Equity Market Reaction Research Articles

Using equity market reactions to infer exposure to trade liberalization

We propose a method for identifying exposure to changes in trade policy based on asset prices that has several advantages over standard measures: it encompasses all avenues of exposure, it is natively firm-level, it yields estimates for both goods and service producers, and it can be used to study reductions in difficult-to-quantify non-tariff-barriers in a way that controls naturally for broader macroeconomic shocks. Applying our method to two well-studied US trade liberalizations provides new insight into service-sector responses and reveals dramatically different outcomes among small versus large firms, even within narrow industries.

Digital vs. Traditional Advertising and the Recognition of Brand Intangible Assets

This paper examines how different advertising categories are associated with attributes of brand asset recognition arising in the context of acquisitions. Prior research documents that aggregate advertising is positively associated with firm sales and brand values, but it fails to consider major recent shifts in advertising from traditional channels (such as TV) to digital advertising (such as paid search and online display). Using proprietary data, I decompose advertising expenditures into the categories of traditional, online display, and paid search. Consistent with expectations, results confirm that target firms’ traditional and online display advertising exhibit a higher likelihood of brand asset recognition and higher recognized brand values as compared with paid search advertising. Confirming the economic substance of the recognized brands, additional results reveal positive investor equity market reactions to brand value, which are driven by firms investing more in traditional and online display advertising. Overall, these results confirm that certain advertising channels exhibit stronger associations with the recognition and characteristics of the underlying brand asset, consistent with their heterogeneous properties. This paper was accepted by Suraj Srinivasan, accounting. Funding: I acknowledge the financial support from my advisor, Eddie Riedl, as well as from the UNH Paul College of Business and Economics Summer Research Support Award. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2022.00387 .

Conventional and Islamic Equity Market Reaction Towards Terrorism: Evidence Based on Target Types, Location and Islamic Calendar Months

Abstract This study investigates the conventional and Islamic equity market reaction towards terrorism events in Pakistan from 2009 to 2016 using OLS regression and GARCH (1, 1) models. The prospect theory and efficient market hypothesis are the relevant theories. Findings indicate that conventional and Islamic equity market reaction towards terrorism events is very short lived and markets recovers quickly. This study also documents the market reaction to terrorism events based on the target type, location and during the Islamic calendar months. The impact of different target types and different event locations on the conventional and Islamic equity markets varies. The equity markets in Pakistan responds negatively to the attacks on educational institutes and businesses whereas positively to attacks on armed forces’ facilities. Furthermore, conventional equity market responds negatively to terrorist attacks in Karachi and positively to attacks in financial cities and FATA. Interestingly, Islamic equity market responds positively towards the attacks in financial cities and FATA, however, with very minute reaction magnitude. The findings of this study are useful for the investors to manage their portfolios by considering magnitude and direction of market reaction towards terrorism based on the target type, location and Islamic months. Overall, this study concludes that conventional and Islamic equity markets reaction towards terrorism is very minute; however, the conventional and Islamic equity markets reaction varies based on target type, event location and different Islamic calendar months. Furthermore, the findings also suggest that equity markets recover very soon, therefore, markets are efficient in observing these shocks.

Market reaction to mandatory sustainability disclosures: evidence from Singapore

PurposeThis study aims to investigate the equity market reaction to sustainability disclosure measures derived from firms' inaugural sustainability reports following the implementation of mandatory sustainability reporting in Singapore.Design/methodology/approachThis study explores the equity market reaction to first-time sustainability reports of mandatory adopters and compares the reactions between voluntary and mandatory adopters. To mitigate any imbalanced distribution effects, entropy balancing techniques are employed.FindingsThe author observes a significant equity market reaction when mandatory adopters adhere to a reporting framework and release sustainability reports as standalone documents. Additionally, the study indicates that government regulation amplifies the equity market reaction for companies that include a board statement within their sustainability reports and present them as standalone publications.Research limitations/implicationsThe lack of quantitative information disclosed in the first-time sustainability reports may restrict the generalizability of the findings.Practical implicationsThe findings provide valuable insights for organizations and managers to evaluate the market's response to sustainability disclosures and improve communication effectiveness with investors. Furthermore, the study has direct policy implications for global standard-setting organizations in sustainability reporting. The findings support the notion that investors value market-led and investor-focused sustainability disclosures.Originality/valueThe study contributes to the limited body of research that examines the capital market effects of mandatory sustainability disclosures. To the author’s knowledge, this is among a few studies to directly investigate the equity market reaction to mandatory sustainability disclosures at the firm level.

Uncertain tone, asset volatility and credit default swap spreads

We examine the relationship between uncertain linguistic tone and credit default swap (CDS) spreads. Using an event study approach, we first show that uncertain linguistic tone in 10-Q/K filings is positively associated with CDS spread changes incremental to positive and negative tone and incremental to the response implied by equity market reactions to the same information. We further demonstrate that the relationship of uncertain tone to CDS spreads manifests largely through its impact on asset volatility. We show that this effect is driven by firms with high leverage and is stronger among firms with shorter relative to longer maturities. Our findings contribute to growing research into credit market reactions to non-quantitative information by demonstrating a positive relationship between credit market responses and uncertainty disclosure language, and that this relationship is mediated by investors’ implied asset volatility estimates.

The Effect of Salience on the Equity Market Reaction to Innovation Announcements: Theory and Evidence from Patent Grants and FDA Drug Approvals

The Effect of Salience on the Equity Market Reaction to Innovation Announcements: Theory and Evidence from Patent Grants and FDA Drug Approvals

Political Attitudes and Equity Market Reactions to Vaccine Mandate Bans

Political Attitudes and Equity Market Reactions to Vaccine Mandate Bans

Equity Market Reactions to War and Prior Currency Exchange Rate Depreciation

Equity Market Reactions to War and Prior Currency Exchange Rate Depreciation

Equity market reactions to increased balance sheet volatility

Equity market reactions to increased balance sheet volatility

Whistling in the Dark? Equity Market Reactions to Digital Service Tax Proposals

Whistling in the Dark? Equity Market Reactions to Digital Service Tax Proposals

The Global Equity Market Reactions of the Oil & Gas Midstream and Marine Shipping Industries to COVID-19: An Entropy Analysis

This article quantifies the information flow between major equities in the Oil & Gas Midstream and Marine Shipping industries, on the basis of the effective transfer entropy methodology. In addition, the article provides the first analysis of the investors` fear and market expectations in these sectors, according to Rényi entropy approach. The period of study was extended over five years, to fully capture the pre/post-COVID situations. The entropy results reveal a major change in the underlying information flow pattern among equities in the Oil & Gas Midstream and Marine Shipping sectors, in the aftermath of COVID-19. According to the new (post-COVID) paradigm, the stocks in the Oil & Gas Midstream and Integrated Freight & Logistics industries have gained momentum in occupying six of the ten positions within the list of most-influencing equities in the market, in terms of information transmission. The disorder and randomness has decreased for over 89% of the studied equities, after virus outbreak. For the equities detected with high information-transmission standing, the Rényi entropy results indicate that investors more likely showed higher level of future expectations and lower level of fear regarding frequent market events, within the post-COVID timeline. Doi: 10.28991/HIJ-2021-02-04-07 Full Text: PDF

Openness, economic uncertainty, government responses, and international financial market performance during the coronavirus pandemic

This study explores the impact of COVID-19 on financial markets controlled by macroeconomic and administrative factors. As natural experimentation, we employ panel data analysis to test 50 stock market indices from January 01 to August 20, 2020. The findings suggest daily growth of COVID-19 confirmed cases have considerable adverse effects on stock returns and positive impacts on investment risks across markets. The government prompt interventions offset adverse impacts of the pandemic. Market reactions to the outbreak and authority responses information are more momentous in more developed economies due to their better information efficiency. The country-specific features of globalisation, uncertainty, healthcare system readiness, and economic development levels appear to have substantial impacts on equity market reactions. Financial markets in countries with higher levels of globalisation, economic policy and financial uncertainty experience more chaos during the pandemic. While those hostile effects are less significant in countries with robust healthcare systems.

Using equity market reactions and network analysis to infer global supply chain interdependencies in the context of COVID-19

While the COVID-19 pandemic has exposed the vulnerabilities of “just-in-time” international supply chains and is set to further accelerate their reconfigurations, very little is known about how global production networks are linked together at the firm level, making it difficult to assess where the dependencies lie. In this study, we use firm-level data on customer-supplier relationships from over 170 economies and network analysis tools to map global supply chain dependencies and shed light on the complex interconnections that facilitated the propagation of COVID-19’s economic impact. Leveraging the early virus outbreak in China as an exogenous shock, we first study the equity price responses of China-linked firms to news of virus-induced lockdowns, finding that markets priced in significant transmission effects of the coronavirus shock across global supply chains. Then, we dive deeper into the production networks of three globalised industries, whose unique and convoluted network structures may serve as a reminder that “reshoring” supply chains is easier said than done.

Ex-intrusion corporate cyber risk: evidence from internet protocol networks

Previous event studies of corporate cyber-risk have been limited to successful attacks on public firms but are biased samples constructed based on the economic magnitude of equity losses. To address this selection bias, we construct a larger and more representative sample of cyber intrusions only to find diminished negative equity (and insignificant corporate bond) market reactions compared to these prior studies. To identify cyber-risk irrespective of observing successful attacks, we match public firms to Internet protocol (IP) network data from the American Registry for Internet Numbers (ARIN) from 1991 to 2017. We find that both stockholders and creditors incorporate external IP network size into firm value. Further, debt and equity market reactions to cyberattacks are mitigated for firms with registered IP networks and that have larger network deployments. Overall, our study demonstrates an important public data source that can help institutions proxy for and more accurately price firm cybersecurity risk.

Market reactions of multinationals to the OECD BEPS Action Plan

This paper investigates the equity market reactions to the publication of the OECD BEPS Action Plan. We examine abnormal stock returns for firms incorporated and traded on the stock market in 36 OECD member states for various event dates during the developmental phase of the OECD BEPS Action Plan. Overall, we find a negative market reaction of multinational companies across the relevant events, which suggests that the additional tax costs from limiting tax avoiding behaviour outweigh the benefits such as more transparency, better international tax dispute resolution, etc related to the introduction of the OECD BEPS Action Plan. The conclusion of the Multilateral Instrument (MLI) results in the most negative cumulative reaction. US corporations show a significant negative mean return across all events, but we find less pronounced evidence for market reactions across the European Union (EU). We find that more tax avoiding firms have stronger negative reactions to the events than less tax avoiding firms. Additionally, we show that there are some spill over effects onto the equity markets for purely domestic firms. We provide first evidence as to how investors reacted to the introduction of the OECD BEPS Action Plan and contribute to the literature by further investigating the association between tax avoidance and stock return.

Equity market reaction to regulatory reforms: a case study of Indian banks

PurposeNon-performing assets (NPAs) have been a cause of concern for the banking sector across the world and have invited a lot research interest, especially for emerging economies. In India, the NPAs grew many folds and reached alarming levels in 2013. The available mechanisms, such as Corporate Debt Restructuring Scheme, were not adequate to address this issue. The Central Reserve Bank of India with the Government of India introduced various guidelines, schemes and regulations like framework for revitalizing distressed assets to tackle NPAs during the period 2013-2017. Taking the case of India, the purpose of this paper is to examine policy initiatives and analyse the impact of regulatory shocks on the equity market returns and the systematic risk of individual banking stocks using an extended version of the market model.Design/methodology/approachIn this study, the authors design the experiment to explore the reaction of banking stocks to the various regulatory measures and also measure the change in systematic risk for these stocks as a result of the regulatory changes. Following the approach suggested by Soraokina and Thornton (2015), the authors use the extended market model to test the reaction of banking company stocks to the regulatory measures.FindingsThe study finds that banking stocks did not earn significant abnormal returns on the announcement of these measures. However, the systematic risk of the banking index reduced significantly on the introduction of regulatory measures, and this risk reduction has been primarily in the stocks of private sector banks.Research limitations/implicationsThis paper provides insights on the equity market's short-term reaction to the reform initiatives introduced by the government. The scope of the paper is with respect to one emerging economy, India, which underwent a series of regulatory reforms to tackle the banking NPA problem.Originality/valueThe paper fills an important research gap where the impact of schemes and regulations is captured for an emerging economy like India. It tries to bring forth the importance of these reforms and how an investor perceives the same. This paper tests for changes in systematic risk as measured by market beta as well as measures cumulative abnormal returns associated with important events in the process of regulatory reforms happening in India from 2013 to 2017.

Equity Market Reaction to Pay Dispersion and Shareholders’ Prosocial Preferences

Do equity markets care about income inequality? We address this question by examining equity markets’ reaction and investors’ portfolio rebalancing in response to the first-time disclosure of the ratio of CEO to median worker pay by U.S. public companies in 2018. We find that firms’ disclosing higher pay ratios experience significantly lower abnormal announcement returns. Additional evidence suggests that equity markets “dislike” high pay dispersion rather than high CEO pay or low worker pay. Firms whose shareholders are more inequality-averse experience a more pronounced negative market response to high pay ratios compared to firms with less inequality-averse shareholders. Finally, we find that during 2018 more inequality-averse investors rebalance their portfolios away from high pay ratio stocks relative to other investors. Overall, our results suggest that equity markets are concerned about high within-firm pay dispersion, and investors’ attitude towards income inequality is a channel through which high pay ratios negatively affect firm value.

Using Equity Market Reactions to Infer Exposure to Trade Liberalization

We outline a method for using asset prices to identify firm exposure to changes in policy. We highlight the benefits of this approach for studying trade agreements and apply it to two US trade liberalizations, with China and Canada. We find that abnormal equity returns during key events associated with these liberalizations are correlated with standard measures of import competition, vary across firms even within industries, predict subsequent firm outcomes, and provide a more complete view of distributional implications. In both cases, predicted relative increases in operating profit among the largest firms dwarf the relative losses of smaller firms.

Using Equity Market Reactions to Infer Exposure to Trade Liberalization

Using Equity Market Reactions to Infer Exposure to Trade Liberalization

Market Reaction to Mandatory Nonfinancial Disclosure

We examine the equity market reaction to events associated with the passage of a directive in the European Union (EU) mandating increased nonfinancial disclosure. These disclosures relate to firms’ environmental, social, and governance (ESG) performance, and would be applicable to firms listed on EU exchanges or with significant operations in the EU. We predict and find (i) an average negative market reaction of –0.79% across all firms, (ii) a less negative market reaction for firms having higher predirective nonfinancial performance, and (iii) a less negative reaction for firms having higher predirective nonfinancial disclosure levels. In addition, results are accentuated for firms having the most material ESG issues, as well as investors anticipating proprietary and political costs as a result of the mandated disclosures. Finally, we find that the negative market reaction is concentrated in firms with weak preregulation ESG performance and disclosure, which exhibit an average return of –1.54%; in contrast, firms with strong preregulation disclosure and performance exhibit an average positive return of 0.52%. Overall, the results are consistent with the equity market perceiving net costs (benefits) for firms with weak (strong) nonfinancial performance and disclosure around key events surrounding the mandatory disclosure regulation of nonfinancial information. This paper was accepted by Shiva Rajgopal, accounting.