Cumulative Abnormal Returns Research Articles

Asset versus equity acquisitions by financial institutions

AbstractWe examine the impact of asset versus equity acquisitions in generating firm value for financial institutions. We find that acquirers experience statistically and economically significantly higher cumulative abnormal returns in asset acquisitions compared to equity acquisitions. We analyze the announcement‐period returns and find that investors' reaction to asset acquisitions by financial institutions is met more favorably than are equity acquisitions. When employing the difference‐in‐differences approach, we find that asset acquisitions entail improved operating performance.

The heterogeneous reaction of green and conventional bonds to exogenous shocks and the hedging implications

Unlike most previous studies considering the yields on green bonds versus conventional bonds or the hedging ability of green bonds against downside market risk, the main purpose of this paper is to paper examine the short-term response of green and conventional bonds to the Russia-Ukraine conflict shock and the US Federal monetary policy tightening. Using daily data from August 3, 2021 to March 29, 2022, this paper conducts an event-based study (Cumulative Abnormal Returns, CAR) and then applies a hedging analysis in the context of increasing geopolitical risk and financial stress. The analysis reveals that green bonds exhibit a stronger reaction to the Russia-Ukraine conflict and the US Federal rate hike than conventional, municipal, and treasury bonds in different time frames. Compared to conventional, municipal, and treasury bonds, green bonds offer lower negative CAR responses during the event window and the [-5, +5] period, suggesting a rigidity feature. The dynamic correlation and hedging analysis indicate that green bonds, unlike the other bonds indices, have a negative dynamic correlation with both geopolitical risks and financial stress, implying a hedging ability around the conflict shock and the Federal tightening cycle. These findings enrich the existing literature on green bonds, offering a wide range of applications for investment managers and policymakers.

U.S.-China Trade War: Announcement Effects of Trump Tariff Cancellations on China’s Financial Firms

The U.S.-China trade war was escalated in 2018 when the Trump administration announced a series of tariffs on Chinese products and services. In January 2018, President Trump imposed 30 percent and 20 percent tariffs on solar panels and washing machines. President Trump continued to impose more tariffs throughout 2018 and 2019. The Trump administration finally reversed course by announcing two Trump tariff cancellations in October 2019 and December 2019; thereby signaling a de-escalation in the U.S.-China trade war. We use an event study methodology to examine the announcement effects of those two Trump tariff cancellations on China’s publicly traded financial firms, including banks, insurance companies, and securities firms. We find the announcement effects are positive for China’s financial firms which experience a tremendous 5.60% cumulative abnormal return. In dollar terms, the mean market capitalization increase was $1.36 billion, cumulatively, the twenty-four financial firms in our sample gained $32.61 billion. These results clearly show that China’s financial firms welcomed the Trump tariff cancellations.

The market reaction of energy companies to the announcement of the Russian–Ukrainian invasion

PurposeThis study aims to empirically analyze the market response of energy companies to the Russian-Ukrainian invasion. Additionally, it examines the comparison of market reactions between companies in NATO member countries and non-member countries.Design/methodology/approachThis study utilizes a sample of 1,511 energy sector companies. To achieve the research objectives, two methods are employed. First, an event study is used to analyze the market reaction using Cumulative Abnormal Return (CAR) to the announcement of Russia's invasion of Ukraine on February 24, 2022 (event day) within an event window of (−30, +30). Second, a cross-sectional analysis is conducted to compare the responses of companies in NATO member countries with those in non-member countries.FindingsThe findings of this study reveal that energy companies worldwide reacted positively both before and after the announcement of the invasion, with significant reactions observed in companies from the Americas, Europe, and Asia & Pacific regions. However, the Middle East and Africa markets did not show significant reactions. Furthermore, the study indicates that most developed and emerging markets responded positively, likely due to the increase in energy commodity prices during the war. Moreover, the market reaction of companies in NATO member countries was stronger compared to other markets.Originality/valueThis study contributes to the existing literature by being the first to examine the impact of the Russian invasion of Ukraine on the energy sector, while categorizing markets as developed, emerging, and frontier. It also specifically explores the market reaction of energy companies in NATO member countries, providing unique insights into the differential responses within the energy sector.

PUBLIC DISCLOSURE OF INFORMATION SECURITY BREACH INCIDENTS: SHORT-TERM STOCK MARKET REACTION ON INDIAN LISTED FIRMS

ABSTRACT Data breach incidents are growing by the day and firms struggle to detect, defend, and respond to such breaches. Nowadays, security breaches are considered one of the major concerns for corporate organizations around the world. Hence, it is essential to assess the impact of such breaches on organizations. This article reports stock price reaction due to public disclosure of information security breach (ISB) incidents on publicly traded firms of India. Using the event study methodology on a sample of 120 publicly announced ISB incidents between January 2004 and April 2019 pertaining to 69 publicly listed firms of India, we found that exposure to an ISB incident exacerbates negative stock price reactions based on both one-factor market model and Fama-French three-factor model. On average, breached firms lost 0.55% of their market value within two days post the announcement of ISB incidents. Further, we found some factors that significantly negatively impacted Cumulative Abnormal Return (CAR). Important emerging factors such as type of compromised data, sentiment, subjectivity, and remedial strategy significantly impact CAR. According to our study findings, we suggest that firms should mention remedial measures in terms of apology and/or compensation in the ISB disclosure. Furthermore, the result indicates that investors penalize listed firms for subsequent ISB incidents. Thus, our findings may guide Chief Information Officers (CIOs), information security managers, and IT managers of publicly traded firms to devise various strategies in terms of IT security measures and content of the ISB disclosure.

The acquisition motive of newly credit rated firms

A large body of research documents an increased acquisition activity among credit rated firms. We examine whether firms seek an initial credit rating to conduct large scale acquisitions, and whether this acquisition activity is driven by empire building or value creation motives. First, we find that acquisitions are a credible motive for seeking a credit rating, initially rated firms are associated with 13.05pp greater acquisition likelihood and these transactions are more likely to be settled by cash. Second, to recoup the costs of becoming rated, firms conduct large-scale high-quality acquisitions associated with 1.52pp higher acquirer announcement returns, where the higher cumulative abnormal returns are concentrated among firms obtaining a speculative grade initial rating. Third, following the initial rating year, acquisition activity dampens to pre-rating levels. In sum our findings lend support to the notion that previously financial constrained firms enter the bond markets to complement bank financing when conducting large value enhancing acquisitions.

Can dividend announcement predict abnormal returns? Tunisia evidence

Purpose – The purpose of this paper is to observe whether the announcement of dividend distribution can affect the abnormal return on the Tunisian stock exchange. Design/methodology/approach – The sample includes 24 non-financial listed stocks in Tunisia Stock Exchange during the years 2004-2013. Company decides to announce its dividend payout policy to signal the market that the firm is now processing future prospects, which will result in changing its stock prices. Findings – The findings yield qualitatively consistent with the previous research. After controlling for the effect of the Politic Crisis in Tunisia during 2010-2013, the result shows that the stock prices move upward significantly after dividend announcements. Abnormal return (AR) and cumulative abnormal return (CAR) from the market model are statistically significantly revealed. Moreover, most event windows show that the stock return becomes lower when the investor sentiment for dividend is higher. Research limitations/implications – The result is limited to the absence of an important number of firms listed in TSE from this period. Practical implications – Investors in Tunisia show their preference for dividend to self-control, satisfaction and increase their profit. “This could be the catering incentive of the firm to decide to pay dividends”. Originality/value – This document provides evidence of Baker and Wurgler's (2002) proposed a new dividend theory; dividend catering theory, Bulan et al (2004) proposed the timing of dividend initiation, Thanwarat Suwanna (2012) document the impact of dividend announcement on stock returns. Even though the results indicate that Tunisian market react to the announcement of dividend by managers. Moreover, the timing of dividend initiation is affected by the investors’ sentiment, measured by the dividend premium. Tunisian investors react positively to the announcement to distribute dividend from firms especially in abnormal economic situation explained by the Tunisian politic crisis.

Value creation or political trick? An event study on anti-ESG regulations

This paper examines the effect of the anti-ESG regulations approved in 18 states from 2021 to 2023. Focusing on the fuel energy sector, we find that the regulatory intervention leads to 0.8 % to 3.5 % cumulative abnormal stock returns (CARs) around the regulation approval dates. The market reactions are found to be more positive and pronounced when the firm has poor previous ESG performance, when the firm is financially more constrained, and when the regulation is less controversial. Meanwhile, although fuel energy firms have more institutional ownership afterwards, their carbon emission also increases, indicating potential negative economic effects of anti-ESG policies.

Short-term Securities Market Surveillance Measures and Market Performance– An Empirical Analysis

Regulators use securities market surveillance as an essential tool to guard against market manipulation, safeguard investors, and maintain the effectiveness of the markets. In an effort to thwart open market manipulation SEBI in consultation with the exchanges has put in place a unique surveillance mechanism known as Additional Surveillance Measures (ASM). The short-term impact of this surveillance measure on stock prices and trading volume is examined in this study, using event study methodology. The sample data consists of 245 instances, where companies were subject to ASM surveillance actions for a brief period. The results of the study show that the Cumulative Abnormal Return (CAR) on the stocks decreased after inclusion into STASM and the same persisted after exclusion also. However, the average abnormal volume (AAV) changed significantly in the pre- and post-event period.

Seemingly manipulated anomaly: Evidence from corporate site visits

We find that the stock prices of some firms are suspected to be manipulated by the market in the CSV disclosure event scenario. An anomaly in the daily cumulative abnormal returns (CARs) of these “suspicious” CSVs is documented. Around the suspicious CSVs, the CAR trending upward (downward) one month before the event day, temporarily declining (increasing) on the event day, and then trending upward (downward) one year after the event day. We refer to this seemingly manipulated anomaly as the CSV manipulative effect. Based on a unique data set of CSVs to listed firms in China, we obtain the following main findings. First, the CSV manipulative effect is not caused by other company announcements disclosed around the CSV event date, and the probability of manipulative effect brought by CSVs is significantly greater than that brought by other company announcements. Second, factors related to market manipulation significantly affect the CSV manipulative effect. Third, we construct a machine learning model to detect the CSV manipulative effect and find that it is capable of detecting this effect. Fourth, the portfolio constructed by the CSV manipulative effect performs better than the portfolio constructed by the momentum or reversal effect.

Pricing protest: the response of financial markets to social unrest

Abstract We identify start days of 156 episodes of social unrest from textual analysis of media reports and show a systematic negative impact of social unrest on stock market performance. Social unrest on average leads to a 1.4 percentage point drop in cumulative abnormal returns in 2 weeks, more for events that last longer and that happen in emerging markets. Stronger institutions, particularly better governance and more democratic systems, are associated with a smaller adverse impact of social unrest on stock market returns. We argue this reflects the ability of better institutions to provide a more reliable way to reconcile conflicting views and dampen uncertainty after unrest.

Criticism of the short-term event analysis method in evaluating the effectiveness of mergers and acquisitions

The article presents the analysis of the contemporary theoretical and empirical research devoted to evaluation of the effectiveness of mergers and acquisitions by means of short-term event analysis method, managers’ motivation in making decisions on the acquisition of other companies from the perspective of the timing of the expected effect; it adduces and systematizes the limitations of the cumulative abnormal returns (or CARs) method. The authors carry out scientific synthesis of the limitations of the method of capabilities of accurate prediction of the final results of transactions. In particular, the following problems of the CARs method have been identified: determining the date of the event, determining the event window, inconsistencies in research results, outflow of funds from purchasing companies during mergers and acquisitions, arbitrage trading strategies, the lack of long-term predictive value of the method of accumulated excessive profitability, efficient market hypotheses, overcharging of the purchasing company shares. The authors have made a conclusion about possible inaccuracy of the method if used to evaluate the effectiveness of mergers and acquisitions.

The value effect of sustainability: evidence from Latin American ESG bond market

ABSTRACT We use the event study methodology to examine the effect of 115 environmental, social, and governance (ESG) bond issuances on the stock price of Latin American listed firms over the period 2016–2022. Consistent with the signaling theory, firms sending a signal of commitment to sustainability obtain a positive and significant average Cumulative Abnormal Return (CAR) of 1.97% during an event window of 18 days. The CAR is higher for first-time issuers, reaching 2.28%. Firms with smaller and more diverse boards are associated with higher CARs. However, ownership concentration reduces the CARs due to the potential misbehavior and expropriation risk from controlling shareholders. These results suggest that firm-level corporate governance mechanisms are critical to the ESG bonds signaling effect. Overall, our findings indicate that investors in Latin American capital markets positively value the reduction of information asymmetries regarding firms’ sustainability efforts, especially in a firm that mitigates potential agency conflicts.

NAV Ratios and REIT Takeovers: The Role of Public and Private Deal Premiums

We investigate how net asset values (NAVs) impact equity real estate investment trusts (REITs) in the market for corporate control. REITs trading at discounts to NAV are more likely to be acquired than those trading at premiums to NAV. For each acquisition, there is a public deal premium (the deal value relative to stock price) and a private deal premium (the deal value relative to NAV). REITs trading at discounts to NAV command larger public deal premiums and smaller private deal premiums. Shareholders of targets respond more favorably if the REIT is trading at a discount to NAV. Three-day cumulative abnormal returns (CARs) around acquisition announcements are 11% higher for targeted REITs that are trading below a price-to-NAV ratio of 0.95 than those trading at a price-to-NAV ratio above 1.05. The sale of a REIT trading at a discount to NAV appears to be a productive transaction for both acquirers and targets.

January Effect And Size Effect Market Anomalies On Banking Companies In Indonesia Stock Exchange

In the capital market, each stock price must reflect all available and relevant information or commonly known as the efficient market. In an efficient market, market anomalies should not occur to affect abnormal returns. This study aims to test whether the Indonesia Stock Exchange has January effect and Size Effect anomalies that can affect the capital market to be inefficient. The population of this study were all banking stocks listed on the IDX in the 2018–2022 periods. From this population, incomplete historical data samples will be excluded from the calculation. Therefore, the sample that meets the criteria is 38 banks. The research is divided into two parts: the first to examine the January effect and the second to exam- ine the Size Effect. In the first study, researchers tested whether there was a significant difference between abnormal returns in January and other months. Statistical tests use the Wilcoxon Signed Rank Test. In the second study, researchers tested whether there was a significant difference between the Average Cumulative Abnormal Return (ACAR) of large market capi- talization stocks and the Average Cumulative Abnormal Return (ACAR) of medium and small market capitalization stocks. Statistical tests use the Paired Samples T-test. The conclusion of this study is that there is no effect of the January effect for the 2018–2022 period except for 2021 period and no effect of the Size Effect anomalies on banking stocks listed on the IDX for the 2018–2022 period.

Placebo in the random walk of stock price: Momentum effect of corporate site visits

Using a unique database of corporate site visits (CSVs) to listed firms in China, we document the daily cumulative abnormal returns (CARs) around site visit events. Based on the performance of CARs before CSVs, we construct a CSV-momentum strategy that involves buying stocks with past winning CSVs and selling stocks with past losing CSVs. We find that the CSV-momentum strategy can generate significant CARs. Furthermore, we propose an explanation of momentum based on the random walk of stock prices over time. The results indicate that the placebo effect of CSVs reduces the accumulated uncertainty in the random walk of stock prices, providing a proper explanation for the momentum effect. In comparison to previous research, our study expands on prior work on CSVs and momentum effects. Moreover, we offer an innovative explanation of momentum formation from the perspective of an information placebo, providing valuable insights for investors into firm-specific information disclosure events.

Do ESG disclosures mitigate investors’ reaction on mining disasters? Evidence from Brazil

The purpose of this paper is to examine the investors´ reaction to the largest ecological disasters –Samarco (2015) and Brumadinho (2019)– occurred in Minas Gerais (Brazil). Applying a short-term event study analysis, we test the stock and Credit Default Swap (CDS) market´s on the mining sector. Moreover, a cross-sectional analysis is performed testing the effect of ESG disclosures on the market reaction –in terms of Cumulative Abnormal Returns, CAR– on the competitors of Vale S.A., the company involved in such ecological catastrophes. Our findings show a statistically significant reaction in both events. Investors´ react negatively and immediately in the case of Vale for both events; CARs are statistically significant for the shorter windows. However, investors react differently in the mining sector sample –excluding Vale–. While CARs are negative in Samarco, investors do so positively in the case of Brumadinho. In that sense, investors seemed as if they switch their perceptions from this first event –Samarco–in comparison to the most recent one –Brumadinho– rewarding the increase of ESG disclosures in the meantime and mitigating a negative contagion effect in the mining sector. The impact on the CDS market is also found positive in mining sector.

De-risking pension plans: the impact on firm value from lump-sum buyouts

Firms have attempted to de-risk their pension obligations by offering its pension beneficiaries a lump-sum distribution instead of the guaranteed payments to be paid to retirees in a defined benefit pension plan. We examine the stock market reaction to the announcement of these offerings using event study methodologies. We find a statistically significant positive cumulative abnormal returns for the 20-day period prior to the event, the 20-day period after the event, and for the entire 41-day event period surrounding the announcement. We also find that the cumulative abnormal returns are higher the more liabilities a firm has and increases with the level of funding of the pension plan. Our results contribute to the literature on pensions by finding that firms that buy out their pensioners’ defined benefit payments via a lump-sum distribution experience an increase in firm value. There is a significant amount of analysis of such buyouts in the literature and in the press, but our results are the first to examine and document the increase in value derived from such pension changes. We also more fully develop the motivations for such events from a cost/benefit perspective.

Reaksi Pasar Modal terhadap Kenaikan Suku Bunga Acuan oleh The Fed tanggal 16 Juni 2022

The research aims to examine whether the Indonesian capital market reacts to the increase in benchmark interest rates by The Fed on June 16, 2022. The event study method is used with an observation period of 107 days, where 100 days are the estimation period and 7 days are the event period. The research sample consists of companies listed in the LQ45 Index from February 2022 to July 2022. The sampling method used is purposive sampling. Market reactions are measured by Cumulative Abnormal Return (CAR) using the mean adjusted model. Data analysis is conducted using the one-sample t-test. The results indicate that there is no significant negative reaction in the Indonesian capital market regarding the increase in benchmark interest rates by The Fed.

Unanticipated Political Events and Their Effect on the Nepalese Insurance Sector and Stock Market

This study analyzes the relationship between unanticipated political events and their profound impact on both the insurance sector and the Nepalese stock market (NEPSE). Utilizing comprehensive analysis, the research spans 200 days before to 10 days after the political event’s announcement. Employing Levene’s test, dummy variable regression, and estimated average abnormal return, the study reveals significant effects of political events on the insurance index and NEPSE indices. The pre-event period is particularly significant, indicating potential information leakage. Window Frame 1 (-10, -1) stands out as the most profoundly impacted period, with Window Frame 2 (0, +10) witnessing moderate impact during the announcement and Window Frame 3 (+2, +10) experiencing a comparatively lesser post-event effect. Nepali Congress Wins Election (Event 1) and End of Nepal Blockade (Event 3) were identified as the most significant events for the Insurance and NEPSE indexes. Dummy variable regression emphasizes the significance (P < 0.05) of multiple window frames (mostly 1, 5, & 6) in the NEPSE index, suggesting early information leakage adjustments. The insurance sector also demonstrates a highly significant (P < 0.05) impact of unanticipated political events across various data points, with the post-event period (Windows 2 and 3) as the sole exception. Cumulative abnormal return analysis demonstrates that the Nepalese stock market is moderately inefficient, as it reinforces the market’s attempt to incorporate political influences within three to five days of the announcement date. These findings bear implications for investors, policymakers, and regulatory authorities seeking to understand the dynamics of the Nepalese stock market, enabling informed decision-making during times of political transitions and uncertainty.