Limitations of Finance Theory in Appraisal Litigation

Dr. Donald G. Margotta, Northeastern University, Boston, MA

ABSTRACT

Courts have increasingly relied on finance theory to resolve valuation issues which arise in corporate litigation. However, finance theory has limitations in doing so. That, combined with ambiguities within the law, have led to misinterpretations of finance principles and to wide ranges of company valuations. This paper analyzes these problems, especially those in assessing fair value in appraisal cases. It concludes, from a finance perspective, that the deal value of a merger should be considered at least equal to a company’s fair value, a view that is consistent with the increasingly held view in the legal literature that the deal value is the best estimate of fair value. Finance theory is used in various types of litigation. Securities fraud litigation requires litigants to meet a reliance requirement which they can do through the legal doctrine of “fraud on the market,” (1) which is based on finance’s efficient market theory. Also, such litigation is often brought as a class action and finance theory is used in certifying a class that is allowed to receive awarded damages. Procedures for determining damages when companies make false statements that affect stock prices also rely on efficient market theory. Appraisal litigation, however, is unique because appraisal statutes require determining the “fair value” of a company, a term that is not defined in the statutes and is not a term commonly used in the finance literature.  This paper shows that although ambiguities in the law and limitations of finance theory are inescapable in valuation cases, the legal principle known as the “business judgement rule” has evolved to enable courts to deal with them under some circumstances and this paper suggests it could be considered even more widely, especially in appraisal cases.  The paper begins with a description of appraisal litigation and of the term “fair value.” It also describes the financial significance of appraisal litigation. Next, since valuation metrics are central to the paper, discounted cash flow (DCF) methodology is discussed in some detail, with emphasis on key variables that contribute to the wide valuation differences seen in appraisal litigation. The final portion of the paper discusses why the deal value in a merger should be considered at least equal to fair value. Appraisal litigation arises when dissenting shareholders of a target company object to a merger price that has been agreed to by the company’s board and seek to get a higher price for their shares by exercising appraisal rights in a judicial proceeding.

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 Contribution of Goodwill and Other Intangible Assets to Investor Returns in the U.S. and

Canadian For-Profit Health Services Sector

Dr. Robert Leach, University of South Carolina Aiken, SC

Dr. Richard Heiens, University of South Carolina Beaufort, SC

Dr. David S. Harrison, University of South Carolina Aiken, SC

ABSTRACT

The study examines the contribution of both acquired goodwill and other intangibles on investor returns in the U.S. and Canadian for-profit health services sector.  Companies included in the study were drawn from the Standard & Poors Compustat Industrial database, which contains income statement, balance sheet, cash flow statement and supplemental data items for publicly traded companies.  In order to measure investor returns, the study utilized the concept of market-adjusted holding period returns (HPR), an investment performance measure associated with a buy and hold strategy over a given investment horizon.  Stock returns data were obtained from the University of Chicago Center for Research in Security Prices database.  The primary finding is that accounting goodwill is the most significant intangible asset associated with investor returns in the for-profit health services sector.  Moreover, the impact of goodwill on HPR is particularly robust in the case of home health care services firms.   On March 23, 2010, President Obama signed into law the Patient Protection and Affordable Care Act (ACA).  The law promised to provide health insurance coverage for millions of previously uninsured Americans, yet the new regulatory landscape also had an effect on many other facets of the health care industry.  For example, faced with a great deal of uncertainty in the early 2010s, which by many accounts has continued to the present day, many firms in the health care industry have sought to minimize their risk profile (Arduino, 2018).  A great deal of research has demonstrated the relationship between company size and profitability (Barton and Gordon, 1988; Chakrabarti, Singh, and Mahmood, 2007).  Not surprisingly, the health care industry in the North American market has been in a long period of consolidation, and experts agree that mergers and acquisitions are likely to continue unabated for years to come before reaching a period of higher stabilization (Cussat, 2016).  According to research, the cost savings as a result of mergers and acquisitions can be significant (Kristensen, Bogetoft, and Pedersen, 2010; Weil, 2010; Wilensky, 2018).  Thus, these growth strategies, which often lead to the creation of additional intangible assets, may ultimately lead to shareholder value.  Therefore, one strategic initiative that may be used as a positive signal to the investment community regarding a company’s anticipated future profitability is to seek growth through mergers and acquisitions.   According to Qureshi (2017), the market attaches different values to intangible assets in different industries. Therefore, studies focusing on the impact of intangibles need to be conducted on an industry-by-industry basis.  Unfortunately, despite the trend toward consolidation in the health care industry and the resulting growth of goodwill and other intangibles, research focusing on the resulting impact of the acquired goodwill and other intangibles has not been widely conducted on health services firms. 

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 Human Resource Motivation and Satisfaction in the Tourism Sector

Claudia Costa, University of the Azores, Portugal

Dr. Sandra Dias Faria, University of the Azores, Portugal

Dr. Joao Couto, University of the Azores, Portugal

ABSTRACT

 From the beginning of the twentieth century, motivation and job satisfaction have become the object of greater interest for several scholars and researchers who seek to understand how they evolve over an individual’s life. The importance given to these concepts is currently even greater owing to constant changes in technology and the labor context. This study focuses on the growth of tourism both globally and in the region being analyzed. This study evaluates the importance of a set of factors, namely, individual characteristics, literacy, and type/nature of the work, using two scales: one for motivation (the Multi-Moti scale) and the other for satisfaction (the Job Satisfaction Survey), both validated for the Portuguese population. The results indicate that motivation and satisfaction are dissimilar between tourism and the other sectors analyzed, and the differences between the two groups are examined.  Human resources are fundamental to the functioning, development, productivity, and success of organizations. In this framework, the concepts of motivation and satisfaction that are indispensable to this study are studied independently and analyzed together because they are interrelated. For this reason, many investigators have focused on understanding the relationship between the individual and his/her work. We analyze the factors that alter behavior and are associated with motivation and satisfaction primarily to evaluate what stimulates a person to move toward certain goals. From the analyses carried out, a set of predominant causes are investigated, such as an individual’s personality, his/her work environment, and his/her relationship with colleagues (Bonfim, Stefano, and Andrade 2010). Nowadays, tourism is recognized as a strategic sector for the growth of the world economy (Silva and Martins, 2016) as it provides recognition to countries at the international level. To maintain this growth, it is essential to meet the needs of tourists and match their expectations. Recognizing the tourism sector as a demanding environment, the levels of motivation and satisfaction should remain high, through effective and efficient practices that promote labor welfare and superior execution of tasks.  Thus, human resources management plays an important role in delivering quality services to customers, thereby providing a competitive advantage (Ishak, Abdullah, and Ramli, 2011).  This study is based on a methodology that allows investigating the main factors that influence motivation and satisfaction, namely, individual characteristics, literary qualifications, the nature of work, and type of activity carried out.  Over the years, motivation has been studied by many authors, which has led to a set of definitions from the theories of the most respected authors in the field of psychology. The study of this concept is an added value, since companies should consider their importance in the organizational context.  According to Kanfer (1990), motivation in organizations relates to what a person does (direction), his/her effort toward the work (intensity), and how long he/she performs the work (persistence).

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The Impact of the Company's Market Timing on the Credibility of Repurchase Announcement

Dr. Han-Ching Huang, Chung Yuan Christian University, Taiwan R.O.C.

Shiao-Ru Peng, Chung Yuan Christian University, Taiwan R.O.C.

ABSTRACT

In this study, we examine the impact of market timing on the actual repurchase ratio by the sample of Taiwan listed companies at stock exchange market and the firms at over-the-counter (OTC) market. Based on Dittmar and Field (2015), we use the relative repurchase price (RRP) to measure the strength of market timing abilities when firm repurchases its own stock. We find that the stronger market timing ability is associated with the lower actual repurchase ratio. The listed firms with larger market values are more likely to use stock repurchase as a tool of supporting their stock prices.  Stock repurchase can be regarded as one of the company's channels to release private information since it shows that the managers think the stock price is undervalued (Dittmar, 2000; Massa, Rehman and Vermaelen, 2007). Choi and Chen (1997) indicate that the response of price after the stock repurchase is stronger than that after the dividend payment, and the analyst adjusts the range of the earnings forecast after the stock repurchase is more than that after the dividend payment. Dittmar and Field (2016) find that companies paid a lower price after general market declines, which is consistent with corporate managers responding to the market’s overreaction to negative information about the firm through repurchases.  There are many literature (e.g. Jenter, 2005; Hong et al., 2008) to discuss whether the manager has the ability of market timing. Most of measuring the company's market timing ability depends on the cumulative abnormal return after stock repurchase. However, due to the different benchmarks to measure the cumulative abnormal remuneration, the results may be different. Thus, it has some drawbacks to use the event study method to measure the market timing ability. In addition, the market timing ability is traditionally measured by long-term returns after the announcement. Nonetheless, most of the firms announce the repurchase but do not actually implement it (Lakonishok and Vermaelen, 1990; Peyer and Vermaelen, 2009). Comparing the actual price paid in the repurchase with the average market price of the stock, Dittmar and Field (2016) show that many companies, and in particular those that buy back infrequently, have been able to time the market with repurchases. According to Dittmar and Field (2015), we use the relative repurchase price (RRP) to measure the strength of market timing abilities when firm repurchases its own stock.  Since the company can declare stock repurchase, but does not guarantee the plan's implementation, the company often announce to repurchase shares but does not buy back actually or the actual purchase rate is low. Thus, investors cannot know the actual proportion of repurchase stock when the firm announces. We argue that the company with stronger market timing ability more likely use the stock repurchase as a tool of supporting their stock price. This company’s repurchase announcement is less credibility. Therefore, this paper explores the impact of market timing on the actual repurchase ratio. We find that the stronger market timing ability is associated with the lower actual repurchase ratio.

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 The Cultural Heritage of Sao Miguel Island as a Valuable Tourism Product

Iva Cogumbreiro Garcia, University of the Azores, Portugal

Dr. Sandra Dias Faria, University of the Azores, Portugal

Dr. Joao Pedro Couto, University of the Azores, Portugal

ABSTRACT

The concept of cultural heritage is increasingly related to economics and sustainable development, both in theoretical work and empirical presentations. The economic component of cultural heritage has borne a new area of study that focuses on tourism as a support for the economic value attributed to it. Understanding the perception and dimension of the cultural tourism market in the Azores, and especially in São Miguel Island, is fundamental to fulfill the public's aspirations and adopt public policies that enhance its value in harmony with the focus on tourism in this archipelago that has been considered a destiny of nature. Culture as the identity of a group or civilization is the general starting point for this, assuming it as both edifying and uplifting of the various dimensions of life in society. We can see the difficulty in circumscribing such a wide universe as a product of concrete economic value. Through the literature review, the concept of tangible and intangible cultural heritage is identified through a typology of values. The research on the actors within the cultural sector on São Miguel Island suggests that there is a developing awareness of the value of Azorean cultural heritage as a tourist product. On the other hand, the result of the research in the consumption of the tourism in São Miguel Island points to new guidelines of the valorization of this product. The growing link between the valuation of cultural heritage and tourism has a significant impact on the development of the Azores.  In the Azores, as an autonomous region, public policies that focus on the cultural sector have been lavish in the construction of infrastructures and valorization of the cultural sector, as well as in reifying the notion that someone’s identity that originates in both history and geography. The empirical analysis in this article focuses on this identity's roots in cultural heritage. The economics of cultural heritage take a singular status because heritage goods share some characteristics with other cultural assets, especially uniqueness (Benhamou, 2011).  The cultural heritage of a tourist destination emerges in the economy of tourism. The growth of tourism activities in the Azores has followed the global trend of the last decade, and the exploitation of consumers’ desires and preferences have been implemented in a differentiation strategy, which promotes the development of new products and offerings (Cogumbreiro, 2015).  It is important to understand the true impact of cultural heritage according to tourists' behavior in São Miguel Island from the demand perspective, as well as the contribution of agencies and entities engaged in cultural activities, according to the offer. The variation in cultural heritage perceptions in São Miguel Island, examined according to the characteristics of the workers in the cultural sector as well as tourists was confirmed as null, which follows the hypothesis. Likewise, the hypothesis that differentiated the recommendation of São Miguel Island as a cultural tourism destination according to the type of respondent (player or tourist) was rejected. From the 13 values of cultural heritage (identity, history, memory, cultural, economic, legacy, pedagogic, artistic, peace promotion, community, aesthetic, tourism, and customs), collected in literature (Ferreira and Carvalho, 2017), only identity, community and memory dimensions are measured differentially from demand and supply perspective. 

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