Higher Abnormal Returns Research Articles

Strategic Announcement Sequencing: Earnings and M&A Announcements

The authors examine whether acquiring companies strategically time their quarterly earnings and merger and acquisition announcements. Acquiring companies have the ability and incentive to alter the sequence of these 2 types of announcements to optimize the market’s perception of the firm. The authors show that acquiring companies are more likely to announce earnings before mergers and acquisitions if their earnings meet analyst expectations, especially if the acquiring company plans to use stock as a full or partial method of payment. Additionally, the authors find that companies that announce favorable earnings profiles create a more positive news environment and generate higher abnormal returns for their subsequently announced acquisitions.

Is a promise a promise? Analyzing performance commitment in acquisitions and target firm performance

Using the acquisition data in China from 2011 to 2019, we show that acquiring firms are more likely to provide target firms with performance commitment (PC) contracts when they (1) use stocks to pay acquisitions, (2) have low profits, (3) make cross-industry and domestic acquisitions, (4) are young, small, non-stated-owned enterprises and not related parties with target firms, and (5) deal value is high. Although PC increases the takeover premia, acquirers with PC experience high cumulative abnormal stock returns (CARs) during the announcement period. Double PC contracts drive acquirers' CARs even higher. Although target firms with double PC have better profitability than those with single PC during the commitment period, their profit starts to decrease sharply once the commitment period expires, and those with double PC deteriorate even further. Finally, we find that target firms with PC engage in earnings management during the commitment period to meet their promised performance. Overall, we do not support previous studies because PCs engender earnings management and impair the values of acquirers in the post-commitment period.

Brand Alliances and Stock Reactions

Purpose: This paper examines the performance and risk of brand alliances by investigating the market value of brand alliances through the analysis of investors’ response, and look into the differen...

Insider Trading Profitability in Turkey

This study presents the first large-scale, comprehensive evidence on the insider trading patterns and abnormal returns in the Turkish stock market. Starting with a summary of the legislation, an event study methodology is used to compute daily abnormal returns of almost 65,000 insider transactions. Findings show that insiders earn 1.56 percent more than the market average return on the first six days following the trading day. The highest abnormal returns are earned by small firm insiders. Top executives, officers, directors, legal entities, funds, and large shareholders earn significantly higher than the market average return. Short-term and midterm abnormal profits vary with size, the value of the trade, holdings of the insider, relation of the insider with the company, number of insiders within a company, and whether the transaction is a sale or purchase.

ASSESSING THE PREDICTABILITY OF CRYPTOCURRENCY PRICES

The predictability of asset prices works against the notion of an efficient market where asset prices reflect all available and relevant information. This paper examined the predictability of Bitcoin and 51 other cryptocurrencies that have been classified into the following five categories: Application, Payment, Privacy, Platform, and Utility. Two market efficiency tests (Ljung-Box autocorrelation and Runs tests) were run on the daily returns of the 52 unique cryptocurrencies and the MSCI World index from 28 April 2013 to 30 June 2019. The results showed that Bitcoin was consistently efficient, whereas most of the other cryptocurrencies and even the MSCI World index were not, implying that their prices were predictable. Categorically, Payment altcoins were the most consistent in showing inefficiency. Since altcoins in this category also recorded the third highest risk-adjusted returns, investors with advanced technical trading strategies had a great chance of exploiting the market information to make extremely high abnormal returns.

Time-Varying Conditional Profitability of Momentum Strategies in Commodity Futures Market: Evidence from India

ABSTRACT Manuscript type: Research paper Research aim: This study aims to provide fresh evidence on the presence of momentum profitability in the Indian commodity futures market. Design/Methodology/Approach: This study is based on a sample of highly traded commodity future contracts of the Indian commodity market over the period from 2006 to 2017. It applies the conditional multi-factor model to test the time-varying performance of momentum strategies. Research findings: This study confirms the existence of exceptionally high abnormal momentum profitability in the commodity futures market despite the presence of transaction costs. However, the application of conditional multi-factor model suggests that momentum profits are basically time-varying. The low and insignificant correlation of momentum portfolios with stocks and bonds confirm that relative strength momentum portfolios of commodity futures can be effectively used to create a well-diversified portfolio. Theoretical contribution/Originality: This study analyses the time-varying conditional profitability of momentum strategies for the commodity market of emerging economies such as India. It enriches the small group of studies conducted on commodity futures in the Indian context. The major contribution of the study is the use of conditional multi-factor model to assess the possible role of time-varying conditional alpha and beta to define the momentum payoffs in commodity futures market for the Indian context. Policy implications: Policymakers should design more lucrative policies so as to attract the institutional investors for investment in the Indian commodity market. This is because domestic and foreign institutional investors are central to the enhancement and stability of the financial market. Research implications/Limitations: The study uses the 13 highly traded commodity futures contract to design the momentum strategies. The robustness of the high abnormal returns given by these strategies can be investigated further by the use of extended study period and expanded cross section of commodity futures contract.

Tunnelling, Fraudulent Financial Statements and Regulation Effects: Chinese Evidence

ABSTRACT This study investigates the impact of regulatory intervention on tunneling through inter-corporate loans in Chinese fraudulent firms. We find fraudulent firms have significantly higher tunneling through inter-corporate loans than matching firms, and suggest that controlling shareholders are motivated to delay the recognition of the ensuing loss in the financial statements to make it more difficult for auditors to detect tunneling. In 2006, new CSRC regulation introduced responsibility by board chairman to resolve tunneling issues while the two Chinese stock exchanges initiated a ‘name and shame’ of tunneling individuals and amounts tunneled through public media. We find that tunneling balances in a sample of fraudulent firms reduce significantly after the announcement of this strict anti-tunneling regulation. Relative to a matched sample, fraudulent firms experienced improved operating performance and higher abnormal returns following the imposition of the new anti-tunneling regulations. We also find that informal institutions, such as social trust play an important role in mitigating tunneling. Overall, our results suggest the means by which Chinese regulatory mechanisms have been effective in protecting minority shareholders from expropriation by controlling shareholders.

The Extended Holiday Effect on US Capital Market

Studies on the financial markets proved that not all calendar anomalies are persistent in time. Some of them experienced various types of changes, including passing from the classical form to an extended one, with an enlarged specific time interval. This paper approaches the Holiday Effect extended form on the United States capital market. In its classical form, the Holiday Effect refers to abnormal stock returns on a trading day before a public holiday and a trading day after. We study the behavior of stocks returns for a time interval that starts four trading days before a public holiday and it ends four trading days after. In this investigation we employ the daily closing values of four important indexes from the United States capital market: Dow Jones Industrial Average, Standard & Poor's 500, Russell 2000 and NASDAQ Composite. In order to capture the changes experienced in time by the Extended Holiday Effect we analyze the returns of these indexes for three periods: January 1990 - December 1999, January 2000 – December 2009 and January 2010 – April 2020. The investigation revealed, for some trading days from the enlarged specific time interval, returns that were, in average, significant larger or smaller than those of the days outside of this interval. We found especially high abnormal returns on four or three trading days before public holidays and low abnormal returns on one or two trading days after public holidays. The results also suggest that the Extended Holiday Effect was more visible in relative quiet periods than in the turbulent ones and it influences especially the stock returns of small cap companies.

Announcement effects in the cryptocurrency market

ABSTRACT Cryptocurrencies have gained popularity as new economic investment assets globally in recent years. This study examines market reactions to major news events associated with cryptocurrencies. Abnormal returns as well as cumulative abnormal returns (CARs) around major news announcements, both positive and negative, are investigated for three primary cryptocurrencies: Bitcoin, Ethereum, and Ripple. High abnormal returns are observed on the event day (Day 0), and CARs typically diverge during event windows of (−3, 6) and (0, 6), indicating that the information is not fully reflected in prices immediately after the news events. The CARs that linger for six days after an event suggest that the information flow in the cryptocurrency market is visibly slow. The magnitudes of CARs are larger for negative events than for positive events, implying that the market reaction to negative events is stronger than to positive announcements. The findings of this study may have crucial implications for investors, arbitragers and practitioners as we document evidence of potential trading opportunities for investors who initiate a trading position even after announcements.

When Japanese Stock Market Meets COVID-19: Impact of Ownership, Trading, ESG, and Liquidity Channels

We identify factors affecting the Japanese stock market during the COVID-19 pandemic period. First, we focus on the ownership structure. We find that indirect ownership through the exchange-traded fund purchasing program by the Bank of Japan has a positive impact on abnormal returns. Foreign ownership is negatively associated with abnormal returns, whereas ownership by traditional business groups is positively associated with abnormal returns. Second, we examine the impact of global value chains and find that stock returns are lower for companies with China and U.S. exposure. Third, in terms of environmental, social, and governance (ESG) engagement, there is no evidence that firms that have highly rated ESG scores have higher abnormal returns, but firms with ESG funds outperform those without.

Divest to Acquire

Are divestitures only an ex-post reactive correction of past inefficient acquisitions or are they also an ex-ante proactive strategy to enhance the value of future acquisitions? We find support for the latter. Firms engaging in divestitures before making acquisitions obtain higher abnormal returns, especially in large acquisitions. These findings are not explained by management turnover or activist targeting. We provide evidence that the ‘divest to acquire’ motive ensures better performance of subsequent acquisitions and argue that divestitures and acquisitions are both critical components of a proactive approach to creating shareholder value.

Turning alphas into betas: Arbitrage and endogenous risk

Using data on asset pricing anomalies, I test the idea that the act of arbitrage turns “alphas” into “betas”: Assets with high initial abnormal returns attract more arbitrage and covary endogenously more with systematic factors that arbitrage capital is exposed to. This channel explains the exposures of 40 anomaly portfolios to aggregate funding liquidity shocks and arbitrageur wealth portfolio shocks. My results highlight that financial intermediaries that act as asset market arbitrageurs not only price assets given risks, but also actively shape these risks through their trades.

Do sin firms engage in real activities manipulation to meet earnings benchmarks?

PurposeRecent literature suggests that sin firms (firms in tobacco, gambling and alcohol industries) have lower institutional ownership, fewer analysts following, higher abnormal returns and higher financial reporting quality. This study aims to investigate empirically how sin firms engage in real activities manipulation (RAM) to meet earnings benchmarks in comparison to non-sin firms.Design/methodology/approachThe authors examine two types of RAM, namely, Cutting discretionary expenditures including research and development (R&D), SG&A and advertising to boost earnings. Extending deep discount or lenient credit terms to boost sales and/or overproducing to decrease COGS to increase gross profit. Consistent with Roychowdhury (2006), the authors use abnormal discretionary expenditures as the proxy for expenditure reduction manipulation and abnormal production costs as the proxy for COGS manipulation.FindingsThe results for the abnormal discretionary expense model suggest that sin firms do not engage in RAM of advertising, R&D, SG&A expense to just meet earnings benchmarks. The results for the production costs model suggest that sin firms do not engage in COGS manipulation to just meet earnings benchmarks. The results are robust after controlling accrual-based earnings management (AEM). Overall, in this setting, these results suggest that managers of sin firms engage less in RAM to meet earnings benchmarks.Originality/valueThe findings are of interest to investors, auditors, regulators and academics with respect to financial statement analysis and earnings quality.

IMMEDIATE AND LONGER-TERM STOCK PRICE DYNAMICS FOLLOWING LARGE STOCK PRICE CHANGES

The study explores the correlation between the immediate and the longer-term stock returns following large daily price moves. Following the previous literature, which documents a tendency for price reversals after initial large price moves, I suggest that if a large stock price move is immediately followed by a short-term price drift, then it may indicate that the company-specific shock is more completely incorporated in the stock price, significantly increasing the probability of subsequent longer-term price reversal. Analyzing a vast sample of large stock price moves, I document that negative (positive) longer-term stock price reversals after large price increases (decreases) are significantly more pronounced if the latter are immediately followed by relatively high (low) short-term cumulative abnormal returns, that is, by short-term price drifts. The effect remains significant after accounting for additional company-specific (size, market model beta, historical, or conditional volatility) and event-specific (stock’s return and trading volume on the event day) factors.

Machine Learning-Based Financial Statement Analysis

This paper explores the application of machine learning methods to financial statement analysis. We compare a range of models in the machine learning repertoire in their ability to predict the sign and magnitude of abnormal stock returns around earnings announcements based on past financial statement data alone. Random Forests produce the most accurate forecasts and the highest abnormal returns. (Nonlinear) neural network-based models perform relatively better for predictions of extreme market reactions, while the linear methods are relatively better in predicting moderate market reactions. Long-short portfolios based on model predictions generate sizable abnormal returns, which seem to decay over time. Abnormal returns are robust to various risk factors and load in expected ways on size, value and accruals. Analysing the underlying economic drivers of the performance of the Random Forests, we find that the models select as most important predictors financial variables required to forecast free cash flows and firm characteristics that are known cross-sectional predictors of stock returns.

Are we in the same boat: Value-creation in alliance portfolios in the US internet sector

Current research admits that value-creation occurs between the focal firm and its partner firms in alliance portfolios. However, most extant studies have focused on performance implications from the perspective of the focal firm. We consider the partner firms' perspective in examining the relationship between portfolio configuration and stock market valuation, along with the moderating role of environmental munificence. Using data on the alliance portfolios of 120 focal firms in the US internet sector covering 1995 to 2003, we found that partner firms that ally with a focal firm with higher portfolio diversity and/or higher portfolio density are likely to enjoy greater abnormal returns when the focal firm announces corporate events. We also found that portfolio density is more likely to be associated with higher abnormal returns when environmental munificence is low than when it is high.

Are we in the same boat: Value-creation in alliance portfolios in the U.S. Internet sector

Current research admits that value-creation occurs between the focal firm and its partner firms in alliance portfolios. However, most extant studies have focused on performance implications from the perspective of the focal firm. We consider the partner firms' perspective in examining the relationship between portfolio configuration and stock market valuation, along with the moderating role of environmental munificence. Using data on the alliance portfolios of 120 focal firms in the US internet sector covering 1995 to 2003, we found that partner firms that ally with a focal firm with higher portfolio diversity and/or higher portfolio density are likely to enjoy greater abnormal returns when the focal firm announces corporate events. We also found that portfolio density is more likely to be associated with higher abnormal returns when environmental munificence is low than when it is high.

R&D Spending and Stock Returns: Evidence from South Korea

This study examined how research and development (R&D) spending affects stock returns. Three strands of research make different predictions about how R&D affects stock prices. The agency theory, presented by Jensen (1986) argues that managers do not make a corporate decision on behalf of shareholders and rather pursue their personal benefits by undertaking value-reducing projects such as R&Ds. The overconfidence theory suggests that overconfident managers tend to invest more in R&D because they overvalue their ability and they are excessively optimistic about future success of the R&D investment. These two theories predict that firms that invest more in R&D earn lower returns than those that invest less. In contrast, the signaling theory predicts that high-quality firms use R&D spending as a means of communicating with the stock market to mitigate information asymmetry problem, resulting in higher returns of the firms. Using data from Korean firms listed from January 1992 to December 2015 we showed that portfolios that invested heavily in R&D earn consistently high abnormal returns and that, consequently, spending on R&D is an effective explanatory factor for stock returns. We also found that the impact R&D expenditures has on stock value was long-term, as well as short-term. Overall, these results are consistent with the signaling theory in that R&D spending is an important channel through which firms improve their values by communicating with the stock market.

Do Chinese M&A activities create shareholder value in the short run? Evidence from Chinese-German cross-border takeovers

Our paper investigates the response of acquiring firms’ stock returns around the announcement date in cross-border mergers and acquisitions (M&A) between listed Chinese acquirers and German targets. We apply an event study methodology to examine the shareholder value effect based on a sample of M&A deals over the most recent period of 2012-2018. We apply a market model event study based on the argumentation of Brown and Warner (1985) and use short-term observation periods according to Andrade, Mitchell, and Stafford (2001) as well as Hackbarth and Morellec (2008). The results indicate that the announcement of M&A involving German targets results in a positive cumulative abnormal return of on average 2.18% for Chinese acquirers’ shareholders in a five-day symmetric event window. Furthermore, we found slight indications of possible information leakage prior to the formal announcement. Although it shows that the size of acquiring firms is not necessarily correlated with the positive abnormal returns in the short run, this study suggests that Chinese acquirers’ shareholders gain higher abnormal returns when the German targets are non-listed companies.

Firm size effects on stock returns in mergers and acquisitions in Asian emerging markets

This study finds that firm size effects can be captured at every step during the process of estimating abnormal returns. Our small firm portfolio has higher averages with respect to alpha, total risk, firm-specific risk, expected return, actual return and abnormal return. However, this small firm portfolio has a smaller beta average, which contradicts most prior findings which suggest that small firms tend to have higher betas. The observed higher alpha coefficient (not beta coefficient) makes a major contribution to the observed higher expected return for small acquiring firms. Small acquiring firms still gain higher abnormal returns than large acquiring firms even when the higher expected returns of the small firms are incorporated in the process of the abnormal return estimation.