Corporate finance - Financial Management Collection

Financial Management (Financial Management Association), Fall, 1993 by Melissa Lunt, Ted Veit

3) According to Anthony Cope, a new board member of the Financial Accounting Standards Board, many analysts simply "load" their spreadsheets with the figures provided by the company, accepting them for face value. Many of these numbers are simply estimates and should be questioned.

4) Michael Murphy, editor of the Overpriced Stock Service, notes that there is really no incentive for the analyst to detect and uncover bad news. Negative remarks may result in an analysts being cut off from information by the company, publicly excoriated, or worse.

The above reasons alone have been enough to support a market niche for CPA's practicing "remedial accounting." So what can investors do to protect themselves? According to Denise and loren Kellogg of Kellogg Associates in Seattle, simply look at and study public financial documents. Robert Renck, managing director of R.L. Renck & Co., uses cash-flow analysis to spot weak corporate earnings. Jack Ciesielski, publisher of the Analyst's Accounting Observer, spends half a day studying a 10-K and annual report.

In their defense, analysts are spending more time studying financial reports. Unfortunately, in a field where whistle-blowing is frowned upon, scrutinizing financial statement footnotes will always have a low priority.

DUTCH AUCTION VERSUS FIXED-PRICE SELF-TENDER OFFERS: DO FIRMS OVERPAY IN FIXED-PRICE OFFERS?

Abstracted with permission from The Journal of Financial Research. This abstract was taken from the original article which appears in the Spring 1993 issue, pp. 39-48.

During the 1980s, Dutch auctions became a popular alternative to fixed-price tender offers as a means of self-tendering shares of common stock. Under a Dutch auction, a firm specifies a price range within which shareholders may tender their shares, and the number of shares the firm wants to repurchase. Interested shareholders state a minimum price at which they are willing to tender their shares (within the company-specified range). The firm then selects the lowest price required to purchase all desired shares, and this price is paid for all shares. In theory, a Dutch auction offers an advantage to non-tendering shareholders because tendering shareholders provide firm's with a supply curve. In fixed-price tender offers, firms must specify a fixed tender price without benefit of knowing the price at which shareholders are willing to tender their shares. Thus in a fixed-price tender offer, firms may offer too much which hurts the remaining shareholders, or it may offer too little which results in an undersubscribed tender offer.

Prior research provides evidence that Dutch auctions permit firms to repurchase their stock more cheaply than fixed-price tenders. Other important research shows that, when more shares are purchased, the premium required for repurchase is greater. Historically, a greater proportion of shares has been sought in fixed-price tender offers than Dutch auctions. Additionally, for larger firms, the slope of the supply curves has been found to be less steep, which could account for the lower premiums.