محتوای اطلاعات اوراق بهادار مشارکت شکایت های قانونی: مورد CalFed Bancorp
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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Journal of Financial Economics, Volume 60, Issues 2–3, May 2001, Pages 371–399
CalFed Bancorp is one of 126 S&Ls suing the U.S. government for breach of contract related to supervisory goodwill, a form of goodwill created by the acquisition of insolvent thrifts during the early 1980s. Before a determination of damages in its lawsuit, CalFed announced and issued a litigation participation security giving shareholders a proportional claim on recovered damages, if any. This announcement generated a positive excess return in part because it made CalFed a more likely acquisition target. Trading in the security also reveals important, yet previously unavailable, information about CalFed's lawsuit: its price reveals a market-based estimate of damages while its beta reveals information regarding expected returns and trial duration. In a broader context, this paper identifies acquisition facilitation as a benefit of issuing targeted stock and highlights a series of lawsuits that will set important precedents regarding the determination of liability and the estimation of damages in breach of contract cases.
During the early 1980s, regulators encouraged healthy savings and loan associations (S&Ls or thrifts) to acquire approximately 300 failing thrifts instead of closing them and paying off their insured depositors. These acquisitions, known as supervisory mergers, created an asset on the acquirers’ balance sheets known as supervisory goodwill (SGW) which was equal to the difference between the fair market value of the acquired thrift's assets and its liabilities under purchase accounting. According to the merger agreements, SGW could be amortized on a straight-line basis over periods of up to 40 years. Thrifts were willing to acquire failed institutions precisely because they could use SGW to meet minimum capital requirements rather than recognizing the insolvent thrift's negative net worth at the time of the merger. The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989, however, restricted thrifts’ abilities to use SGW as capital by reducing the amortization period and by creating alternative, stricter capital standards. As a result, many thrifts fell below minimum capital standards and were either closed by the regulators or forced to recapitalize. In response, a total of 126 thrifts sued the U.S. government for breach of contract related to FIRREA.2 CalFed Bancorp (CalFed), which is now part of Golden State Bancorp but was formerly one of the country's largest S&Ls, filed its lawsuit in February 1992. The U.S. Court of Federal Claims (the Claims Court) stayed CalFed's lawsuit and other similar lawsuits pending resolution of three test cases – Winstar, Statesman, and Glendale – filed prior to 1992.3 The test cases have proceeded in two phases. During the first phase, the Claims Court found the government liable for breach of contract in August 1995, a decision that was later upheld by the U.S. Supreme Court in July 1996. In his 7–2 majority opinion, Supreme Court Justice Souter commented, “It would, indeed, have been madness for the healthy S&Ls to acquire the ailing ones if they had known the government could then rewrite the rules that enticed them in the first place”(Los Angeles Times, 1996). During the second phase, the Claims Court determined damages for the plaintiffs. As of July 2000, all three test cases and several follow-on cases have been decided. In the two most prominent cases, the judges reached dramatically different conclusions with awarded significantly different amounts: Glendale received $909 million while CalFed received $23 million. An Appeals Court reviewed both decisions in July 2000, but has yet to make a final ruling. Prior to the liability finding by the Claims Court in 1995, CalFed issued the first of two litigation participation securities. Shortly after the Supreme Court upheld the ruling, it issued a second litigation participation security. Both securities entitle shareholders to a fraction of damages, if any, received from the government. Section 2 provides further background on these unique forms of targeted stock. Consistent with prior research on targeted stock (Logue et al., 1996; Zuta, 1999; Billet and Mauer, 2000; D’Souza and Jacob, 2000; Elder and Westra, 2000), this paper finds that CalFed experienced a positive, excess return of 4.3% when it announced the first security. Section 3 details this finding. Because these securities are not tied to operating units, but rather the outcome of a lawsuit, many of the explanations for why targeted stock creates value, such as improved incentive compensation, reduced information asymmetry, and greater flexibility in capital raising, do not apply. Instead, this paper examines a variety of other hypotheses including an agency-based hypothesis regarding cash management. In particular, I test Blanchard et al.'s (1994) hypothesis that firms waste cash windfalls from lawsuits using a unique set of tests that capitalize on the co-existence of two proportional claims, CalFed and CALGZ, on the same stock. The tests produce ambiguous results leaving me unable to reject the hypothesis that CalFed's stock price fully incorporates the value of the potential damage award. The most likely explanation for the positive return is that issuance increased the probability CalFed would become an acquisition target by segregating its risky asset (its claim in the lawsuit) and by establishing an independent, market-determined value for it. Besides facilitating a possible acquisition, this security reveals important, yet previously unavailable, information about CalFed's lawsuit. Section 4 analyzes CALGZ's price and shows that it reveals a market-based estimate of damages. Before the Glendale and CalFed rulings, total damages ranged from $400–$500 million for CalFed and approximately $5 billion across all 126 plaintiffs. While far less than the $20–$30 billion figures commonly cited in the popular press (see Schmitt, 1999, or Knigh and Biskupic, 1996), these lawsuits clearly represent significant potential liabilities for the US government. Following the Glendale and CalFed rulings, the price fell dramatically to the point where current damage award estimates are $80 million for CalFed and less than $3 billion for all the plaintiffs collectively. The security also reveals information regarding expected returns and trial duration. Section 5 analyzes the security's beta and its time-series evolution from issuance through the present. Over the full period, it has a beta of 0.53, yet it begins the period with a beta in excess of 1.00 and finishes with a beta that is not significantly different from zero. One interpretation of this pattern is that it reflects changing expectations on the time until damages will be received by security holders. At first, the security trades like a risky, medium-term bond with interest-rate risk because the security does not pay pre-judgement interest and credit risk because the ultimate amount of damages is unknown. Such a bond would have a positive beta, though not one in excess of 1.00. The magnitude of the beta reflects some expectation of how the Court would ultimately determine the amount of damages. For example, if the Court were to use an ex post damage theory, one that set damages based on information known subsequent to the breach such as realized industry profitability or equity returns, then the damage amount would be highly correlated with market movements. As the trials progressed and the perceived uncertainty surrounding damages declined, the security began to trade more like a safer, short-term bond with a beta of zero. Although this paper focuses on a single, novel security, it yields a surprising amount information about the SGW lawsuits and the use of targeted stock more generally. Somewhat curiously, the SGW lawsuits have received little academic attention despite the fact they will establish important legal precedents regarding the determination of liability and the measurement of damages in regulatory breach of contract cases. This paper highlights the existence of the lawsuits and the magnitude of the potential liability for taxpayers. In a broader context, it contributes to the growing debate on the merits of targeted stock by documenting acquisition facilitation as a possible benefit (Strom, 1994; Hass, 1996; and Billet and Vijh, 2000). As targeted stock issuance becomes more common both here and abroad – Elder and Westra (2000) document 16 offerings in 1999, up from seven in 1998 and five in 1997 – it becomes increasingly important to understand why and how targeted stock creates value. I discuss my contribution to this debate and summarize my findings in Section 6.
نتیجه گیری انگلیسی
CalFed's issuance of litigation participation securities provides an opportunity to analyze a unique form of targeted stock with wide ranging financial and legal applications. Consistent with previous studies on targeted stock announcements, CalFed experienced a positive excess return when it announced CALGZ. In contrast to the information and agency-based motivations for targeted stock issuance, CalFed's positive return stems from an increased probability of takeover even though I cannot conclusively reject other factors. Besides making CalFed a more likely target, CALGZ reveals important information that was previously unavailable to litigation participants. Its price reveals an unbiased estimate of damages for CalFed and, by crude extrapolation, for the other SGW plaintiffs. The current damage estimate of $3 billion across all plaintiffs represents an expensive epilogue to what has already been an expensive period in S&L history. At the same time, CALGZ's beta reveals information on investors’ expected returns on the goodwill securities and provides some indication of expected trial duration. In terms of applications, the idea that targeted stock can be used to facilitate mergers and acquisitions is novel, at least in the academic literature. By isolating risky, hard-to-value assets, particularly those with unhedgeable risks due to deregulation or litigation, targeted stock can facilitate acquisitions by increasing the probability the parties will agree on a price for core assets. In fact, Corporate Finance magazine (1996) named a transaction using targeted stock as its “M&A Deal of the Year” for exactly this reason. Whereas many of the early targeted stock announcements were done by actual or potential targets, more recent announcements have been done by potential acquirers including DLJ, AT&T, and DuPont in an attempt to create an acquisition currency. One direction for future work should be to improve our understanding of targeted stock as a form of acquisition currency. Within the legal community, targeted stock also has potentially exciting applications as a way to fund litigation and structure compensation for litigation participants. At the very least, litigation securities could provide signals regarding an individual's effectiveness for use in subsequent litigation. Again, more research is needed to explore these possibilities. While one goal of this paper has been to document the role targeted stock can play facilitating acquisitions, a second goal has been to highlight the SGW lawsuits and the important legal precedents they are establishing regarding the determination of liability and the measurement of damages. Other lawsuits against the US government involve similar issues (e.g. breach of contract) and potentially much greater damages. For example, utilities are suing to recover stranded asset investments, contractors are suing to recover lost value in “expiring use” (low income) housing, and aerospace firms are suing to recover for cancelled satellite launches (see Grunwald, 1998). With potentially hundreds of billions of dollars at stake in follow-on suits, a thorough understanding of the legal and financial ramifications of the SGW lawsuits is clearly warranted. This paper is a first step in that direction. Appendix A. Testing for agency conflicts involving wasted cash proceeds Appendix A tests the agency-based hypothesis that CalFed's positive announcement day return was due to their commitment to disgorge cash proceeds. The test capitalizes on the fact that CalFed and CALGZ are proportional claims on the same asset and, therefore, should exhibit proportional returns, particularly after controlling for the returns on CalFed's non-goodwill assets. CalFed (CAL) is comprised of a goodwill claim (SGW) and S&L assets (S&L): equation(A.1) View the MathML source Its returns should be a value-weighted average of returns on these two assets: equation(A.2) View the MathML source where View the MathML source, and View the MathML source are the returns on CalFed, the goodwill asset, and the S&L assets, respectively. Dividing through by CalFed's market value yields: equation(A.3) View the MathML source Eq. (3) can be rewritten and tested econometrically as equation(A.4) View the MathML source To calculate the weights (SGW/CAL and S&L/CAL), select proxies for SGW and S&L because neither one is observable. Using CALGZ, estimate the value of the goodwill asset. Assume that CalFed receives full credit (i.e. 74.62% of the total) for its share of the damage proceeds. Then assume that CalFed's S&L assets are equal to the difference between the value of the holding company and the value of the goodwill asset (S&L=CAL−SGW). For the returns, observe CalFed's returns (RCAL) and CALGZ's returns (RSGW) directly. As a proxy for the S&L returns (View the MathML source), calculate a weighted average return for a portfolio consisting of the 10 largest California S&Ls that did not have goodwill lawsuits against the government. This regression is run during the period when both securities were trading (7/31/95 to 1/3/96) and test whether the coefficient on the goodwill variable (β1) is equal to 1.00. A coefficient that is significantly less than 1.00 would indicate that CalFed was not getting full credit for its share of the litigation asset. Such a finding would be consistent with value destruction at the corporate level. As shown in Table 4, the coefficient on the goodwill asset is 0.634 for the 363 days when both securities were trading, which is significantly less than 1.00 at the 1% level. Unfortunately, measurement error in the goodwill variable will cause this coefficient to be biased downwards. Table 4. Testing for agency conflicts involving cash proceeds This table analyzes CalFed's returns (RCAL) as a weighted average of returns on the goodwill security (RSGW=RCALGZ) and a portfolio of California S&L thrifts (View the MathML source) during the period 7/31/95 to 1/3/96 when both CalFed (CAL) and the goodwill security (CALGZ) were trading. The weights assume CalFed is comprised of S&L assets (S&L) and a goodwill claim (SGW) and are determined as of the prior day of trading: CAL is CalFed's market value of equity, SGW is the theoretical value of CalFed's goodwill claim (assuming the market gives it credit for the full award), and S&L is the difference between CAL and SGW (View the MathML source). S&L returns are based on a portfolio of the ten largest California S&Ls that did not have goodwill claims against the government. The sample includes all days on which both CalFed and CALGZ were trading, and five subsamples based on the absolute value of CALGZ's returns. The tested hypothesis is that both β1 and β2 are equal to 1.0. View the MathML source Absolute value of CALGZ Returns Returns on the Goodwill Asset (β1) Returns on the S&L Assets (β2) Number of days Coefficient t-statistic for β1=0 t-statistic for β1=1.00 Coefficient t-statistic for β2=0 t-statistic for β2=1.00 Adjusted R2 F-Statistic All days 363 0.634 5.64∗∗ 3.26∗∗ 0.529 7.20∗∗ 6.41∗∗ 22.2 52.6∗∗ >2.0% 152 0.668 4.99∗∗ 2.48∗ 0.498 4.00∗∗ 4.02∗∗ 27.8 30.0∗∗ >4.0% 68 0.738 4.39∗∗ 1.56 0.539 2.42∗ 2.07∗∗ 35.2 19.2∗∗ >6.0% 33 0.620 2.97∗∗ 1.82∗ 0.800 2.48∗ 0.62 41.5 12.4∗∗ >8.0% 16 0.820 2.78∗∗ 0.61 0.427 0.70 0.94 44.5 7.02∗∗ >10.0% 10 0.790 2.24∗ 0.59 0.525 0.69 0.62 47.8 5.07∗ ∗ indicate significance at the 10% level. ∗∗ indicate significance at the 1% level. Table options To maximize the accuracy of the goodwill variable and minimize the measurement error in the S&L variable, I restrict the sample to days where the goodwill security had the largest absolute returns, i.e. days with major litigation-related news. Table 4 shows the results for samples containing returns in which the absolute value of the returns are greater than 2%, 4%, 6%, 8%, and 10%. As the number of observations decreases, the informativeness of the observations increases and the adjusted R2 increases from 22.2% to 47.8%. In three of the five regression (4%, 8%, and 10%), I cannot reject the hypothesis that the coefficient on the goodwill variable is equal to 1.00. In other words, I cannot reject the hypothesis that CalFed was getting full credit for the expected cash proceeds from the SGW lawsuit. It is important to recognize that this analysis involves a trade-off between an imprecise test due to measurement error and multi-collinearity, and a weak test due to limited power. The multi-collinearity is the result of correlation between the S&L and goodwill variables. As in Section 5, the damage award has a positive beta and appears to be related to S&L performance after the breach, which means the returns on the S&L and goodwill variables will be correlated. Low power, on the other hand, is the result of limiting the analysis to the days with litigation news in an attempt to reduce the measurement error.