Firm Abnormal Returns Research Articles

Does Terrorism Affect Acquisitions?

Using terrorist attacks as an exogenous shock to uncertainty, we provide evidence that firms located near terrorism-stricken areas are less likely takeover targets for two years after the attack and receive lower acquisition premiums. The latter finding is reflected in lower target firm abnormal returns and synergy gains. Additionally, in terrorism-stricken areas, target firms are associated with a lower share of synergies, withdrawn deals rise, and acquirers are more likely to get involved in acquisitions of target firms located in different metropolitan statistical areas than their own or acquire faraway target firms. We attribute our results to the real options theory, which predicts that high uncertainty increases the value of the option to delay investments. Additionally, we show that the impact on target firm human capital and acquirer CEO uncertainty and fear are potential sources of terrorism-induced uncertainty with the former source prevailing over the latter. This paper was accepted by Gustavo Manso, finance. Supplemental Material: The online appendix and data are available at https://doi.org/10.1287/mnsc.2022.4506 .

Target shareholder gains, peer firm values, and merger and acquisition announcements

AbstractAn average M&A announcement increases the target's peer firm stock prices. While it is documented that an increased takeover likelihood increases the peer firm values, it is also possible that an increase in the expected shareholder gains, conditional on receiving an acquisition offer, affects the valuation of peer firms. In this paper, I document that peer firm abnormal returns during the announcement period are positively affected by the target firm announcement return and offer premium, which reflect target shareholder gains from the announced deal. Moreover, I find that target announcement returns are lower, on average, when the offer premium is lower than those of recent transactions in the industry. This paper highlights that investors reflect not only the increased takeover likelihood but also the revised expectations on the gains from a potential takeover bid in the valuation of peer firms.

Market effects of private equity placement: Evidence from Chinese equity and bond markets

Research has provided empirical evidence for the stock market reaction toward private placement; however, similar research has not been conducted in terms of the bond market. Using the event study method, we empirically examine the explanatory power of the signaling, free cash flow, and wealth transfer hypotheses based on the reaction of the stock market, bond market, and firm abnormal returns to the private placement announcement. The results show that the stock market has a negative reaction toward private placement, whereas the bond market has a positive reaction. The results also show that the scale of private placement is correlated with the severity of the market reaction. Abnormal returns indicate no significant change both before and after the private placement, and they are unaffected by the scale of private placement. These results are consistent with the wealth transfer hypothesis; however, the market reaction is not attributable to the signaling hypothesis and the free cash flow hypothesis. Extensive research shows that the abnormal returns of private placement change dramatically in non-state-owned enterprises and firms with low credit rating bonds, whereas the bond maturity has no significant impact on the abnormal returns—the wealth transfer effect of private placement is stronger in non-state-owned enterprises and firms with low credit rating bond.

Influence of Social Media Emotional Word of Mouth on Institutional Investors’ Decisions and Firm Value

This paper examines how customer sentiment expressed through social media influences institutional investors’ investment decisions and firm value. We use psychology theory to classify the emotional content of social media-based word of mouth, which we refer to as ESWOM. We examine whether ESWOM influences institutional investors’ stockholdings differentially based on investor type and if institutional investors’ stockholdings mediate the relation between ESWOM and firm value. We identify eight types of ESWOM by linguistically interpreting web scrapings of millions of social media posts on 38 corporate brands for the 2007–2015 period. We find differential effects of ESWOM on stockholdings of institutional investors. Dedicated and quasi-index institutional investors increase their stockholdings in response to increases in positive ESWOM such as joy and trust. Transient investors decrease their stockholdings in response to increases in negative ESWOM such as anger, disgust, and fear. Competitive intensity and intangible asset intensity influence these results. Path analysis indicates that ESWOM influences firm abnormal stock returns and idiosyncratic risk both directly and indirectly through its effects on institutional investors’ stockholdings. These findings support our hypothesis that investors’ responses to customer sentiment vary based on whether they follow long-term or short-term investment strategies. Our research highlights the importance of understanding the heterogeneous preferences of institutional investors and their use of social media information for decision making.This paper was accepted by Suraj Srinivasan, accounting.

Alliance Announcement “Surprise” and the Impact on Firm Valuation

This submission is sourced from a dissertation that was successfully defended in November 2018. This study integrated research on strategic alliance formation activity and market signals to examine the impact of alliance announcement history and alliance announcement surprise on firm performance consequences, and then explored the affect of a moderator \on the prior alliance announcement/firm performance consequences and the alliance announcement surprise/firm performance consequences relationships. The focus is on non-equity alliances that involve marketing, product development, research, technology transfer, and licensing agreements. The non-equity alliance is the preferred mode of collaboration because it provides a quick way to markets, resources, and capabilities (Kwicinski, 2017), although it lacks the control aspect of ownership found in an equity alliance (Globerman & Nielsen, 2007; Gudergan, 2002; Gulati, 1995). The research model revealed that abnormal returns, for firms making announcements with no alliance announcement history, were roughly 3x higher in magnitude than the abnormal returns for firms with alliance announcement history. Moreover, abnormal returns for firms that disclosed less than three announcements within a calendar year were 2x to 3x higher than abnormal returns for firms that disclosed three or more announcements within a calendar year. Finally, the combined contributions relating to alliance announcement surprise and prior alliance announcement history offer an interesting new perspective to the alliance formation literature: the notion of alliance announcement cadence.

Terrorism and Corporate Acquisitions

Using terrorist attacks as an exogenous shock to uncertainty, we provide evidence that firms located near terrorism-stricken areas are less likely takeover targets for two years after the attack and receive lower acquisition premiums. The latter finding is reflected in lower target firm abnormal returns and synergy gains. Additionally, in terrorism-stricken areas, target firms are associated with lower share of synergies, withdrawn deals rise, and acquirers are more likely to get involved in cross-MSA acquisitions or acquire faraway target firms. We attribute our results to the real options theory which predicts that high uncertainty increases the value of the option to delay investments. Additionally, we show that the impact on target firm human capital and acquirer CEO uncertainty and fear are potential sources of terrorism-induced uncertainty with the former source prevailing the latter.

Rumor rationales: The impact of message justification on article credibility

We perform content analysis on a unique sample of 2074 first-instance published takeover rumors to study how the rationale underlying a publication relates to its credibility and its association with firm returns and rumor accuracy. While most takeover rumors are inaccurate, we find that distinguishing between various justifications of potential takeover activity as provided within the published article serves to predict takeover announcements, subsequent firm abnormal returns, and – to a lesser extent – premiums. In addition, we note a clear distinction in results based upon the informative versus speculative nature of the rumor. We interpret this evidence as supportive of our hypothesis that the underlying rationale justifying the release of public information affects firm share prices and aids in predictability.

Effects of ambiguity in market reaction to changes in stock recommendations

This study uses analyst recommendations and three ambiguity proxies, namely ambiguity in fundamentals, ambiguity in information and market ambiguity, to examine market reaction to recommendation changes in the Taiwanese stock market. The authors find that analysts’ recommendation changes have positive effects on subsequent buy-and-hold abnormal returns when market ambiguity is moderate. When ambiguity in fundamentals is low, recommendation changes have a positive influence on smaller firms. The effect of ambiguity in information on stock returns is associated with market ambiguity; market ambiguity is negatively associated with abnormal returns for firms with moderate ambiguity in fundamentals. Investors in a small firm rely more on analyst recommendations.

Tests for Abnormal Returns in the Presence of Event-Induced Cross-Sectional Correlation

We introduce a spatial autoregressive model for cross-sectional correlation of abnormal returns. In the model the abnormal returns of firms in the same industry are correlated, whereas the abnormal returns of firms in different industries are uncorrelated. Tests for abnormal returns which are robust to event-induced cross-sectional correlation are proposed. We apply our tests to U.S. stock returns from Bear Stearns’ collapse and Lehman Brothers’ bankruptcy in 2008. We document evidence of event-induced cross-sectional correlation. Simulations show that tests which estimate the cross-sectional correlation from the event period have size close to the nominal level.

Global Mergers and Acquisitions-An event study analysis on Tata Chemicals and British Salt.

This study presents the effect of Global Merger on stock prices of Tata Chemicals. We examine shareholder wealth gains of Tata Chemicals that acquired British Salt in Dec 2010. This study analyses global merger by Tata Chemicals in UK and the returns to shareholders as a result of the merger, using the event study methodology (Brown and Warner, 1980, 1985; and MacKinlay, 1997).We find that foreign acquirers experience positive and significant abnormal returns of nearly two percent over days (- 10,+ 10) when they acquire target in the UK. To capture the impact on stock prices as a result of global M&A using the event study methodology. Using the single-factor model the study finds that the average cumulative abnormal return (CAR) of the Tata Chemicals is positive and substantial. These results are statistically significant also. Thus, the bidder firm got significant positive abnormal returns. The single-factor model finds that the combined CAR is positive, significant and substantial. The bidder firm created a wealth of Rs 33.73 million in a one day window (single-factor model) as a result of the merger. The merger announcements of Tata Chemicals have positive and significant shareholder wealth effect both for bidder and target firm. The aim is to understand the shareholder wealth effects of merger. *Using the single-factor model, the study finds that the average cumulative abnormal return (CAR) of the Tata Chemicals is positive and substantial. These results are also statistically significant. Thus, the bidder firm got significant positive abnormal returns. *The single-factor model finds that the combined CAR for the target firm is positive, significant, and substantial. The bidder firm created a wealth of Rs 33.73 million in a one-day window (single factor model) as a result of the merger.

Do financial blogs serve an infomediary role in capital markets?

Purpose – Financial blogs provide an online platform whereby retail investors effortlessly gain access to an abundant array of investment guidance. Prior studies find that the market reacts to financial blogs and similar online venues but results are inconsistent and financial blogs, a growing area in new media and distinct from other online venues, have received little attention. The purpose of this paper is to examine the particular conditions in which financial blogs serve an infomediary role in capital markets; when information asymmetry is high, earnings quality is low, and during economic uncertainty. These are conditions in which retail investors may seek easily accessible advice for their investment decisions. Design/methodology/approach – Abnormal returns for firms mentioned in blog posts on the SeekingAlpha.com financial blog are examined using a multivariate regression to determine whether or not the market reaction associated with these posts is related to information asymmetry, earnings quality, and economic uncertainty. Findings – Results indicate that abnormal returns are associated with the SeekingAlpha.com financial blog when information asymmetry is high and during bearish market conditions, and in particular when buy recommendations are posted on the blog for firms with high information asymmetry. This association is strengthened for firms with low institutional ownership, a proxy for unsophisticated or retail investors. Research limitations/implications – Results are based on a sample collected during a specific time period in order to detect whether financial blogs serve an infomediary role during uncertain market conditions. Practical implications – Results of this study can be useful to company executives who may want to monitor investment advice posted about their firm on financial blogs. Financial blogs and other forms of social media such as Twitter and Facebook are becoming the “new normal” in the investor information environment, a trend that is likely to continue. Originality/value – Financial blogs provide an abundance of supplemental information demanded by investors. Financial blogs represent a form of “new media,” now considered a key component of firms’ information environment (Saxton, 2012). In contrast to prior studies which primarily investigate only whether the market reacts to financial blogs or similar online platforms such as stock message boards, this study attempts to understand the specific conditions in which the market reacts to financial blogs. The results provide a rationale as to when and why investors rely on financial blogs and whether financial blogs serve an infomediary role in capital markets.

Drivers of price reaction to rights issue announcements in the Kuwait Stock Exchange

This study examines the drivers behind stock price reactions to announcements of rights issues by firms listed on the Kuwaiti Stock Exchange for the period 2003–2013. We find higher cumulative abnormal returns for firms that undertake larger issues, with the issue size reflecting the availability of favourable investment opportunities and their potential positive impact on firms’ earnings. We also document a positive price reaction in firms that are affiliated with a family group. We interpret this as evidence that the proceeds of the rights offering would be employed effectively when the firm is controlled by a family firm. No evidence was found for the price pressure and pricing effects.

Are Ethical Investments Good?

Our study considers whether ethical investments are also good investments. In contrast with previous studies, we utilize long-run event study methodology to examine abnormal returns associated with firms being included in, and dropped from, the MSCI KLD400 Social Index (MSCI KLD400). We find that there are positive and statistically significant long-run abnormal returns for firms being included in the MSCI KLD400. These abnormal returns are associated with higher shareholdings by institutional investors (who are subject to higher public scrutiny), higher analyst coverage and higher growth opportunities.

ERP system implementation announcements: does the market cheer or jeer the adopters and vendors?

Purpose – The purpose of the study is to examine the implementation of Enterprise Resource Planning (ERP) on the announcement of firms’ stock market returns. The authors investigate the stock market reaction on ERP adopters and ERP vendor firms in the USA during 1990-2010. The study examines firm- and non-firm-specific factors including the role of the financial analyst in explaining the determinants of the cumulative abnormal returns surrounding ERP announcements of adopting firms. Design/methodology/approach – Data on ERP system implementation announcements of 112 US firms for the period 1990-2010 were collected from LexisNexis Academics. The authors estimate abnormal returns using an event study methodology for each of the ERP announcements based on the Fama–French three-factor and Fama–French-momentum four-factor models for ERP adopters and for vendors. Subsequently, the authors explain the determinants of abnormal returns in terms of firm and non-firm behavioral variables using cross-section regression methodology. Findings – The empirical results establish that cumulative abnormal returns of US firms on ERP system implementation announcements are positive, signifying that investors view this decision positively and that ERP implementation contributes to enhanced business value in the future. On the contrary, the impact of ERP announcements on vendors is muted. We find that the extent of financial analyst coverage negatively impacts abnormal returns, while the extent of stock market liquidity has a significant positive impact on abnormal returns. Research limitations/implications – This study is based on a sample of ERP implementing firms which are predominantly large firms and on technology provided by one vendor that is predominantly monopolistic. Practical implications – Firms’ attitudes toward implementing an ERP system for future efficiency gains and the implications on the stock market (and indirectly, on the cost of equity of adopters) provide valuable insights for firms and stock markets. Originality/value – This study brings clarity to the debate on stock market impacts of ERP implementation announcements – stock markets cheer such announcements. The study also contributes to the literature by examining firm-specific factors (such as performance, size and leverage) and non-firm-specific factors (such as market risk and analyst coverage) in explaining the determinants of abnormal returns of firms announcing ERP investment.

Employee satisfaction and long-run shareholder returns

This study empirically tests whether there are differences in the employee satisfaction premium among people- and possession-processing service firms, information-processing service firms, and goods-producing firms. The employee satisfaction premium is measured using the long-run abnormal returns of firms with high employee satisfaction ratings, adjusted for industry and size effects. Results show that the employee satisfaction premium is higher for information-processing services than for people- and possession-processing services. There is no significant difference between people- and possession-processing service firms and goods-producing firms. This finding suggests that employee satisfaction may create higher value for shareholders when it is realised through information-processing services rather than people- and possession-processing services.

Measuring Deal Premiums in Takeovers

We investigate whether the merger announcement dates provided in the Securities Data Corporation (SDC) database are handled correctly by researchers performing event studies. We find that in 24.1% of deals, the popular choice of using the SDC's “Date Announced” field as the event date leads to biased estimates of target firm abnormal returns because of earlier abnormal price movements due to merger‐related events such as merger rumors or search‐for‐buyer types of announcements. We hand collect the merger‐related events from news sources and make the complete data set publicly available at the Financial Management website.

Are ethical investments good?

Our study considers whether ethical investments are also good investments. In contrast with previous studies, we utilize long-run event study methodology to examine abnormal returns associated with firms being included in, and dropped from, the MSCI KLD400 Social Index (MSCI KLD400). We find that there are positive and statistically significant long-run abnormal returns for firms being included in the MSCI KLD400. These abnormal returns are associated with higher shareholdings by institutional investors (who are subject to higher public scrutiny), higher analyst coverage and higher growth opportunities.

On the Impact of Bond's Rating Changes on the Firm's Stock Price

In the following research I have studied how bond rating changes that was conducted by Israel leading rating agency is affecting the firm's stocks abnormal returns. In order to do so I have examined 9 bonds upgrades and 9 downgrades from December 2012 until October 2013. For each of the stocks I have calculated three times abnormal return 30 days before and 60 days after the event. Results show that bond's rating downgrades has a more significant effect on the socks abnormal return than upgrades. This is especially true for bonds that were downgraded from Lower-medium grade to Non- Investment grade. Moreover, the downgrade effect on the stock price is diminishing after 45 days.

A link between mergers and consumer confidence

Researchers have put forth several explanations as to why mergers underperform in the short-term horizon as well as over the long-term horizon. This study examines the relationship between consumer confidence and the success of mergers. The results show that high consumer confidence, as measured by the Michigan Consumer Sentiment Index, is statistically significant and negatively related to bidder firm average abnormal returns, providing evidence in support of the performance over-extrapolation hypothesis and the hubris hypothesis.

Competitive valuation effects of Australian IPOs

This study examines the valuation effects that Australian initial public offerings (IPOs) have on industry competitors and to what extent this can be explained by the IPO firm's corporate governance profile and the intended use of their offer proceeds. Using a sample of 106 IPOs between 1999 and 2009, the results indicate that companies experience negative stock price reactions to the completion of an IPO in their industry on days leading up to and including the event date. The multivariate results show that in relation to corporate governance factors, both board size and CEO share ownership exhibit negative relationships with rival firm abnormal returns. Moreover, IPOs which disclose either investment, or both debt reduction and investment as the intended use of proceeds result in a greater negative price impact upon rival firms.