research question. Depending on these variables, results show that CBDC improves security, transparency, and speed of transactions. It would also update wholesale payments and replace old cross-border payment systems such as cheque clearinghouses. Finally, the use of CBDC would also provide a way to expand financial inclusion and stability in EME countries.

Listed companies in Switzerland have big differences in their shareholding structure; some companies have a controlling shareholder such as a family, a private financial or juridical person, whereas others have widely dispersed ownership. This paper examines whether companies that have a family as controlling shareholder outperform their peer listed companies in terms of market and accounting performance. To investigate the effects of family-control on a firm and its performance, various simple OLS regressions of ownership and control variables on performance are run. The results show that family-controlled firms outperform their peers in terms of Return on Assets. The capability and commitment of a family to oversee the management seem to reduce agency problem I; the problem coming from the separation of ownership and control in a company. However, the stocks of family-controlled firms show a discount on market valuation in terms of Tobin’s q. Minority shareholders seem to discount the presence of a controlling shareholder in fear of agency problem II; the problem that major shareholders may extract private benefits and act in a way that is not in the interests of minority shareholders. In conclusion, even though family-control does not lead to a higher, but lower market valuation, my paper shows that family ownership is an effective organizational structure as it seems to reduce agency problem I whereas agency problem II, contrary to the fears of minority shareholders, at most plays a minor role in family-controlled firms.

Cost of capital and valuation differ in the private and public sectors, because taxes are a cost to the private sector but are only a transfer to the private sector. We show how to transform the after‐tax private sector cost of capital into its pre‐tax equivalent, for comparison with the public sector cost of capital. We establish the existence of a tax induced wedge between these two costs of capital. The wedge introduces a preference on the part of the private sector for assets with rapid tax depreciation, high debt capacity, and low risk. We show that, in circumstances where an asset has identical public and private sector valuation in the absence of taxes, the tax induced difference in valuation is identical to the change in government tax receipts that results from having the asset owned by the private rather than the public sector. We provide some examples of distortions that result from failure to adjust for changes in tax revenues, and show how to effect such adjustment.

The aim of this thesis is to show how an investment process including an investment guideline can be optimally designed using Zehnder Group as an example. The information required was gathered by means of literature research, analysis of the Zehnder Group process and empirical surveys of peer groups. The empirical survey confirms that a structured investment process is of high relevance. Zehnder Group has well standardized sub-processes application, evaluation and decision, but there is no structured process for the implementation of investments. In particular, there is a need for improvement in the area of control and communication within the group. The central element of corporate management is the efficient allocation of capital resources to achieve a sustainable increase in enterprise value, which is ultimately the primary financial objective. This requires the establishment of necessary investment analyses and decision-making processes as well as targeted investment controlling (IFBC (2011)). Investments serve the company to develop its entrepreneurial skills and thus to position itself optimally in the market and competitive environment (Hofmann and Hierl (2015)). Decisions on major investments in companies are of great importance because they prove to be key strategic decisions (Affolter and Volkart (2012)). It is very difficult to judge how successful an investment will be at the time of the decision, not least because of the rapid changes in products and the development of technologies (Ter Horst (2009)). Nevertheless, investments have a longterm impact on the existence and the development of the respective company, which is why these decisions should be made within the framework of a structured process (Jung (2014)).

Relative valuation, as opposed to the dividend discount model (DDM) and the discounted cash flow (DCF) model, is less cumbersome to implement and it is less influenced by certain assumptions when facing valuation questions involving IPOs, corporate restructuring (mergers and acquisitions), financial analysts’ recommendations and investment bankers’ opinions. For this reason, practitioners such as investment bankers and portfolio managers, more often than not, also tend to adopt a relative valuation approach in their analyses due to its straightforward application. However, even though it is easier to implement, its successful prediction is strongly affected by the choice of comparable firms that are being designated according to, among various criteria, industry, risk and earnings growth. Additionally, as far as relative valuation is concerned, it is not always evident to choose among a series of different multiples used to estimate corporate value. Indeed, investors may opt for earnings, book value and sales multiples, and between equity and enterprise value accounting ratios in their decision-making process. Consequently, the apparently easy application and usefulness of this valuation approach call for a more in-depth examination, as performed in this thesis, of the previously explained difficulties in order to identify comparable firms systematically and to know whether there are any multiples performing better than others in specific circumstances. The empirical analysis of this work has been performed on the constituents of the Eurostoxx 600 index in 2010, 2014 and 2018, and represents a complement to the reference’s works of Alford (1992) and Lie and Lie (2002) that performed a similar analysis in the United States. The concepts of valuation accuracy and bias are used to evaluate the effects of the set of comparable firms on the accuracy of the P/E ratio valuation technique, and to evaluate the performance of different multiples being used in business valuation. Additionally, as far as the creation of the comparable firms’ portfolios is concerned, some statistical tests such as the Friedman, Wilcoxon signed-rank and Wilcoxon sum-rank tests are performed. Overall, the industry membership generates the most accurate estimates among all the other criteria tested in the definition of the peers’ groups. In addition, any proxy for risk or earnings growth can reach a similar precision. Moreover, the different levels of leverage across firms do not improve the accuracy, implying that in a European setting the industry classification can detect the majority of the cross-sectional variation in the P/E multiple. The performance of various accounting ratios is thus tested with the adoption of the industry method in the selection of comparable firms. The results suggest that earnings multiples perform better than the book value and sales ones in the analysis of the whole sample, and for a subgroup of only non-financial companies. The forward P/E generates more precise estimates than the trailing P/E and the EV/EBITDA ratio is more accurate than the EV/EBIT. These results are also consistent in the analysis of the companies of these same samples evaluated based on their size and profitability. By turning towards the analysis of financial firms, the equity multiples generate more satisfying results than the enterprise value ones. Again, the forward P/E results are more precise than those from the trailing one. Finally, as far as the selection of peers is concerned, this thesis confirms the result of the paper of Alford (1992). However, the analysis of different multiples ends up providing different findings from the one of the works of Lie and Lie (2002). Additionally, by considering that incredibly little literature has been devoted to the study of relative valuation, the final results of this research seem to add more shadows than lights on the clarity of this topic.

This thesis evaluated the effect of activist campaigns on target stock returns around the announcement date of the intervention in Europe. Using a data sample from FactSet comprised of 262 unique events from 2005 to 2018 in an event study, it was demonstrated that statistically significant positive abnormal stock returns in target companies ensued over several of the tested event windows; the broadest of these ranged from 20 days before the announcement to 20 days after the announcement. Following this, the researcher attempted to identify the drivers of potential abnormal returns. Accordingly, the event and target characteristics of 214 of the initial 262 events were tested for their impact upon short-term excess returns. Across three different regression models, it was found that the campaign objectives were the leading driver of abnormal returns, with the intention of a hostile takeover resulting in the highest abnormal returns. In regard to target-specific characteristics, the historical two-year sales growth ratio was found to have a statistically significant negative impact on short-term excess returns.

Awareness of how shareholders perceive announced transactions is crucial for managers of public companies, as wrong decisions can lead to significant value destruction. This thesis explores, whether premiums a↵ect transaction announcement returns di↵erently in the short term, when capturing synergies between the acquirer and target company is more feasible. Using the event study methodology, this thesis provides significant evidence for a positive change in the correlation between premium and abnormal returns to the acquirer for transactions with lower expected synergies. It is concluded, that strong fundamentals of the target company might be more important to shareholders than strategic fit.

This thesis provides an overview of the field of financial research and seeks whether it is more worthwhile to invest actively or passively. Based on the concepts of modern finance, an attempt is made to build on the existing theory. The study examines the Swiss stock market. The data is analyzed using linear regressions and makes use of the capital asset pricing model. The 3-factor model from Fama and French is also used and supplemented by a personal extension. The results reinforce existing theses and express anew that it tends to be more worthwhile for individuals to peruse passive strategies.