Event Study Methodology Research Articles

Market Warnings : Learning from the Short-Term Impact of COVID-19 on Stock Market Constituents

Purpose : The paper investigated the short-term impact of the lockdown announcement due to COVID-19 on various industries in India using firms’ stock returns and credit ratings. Design/Methodology : The paper used event study methodology to analyze abnormal returns on stocks and credit rating changes of firms following the lockdown to understand the impact on the debt servicing of firms. Findings : The paper found a heterogeneous impact of lockdown on various industries. Pharmaceuticals, chemicals, FMCGs, and telecom sectors saw positive abnormal returns, while textiles, financial services, construction, services, cement, and automobile sectors were the worst affected. The paper also found that smaller companies were more susceptible to the effects of such lockdowns. Indian subsidiaries of foreign MNCs and Central Government-owned firms fared better than privately-owned domestic firms. The debt servicing ability of firms was unimpacted due to the debt relief package announced to mitigate the impact of the lockdown. Practical Implications : The paper's findings have implications for investors and managers who can make informed decisions in advance to reduce the risk to their investment if such a black swan event is expected. The paper's findings could help policymakers identify sectors that require immediate support due to the disruption from such an event. Originality : The paper is unique in investigating the impact of the lockdown due to COVID-19 on companies across different industries, with different ownership groups and sizes. We have not come across such a detailed study investigating the impact of COVID-19 on various industries in India.

The European Banks Under the Shock of the Russian Invasion of 2022: An Event Study Approach

Abstract This paper evaluates the reaction of systemically important banks in Europe to the shock of the Russian invasion of Ukraine in 2022. Using the event study methodology and three of the most commonly used models for estimating theoretical returns (CAPM, Fama-French with 3 factors, Fama-French with 5 factors), we show that banks react differently relative to the event date (February 24, 2022) depending on the country. Overall, systemically important banks recorded massive cumulative abnormal returns in the event window. The results differ at the country level depending on the exposure of the respective banks to Russia, the dependence of countries on Russian gas and oil, and the level of informational efficiency of the markets on which they are traded.

The Global Stock Market Reactions to the 2016 U.S. Presidential Election

Donald Trump’s victory in the 2016 presidential election was a political surprise to almost everyone, domestically and internationally. This paper investigates international investors’ reaction to this apparent global political surprise. Employing an event study methodology, we test the three widely known behavioral hypotheses concerning international investor reaction to this unexpected news, that is, the Overreaction Hypothesis (OH), the Uncertain Information Hypothesis (UIH), and the Efficient Market Hypothesis (EMH). The study results show that most of the indexes initially reacted unfavorably to the announcement of Trump’s win; however, subsequent stock index returns exhibit corrective upward patterns consistent with the predictions of the OH, except for the Latin American and France markets. The reactions of the other indexes appear to be favorable and in line with the prediction of the UIH. These findings suggest that in most countries under study, investors could utilize contrarian strategies to generate abnormal returns, as evidenced by price reversal following the arrival of the surprise. JEL classification: G14, G15.

Reaction of US and Chinese Stock Markets to COVID-19 News

The COVID-19 outbreak slowed down global economic activities substantially, resulting in unrest in the financial markets, especially in the beginning of the pandemic outbreak. This study aims to investigate if COVID-19 caused abnormal returns in the US and the Chinese stock markets in the beginning of the pandemic outbreak. Event study methodology is adopted for this purpose. This study finds that a significant negative impact appeared immediately after the Wuhan lockdown in the Chinese markets, while the US markets were slow to pick up. The former was more severely hurt after lockdown, while the latter was more brutally affected after COVID-19 was labeled a global threat. COVID-19 also played a significant role in connecting these two stock markets. The US and China should collaborate further in combating this novel and notorious global pandemic.

Effects of Budget Announcement on Stock Prices in the Indian Context

The stock prices are quick to respond to announcements of union budgets for structural reforms. The paper tests the effects of union budget announcement on stock prices by applying event study methodology. The reactions are tested using market model, Abnormal Returns (AR), Average Abnormal Returns (AAR) and Cumulative Average Abnormal Returns (CAAR) for 15 days prior and 15 days after the event date. Result show that CAARs are significant for most of the days in the event window. The findings support the prediction that budget announcement contains information value and therefore traders can earn abnormal gain on budget announcements in Indian capital market.

Europe's gone “right” – A comparative study of stock market reactions to populist success in Sweden and Italy

We analyze the reactions of national equity markets to the election of far-right populist governments in Italy and Sweden in September 2022. We apply event study methodology to samples of 285 Swedish and 144 Italian stocks. Share prices of Italian stocks largely aligned in the week before the vote. Conversely, the Swedish electoral outcome hit markets by surprise. Share prices adjusted in the days following the vote. We use firm-level increases in intraday volatility before the vote to estimate sensitivities to electoral outcomes. Dollar-neutral long-minus-short strategies based on these sensitivities prove explanatory power of historical intraday volatility in Sweden, where post-event reactions and uncertainty were evident. The model identified those stocks that are most sensitive to the election outcome.

Effect of insider trading prohibitions: Regulation on security market returns in Kenya

This paper provides an analysis of legal insider trading on the Nairobi Securities Exchange(NSE) by using data published by security market. An event study methodology was used todetermine the unit of analysis. The causal research design was used on the event to find outwhether there was any significant difference between pre and post regulation by observing thebehaviour of abnormal returns and stock returns volatility. The sample comprised of 39companies out a population of 55 companies that traded continuously from 1998 to 2010. Themarket model was used to determine alpha and beta to calculate abnormal returns. The GARCHmodel was used to find the significant difference between the pre and post regulation throughstock market volatility. The study results indicate that the regulation analysed had evidence ofabnormal returns that accumulated slowly over the event period of the regulation. The analysis ofregulation on insider trading shows high level of abnormal returns ranging from 0 to 8. Theregulation results indicate reduced volatility during the post regulation as indicated by theGARCH model. Statistical analysis gives an F statistic of 242.5 while the critical F statistic is3.85. The results indicate that investors viewed the regulation as good news to the market. Therewas anticipation among the investors during pre-regulation as reflected by stock volatility duringthe pre-regulation period. The study concludes that regulation of the capital market brings aboutefficiency through reduced volatility and reduced abnormal returns after regulation is enacted bythe government.

Market Reaction to Dividend Announcements Before and During COVID-19 - Evidence from Banking Sector

The present study documented the behaviour of stock of the Indian banking sector around the announcements of dividends before and during the global health crisis of 2019. The study considered all the banks in the Indian banking sector that have announced the dividend from January 2015 to December 2021 and conducted the analysis using event study methodology with Multi-Index Model (MIM). The study found that during the pre-crisis period, the stock of the PSU banks were more sensitive towards the announcements when dividends were decreased compared to the announcements when it was increased. While, stock of private banks was significantly impacted by both positive and negative dividend announcements, however, the impact of negative dividend announcements was severe and more prolonged than that of positive dividend announcements. Further, during the COVID 19 Pandemic, it is witnessed that information relating to dividend announcement has positively affected the behaviour of the banking sector stock.

Open repurchase announcements and abnormal returns of Indian firms: An industry-wise analysis

Although the tender offer buyback method has gained significance over time, many companies still prefer open market repurchases. The existing literature focuses mainly on the impact of buyback announcements, specifically on stock returns; however, buyback announcements and abnormal returns in the case of open market repurchases have not yet been studied in detail, especially across industries in the Indian context. This study, therefore, attempts to analyze the impact of open market repurchase announcements on the stock returns of Indian firms. To that end, the event study methodology has been used for a period of 31 days, i.e. 15 days prior to and 15 days after the buyback announcement on a filtered sample of 100 firms during the period 2010–2020. The results of the study indicate that the returns were more favorable in the short run. The findings do not support the undervaluation rationale of firms behind the open buyback statement. The low-profit opportunities in the prior event window convey investors’ predictions about the repurchase announcement. In the context of industries, the manufacturing sector seemed to be far better than IT & telecom, chemical, and pharma firms as the returns were statistically significant for five (5) out of 31 days. The industry-specific results also suggest that the profit opportunities are majorly in the pre-announcement phase. The overall findings corroborate that share repurchases might be irrelevant to shareholders’ wealth. Therefore, open market buybacks may support decisions related to capital structure changes. AcknowledgmentThe infrastructural support provided by the FORE School of Management, New Delhi in completing this paper is gratefully acknowledged.

Impact of Corporate Name Change on Stock Prices: Evidence from BSE

The study examines the impact of the corporate name change on stock prices. By employing the event study methodology, efforts have been made to analyze how the market reacts to the corporate name change of companies during the years 2019 and 2020 listed on the Bombay Stock Exchange (BSE). The results suggested that corporate name change hardly impacts stock prices and shareholders’ wealth. Our findings also indicated that investors are rational in India. The t-test has been used to test the significance of the results. The study adds to the literature as few studies have been conducted in the Indian context that analyzed the impact of the corporate name change on stock market reactions and has provided inconclusive results.

Investor Reactions to Twin Transformers Announcements

Research Question: This study aims to empirically test the effects of the digital and sustainability announcements of twin transformation companies on their shareholder value creation. Motivation: This paper builds on the vast research regarding the Efficient Market Hypothesis, such as the work of Fama (1970, 1998) which discussed efficiency of the capital markets. Stock markets reflect new information and future prices cannot be predicted based on historical prices. Investors’ reaction, e.g., overreaction or underreaction are well documented. Furthermore, Del Rio Castro et al. (2021) present contemporary research findings related to the emerging issue of reaching Sustainability Development Goals and connects it with digitalization. Ukko et al. (2019) find that a company will reach superior financial performance if managers simultaneously devote their efforts to sustainability and digitalization. This research builds on the previous literature and tries to determine whether stock market recognizes such efforts and whether there is efficiency. Idea: The idea behind this research is to empirically determine whether investors react to twin transformation. Short- and long-term investors’ reaction was tested against sustainability and digitalization announcements of the companies that are recognized by professionals to follow the path of simultaneous transformation. Data: The sample includes companies from the Accenture research of the European twin transformation companies. Data implemented in this study were collected from several sources. Share prices were collected from the Yahoo Finance website, and event announcements from corporate websites. Tools: The methodology employed in this research is the event study methodology. Cumulative abnormal returns are calculated for different event windows and t-statistic is calculated to determine whether there is statistically significant investors’ reaction to sustainability and digitalization events. Findings: Sustainability announcements yield significant market reaction. Depending on the news content they can be both positive and negative. Moreover, dates when the sustainability ranking of some company was released are among the most significant sustainability events. In most instances, investors do not react to the information instantaneously, they need time to absorb it. Investors do not find digitalization events to be significant. Contribution: To the best of the author’s knowledge, this is the first study to test investors’ reaction to digitally sustainable announcements of twin transformation companies.

Central Bank Independence and stock market outcomes: An event study on Borsa Istanbul

This study explores the importance of central bank independence on stock market outcomes. Specifically, we examine the effects of President Recep Tayyip Erdogan’s decree, which removes the top officials of the Central Bank of Turkey, on Borsa Istanbul returns. We use a well-established event study methodology for five events from 20 July 2018, to 11 November 2021. The results show that the market is sensitive to the dismissal decrees in that they have positive effects on cumulative abnormal returns in the first two events, while the three events that follow have negative effects on cumulative abnormal returns. Our results support the importance of central bank independence, revealing that political intervention in central banks has a robust, positive, negative, and significant impact on stock market outcomes.

The effect of natural gas discoveries in Israel on the strength of its currency

AbstractIn light of the natural gas discoveries in the Mediterranean Sea and their impact on the Israeli economy, I must assess the change in the exchange rate and its impact on the foreign exchange market. There are numerous positive social impacts resulting from the gas discoveries including optimising Israel's energy security and its move to cleaner energy. However, not all of the consequences of discovering natural resources may be positive. One possibly negative outcome could be the well‐known phenomenon called the “Dutch disease” in which the discovery of a natural resource can cause a country's currency to spike. To investigate whether the strengthening of the Israeli currency in recent years is a symptom of the “Dutch disease” I used daily and intraday event study methodology to explore the changes in the real exchange rate of the Israeli shekel and the US dollar between 2008 and 2017, according to announcements related to the gas discoveries published during this period. In addition, I examined whether an increase in the real exchange rate was a result of the publication of announcements about natural gas harming the manufacturing and industrial sectors. I found that announcements related to gas discoveries did affect the real exchange rate and caused an appreciation of the Israeli shekel. Investors could analyse the announcements and achieve an abnormal return in the foreign exchange market. In addition, investors' expectations of an appreciation in the real exchange rate causes damage to various manufacturing and industrial sectors.

Reverse stock splits effects on the liquidity of European stocks

Purpose: It is common that firms listed at undesirably low prices perform reverse stock splits to increase prices while decreasing the number of shares outstanding. In addition to these impacts, it is important to understand whether this operation has any side effects on the liquidity, as this is a fundamental element for the proper functioning of the financial markets. Therefore, our main goal is to analyze the effect that reverse stock splits have on the liquidity of European stocks. Methodology: To analyze the effect on the liquidity of the 30 firms, members of the STOXX Europe 600 index, which performed the 35 reverse stock splits identified between January 1, 2015, and December 31, 2019, we use the event study methodology and parametric and non-parametric tests. The analysis is done with a short-term (1 month) and a medium-term (6 months) event windows and to measure liquidity we use the turnover ratio and Liu’s (2006) LMx measure. Findings: In the short-term analysis, reverse stock splits contribute to increasing firms’ stock liquidity. In the medium-term analysis, it is not possible to draw a clear conclusion on the effects of reverse stock split on stock liquidity. Practical implications: The results have important implications for investors wishing to acquire shares in firms on the verge of executing this operation, as it clarifies the behavior of liquidity after the reverse stock split, which may influence their investment decision. They also contribute to helping the boards of directors of listed firms in the decision-making process. Originality/value: This work contributes to the financial literature on the relationship between reverse stock splits and liquidity, and to a better knowledge of European markets. Keywords: reverse stock splits, liquidity, Europe.

Assessing Returns from New Sport Marketing Opportunities: The Case of NBA Jersey Sponsorships

Abstract: One of the newest opportunities available to sport marketing decision-makers is branding on the game-worn jerseys of teams competing in the National Basketball Association (NBA). Given the novelty of this opportunity, research on the returns marketers may receive from such investments is scarce. This study applies the event study methodology to measure shareholder reaction to the announcements of NBA jersey sponsorships utilizing multiple financial models and event windows, with results indicating abnormal and positive return on investment (ROI). Reflective of signaling theory, the market’s reaction to announcements involving tech firms was more positive, and as expected based on the theoretical lens of agency theory, the reaction for firms with regional proximity was muted. Given that the NBA is one of several leagues that will be providing brand integration on game-worn jerseys, this study’s findings have important managerial implications for brand marketers planning investments in such opportunities.

Stock Market Returns and Announcements of COVID-19 Vaccine: An Event Study Analysis of Vaccine Companies

For vaccine companies, the announcements of beginning and ending of COVID-19 vaccine development are milestones of vaccine companies. Few studies have explored how announcements of COVID-19 vaccine affect stock market returns of vaccine companies. In this work, we match the announcements of beginning and ending of COVID-19 vaccine development with three leading vaccine companies and adopt the event study methodology to examine the relationship between COVID-19 vaccine development events and changes in stock returns. We identify the 6 public announcements related to 3 begging and 3 ending as well as 3 vaccine companies. The majority events were associated with stock prices increases when those events happened. Our study shows that Covid-19 vaccine R&D have material economic implications and the result shows that investors can use biological company announcements as a solution for determining when to invest in the company and its competitors.

The Impact of Blockchain Technology Adoption Announcements on Firm’s Market Value

ABSTRACTDespite the growing interest in blockchain (BC) technology, recent research shows mixed perceptions due to its risks and returns. We utilize event study methodology to examine overall market reactions and to delineate how specific contexts associated with BC technology influence the market reactions. Using 149 BC technology adoptions announced between January 2015 and December 2019, we find positive abnormal returns, reflecting investors’ optimistic perception toward BC technology adoption. Specifically, we find that abnormal returns from BC technology are higher when used in a transformative strategic role and offered by leading vendors, suggesting that investors view this adoption as a value-enhancing activity. Our results are robust to the use of an alternative sample and different methods of measuring variables. Overall, our study provides insights for academics and practitioners to better understand the market value of BC technology adoptions.Data Availability: Data are available from the public sources cited in the text.

Behind the child penalty: understanding what contributes to the labour market costs of motherhood

We study the short- and long-run effects of having a child on labour market outcomes of mothers compared to non-mothers. Using matched employer-employee data for Italy over 1985–2018, through an event study methodology around childbirth, we show that the long-run child penalty in annual earnings is 52 log points and the penalty largely depends on the reduction in weeks worked by mothers. We then investigate sorting of women with and without children across different types of firms, providing evidence that mothers work in firms with lower productivity, sales, capital and wages after childbirth. Differences in rent-sharing between mothers and non-mothers explain 11.3% of the long-run child penalty in weekly wages, mostly due to between-firm components. Finally, we explore the individual-level, firm-level, and cultural factors that influence the size of child penalties. We find that the child penalty is higher for young, low-wage mothers and those taking longer leaves. It is larger in small firms with less generous pay and worse peers, and in more gender-conservative regions.

Research On Portfolio Construction for Information Technology and Communication Service Industries Based on The Monte Carlo Simulation

Attention is paid to the portfolio construction of the information technology and the communication services industries affected by the Covid-19. Firstly, the representative stocks which cover the most varieties of different market values are selected and the preliminary analysis for return performance is performed. Then, the event-study methodology is used to explore the effect of Covid-19 on the stocks chosen by this paper. The Monte Carlo simulation is also used to do the portfolio optimization. In the process of research, the Monte Carlo simulation and event study method are mainly used. Through the former one, the efficient frontier is obtained. Besides, this research also get the minimum volatility portfolio, where AT&T has the largest share of 16.33%, and the maximum Sharpe ratio portfolio, where ZOOM has the largest share of 18.79%. Then through the results of event-study, it is found that most companies generated negative abnormal returns on event date and had negative cumulative returns during the post-event window. Finally, the back test is done by comparing our portfolio with the equal weighted portfolio and NASDAQ index, and our work performs better both in the return and the risk. The results in this paper benefit the investors in the technology and communication service industries, which is especially helpful for them to do invest decision after COVID-19.

Bank resolutions through M&As: The case of Ghana’s purchase and assumption agreement

In this article, we examine the possible effects of acquisition through a Purchase and assumption agreement (P&A) as a resolution approach by the central bank of Ghana on the performance of the acquiring bank post-acquisition. By assessing the execution of the first P&A agreement, we contribute to the dearth of literature on the impact of M&As on bank performance in a developing context. We use secondary data from the Ghana Stock Exchange and the acquirer’s financial reports from 2015 to 2019 to assess the likely performance changes. We employ event study methodology and ratio analysis to determine the impact. We observe that while depositor funds were saved and the acquirer succeeded in widening their asset base through the acquisition, their efficiency levels during the assessed period did not improve. Our findings help explain the effects of such M&As through P&As on bank performance to assist investors and management in decision-making. It further accentuates the importance of adequate preparations before embarking on any sort of P&A agreement.