RT Journal Article
SR Electronic
T1 Trading Applications Using EVA Style Analysis
JF The Journal of Investing
FD Institutional Investor Journals
SP joi.2021.1.210
DO 10.3905/joi.2021.1.210
A1 Atreya Chakraborty
A1 James L. Grant
A1 Emery A. Trahan
A1 Bhakti Varma
YR 2021
UL https://pm-research.com/content/early/2021/11/07/joi.2021.1.210.abstract
AB The authors apply economic value added (EVA) style analysis to four corporate actions: acquisitions, share repurchases, stock splits, and dividend announcements. Firms acquiring public targets provide significant shorting opportunities on value-destroying growth and “wise” restructurers. Acquiring firms with private targets provide longing opportunities on underinvesting and wise restructurers. For share repurchases, the authors find consistent alpha opportunities on repurchasing firms by longing their stocks, with the highest alpha on the wise restructurers. The post-announcement returns for stock splits were negative for value destroyers and positive for restructurers. For dividend increases, post-announcement effects are small except for positive alpha on the wise restructurers. For dividend decreases, negative abnormal returns continue for the value destroyers and restructurers. The best longing opportunity is on the stocks of share repurchasing companies in a wise restructurer position, while the best shorting opportunity is on the stocks of dividend-decreasing companies in a value-destroyer position. For active investors, EVA style analysis illuminates the naiveté of a “one size fits all” trading strategy on corporate actions.Key Findings▪ The authors apply economic value added (EVA) style analysis to four major corporate actions: acquisitions, share repurchases (buybacks), stock splits, and dividend announcements. The best alpha trading opportunity was on the stocks of share repurchasing companies in a “wise” restructurer position, while the best shorting opportunity was on the stocks of dividend-decreasing companies in a value-destroying growth position. Abnormal returns on stock splits were also available on the wise restructurers.▪ Acquiring firms with public targets provide significant shorting opportunities on both value-destroying growth companies and the restructurers. Acquiring firms with private targets provide longing opportunities on underinvesting and wise restructurers, while continued shorting opportunities were available on acquirers in a value-destroying growth position.▪ Alpha trading opportunities from going long or short vary across the type of corporate action and the EVA quadrants. EVA style illuminates the naiveté of a “one size fits all” trading strategy on corporate actions.