Asymmetric Market Reaction Research Articles

Bankruptcy as a planned business strategy? Evidence from the stock market

Purpose This paper aims to investigate how the US stock market deals with the announcement of a strategic Chapter 11, a special type of corporate bankruptcy in which companies seek the protection of the law not as a last resort but as a planned business decision. Design/methodology/approach An event study is conducted by using data concerning a group of US publicly traded companies that entered Chapter 11 for both strategic and nonstrategic reasons. Regression analysis is also used for robustness purposes. Findings This study reveals that initiating both strategic and nonstrategic Chapter 11 proceedings results in negative and statistically significant abnormal stock returns before and at the bankruptcy announcement date. However, in the period following the filing, the market gradually views strategic bankruptcy cases as positive news, whereas nonstrategic Chapter 11 filings continue to be perceived as distinctly negative. Originality/value To the best of the author’s knowledge, this is the first paper that documents an asymmetric market reaction to the announcement of Chapter 11, suggesting that, in certain circumstances, managers can add value by filing a strategic bankruptcy.

What’s hidden behind bulk deals? A study on Indian stock market

Purpose Emerging market, like India, is characterised by poor institutional structure, weaker regulations and higher information asymmetry which may lead to stock price manipulation. This study shed some light on such manipulation by investigating front-running behaviour around the bulk deals of stocks traded at the National Stock Exchange (NSE) from 2010 to 2019.Design/methodology/approach The authors employ an event study methodology to identify front-running in pre-event period of bulk deals. The bulk deals are classified into Only Buy, Only Sell, Partial Buy and Partial Sell trades. They are further subsampled based on the category of investors. Through cross-sectional regression, the authors also identify factors explaining such front-running.Findings The results show that the front-runners can achieve 5%–7% returns within a week around the event day. Abnormal Returns (AR) before the deals are higher for “Buy” deals than “Sell” deals. The authors also examine the role of volume and delivery in explaining the AR and cumulative abnormal returns (CAR). Lagged CAR, change in volume and change in delivery explain the AR. The results are robust after controlling for Bullish and Bearish Periods.Originality/value To the best of authors’ knowledge, this is the first study that explores the front-running in “Partial Buy” and “Partial Sell” bulk deals. Further, it investigates whether the category of investors has any role in front running. It empirically tests the asymmetric market reaction between “Buy” and “Sell” trades. Finally, it examines the role of volume and delivery in front-running.

Is Good News Good and Bad News Bad in the REIT Market?

In this study, we examine the asymmetric effect of positive and negative real estate news on REIT market returns. While findings in the general stock market show a greater market reaction to negative news, we find that the REIT market reacts predominantly to positive rather than to negative real estate news. We show that the content of positive real estate news becomes significantly related to REIT market returns in the modern REIT era and in recession periods. We further find that the asymmetric market reaction to positive real estate news is apparent only in REITs with high institutional ownership and REITs that report high rental income. Our findings imply that the REIT market’s diversification benefits and its unique institutional features could be the driving factors for the asymmetric market responses. In additional analysis, we show that there exists little market reversal in subsequent periods, implying that REIT investors respond to the information contained in the news content and do not solely act on their sentiment. Lastly, we show that our findings are robust to alternative news and return measures.

The Oil Market Reactions to OPEC’s Announcements

Because of the crucial implications of the market power of OPEC, the aim of this paper was to investigate the oil asymmetric market reactions, such as the price and risk reactions, to OPEC’s announcements. Specifically, this paper first explored the oil price reactions to OPEC’s announcements and their heterogeneity to depict the directional role of OPEC based on event study methodology. Furthermore, this paper analyzed the oil risk reactions in the framework of a linear model. Our findings reveal several key results. The oil price reactions to OPEC production decisions behave quite heterogeneously in three kinds of decisions. Specifically, the reaction to announcements of a production increase shows an invert “U” shape, whereas there is a linear effect of cut announcements. Otherwise, when a maintain decision is announced, the oil prices have no obvious change over the sample period. Additionally, the oil risk reactions to OPEC’s announcements are heavily related to the interaction item between OPEC decisions and its production over full sample periods. Furthermore, OPEC’s role in promoting stability in crude oil markets by changing its production shows a heterogeneous condition after global financial crisis.

The quantile dependence of commodity futures markets on news sentiment

AbstractFocusing on energy commodities, industrial metals, and gold, this paper examines the degree to which commodity futures returns depend on news sentiment under various market conditions, and the structure of that dependence. We observe an asymmetric market reaction to positive and negative news sentiment, which changes in periods of financial turmoil. The quantile regression analysis shows that news sentiment's influence on the futures returns follows an upward trend at higher percentiles. This structure flattens for positive news during the global financial crisis, while the slope for the negative component steepens in backwardation periods.

Asymmetric Investor Reaction around Earnings Benchmark under Economic Uncertainty

AbstractThis study examines the effect of macro‐economic shocks on asymmetric investor reactions to earnings announcements. Specifically, we focus on a small range around the earnings benchmark and find a disproportionately large market penalty for firms with small negative earnings surprises (ESs) following an increase in macro‐uncertainty. By contrast, we find no evidence of an asymmetric market reaction to firms with small negative ESs following a decrease in macro‐uncertainty. While prior empirical research failed to document the large penalty for small negative ESs, our findings suggest macro‐economic shocks as a factor that explains the asymmetric pricing effect.

Instability of Economic Systems: Signals, Asymmetric Reactions, Corrections

An economic system becomes unstable when it’s deviating from the compatible growth course, because of human errors. Systems have a natural tendency to linear growth so that if they deviate, the growth and price profile takes a cyclical trend. The cyclical rhythm of the economy is not an end, but it’s a natural order trying to bring the economy back to its lost stability, over time. The unstable system, in promoting this return to stability, has a whole range of tools, including the spread of implicit perceptions about the economy state among companies and families: a sort of signal widespread by the sick economy. So, every common man is perceiving the country system malaise, nevertheless without having a direct knowledge of the problems and their causes. Starting from this implicit perception, the democratic process and the periodic use of polls are to be considered not only as the exercise of civic rights, but also as a test for the choice of a good government that would implement the program to balance again the unstable system. The collective wisdom of the people in selecting their own rulers, thus is moving in the context of the economy’s general tendency to the stability and to the compatibility with the natural environment. Moreover, the asymmetric market reaction is also reported. The system reacts to a prolonged instability with speculative waves inexorably converging towards the financial crisis, to clean up the corrupt system. Finally, a mention to the Euro theme is also made.

A rational asymmetric reaction to news: evidence from English football clubs

Using a large dataset of matches played between two publicly traded English football (soccer) clubs, we test for and confirm an asymmetric market reaction to winning and losing and that the stock market respond stronger and slower to bad news (losing) than good news (winning). In contrast to previous studies, we show that financial fundamentals help explain this asymmetry. In particular, club short-term financial performance is negatively impacted by losing but not impacted by winning. Furthermore, losing is a significantly stronger predictor of future match outcomes than winning.

Analystss Over-Optimistic Bias From the Asymmetric Market Reaction to the Recommendations

The paper documents evidence regarding the asymmetric short-term market reactions to analysts’ recommendations, in which the favorable recommendations consistently underperform the corresponding unfavorable recommendations across ratings and revisions. This market reaction asymmetry is attributed to two aspects of analysts’ over-optimistic bias, the conscious distortion due to the conflicts-of-interest and the unconscious over-optimism due to the cognitive and behavioral bias. This paper analyzes the dynamics of the market reaction asymmetry and the result indicates a “self-correction” mechanism of the financial market which automatically reduces analysts’ unconscious over-optimism. Failure to account for this “self-correction” mechanism leads to an overestimation of the regulatory effort by NASD Rule 2711 and NYSE Rule 472 in addressing the conscious distortion due to the issue of conflicts-of-interest.

The Asymmetric Market Reaction of Stockholders and Bondholders to the Implementation of Early-Warnings Pre Going Concern Opinion

Auditing standards requiring auditors to issue going concern opinions (GCOs) have existed for several decades. The FASB exposure draft of June 2013 suggests early disclosures of uncertainties about an entity’s ability to continue as going concerns (GCUs). The FASB’s board argues that the proposed amendments would improve the timeliness and the quality of disclosures of going concern opinions. In Israel, since 2008, about 70% of the publicly traded companies implemented the two-phase models for going concern auditors’ opinions. We utilize a hand-collected dataset of 143 GCOs of publicly traded companies for the years 2007-2013. We examine the stockholders’ and bondholders’ reactions to GCOs preceded by early warnings of uncertainty (GCUs) compared to companies where the GCO disclosure tracks a “clean” opinion. The findings indicate that the equity and debt market reacts to GCUs in a negative and economically significant fashion. In addition, we find that GCUs reduce the negative market reaction to GCOs. This finding indicates that GCU announcements improve the timing and quality of the financial statement disclosure.

Financial statement comparability and expected crash risk

This study examines the impact of financial statement comparability on ex ante crash risk. Using the comparability measures of De Franco et al. (2011), we find that expected crash risk decreases with financial statement comparability, and this negative relation is more pronounced in an environment where managers are more prone to withhold bad news. We also provide evidence that comparability can mitigate the asymmetric market reaction to bad versus good news disclosures. Our results suggest that financial statement comparability disinclines managers from bad news hoarding, which reduces investors׳ perceptions of a firm׳s future crash risk.

How the Market Values Greenwashing? Evidence from China

In China, many firms advertise that they follow environmentally friendly practices to cover their true activities, a practice called greenwashing, which can cause the public to doubt the sincerity of greenization messages. In this study, I investigate how the market values greenwashing and further examine whether corporate environmental performance can explain different and asymmetric market reactions to environmentally friendly and unfriendly firms. Using a sample from the Chinese stock market, I provide strong evidence to show that greenwashing is significantly negatively associated with cumulative abnormal returns (CAR) around the exposure of greenwashing. In addition, corporate environmental performance is significantly positively associated with CAR around the exposure of greenwashing. Furthermore, my findings suggest that corporate environmental performance has two distinct effects on CAR around the exposure of greenwashing: the competitive effect for environmentally friendly firms and the contagious effect for potential environmental wrongdoers, respectively. The results are robust to various sensitivity tests.

Market reaction to second-hand news: inside the attention-grabbing hypothesis

This article investigates whether the market reaction to second-hand information is due to price pressure or information dissemination. We use the perspective of attention grabbing to analyse the market reaction to the dissemination of analysts’ recommendations published in print media. This perspective is able to explain the asymmetric market reaction to ‘buy’ and ‘sell’ advice, which is difficult to rationalize within the price pressure hypothesis. We base our empirical analysis on the content of a weekly column in the most important Italian financial newspaper, which publishes past information and analysts’ recommendations on listed companies. Our findings show asymmetric price and volume reactions on the publication day. Contrary to previous evidence, we document a positive relationship between the number of analysts quoted in the column and the price (volume) increase associated with positive recommendations. Because the weekly columns seem to simply attract investors’ attention, with no additional new information, observing a reaction positively related to the column’s salience (proxied by the number of quoted analysts) is natural. In addition, we find that the market reaction is higher when the order size is lower, i.e., when individual investors’ trades constitute a higher fraction of the total trading activity in the market.

Stock Market Returns and Clinical Trial Results of Investigational Compounds: An Event Study Analysis of Large Biopharmaceutical Companies

BackgroundFor biopharmaceutical companies, investments in research and development are risky, and the results from clinical trials are key inflection points in the process. Few studies have explored how and to what extent the public equity market values clinical trial results.MethodsOur study dataset matched announcements of clinical trial results for investigational compounds from January 2011 to May 2013 with daily stock market returns of large United States-listed pharmaceutical and biotechnology companies. Event study methodology was used to examine the relationship between clinical research events and changes in stock returns.ResultsWe identified public announcements for clinical trials of 24 investigational compounds, including 16 (67%) positive and 8 (33%) negative events. The majority of announcements were for Phase 3 clinical trials (N = 13, 54%), and for oncologic (N = 7, 29%) and neurologic (N = 6, 24%) indications. The median cumulative abnormal returns on the day of the announcement were 0.8% (95% confidence interval [CI]: –2.3, 13.4%; P = 0.02) for positive events and –2.0% (95% CI: –9.1, 0.7%; P = 0.04) for negative events, with statistically significant differences from zero. In the day immediately following the announcement, firms with positive events were associated with stock price corrections, with median cumulative abnormal returns falling to 0.4% (95% CI: –3.8, 12.3%; P = 0.33). For firms with negative announcements, the median cumulative abnormal returns were –1.7% (95% CI: –9.5, 1.0%; P = 0.03), and remained significantly negative over the two day event window. The magnitude of abnormal returns did not differ statistically by indication, by trial phase, or between biotechnology and pharmaceutical firms.ConclusionsThe release of clinical trial results is an economically significant event and has meaningful effects on market value for large biopharmaceutical companies. Stock return underperformance due to negative events is greater in magnitude and persists longer than abnormal returns due to positive events, suggesting asymmetric market reactions.

Insiders’ incentives for asymmetric disclosure and firm-specific information flows

Recent research suggests that insiders’ incentives for capturing cash flows affect price formation process in which insiders are inclined to withhold good news and to accelerate the release of bad news (Jin and Myers, 2006). We investigate whether insiders’ incentives for private control benefit, proxied by control-ownership wedge, affect firm-specific return characteristics. We find that control-ownership wedge is negatively related to the likelihood of positive return jumps and positively related to the extent of asymmetric market reaction to good news rather than to bad news. Overall, our results support the notion that corporate insiders increase opaqueness and withhold good news in order to capture unexpected cash flow.

Market Reaction to Information Shocks—Does the Bloomberg and Briefing.com Survey Matter?

Bloomberg and Briefing.com provide competing forecasts for prescheduled macroeconomic announcements. This study examines the accuracy of these forecasts and market reactions to announcement surprises. Our results show that the Bloomberg survey is slightly more accurate than the Briefing.com survey. More importantly, although announcement surprises based on both surveys have a significant effect on the trading activities and returns of S&P 500 futures contracts, the Bloomberg survey subsumes the explanatory power of the Briefing.com survey. The findings suggest that on average Bloomberg forecasts are more consistent with the market consensus view. In addition, we provide evidence of asymmetric market reactions to positive versus negative announcement surprises. In particular, the market reacts strongly to inflation news in the Consumer Price Index (CPI) and Producer Price Index (PPI) announcements and negative shocks in housing price, personal spending, and retail sales.

Market Reaction to Second-Hand News: Attention Grabbing or Information Dissemination?

This paper investigates whether the market reaction to second-hand information is due to price pressure or information dissemination. We use the perspective of attention grabbing to analyze the market reaction to the dissemination of analysts’ recommendations published in print media. This perspective is able to explain the asymmetric market reaction to “buy” and “sell” advice, which is difficult to rationalize within the price pressure hypothesis. We base our empirical analysis on the content of a weekly column in the most important Italian financial newspaper which publishes past information and analysts’ recommendations on listed companies. Our findings show asymmetric price and volume reactions on the publication day. Contrary to previous evidence, we document a positive relationship between the number of analysts quoted in the column and the price (volume) increase associated with positive recommendations. Because the weekly columns seem to simply attract investors’ attention, with no additional new information, observing a reaction positively related to the column’s salience (proxied by the number of quoted analysts) is natural. In addition, we find that the market reaction is higher when the order size is lower, i.e., when individual investors’ trades constitute a higher fraction of the total trading activity in the market.

Short-Sales Constraints, Investor Disagreement, and the Asymmetric Market Reaction to Earnings News

Short-Sales Constraints, Investor Disagreement, and the Asymmetric Market Reaction to Earnings News

Short-Sales Constraints, Investor Disagreement, and the Asymmetric Market Reaction to Earnings News

Short-Sales Constraints, Investor Disagreement, and the Asymmetric Market Reaction to Earnings News

Short-Sales Constraints, Investor Disagreement, and the Asymmetric Market Reaction to Earnings News*

Short-Sales Constraints, Investor Disagreement, and the Asymmetric Market Reaction to Earnings News*