Investor Reaction Research Articles

Investor Reaction to the Discovery of Accounting Fraud: The Period from the Discovery of the Fraud to the Completion of the Correction

This paper examines the period from the discovery of accounting fraud to the completion of correction and examines the reaction of investors on the date of the first news release suggesting accounting manipulation, the date of the subsequent release of information related to the amount of profit correction that was not disclosed on the date of the first news release, and the date of the submission of the correction report. The verification results show that the stock price falls sharply on the day of the first news release and the day when the information about the amount of profit revision is disclosed, that when the amount of profit revision is large and it takes time to disclose information about the amount of profit revision, there is a rebound in the stock price on the day when the correction report is submitted because investors like the resolution of uncertainty, and that there is a relationship between the amount of profit revision and the size of stock price decline. However, when there is no information about the amount of correction on the first day of the news release, investors react uniformly, and the reaction to a large (small) amount of correction is underreaction (overreaction). These results indicate that investors were misled by the misstatements until the fraud was discovered and made decisions based on overestimates of future cash flows, so they suffered unexpected losses when the fraud was discovered, and during the period from the fraud discovery to the completion of correction.
 
 Received: 3 August 2021 / Accepted: 6 October 2021 / Published: 5 November 2021

Political uncertainty, financial crises, and stock market volatility: Evidence fromMENAregion

The main objective of this article is to analyze and compare the impact of political uncertainty and financial crises on stock market volatility in 10 MENA countries over the period 2005–2018. To test our hypothesis, a variety of GARCH models are used. The results indicate that political events have more significant effect than financial crises on stock market volatility, as we detect an increase in market volatility during political elections and terrorist attacks. The comparative tests employed to identify the best GARCH model in capturing stock markets volatilities reveal that GARCH/EGARCH models perform the best in our study. EGARCH model is more suitable during unpredictable events while GARCH model work well during predictable events. Additionally, we found that the reaction of investors is not similar during the three events studied. In fact, terrorist attacks admit a more significant effect than political election periods. We observed that the reaction of the stock market during expected events is not instantaneous, whereas it is instantaneous during unexpected events. Overall, our findings are of great significance for investors and market regulators in understanding the role of major events on stock market stability, particularly in MENA region.

Impairment of Assets and Market Reaction during COVID-19 Pandemic on the Example of WSE

The main task of the article is to examine the impact of the reported impairment of assets (IoA) on the market reaction of investors on the Warsaw Stock Exchange [WSE] in the crisis condition caused by the COVID-19 pandemic. There is a need to verify whether the disclosure of this information in the period of economic downturn will cause a similar negative reaction as in previous topics in this area. Research undertaken in this article helps identify the rules of behaviour (in the short term) whether the reaction of investors on updating the company’s assets in crisis conditions is different than in times of prosperity. The main hypothesis will be verified using the event study methodology. It allows to verify whether the upcoming information about IoA during the COVID-19 pandemic confirms an existence of statistically significant negative abnormal returns. Based on the 55 cases of current reports informing about IoA, which were submitted to the investors in the year 2020 and finally qualified for the research sample, I have not observed statistically significant negative abnormal returns on the adjacent days. The results are different from those obtained by researchers who study the market reaction to the IoA under non-crisis conditions of the economy.

Market Overreaction at the Beginning of Covid-19 Pandemic Periods in Indonesia Stock Exchange

This study aims to determine whether the markets overreaction occurred in Indonesian capital market in the beginning of Covid-19 pandemic periods, especially in Indonesia Stock Exchange. This market overreaction is the one of anomalies in capital market and is opposite the efficient market hypotheses. Bad or good information is a trigger for investors reactions that cause anomalies such as this market overreaction. The information can be sourced from internal and external conditions of the company. The external condition that is currently affecting the national and international economy are the Corona pandemic (Covid-19) which has spread around the end of 2019. Based on the phenomenon occurs, the purposes of this study are to test: (a) Did market overreaction occur in Indonesian capital market in the beginning of Covid-19 pandemic periods? (b) Is a contrarian strategy relevant to be implemented? (c) Does the market risk factor based on the CAPM will affect the abnormal return? Keywords: CAPM; Market Overreaction; Return Reversal

The Joint Effect of Presentation Format and Disclosure Balance on Investors' Reactions to Sensitivity Disclosures of Hedging Instruments

SYNOPSISDerivative-related risk disclosure has been a key issue in accounting regulation and research, and sensitivity analysis is the most popular form of quantitative derivative-related disclosure. In an experiment, we find that, relative to disclosing potential losses only, disclosing both potential gains and potential losses associated with hedged items and derivatives leads to favorable investor reactions when information about net risk after hedging is omitted from the disclosure, but not when net risk is shown. We further show that disclosing net risk in addition to hedged-item and derivative risks is as effective at lowering investors' risk perceptions as disclosing potential gains. Finally, we demonstrate that disclosing net risk and disclosing potential gains affect investors' judgments through different mechanisms. Our results have important implications for investors, managers, and regulators.Data Availability: Contact the authors.

THE INFLUENCE OF COVID-19 EVENTS TO VACCINATION ON ABNORMAL RETURN AND TRADING VOLUME ACTIVITY IN IDX30 COMPANIES

The purpose of this study was to analyze how the market reacted to the covid-19 event that occurred in Indonesia, namely the existence of PSBB Volume I, New Normal, PSBB Volume II, the entry of the sinovac vaccine phase 1 to Indonesia, and the injection of the first vaccine to President Jokowi using abnormal returns and trading volume activity as an indicator of investor reaction in the capital market. In this study, there were 30 samples of IDX30 companies for the January 2021 period. To test investor reactions, an event study was used to measure the difference in reactions before and after the event. This study also used paired sample t-test for normally distributed data and the Wilcoxon sign rank test for data that were not normally distributed. The results of this study in the PSBB Volume I and New Normal events there was no abnormal return either before or after the event, in the PSBB Volume II event there was a positive abnormal return, 2 days before PSBB Volume II and negative abnormal returns 3 days after, in the event of the entry of the sinovac vaccine phase 1 into Indonesia, there was a negative abnormal return 2 days before the event, and in the event of the first vaccine injection to President Jokowi, there was a negative abnormal return 2 days before the event. However, there is no significant difference between abnormal returns before and after all events. While trading volume activity in the PSBB Volume I, New Normal, the entry of the sinovac vaccine phase 1 to Indonesia, and the first vaccine injection to President Jokowi, there was no difference between the activities before and after the event. But in the PSBB Volume II, there were significant differences in trading volume activity before and after the event.

Effect of Mergers and Acquisitions on Stock Returns: Evidence from a Frontier Market

This study examines the mergers and acquisitions on stock returns in the Sri Lankan context. The main objective of this study is to investigate the effects of mergers and acquisitions on stock returns of Sri Lankan companies and establish whether there is any relationship between mergers and acquisitions on stock returns. For the intended purposes, the impact of mergers and acquisitions on stock returns, the secondary data is used from 10 listed companies for the period from 2010 to 2019. The event study methodology is used to examine the reaction of investors to the announcement of mergers and acquisitions. The event window was 80 days, which is 40 days before and after the announcement date. The result indicates that mergers and acquisitions announcements generate positive significant Cumulative average abnormal returns (CAAR) at the event date. However, after the event date, acquirer companies exhibit very low CAAR close to zero or sometimes negative value and not statistically significant. Thus, findings suggest that the shareholders' reaction to the information content of mergers and acquisitions limited to event day. After the announcement date, the CAAR takes a gradual declining trend.
 Keywords: Acquisition, Colombo Stock Exchange, Event Study analysis, Merger, Stock Return

Bank board changes in size and composition: Do they matter for investors?

AbstractResearch Question/IssueThis research seeks to explain whether changes in bank board size and/or composition signal the effectiveness of the board in terms of monitoring and advising.Research Findings/InsightsOur contribution provides empirical evidence on the negative reaction of investors to board changes, identifies the variables that explain this reaction, and finds that banks with experienced executive directors on their board are candidates to announce increases in board size. Our empirical analysis is based on 608 announcements by banks headquartered in 19 European countries over the period 2003–2015. We apply the Event Studies methodology, Heckman's analysis, system estimator regressions, and probit analysis.Theoretical/Academic ImplicationsOur results allow us to conclude that investors perceive changes in board composition as an ineffective response to bank problems, except when the changes increase the number of non‐executives. Bank shareholders positively value board changes when the bank has a powerful corporate executive officer and negatively value those banks with high dividends that announce these changes. Banks with higher interest margin and higher executive experience and seniority are more prone to make changes in board size and composition, while those with powerful corporate executive officers, executive directors distracted by their responsibilities on other boards, higher non‐executive attrition, where all non‐executives are male, with one‐tier boards, headquartered in a large country, or those delisting from stock markets will avoid changes in board size.Practitioner/Policy ImplicationsThis study offers insights to policy makers interested in enhancing banks' corporate governance. Boards should improve the information and transparency of their announcements to signal the effectiveness of board decisions. In addition, it provides insights about the influence of Board Chairs who hold the position of corporate executive officer in the design and effectiveness of banks' corporate governance.

Mediation Effects of Internal Financial Decisions and Company Performance on the Relationship of Macroeconomic Factors and Market Reactions

This study examines the effect of macroeconomic factors on investor reactions in the capital market with internal financial decisions and company performance as the intervening variables. Previous studies examined only the effect of macroeconomic factors on direct market reactions. The sample of this research are manufacturing companies listed on the Indonesia Stock Exchange. Structural Equation Modeling (SEM) was tested using SmartPLS. This study concludes that financial decisions and company performance are not the intervening variables between macroeconomic factors and market reactions. Macroeconomic factors do not affect the company's internal financial decisions and company performance but the market reaction. Meanwhile, the company's internal financial decisions have no effect on the company's performance and market reaction. The company's performance affects the market reaction. The results of this study prove that investors are very concerned about macroeconomic factors in making investment decisions. The dynamics of macroeconomic factors directly influence investment decisions in the capital market.

Near-miss disaster violations and investor reactions

Investors penalize firms for their misconduct because it violates expectations that firm adhere to generally agreed upon norms and standards. In this paper, we present a new class of misconduct events, labeled “near-miss” events, which may bring to investor attention the potential disaster that was averted because of this violation revelation. Examples of such events include safety inspection violation reports identifying violations that may lead to imminent disasters. We develop a theoretical framework theorizing how investor reactions are shaped by a different mechanism in these contexts. We hypothesize that investor reactions will be affected by the saliency of past disasters in the industry, and how this relationship is moderated by the extent of a firm’s vulnerability to disaster. Our empirical investigation in the context of mining industry provides broad support for this novel mechanism and has implications for research on organizational misconduct and strategic research on investor reactions.

Crash and Burn: Investor Perceptions of CEO/CFO Dismissal Following a Stock Price Crash

Prior studies on the consequences of executive dismissal following a performance failure on investor reactions are contradictory. However, the literature has been silent on whether and how the actual responsibilities of the dismissed executives studied could influence investor reactions. Drawing on signaling theory and role theory, we examine how CEO dismissal and CFO dismissal following a stock price crash might be differentially perceived by investors as distinct executive roles. We propose that the fit between a dismissed executive’s role (CEO versus CFO) as a signal of blame, and the specific circumstances surrounding a stock price crash failure, will be fundamental in shaping investor reactions. We find support for our theorizing across two studies. Study 1 is an archival study of U.S. firms spanning the period 1992—2014 that comprised 29,242 firm-year observations. Study 2 is an experiment that conceptually replicates our first study to address causality concerns using two samples: 820 participants with investment experience and 297 professional investors. Our findings indicate that executive role, and the fit between role and circumstances of failure, are important considerations when using executive dismissal to restore investor confidence.

Beyond Biology – The impact of Perceptions CEO Social Gender on Investor Reactions During an IPO

Leadership at the top of firms is largely performed by men. One reason for this male dominance in top leadership positions has been found in the congruity of male gender and leadership roles. Both – men as well as leaders – are assumed to show agentic behavior. We build on the assumption of the congruity of male gender and leadership roles, yet take it beyond biology. We hypothize that CEOs of both sexes are rewarded by investors for behaving agentic in an IPO setting. We use a mixed method approach to investigate this phenomenon. We conduct a field study analyzing videos of CEOs during road show events complemented by an experimental study were investment decision based on CEO agentic behavior will be made under experimental conditions.

Investor Reactions to Minority CEO Appointments: The Intersection of Race-Ethnicity and Gender

Despite growing attention to the disadvantages experienced by racial-ethnic minorities in society, there is limited understanding of how race-ethnicity affects strategic leaders. We develop theory ...

Lifelines and Sinking Ships: Investor Reactions to Divestments During Industry Change

Navigating a period of industry change can be challenging for incumbent firms. In this paper, we consider an important barrier to adaptation – technological commitment – and analyze how investors react to a firm’s departure from its core position. We argue that, over time, cost efficiency concerns and shareholder advocacy potentially moderate the negative impact of commitment to a fading technology on market valuation. Building on the industry change and corporate divestment literatures, we argue that it will be increasingly difficult for incumbents with greater technological commitment to exit from this position even as the transition becomes more inevitable, unless investors formally pressure the firm to do so. We find support for our arguments from an event study of announcements of coal plant retirements by U.S. public electric utilities from 2007 to 2019. Our results contribute to understanding challenges with incumbent adaptation to environmental disruptions, as well as the urgent issue of climate change mitigation.

The influence of target CSR performance on acquirer acquisition announcement returns

With this study, we examine the influence of a target’s CSR performance on acquirer announcement returns. We posit that when targeting a company with superior CSR status, acquirers face lower information asymmetries and less opportunistic behavior during the acquisition process as well as post-acquisition access to valuable resources, resulting in a more positive investor reaction and thus higher acquirer announcement returns. We furthermore argue for the acquirer’s own CSR performance being a contingency factor moderating the target CSR-acquirer performance relationship. We find empirical support for our hypotheses in a sample of 232 acquisitions announced between 2003 and 2013. Our work adds to research on acquisition performance, specifically how target characteristics influence acquisition outcomes.

When Beauty is Beastly: Facial Attractiveness of Female CEOs and Investor Reactions to Acquisitions

The increasing presence of women in corporate executive positions has sparked research on gender bias against female leaders. Prior work in the management area has focused on between-group gender bias in which female executives are compared to their male counterparts, which has led to mixed findings. In this study, we move beyond prior management work to explore within-group variability of gender bias in which some female executives encounter greater levels of gender bias than others do. Specifically, we investigate a personal attribute that contributes to within-group variability: facial attractiveness. Building on gender role congruity theory and the beauty-is-beastly effect, we propose that more, as compared to less, attractive female CEOs are viewed as less competent to manage stereotypically male-typed strategic actions, such as acquisitions. In a sample of female CEOs of public firms in China, we hypothesize and find that investors react more negatively to acquisitions conducted by more attractive female CEOs than to those conducted by less attractive female CEOs. Moreover, we find that this within-group bias is reduced under conditions in which there are more positive media reports about the focal female CEO, and in industries in which female CEOs are represented at a higher rate. Finally, in supplementary analyses, we assess within group male CEO attractiveness, but find that it does not influence investor perceptions of male CEO competence in conducting acquisitions.

Impact of Ownership Structure on Communication of Corporate Strategy

According to impression management research, strategic leaders tailor their strategic communication to elicit favorable investor reactions. However, past research on strategy communication view inv...

REAKSI INVESTOR TERHADAP PENGUMUMAN LABA DAN UNEXPECTED EARNING PADA SEKTOR INFRASTRUKTUR SAAT MENGHADAPI KOS STICKINESS

The purpose of this study is to determine investors reactions to earnings announcements and unexpected earnings when facing stickiness cost. Sampling in this study used a purposive sampling technique with a total of 10 infrastructure companies listed on the IDX during 2015-2019. The analysis technique in this study uses panel regression analysis using EVIEWS 9. The results of this study indicate that there is no investor reaction to earnings announcements in infrastructure companies when there are low and high stickiness cost. However, when the company has a combined stickiness cost, there is an investor's reaction to the earnings announcement by seeing a positive CAR value which means good earnings quality. Unexpected Earning has no effect on companies that are facing stickiness cost, so the results of this study indicate that there is no investor reaction to unexpected earnings in infrastructure companies that have low, high, and combined stickiness cost. The conclusion of this study is that earnings information becomes less important in predicting future earnings.

Analisis Sentimen Pemberitaan Vaksin Covid-19 dan Kaitannya dengan Perubahan Harga Saham Emiten Farmasi

Pandemic of Covid-19 that entered Indonesia in early March 2021 limited activities in various sectors. This condition causes the economy in Indonesia to become unstable and even experience a recession in 2020. Vaccines produced by pharmaceutical companies are one of the government's ways to improve not only health but also economic conditions in Indonesia. Various reports on the Covid-19 vaccine have caused investor reactions in the capital market, one of which is in the pharmaceutical sector itself as a producer of the Covid-19 vaccine. Using the Lexicon-based method and Pearson correlation, this study aims to analyze the sentiment of the Covid-19 vaccine coverage and analyze the relationship between these sentiments and the stock price of pharmaceutical issuers. Covid-19 vaccine news data is collected from Twitter for 22 days with 500 tweets per day. The tweets were categorized into positive, negative, or neutral sentiments using the Lexicon-based method. The results of this study indicate that the media provides more positive sentiment towards the Covid-19 vaccine. A unidirectional relationship exists between the sentiment in the Covid-19 vaccine coverage and one of the stock prices of a pharmaceutical issuer.

Investors Reaction to Bad News of COVID 19 (Evidence for Food and Beverage stocks: Comparison between IDX and BIST)

The study aims to examine the reaction of stock investors in the food and beverage sub-sector to the announcement of COVID-19 on the Indonesia Stock Exchange (IDX) and the Turkish Istanbul Exchange (BIST). The approach method is an Event Study by comparing the return and volume of trading activity before and after the announcement of COVID-19 on the Indonesian and Turkish Stock Exchanges. The research sample is 32 IDX stocks and 27 BIST stocks. Observation period 13 weeks before and after the announcement. The distribution of the data is the basis for the selection of hypothesis testing. The study results showed that IDX investors reacted positively to the announcement of the COVID-19 pandemic, where stock returns were higher than before. Likewise, VTA was higher after the information, although not significant. Meanwhile, on the Turkish Stock Exchange, investors' positive reactions were shown by stock returns and trading volume activity, which was significantly higher after the COVID-19 announcement than IDX, which tends to stagnate.