Announcement Month Research Articles

Stock Price Reactions to the Information and Bias in Analyst-Expected Returns

ABSTRACT I use a novel decomposition to estimate information and bias components from the returns implied by analyst price targets and provide evidence that prices simultaneously under-react to information and over-react to bias. Price reactions to information are permanent, and prices drift in the direction of their initial reaction for up to 12 months. Price reactions to bias are transitory, and prices reverse their initial reaction after about three months. Price reactions are relatively efficient. Approximately 85 percent of the total price reaction to information occurs during price target announcement months. Market participants are able to mostly (but not fully) debias analyst-expected returns before incorporating them into prices, with the announcement-month reaction to bias being relatively weak at about 15 percent of its reaction to information. A trading strategy analysis implies that mispricing induced by bias is only about one-third of that implied by prior research. JEL Classifications: G12; G14; G40.

Monkeypox caused less worry than COVID-19 among the general population during the first month of the WHO Monkeypox alert: Experience from Saudi Arabia

BackgroundMonkeypox re-emerged in May 2022 as another global health threat. This study assessed the public's perception, worries, and vaccine acceptance for Monkeypox and COVID-19 during the first month of WHO announcement. MethodsA large-scale, cross-sectional survey was conducted between May 27 and June 5, 2022, in Saudi Arabia. Data were collected on sociodemographic characteristics, previous infection with COVID-19, worry levels regarding Monkeypox compared to COVID-19, awareness, and perceptions of Monkeypox, and vaccine acceptance. ResultsAmong the 1546 participants, most respondents (62%) were more worried about COVID-19 than Monkeypox. Respondents aged 45 years and above and those with a university degree or higher had lower odds of agreement with Monkeypox vaccination (OR 0.871, p-value 0.006, OR 0.719, p-value <0.001), respectively. Respondents with moderate to a high level of self and family commitment to infection control precautionary measures and those who expressed self and family worry of Monkeypox infection had significantly higher odds of vaccination agreement (OR 1.089 p-value = 0.047, OR1.395 p-value = 0.003) respectively. On the other hand, respondents who previously developed COVID-19 were significantly more worried about the Monkeypox disease (1.30 times more, p-value = 0.020). ConclusionWorry levels amongst the public are higher from COVID-19 than Monkeypox. Perception of Monkeypox as a dangerous and virulent disease, worry from contracting the disease, and high commitment to infection precautionary measures were predictors of agreement with Monkeypox vaccination. While advanced age and high education level are predictors of low agreement with vaccination.

Merging One's Way to the Top: AB Inbev versus Heineken

AbstractLeuven's Den Hoorn brewery, now AB Inbev SA, has become the world's largest brewing group by far, but critics say the company overpaid for its acquisitions. In this article, we study typical stock market reactions to the many takeover announcements by AB Inbev and the industry's runner-up, Heineken. Unlike Heineken's, the market leader's takeover announcements were met by, on average, a –2% price reaction in the stock market in the announcement month, but most of that is already undone in the next month. For Heineken, the same pattern shows up, only faster: the V-shaped reaction takes a few weeks rather than a few months. Such V-reactions may actually reflect a temporary rise in uncertainty rather than overpaying. The finding that reactions are reversed and heterogeneous across firms, raises issues of interpretation and optimal test design of event studies. (JEL Classifications: G12, G14, G17)

Do single takeovers outperform corporate acquisition programs Evidence from the French stock market

This paper compares the profitability of French acquiring firms following the launch of corporate acquisition programs with that of single takeovers, by examining wealth of acquirers in both cases. While using the event study methodology for the calculation of abnormal returns for single takeovers, this study also considers the model of partially anticipated events for the assessment of the economic impact and the announcement effect of acquisition attempts. For the acquisition programs, we used a sample containing 46 French active acquirers, which launched 97 acquisition attempts between 1997 and 2007. For single takeovers, we examined 23 acquisitions by the same acquirers. The results of this study show that French investors obtain positive returns during and around the month of takeover announcement. French acquirers earn an average of 3.75% in two months, the month of announcement and the following month, and 4.02% in the month of announcement and the month preceding the announcement. These results show that single takeovers outperform corporate acquisition programs, since these same French acquiring firms do not generate any profitability following the launch of these investment programs.

The structure of information release and the factor structure of returns

We model how firms releasing information on different dates causes the CAPM to fail, requiring an additional factor based on the information structure to price assets. We exemplify this mechanism’s empirical relevance using quarterly earnings announcements, which cluster across months along size and book-to-market. Seventy percent of the alpha reduction from including SMB and HML occurs in the four main earnings announcement months. The information structure factor accounts for all of SMB and HML’s seasonal alpha reduction and one third of their overall alpha reduction. Controlling for size and book-to-market, exposures to SMB and HML vary with firms’ earnings announcement month.

Expectations Management and Stock Returns

We show that proxies for firms’ incentives to manage earnings expectations toward beatable levels contain strong predictive power for earnings announcement returns. Firms with stronger incentives to manage expectations predictably outperform firms with weaker incentives by approximately 1% in their expected announcement months. We validate our proxies by showing that firms with stronger incentives display several intuitive patterns; they are more likely to beat analysts’ forecasts even when earnings decline, more often narrowly beat expectations than narrowly miss, and issue low-ball earnings guidance. Collectively, our results suggest firms predictably influence investors’ expectations to manufacture positive “surprises” in high attention periods and thus that expectations management is important for understanding earnings announcement premia, return seasonalities, and the role of investor attention.

The Structure of Information Release and the Factor Structure of Returns

Seventy percent of the reduction in CAPM alphas from including SMB and HML occurs in the main earnings announcement months. Relatedly, quarterly earnings announcements cluster across months along size and book-to-market. We model how such clustering of information release distorts CAPM betas, creating seasonal alphas, and how a factor based on announcement timing reduces the mispricing. SMB and HML’s exposure to this factor accounts for all of their seasonal alpha reduction and one third of their overall alpha reduction. After accounting for size and book-to-market, a firm’s exposure to SMB and HML varies with its earnings announcement timing.

New findings on repurchase anomaly — The first-month effect

Prior studies find positive abnormal returns following share repurchase announcements. We examine the association between announcement month and the excess returns. We find that the average excess return is consistently higher for repurchases announced in the first month of a fiscal quarter than for those announced in the other two months. Interestingly, 1st-month and non-1st-month announcers are highly comparable in firm characteristics, pre-announcement returns, and disclosed motives. The magnitude of the first-month effect barely changes after we switch to multivariate regressions, and it remains large under firm-fixed effects. Investment strategies based on BTM, firm size, and pre-announcement return are all improved by a first-month strategy. The first-month effect extends well beyond the first year, but the market does not seem to realize it. We propose an explanation for the first-month effect based on the conjecture that managers receive firm information in an uneven manner throughout a fiscal period. This explanation is supported by our empirical tests. Additional empirical analyses provide results that fail to support several plausible alternative explanations.

The earnings announcement premium around the globe

U.S. stocks have been shown to earn higher returns during earnings announcement months than during non-announcement months. We document that this earnings announcement premium exists across the globe. Moreover, it is not isolated to a few countries. Of the 20 countries with enough data to conduct a within-country analysis, nine exhibit a significantly positive premium. A cross-country analysis finds that the premium is strongest in countries with the greatest increase in idiosyncratic volatility around the time of their firms' earnings announcements, suggesting that uncertainty over the earnings information to be disclosed is a primary driver of the global announcement premium.

Pricing Strategy and Corporate Bond Value

Pricing strategy is expected to impose profound impacts on a firm’s cash flow and default risk. However, little research has been done to examine its direct impacts on financial markets. Applying event study methodology on the airline industry data, this paper aims to fill this gap by investigating whether and how corporate bond value is affected by pricing cut events in the airline industry in various time windows. The authors’ empirical results find significant positive abnormal bond returns in the announcement month. However, the price effect becomes insignificant and vanishes in the following months. By integrating financial market and marketing behavior analysis, this paper provides managerial insights for both marketing managers and corporate bond investors.

Are Short Sellers Informed? Evidence from the 2007–2008 Subprime Mortgage Crisis

AbstractThis paper examines the short selling activities around financial firms’ announcements of asset write‐downs during the 2007–2008 subprime mortgage crisis. We find that short sellers accumulate short positions prior to write‐down announcements, and that stocks experience significantly negative returns around such announcements. These results suggest that the return predictability of short interests is due to short sellers’ informational advantage. Furthermore, we show that short sellers increase their positions significantly in the announcement month and keep increasing their positions afterward, suggesting the feedback effect of the disclosed write‐downs on financial firms’ existing exposures. The valuable information contained in the short interest should encourage regulators to mandate stock exchanges disclose short selling activities more frequently.

The Earnings Announcement Premium Around the Globe

U.S. stocks have been shown to earn higher returns during earnings announcement months than during non-announcement months. We document that this earnings announcement premium exists across the globe. Using data from 46 countries, we find that the average stock return during earnings announcement months exceeds the return during non-announcement months by over 11 percent annually, after controlling for factors known to be associated with stock returns. The positive incremental return during earnings announcement months is not isolated to a few years; it is significant for 16 of the 20 years of our sample period. Moreover, it is not isolated to a few countries. Of the 20 countries with enough data to conduct a within-country analysis, nine exhibit a significantly positive premium. A cross-country analysis finds that the premium is strongest in countries with the greatest increase in idiosyncratic volatility around the time of their firms’ earnings announcements, suggesting that uncertainty over the earnings information to be disclosed is a primary driver of the global announcement premium.

From Competition to Cartel: Bank Mergers in the U.K. 1885 to 1925

We study the effects of bank mergers and acquisitions in the U.K. from 1885 to 1925. The lack of a regulatory authority and the confidential nature of merger negotiations allows us to precisely measure the wealth effects of M&As in a laissez-faire environment. We find positive wealth effects for bidders (0.7%-1%) and targets (6.7%-8%) over the announcement month. When takeovers took place in a competitive environment wealth creation appears to be related to efficiency gains. As competition decreased, gains to shareholders appear to be related to increased oligopoly power. In a less competitive environment, banks tended to reduce the amount of loans and increase their holdings of safe marketable securities. Banks with higher charter value displayed higher capital ratios.

Short Seller Trading in Companies with a Severe Accounting Irregularity

We find that shorts establish significant positions more than a year before the average restatement announcement, those positions increase as the announcement month approaches, and the largest positions are held in companies that will announce an accounting irregularity that attracts class action litigation. Shorts are thereby well positioned to profit from the lengthy string of negative returns that precede the announcement of a severe accounting irregularity. Afterward, we find average short interest is sticky, and shorts retain positions in firms that experience a further price decline. In the six months after an announcement, positions in heavily shorted restating firms (i.e., short interest exceeding 2.5 percent before the announcement) earn an additional 24 percent (31 percent with class action litigation). We conclude that shorts have the skill to play an important private-sector role in identifying and disciplining companies with accounting irregularities.

Stock Return Momentum and Reversal

Stock return momentum and reversal have been known for well over a decade. This work documents two new momentum effects that are even stronger than effects documented to date: yearly and quarterly periodicity. That is, in the long term, stock returns tend to follow a pattern every twelve months, and in the intermediate term to follow a pattern every three months. This analysis of the S&amp;P 500 over 1970-2004 includes examination of five momentum and reversal effects by industry, calendar month, and earnings announcement month. The sustainability of stock return momentum and reversal strategies of course has some implications for implementation. <b>TOPICS:</b>Portfolio construction, exchanges/markets/clearinghouses

Half a Century of Medical History

Half a Century of <i>Medical History</i>

Corporate mergers and the impact if pre-merger variance, leverage and maturity of bonds on wealth transfers

This paper addresses several hypotheses concerning wealth transfers among bondholders and stockholders in two firms which merge. In so doing, several refinements relative to the previous research in this area are introduced. We find evidence which supports the presence of diversification effects (coinsurance) to some bondholders, incentive effects (risk increases) to other bondholders, and wealth transfers between stockholders and bondholders. This study examines the impact of 49 industrial mergers between 1970 through 1984 on the returns to bondholders and stockholders of the merging firms. Results indicate that bondholders of the acquired firm group gain significantly in the announcement month, suggesting a diversification effect for acquired firm bondholders. Acquiring firm bondholders suffer significant losses in the pre-announcement month supporting the incentive effects hypothesis for the acquiring firm bondholders. Further analysis indicates that abnormal returns to bondholders are greater for firms with high variance and high leverage pre-merger. We do not find any direct evidence that differences in maturity of merging firms’ bonds have a significant impact on merger-related bondholder returns. We find evidence of wealth transfers between stockholders and bondholders of merging firms and some support for the theory that bondholder returns are negatively related to the pre-merger correlation between cash flows of the merging firms. In total, the empirical findings enable more definitive conclusions regarding the wealth effects of mergers on important classes of claimholders of merging firms, and buttress the theoretical developments relating to wealth transfers among those claimholders.

NIH Rules Make Some Pack, Others Plead

The ethics crackdown announced last month at the National Institutes of Health continues to reverberate across the Bethesda, Maryland, campus.

Recapitalization of one class of common stock into dual-class: Growth and long-run stock returns

We study a sample of 178 firms that changed from a one-share one-vote into a dual-class common stock structure during 1979–1998. We find that dual-class recapitalizations are shareholder value enhancing corporate initiatives. Using accounting data, Lehn et al. (1990) [Lehn, K., Netter, J., Poulsen, A., 1990. Consolidating corporate control: dual-class recapitalizations versus leveraged buyouts. Journal of Financial Economics 27, 557–580] provide evidence that dual-class recapitalizing firms grow faster than firms in a control group and undertake secondary equity offerings (SEOs) to finance growth. We show that growth is indeed beneficial to the shareholders. The stockholders, on average, earn significant positive abnormal returns of 23.11% in a period of 4 years following the announcement month. Furthermore, abnormal returns are even larger (52.61%) for the dual-class firms that issue equity. This evidence is especially supportive of the value enhancing hypothesis as it is contrary to the prevailing result that SEOs are generally followed by large negative returns. We do not find any evidence of managerial entrenchment.

Can Short Sellers Anticipate Accounting Restatements?

An announcement by corporate managers that they will restate a past financial statement due to an irregularity provides the laboratory market for our tests of short seller expertise. For 565 firms announcing a restatement during the period 1995 - 2002, we find the level of short interest in the announcement month is substantially higher for restating firms than for control firms. A statistically significant difference begins 19 months before the announcement date, increases significantly in the six months preceding the restatement announcement, and peaks in the announcement month. In the twelve months after the announcement, the average level of short interest remains steady for the restating firms - as if short sellers are waiting to be sure all bad news has been released before unwinding their positions. Consistent with a contagion effect, the level of short interest for the control firms begins to increase after a restatement is announced by its industry- and size-matched counterpart. Using three proxies for accounting irregularities, we find that the significant difference in short interest between restatement and control firms is driven entirely by those firms restating because of severe accounting irregularities. Our results indicate a high level of short seller expertise in identifying accounting irregularities.