Announcement Day Research Articles

Heterogeneous Beliefs and the FOMC Announcements

This paper studies the effect of FOMC announcements on the dynamics of heterogeneous beliefs. The open interest of options decreases significantly after announcements, implying the associated high trading volume comes from unwinding positions with less disagreement. To measure this effect, I develop a quantitative general equilibrium model with heterogeneous beliefs about fundamental growth under recursive utility. On average, the disagreement on growth decreases from 1.15% to 0.55% on announcement days for recent years. In a counterfactual economy where the transparency of announcements decreases by half, disagreement increases 0.31%, and stock market volatility is 16.8% higher due to more speculative trading.

Advance notice labor conflicts and firm value—An event study analysis on Israeli companies

The Israeli law has a special requirement—unions must announce a labor-conflict at least 15 days before a potential strike. This raises the question whether (and how) an advance notice affects the firm value, as it allows employees and employers to negotiate and reach an agreement prior to an actual strike. Using event study analysis, we find in large firms and in companies with relatively high stock liquidity significant negative effect only after the announcement. Smaller firms with relatively illiquid stock exhibit significant negative effect prior to the announcement day, and their post event-day effect is statistically insignificant.

UK's stock market reaction to Brexit process: A tale of two halves

We examine the UK's stock market reaction to 27 events associated with the likelihood of Brexit. Though the overall market reactions to these events is negative, a dissection of these events into the pre and post Brexit referendum events unearth interesting facts. In particular, we find that the market reaction is negative and significant to the events leading up to and including the announcement of Brexit results. This negative reaction is not confined to the day of announcement of the outcome of Brexit referendum only rather it spans over the events that enhanced the likelihood of the Brexit in the pre-Brexit referendum period. However, our results show a positive market reaction to events that occurred after the Brexit referendum. These findings suggest that initially market reacted negatively to the Brexit; however, as the UK's future economic relations with EU started to take a shape, the market started to see the positive side of Brexit. Consistent with this notion, our cross-sectional analysis shows a positive market reaction for the firms that are engaged in foreign sales and that much of the negative market's reaction relates to the firms that openly stated the negative effect of Brexit on their operations. Finally, we do not find evidence of market reaction to UK firms depending on European labor force; however, we do find significantly positive stock market reaction to the firms involved more in international trade. An important caveat of our study is that our reported results are sensitive to the choice of market index.

Surprise and dispersion: informational impact of USDA announcements

AbstractWe examine the role of information asymmetry on changes in bid‐ask spreads during major United States Department of Agriculture (USDA) announcements. Our analyses, using corn, wheat, and soybean futures, indicate that information asymmetry is significantly higher on USDA announcement days compared to nonannouncement days. We further observe that the increased information asymmetry prior to news announcements is mainly driven by the divergence in private information possessed by market participants. However, once the USDA news is released, not only the dispersion in investors’ private information but also the surprises in news announcements contribute to increased information asymmetry and widening of bid‐ask spreads.

How Did the Introduction of Deposit Insurance Affect Chinese Banks? An Investigation of Its Wealth Effects

ABSTRACTThe latest introduction of deposit insurance in China gives us a chance to explore the stock market reaction to the major regulatory policy change in banking. Our results show the average abnormal returns of all listed banks in China are significantly negative on the announcement day. It indicates the introduction of deposit insurance has an adverse wealth effect on the banking industry in China. We also find that among bank characteristics such as asset size, z-score, and ROE, only size has a statistically significant positive impact on the abnormal returns of the Chinese listed banks on the announcement day. The results mean the introduction of deposit insurance in China creates a redistribution of wealth from small banks to those with larger size.

Anomalies and News

ABSTRACTUsing a sample of 97 stock return anomalies, we find that anomaly returns are 50% higher on corporate news days and six times higher on earnings announcement days. These results could be explained by dynamic risk, mispricing due to biased expectations, or data mining. We develop and conduct several unique tests to differentiate between these three explanations. Our results are most consistent with the idea that anomaly returns are driven by biased expectations, which are at least partly corrected upon news arrival.

Central bank announcements and realized volatility of stock markets in G7 countries

We investigate the impact of monetary policy announcements on stock market volatility in the U.S., Canada, Japan, the U.K., Germany, France and Italy during the 2006–2016 period. More specifically, we study the impact of policy rate and quantitative easing announcements of domestic and foreign central banks on realized volatility before, during, and after the event. We find that on the day of an interest rate announcement of the domestic central bank, volatility increases in a manner that is both statistically and economically significant. We also find a decline in volatility five days after an interest rate announcement across all countries in our sample. We further find that quantitative easing announcements have no impact on stock market volatility not only at but also five days before and five days after the announcement date.

Relief Rallies after FOMC Announcements as a Resolution of Uncertainty

Abstract We find substantial positive average stock returns after FOMC announcements accompanied by the release of the Summary of Economic Projections (SEP) and press conference by the Fed Chair. Both SEPs and press conferences contain new information that moves financial markets. We show that several measures of uncertainty are significantly higher on days of FOMC announcements accompanied by SEP and press conference than on announcement days without SEP and press conference. Controlling for changes in uncertainty measured by VIX changes, the positive unconditional mean returns after the FOMC announcements with SEP and press conference disappear. We also find that stocks correlated with market uncertainty shocks have higher returns on days of FOMC meetings with SEP and press conference. These results suggest that the positive post-announcement stock market returns are related to resolution of uncertainty.

Maximum Mispricing on Announcement Days

A simple model of investor behavior can capture the cross-sectional and time-series patterns of stock returns around macroeconomic announcement days. The model makes several predictions that I confirm empirically: i) The security market line on announcement days is much flatter when sentiment demand is high. ii) On high-sentiment months, the announcement returns of portfolios exploiting CAPM-mispricing are larger. iii) Bad news resolve less uncertainty on macroeconomic announcements, causing a price drift after bad news, and a post-announcement negative premia. iv) CAPM-underpriced (overpriced) stocks deliver most of their price correction during the days leading to (after) macroeconomic announcements.

Earnings Announcement Promotions: A Yahoo Finance Field Experiment

This study presents a field experiment we conducted in which media articles for a random sample of firms with earnings announcements are promoted to a one percent subset of Yahoo Finance users. The promoted firms have similar fundamental and earnings-news characteristics as control firms, yet we find that promoted firms have higher abnormal returns on the day of the earnings announcement, and some evidence of lower bid-ask spreads. Moreover, these results are more pronounced for less visible firms, negative earnings news, and on days with fewer promoted firms. We do not find evidence of significant increases in trading volume, or of information acquisition by users subject to the promotion. These findings suggest that investor attention affects the pricing of earnings and that retail investors buy stocks that catch their attention, in a setting where attention is randomly assigned.

Earnings announcement promotions: A Yahoo Finance field experiment

This study presents a field experiment in which media articles for a random sample of firms with earnings announcements are promoted to a one percent subset of Yahoo Finance users. Promoted firms have higher abnormal returns and some evidence of lower bid-ask spreads on the day of the earnings announcement. These results are more pronounced for less visible firms, negative earnings news, and on days with fewer promoted firms. These findings suggest that investor attention affects the pricing of earnings and that retail investors buy stocks that catch their attention, in a setting where attention is randomly assigned.

Hidden Gems: Do Compensation Disclosures Reveal Performance Expectations?

We find that a new compensation disclosure item on expected payouts from performance-based stock grants contains incremental information of a firm’s future performance. Firms that disclose the most optimistic expected payment significantly outperform over the next two years, while the least optimistic firms underperform. Investors and analysts are slow to process the embedded information and are later surprised around earnings announcement days. A portfolio long stocks of the most optimistic firms and short the least optimistic ones earns significant positive post-disclosure abnormal returns. The result is more pronounced when the embedded “soft” information differs from the more visible earnings news.

Investment Performance of Component Stocks from the Respect Sustainability Index at the Warsaw Stock Exchange

In this paper, we analyze the profitability of investments in stocks from the RESPECT sustainability index at the Warsaw Stock Exchange (WSE) since its launch in year 2009 until the year 2018. We calculate raw returns for individual component stocks, estimate their beta coefficients as well as assess their performance on the risk-adjusted basis using such measures as the modified Sharpe ratio (MSR) and the Certainty Equivalent (CEQ) returns. Our results indicate that the profitability of investing in the socially responsible investments (SRI) stocks from the RESPECT index is on average higher than the corresponding returns of the benchmark broad market index WIG, although the differences are rather marginal. Nevertheless, we can conclude that the financial market in Poland did not penalize the investors for allocating their funds in the SRI companies, which is the finding consistent with previous studies using the data from other countries (see e.g. Orlitzky et al. (2003)). We also investigated the indexing effect i.e. we investigate if including or removing stocks into RESPECT index results in higher return (in the day of announcement, day of actual change of components of the index, or in longer horizon). However we found very little evidence of indexing effect existence in the analysed data sample. Overall, our results provide new empirical evidence for the SRI stocks from the market in Poland and show the importance of SRI stocks in investors’ portfolios, which includes also the risk-adjusted performance perspective.

The 'Big' Question on Accounting Restatements: When and How Do Earnings Restatement News Affect Investor Trading and Investing Trust?

In this paper, I examine when and how accounting restatement information about a firm manifests in its price and volume of shares traded and empirically contrast price and trading volume responses with the endogenous firm size factor. The stock price analyses indicate that investors’ increased announcement-period response is systematic (i.e. has a market-wide effect). I find evidence of price adjustments in the non-announcement and extended announcement days, suggesting that the market is adjusting slowly to restatement information as investors weigh disclosures according to the credibility of the information. I find evidence of significant pre-and post-disclosure periods trading responses, consistent with Holthausen and Verrecchia (1990) two round trading by investors. In comparing price response between large versus small firms, I find evidence of price response and the response appears to be concentrated among large firms. No evidence of significant trading response is found for large firms, except for the multi-day period examined. Extending the analysis on partition sample — large versus small firms, I find that small firms’ trade on a relatively small portion of earnings restatement information that tend to cluster around pre-announcement period. Overall, the results indicate that investors do not appear to be confused about accounting restatements, and in fact use information about earnings restatement in their valuation of the affected firms’ equity.

Excess offer premium and acquirers’ performance

PurposeThis paper aims to investigate the causes of mergers and acquisitions (M&A) deals that acquiring firms pay excess premium beyond the market-expected level and examine the relation between the announcement return and long-term performance of the acquiring firms.Design/methodology/approachBased on a sample of 1,767 US firms’ M&A deals from 2000 to 2014, the authors use the expectation model used by Ang and Ismail (2015) to measure normal offer premium in an M&A deal. They conduct the standard event study methodology to observe the market reaction for acquiring companies on the announcement day. Buy-and-hold abnormal returns are used for the main explanatory variable so as to find the impact of the premium paid on the long-term performance of the acquirer.FindingsFirst, acquiring firms are faced with negative market returns when acquiring firms pay excess premiums. Second, poor long-term performance of the acquiring firms is observed if acquiring firms pay excess premium. Finally, the negative relation between excess premium and acquiring firms’ long-term performance weakens, as the sample period becomes longer.Research limitations/implicationsThe hypotheses and results of the empirical study are as follows. First, the acquirer’s market reaction on the announcement day is negative when it pays an excess offer premium. This is because the market perceives the premium to be greater than the value of the deal, which damages the value of the market, as it is not perceived as a proxy for future synergy. Second, the acquirer’s long-term performance is low when it pays the excess offer premium. It is the same result as the acquirer’s market reaction on the announcement day. This shows that the excess premium does not result in either a short-term positive reaction or a long-term profit for the acquiring shareholders. However, it is found that the relationship between the excess premium and the long-term performance of the acquirer decreases with time. This is because the long-term performance of the acquirer is more affected by management and other events after the deal.Originality/valueThe authors divide the total premium paid into the normal offer premium and the excess premium, and their focus is on the excess premium part. The main contribution of this paper is that it analyzes how the excess premium affects the market reaction on the announcement day and the long-term performance of acquiring firms.

A labor news hedge portfolio and the cross-section of expected stock returns

Abstract Using the relation between the surprise component in labor statistics and an asset’s return on labor news announcement days, we derive a labor beta. By adding a labor news hedge portfolio which is long in high labor beta assets and short in low labor beta assets to the market portfolio, we obtain a labor news model. This model describes the cross-section of expected stock returns just as well as or even better than alternative multifactor models. The estimated premium for bearing labor income risk varies between three and five percentage points per annum.

Firm opacity and informed trading around spinoffs

PurposeThis paper aims to examine the prevalence of informed trading around corporate spinoffs and the relation between firm opacity and informed trading using option market data.Design/methodology/approachThe author investigates the prevalence of informed trading by examining the relationship between abnormal stock returns associated with spinoffs and the volatility spread/volatility skewness of options prior to the spinoffs. Furthermore, the author examines how opacity and organizational complexity prior to the spinoffs affect informed trading.FindingsThe study shows that option volatility spread and volatility skewness for the five days prior to the spinoffs can predict the abnormal stock returns on the spinoff announcement days, suggesting that there is informed trading in the options market prior to spinoffs. The study shows that informed trading is more prevalent for firms that are more opaque prior to the spinoff. Furthermore, informed trading decreases after spinoffs.Originality/valueTo the best of knowledge, this is the first empirical research that examines the prevalence of informed trading around spinoffs by using options volatility spread/skewness and the relation between firm opacity and informed options trading.

Investor behavior around monetary policy announcements: Evidence from the Korean stock market

Using the Korean stock market data between 2000 and 2017, this paper examines the order imbalances of different investors around monetary policy announcements. In line with the temporary reallocation of risk hypothesis, individual investors sell significantly on the day before the U.S. Federal Open Market Committee (FOMC) interest rate announcements, while the proprietary accounts of domestic institutions correspondingly take a long position. On the announcement day, foreign investors engage in substantial buying. Our main finding, particularly with regards to institutional investors’ proprietary accounts, appears to be consistent with temporary reallocation of risk between investors rather than being informationally motivated.

Price discovery in short‐term interest rate markets: Futures versus swaps

This study examines price discovery at the short end of the yield curve by examining the lead–lag relationship in the prices of Australian interest rate swap and bank accepted bill futures contracts. Consistent with previous research, we find strong bidirectional flows of information between swap and futures markets during daytime trading. However, the swap market leads price discovery during overnight trading while futures markets lead swap markets on macroeconomic announcement days—both new findings. We demonstrate and conclude that price discovery in derivatives at the short end of the yield curve is driven by transaction costs.

Does Noninformative Text Affect Investor Behavior?

AbstractThis article demonstrates that easily processed texts affect investor trading behavior even in the absence of any informational content. We examine the trading symbols of US firms and find that stocks with clever tickers (those that are actual words in the English language) are more liquid, as measured by higher turnover and trading volume, as well as lower spreads. Furthermore, clever ticker stocks are traded more by uninformed investors and have larger market reactions on earnings announcement days. These results suggest that ticker fluency facilitates trading by improving the firm's visibility among retail investors through attention grabbing and memorization.