Adverse Market Reaction Research Articles

Market responses to the China's transaction cost changes: An analysis of volatility dynamics

This paper analyzes the effects of China's fiscal tax policy changes. By exploring the immediate market responses and subsequent volatility, the study highlights the unanticipated nature of the tax hike and its significant impact on market dynamics. Using high-frequency trading data, the analysis demonstrates increased market volatility and reduced trading volumes following the tax adjustment. Comparative analysis with later adjustments in 2008 and 2023 further explains the differential impacts of such fiscal measures on various types of stocks. The findings emphasize the necessity for policymakers to consider market expectations and the specific characteristics of securities when implementing transaction taxes, suggesting approaches to reducing adverse market reactions and enhancing market stability.

Uncertain Regulations, Definite Impacts: The Impact of the U.S. Securities and Exchange Commission's Regulatory Interventions on Crypto Assets

This study employs an event study methodology to investigate the market impact of the U.S. Securities and Exchange Commission's (SEC) classification of crypto assets as securities. It explores how SEC interventions influence asset returns and trading volumes, focusing on explicitly named crypto assets. The empirical analysis highlights significant adverse market reactions, notably returns plummeting 12 % over one week post-announcement, persisting for a month. We demonstrate that the severity of market reaction depends on sentiment and asset characteristics such as market size, age, volatility, and illiquidity. Further, we identify significant ex-ante trading volume effects indicative of pre-announcement informed trading.

Corporate Misconduct and Subsequent Consequences in Family Firms

This paper investigates the effect of family ownership on corporate misconduct and its subsequent consequences. We argue that the reduced Type I agency conflicts (conflicts between managers and shareholders) in family firms may create an alignment effect, thereby curbing managerial misbehaviour. In contrast, the more severe Type II agency issues (conflicts between family owners and other shareholders) may induce an entrenchment effect, potentially fostering misconduct in these firms. Whether and how family ownership affects firm misconduct remains an empirical question. Through a research design that analyzes both types of agency conflict across various combinations of ownership and management control, our study of S&P 500 firms in the US suggests that family ownership tends to restrain firm misconduct. Specifically, family firms with externally hired CEOs effectively mitigate Type I agency problems and deter misconduct. Further analyses of misconduct consequences show that family ownership mitigates the negative effect of misconduct on firms’ credit ratings, particularly in firms with outside‐hired CEOs. Moreover, family firms encounter less adverse market reactions in response to disclosures of misconduct penalties.

Do election results resolve economic uncertainty? Evidence from Indian election 2024

We examine the immediate short-term effects of the election results using event study analysis on 1546 NSE-listed firms and find significant adverse market reactions around the counting day. However, the market recovers with expectations of a stable government. Sectoral analysis showed varied recovery across sectors. Cross-sectional analysis indicates that larger firms and those with better fundamentals manage uncertainties better, while volatile and highly-priced stocks suffer more. The findings theoretically contribute to the semi-strong form of the efficient market and uncertain information hypotheses.

Can High-Quality Interactions Reduce the Regulatory Inquiries Received by Firms? Evidence from Interactive Investor Platforms in China

ABSTRACT Utilizing data from online interactive investor platforms (IIPs) in China, we find that high-quality interactions between investors and listed companies significantly reduce the incidence of regulatory inquiries. This reduction is primarily achieved through alleviating information asymmetry and enhancing corporate governance. Our conclusions have proven robust across various tests. Additional analysis finds that a higher response ratio, greater detail in responses, clearer readability, and timeliness in replies correlate with fewer regulatory inquiries. The reduction effect is more pronounced in firms with weaker external monitoring and more sophisticated board secretaries. Furthermore, our findings indicate that interactions on IIPs can mitigate adverse market reactions to regulatory inquiries. These insights underscore the importance of fostering transparent and effective communication channels between investors and firms, highlighting their significant implications for improving the information environment in capital markets.

How do stock markets react to dividend announcements during the COVID-19 pandemic? Evidence from the GCC markets

PurposeThis study aims to investigate how stock markets responded to corporate dividend policy changes during the COVID-19 pandemic in the Gulf Cooperation Council (GCC) countries. Likewise, it explores how efficiently market prices incorporate the news by examining the speed of stock price adjustment to various dividend announcements.Design/methodology/approachThe sample includes 741 dividend announcements from 2017 to 2021 made by 326 firms listed in the stock markets of the GCC countries. A series of regression analyses examine how dividend announcements influence the market reaction during the COVID-19 pandemic, controlling for other well-documented firm characteristics.FindingsThis study reveals an adverse stock price reaction to all the dividend announcements in most GCC markets. The findings also show strong asymmetric effects of COVID-19 on how the markets react to different dividend changes. Likewise, the authors show that investors tend to underreact to the good news of dividend increases amid hard times of crises due to prevailing uncertainty and bearish sentiment. Besides, regression results reveal that firms with dividend reductions during the pandemic experience less adverse market reactions than dividend-decreasing firms prepandemic.Practical implicationsFor firms, the findings confirm the role that corporate dividend policy can play in conveying signals to investors, especially during hard times of crises and turbulences, thereby affecting their share price. For policymakers, the results substantially affect market efficiency and firm valuation in the GCC markets.Originality/valueThis study is not only one of the first few attempts to scrutinize how the pandemic has affected the market reaction to changes in corporate dividend policies but also, to the best of the authors’ knowledge, it is the first to examine how corporate dividend policy could affect stock markets during COVID-19 in the context of GCC markets.

Tax avoidance news, investor behavior, and stock market performance

This study investigates the relationship between tax avoidance news, investor behavior, and stock market performance in the Chinese financial context. Leveraging a comprehensive dataset spanning 2020–2023, we employ regression analyses and robustness tests to examine the impact of tax avoidance news on stock market performance. This quantitative empirical study addresses a significant gap in our understanding of the financial implications of tax avoidance news in China, highlighting its substantial influence on investor decisions and market dynamics. Key findings indicate that tax avoidance news leads to increased stock price volatility, moderated by investor trading behavior. This research contributes to the literature on taxation and financial markets by offering practical insights for policymakers, investors, and corporate entities. By understanding these dynamics, stakeholders can better navigate the complexities of financial markets and enhance corporate transparency and governance. The findings underscore the importance of effective communication and ethical practices in mitigating adverse market reactions, potentially influencing regulatory reforms and investment strategies.

Does legal justice promote stakeholder justice? Evidence from a judicial reform in China

This paper investigates how judicial quality affects corporate social responsibility (CSR) performance. Employing a difference-in-differences model based on the establishment of circuit courts in China and a sample of Chinese A-share listed firms from 2010 to 2020, we find that enhanced judicial quality improves firms' CSR performance. Further analysis shows that CSR helps reduce the incidence and expense of lawsuits and financial constraints arising after the circuit court establishment and mitigates negative market responses toward lawsuit announcements. This suggests that CSR has strategic value against lawsuits and firms' incentives to reduce litigation costs, financial constraints, and adverse market reactions are the potential mechanisms. The effect of judicial quality on CSR performance is more pronounced for firms with greater ex-ante litigation risk, lower ex-ante CSR awareness, and close to circuit courts. Overall, this study highlights a novel externality of the judiciary and suggests that legal justice can promote stakeholder justice.

Media coverage of corporate wrongdoing: International evidence on the stock market reaction and the buffering effect of prior corporate social performance

AbstractUsing an international sample of 111,251 news published in print, online, and social media between 2007 and 2021 covering 3202 firms in 20 countries, I find that superior prior corporate social performance (CSP) buffers the adverse market reaction to media coverage of corporate social irresponsibility (CSI), indicating that stakeholders interpret the misbehaviour as an anomaly rather than a pattern. Generally, the magnitude of the negative market reaction to CSI news intensified over time, confirming increased social awareness of corporate responsibility. I complement existing literature by revealing a diminishing marginal benefit of prior CSP: the buffering effect is consistently positive while strongly flattening, suggesting that stakeholders are somewhat indifferent between good and excellent CSP but highly sensitive towards previous misbehaviour. The shareholder value loss and insurance‐like effect of prior CSP are enhanced for firms located in stakeholder‐oriented business cultures, indicating that societal culture shapes stakeholders' attitudes towards corporate responsibility.

Does carbon neutrality commitment enhance firm value?

ABSTRACT This study discusses the stock market reaction to the firm’s carbon neutrality commitments. By hand-collecting firm-level news and stock data, we conduct event studies as well as regression modelling studies. The results show that firms experience losses in market value from committing to being carbon neutral, and the decline in cumulative abnormal returns ranges from −2.09% to −1.21% across different event windows. However, we find better previous ESG performance and a higher level of carbon disclosure could mitigate adverse market reactions. This study innovatively links the ‘trade-off theory’ and ‘resource-based view’ to the discussion of CSR/ESG on firm value from the lens of carbon neutrality commitments.

THE IMPACT OF ENVIRONMENTAL LIABILITIES ON THE STOCK PRICE AND MARKET VALUE

This study examines the effect on the security returns of a company named on the National Priority List (NPL) for the Superfund site. It investigates if the designation as a potentially responsible party (PRP) generates more negative abnormal returns after listing the NPL. Since this designation of firms as PRPs increase regulatory costs such as cleanup costs and disclosure requirements, an adverse market reaction is expected. This study employs several financial databases, such as Research Insight, CRSP, I/B/E/S, and the EPA's NPL database, which compile the Superfund listing for each firm in the sample. In the case of environmental liabilities, the potential future cost of environmental remediation makes estimating the firm's earnings more difficult. This implies that the earnings of PRP firms may not persist, resulting in noisier accounting information. The empirical results support the hypotheses that the markets react negatively to the bad news that the firm has been designated as a PRP in the Superfund site, implying that environmental liabilities negatively impact firm stock price and valuation. Significant findings provide financial statement users with helpful information about contingent environmental liabilities and help them make more informed investment decisions and better judge the firms' future performance.

Market reactions to a cross-border carbon policy: Evidence from listed Chinese companies

The effects of cross-border carbon policy have attracted increasing attention worldwide. We investigate the reaction of the Chinese stock market to the announcements of 12 legislative events associated with the European Union Carbon Border Adjustment Mechanism (EU CBAM). Our results, based on all industrial companies listed on China's Shenzhen or Shanghai Stock Exchanges, show that Chinese companies that export their products to the EU experience a more negative cumulative abnormal return around EU CBAM events than their counterparts (non-export companies and non-EU export companies). A cross-sectional analysis reveals that negative stock market reactions to the legislative events are greater when companies have greater carbon emissions intensity. Our further analyses show that being listed in both A-share and H-share markets, participating in a carbon emissions trading scheme, and having intensive cross-border collaboration mitigate the adverse market reactions. Our results show that the Chinese market is sensitive to legislative announcements associated with this cross-border carbon policy.

Corporate climate risk and stock market reaction to performance briefings in China.

This study aims to enrich our understanding of the valuation consequence of climate risk in financial markets. The primary focus of our study is on the stock price reaction to firms’ climate-risk-related information. We employ transcripts of Chinese listed firms’ performance briefings to capture the climate risk at the firm level. Using a sample of Chinese listed firms between 2009 and 2021, we find that greater corporate climate risks lead to negative market reactions over a short time window, consistent with the market quickly comprehending corporate climate risks. This result holds for a series of robustness checks. We further find that the negative impact of corporate climate risk on the stock price reaction operates through the increased market trading activities, greater investor attention, and reduced positive media coverage. Finally, we demonstrate that industry carbon emission, local abnormal temperature, state ownership, institutional shareholding, and dividend payout are important moderators that shape the association of the corporate climate risk and the adverse market reaction. Our evidence suggests that disclosures of climate-related information can help the stock market to price climate risk more efficiently.

The effects of drug safety warnings on drug sales and share prices.

Current regulations require that when seeking approval for new drugs, pharmaceutical companies must demonstrate their short- but not long-term safety and efficacy. Instead, post-approval, clinicians report adverse reactions to regulators, who may issue additional safety warnings. We investigate the incentives this creates for pharmaceutical companies to seek approval for new drugs with unknown long-term effects. We first construct models predicting that (1) long-run effects can be reasonably approximated from observational follow-up of short-term randomized control trials, and (2) companies will trade-off short-term sales against possible later adverse demand effects. We then test whether regulator warnings over diabetic, analgesic, analeptic, or psychoanaleptic drugs sold in the US and UK hospital and retail sectors affect the sales of individual drugs or the share prices of companies that sell them. With some exceptions, we find that pharmaceutical companies generally face no adverse market reaction in sales or share price from newly issued warnings in these four drug categories.

Compliance, defiance, and the dependency trap: International Monetary Fund program interruptions and their impact on capital markets

AbstractThe International Monetary Fund (IMF) is infamous for its structural adjustment programs, requiring countries to undertake policy reforms in exchange for loans. Yet, not only do countries routinely fail to implement these reforms, but they also frequently return to the IMF to start the process anew. What explains this compelling case of transnational regulatory ineffectiveness? We argue that countries are caught in a dependency trap: politically contentious policy prescriptions drive non‐compliance, triggering adverse market reactions that leave countries with few sources of financing beyond the IMF, leading to their eventual return to the doors of the organization for a fresh loan. Using new data on 763 IMF programs from 1980 to 2015, we initially demonstrate that the prevalence of market‐liberalizing structural reforms increases the likelihood of program interruptions. We then show that program interruptions undermine investor confidence and increase sovereign borrowing costs. Our study uncovers hitherto neglected relationships between the international institutions of regulatory capitalism, country compliance, and financial market responses.

State ownership and internationalization: The advantage and disadvantage of stateness

We critically review the literature on state-owned multinationals to clarify previous arguments and guide future studies. The content analysis of prior research reveals that state-owned firms differ from private firms in their internationalization: they are motivated by national strategic objectives, select more challenging countries, and use acquisitions more intensively despite adverse market reactions. The analysis also reveals conflicting predictions on the level of internationalization; some studies find that state-owned multinationals internationalize more while others find the contrary. We introduce one solution to these conflicts by classifying theories into two camps based on the balance between the costs and benefits of state ownership. One camp suggests a disadvantage of stateness (agency theory, resource dependence theory, and neo-institutional theory). Another camp promotes an advantage of stateness (economic development, resource-based view, and institutional economics). We conclude by outlining three promising relationships in the study of these firms: (1) relationships internal to state-owned multinationals and the balancing of stakeholder demands; (2)relationships between state-owned multinationals and government and the influence of the political system; and (3) relationships between home and host country governments and the impact of their dynamics on state-owned multinationals.

Do Lenders Care Who Did the Audit?

While non-U.S. auditors audit a significant proportion of U.S.-based clients, until recently, lenders were largely unaware of the involvement of component auditors since the U.S.-based lead auditor was not required to disclose information about participating auditors. Using the disclosure under Form AP mandated by the PCAOB, we find that the increase in cost of debt ranges from 15 basis points to 22 basis points when component auditors are used relative to engagements that do not involve component auditors. We also find that cost of debt is greater when the component auditor has GAAP-related audit deficiencies and fewer CPAs, face PCAOB disciplinary orders or more frequent inspection, and when the lead auditor and the component auditors are not from the same Big 4 audit networks. These findings are consistent with the notion that lenders associate lower audit quality and higher information risk with certain attributes of component auditors. Further, the component auditor’s superior local knowledge mitigates cost of debt for firms with high foreign operations. We also conduct an event study and find an adverse bond market reaction around the first-time disclosure of Form AP.

The choice of SEO method in Korea: Rights vs. public offers

Using South Korean data for 2000–2015, we find that firms with less information asymmetry and larger issue size are more likely to choose rights issues over public offerings and that control considerations also affect the flotation choice. We also find that rights offerings are met with more negative announcement returns than public offerings, and that stockholders of rights issuing firms seem to be compensated for the initial adverse market reaction by large issue-day returns. We contribute to the literature with an intra-market analysis of the SEO method choice, which cannot be done in markets with a dominant flotation type.

Stock market response to environmental policies: Evidence from heavily polluting firms in China

Pollution problems have recently become prominent in China, which has not only amplified public concerns on environmental protection but has also pushed the Chinese government to enforce more stringent environmental regulation. In this paper, we investigate the stock market response to the release of new environmental policies in China from the perspective of investor attention. By using the event study methodology, we assess the impact of 10 environmental policies issued by the central government over the period of 2014–2017. We find consistent evidence that the announcement of new environmental policies hurts the stock returns of heavily polluting firms in the short term. Meanwhile, compared to environmental regulations, environmental laws result in more adverse market reactions due to stricter policy enforcement. More importantly, investor attention to the environment issues, as measured by the Baidu Index, plays an essential role in predicting the stock market response, as we find a higher Baidu Index leads to lower stock returns for heavily polluting firms. Heterogeneity analyses further reveal the negative impact of environmental policies on market value is contingent on firm characteristics such as size, ownership structure, profitability and industry.

STIGMA? WHAT STIGMA? A Contribution to the Debate on the Effectiveness of IMF Lending

There is a perception that IMF programmes are not catalytic and instead associated with large capital outflows, higher refinancing costs for sovereigns and adverse movements in stock markets. This has led to concerns that an expectation of adverse effects of IMF programmes may deter countries from asking for an IMF programme when they need one, a form of ‘IMF stigma’. We address these questions using monthly data by estimating how and to which extent adverse market reactions to a programme materialise and how past experience with adverse market reactions affects subsequent IMF programme participation. Our results, derived with a propensity score matching approach, indicate no role for ‘IMF stigma’ stemming from the fear of adverse market movements.