Empirical Corporate Finance
* Table of Content
Table of Content i
1 The Porsche Takeover 1
2 FPL Case 3
2.1 Expected Reaction of Stock Price 3
2.1.1 The Modigliani/Miller Theorem 3
2.1.2 The Tax Theory of Dividends 4
2.1.3 The Signaling Theory of Dividends 5
2.1.4 Agency Costs 5
2.1.5 Theory of Dividends Based on Tax Clienteles 6
2.2 Chart in the Light of Previous Theories 7
3 Elton and Gruber (1970): “Marginal Stock Holders tax Rates and the Clientele effect”, Review of Economics and Statistics 52, p. 68-74 8
3.1 Investors’ Marginal Tax Rate 8
3.2 Ex-Dividend Price Decline 8
3.3 Equal Tax Rates 9
4 Reference List 9
Allen, F., Bernardo, A.E., ...view middle of the document...
Hence, investors who want to exercise their control rights need a proportionally higher amount of common stock, than they would require in the absence of the VW law, in order to influence operations.
The price curves of the two types of stocks diverged significantly upon the announcement that Porsche Holding has been granted the permission by the German and European authorities, to take over the majority interest in Volkswagen. After the announcement (25.07.2008), common stock prices rose dramatically as Porsche was interested only in the control rights of VW in order to establish a corporation under the leadership of Porsche. Investors speculated on an abolishment of the VW law by the European Union, meaning a higher power of the voting rights, which, in turn, would have favored Porsche as one of the major stake holders. Prior to the announcement, analysts downgraded VW shares, as they determined that VW stocks were overvalued compared to the rest of the industry. As a reaction to Porsche’s announcement to take over the majority interest in VW, hedge funds, which practiced extensive short selling, had to cover their short positions as the ordinary share prices increased. Consequently, this lead to a “short squeeze” accelerating the rise of common stocks even more.
The high valuation of VW stock severely influenced Porsches acquisition plan. From a financial perspective, Porsche couldn’t acquire VW as a later relaxation in share prices to normal levels would have required depreciation in the billions. Porsche therefore announced that at the current trading level an acquisition is not reasonable and postponed the acquisition, leading to falling market prices.
The development of the preferred share price was constant up to the announcement (25.07.2008) that Porsche can officially take over VW. Ex-announcement prices decreased, as investors were uncertain about Porsche’s future actions with regard to dividend payments and anticipating the risk of a potential squeeze-out. Since holders of preferred stock have no control rights, they were afraid about not receiving historic dividend levels in the future under Porsche’s ownership.
Press and Investor reports:
02.04.2008: Investor reports give no indication of a possible takeover of Porsche. Reports only address current sales figures and financial data. VW share is set on hold (UniCredit Marktes&Investment Banking, 2008).
24.07.2008: Last trading day before Porsche received permission of the authorities to take over Volkswagen. Analysts forecast reduced sales in year 2009 but VW share is still on hold (Independent Research, 2008).
01.08.2008: VW stock was downgraded from “equal weight” to “underweight” as analysts believed that the chance/risk ratio turned towards negative as the expected increase of Porsche’s share in VW will offset the majority of factors that previously led to higher valuation of the stock (Lehman Brothers, 2008).
18.09.2008: The VW common stock achieved all-time high,...