Magnitude Of Abnormal Returns Research Articles

The Value of Corporate Political Donations: Evidence from the Capitol Riot

Corporate political action committees donate about $300 million to federal political candidates each election cycle, but research offers mixed evidence on the value of these contributions. We estimate the value of firms' campaign contributions by studying the decision of 159 S&P 500 companies to stop donations following a riot in the U.S. Capitol building. Average cumulative abnormal returns over the two days following firms' announcements to halt donations were -0.6 percent. There is no significant relationship between the magnitude of abnormal returns and (a) the amount of political contributions, (b) the intensity of regulation in a firm's industry, (c) the firm's lobbying expenditures, or (d) the firm's score on governance and political accountability indexes. Analysis of campaign donations following the riot shows that firms mostly honored their pledge to stop donations, at least for the first quarter of 2021. Together, the results suggest campaign donations by corporate political action committees have small effects on firm value.

Stock market reactions to favorable and unfavorable information security events: A systematic literature review

The rapid digital transformations across every industry sector, accelerated partly due to the COVID-19 pandemic, have increased organizations’ use of information systems for operational and strategic purposes. These organizational responses have led to a confluence of digital, biological, and physical technologies that are revolutionizing business practices and workflows. But accompanying the pervasive use of digital technologies and the evolutionary nature of digital assets, is a shifting world of cyberattacks and information security (ISec) cybercrimes. Dynamic cybercrimes make it increasingly difficult for managers and researchers to anticipate the types, magnitude, and severity of future information security (ISec) breaches. Thus, we perform a systematic literature review (SLR) that explores, gathers, and categorizes event studies to examine the influence of favorable and unfavorable ISec events on stock markets. We extend the research conducted by Spanos and Angelis (2016) and provide a comprehensive understanding of the market’s efficiency to process public information released about ISec events, ISec contingency factors, and the influence of ISec events on stock prices and factors other than price. Our systematic search reveals 58 relevant papers that include 80 studies. We find that in 75% of the studies ISec events can significantly affect a company’s stock market performance, and that such effects are primarily exhibited within two days before and after the event day. Further, the magnitude of abnormal returns is higher in studies examining unfavorable ISec events, such as ISec breaches, compared to abnormal returns from favorable events, such as ISec investments and ISec certifications. In the end, our SLR serves as a foundation for ISec and management communities to build upon to keep industry and academia apprised of continually developing trends, new attack vectors and types of data breaches, protective ISec behaviors and programs, and their subsequent influences on stock market values and returns.

Behavior of stock prices due to the lock-up period expiration in IPOs and follow-ons

ABSTRACT The objective of this study was to verify the effects of the lock-up expiration on the behavior of prices and volumes in IPOs and follow-ons in the Brazilian market and to identify factors that may explain the existence and magnitude of abnormal returns. Few studies were found to investigate this phenomenon in Brazil, which were limited to the analysis of IPOs without examining the effect on follow-ons and the construction of abnormal accumulated returns compared to the Ibovespa, instead of benchmarks appropriate to each stock's risk. Lock-up clauses exist to mitigate the problem of information asymmetry in public offers but expose investors to the risk of a price drop after its expiration. Understanding the magnitude of this impact is essential for investors in the stock market. Through this article's analysis, investors will be able to estimate the magnitude of the price variation around the lock-up expiration, what factors explain the returns, and whether there are indications of short selling limitations. The event study method was applied, comparing returns to the Ibovespa and an individual reference portfolio composed of similar companies. Database: 313 offers that occurred on the Brazilian stock market between 2004 and 2019. Evidence of volume increase was found around the expiry of lock-up in IPOs, but the price drop was verified only in companies with private equity funds as shareholders. In follow-ons, in which the asymmetry of information about the issuer is less pronounced, the opposite situation was verified. There are several extensions and lock-up formats worldwide, which provide different impacts on volume and price. This article contributes to the literature when analyzing this event in Brazil and extending the analysis to follow-ons. A possible interpretation for the phenomenon is the restrictions on short-selling in the Brazilian market.

The relevance of annual general meetings: recent evidence from the UK

Using over 14,000 hand-collected annual general meeting dates of UK firms over the period 2004 to 2014, the study provides some evidence in support of the information content hypothesis from the analysis of price and volume reactions around annual general meetings. In addition, the study finds some support for an increase in the information content of annual general meetings during the study period. Our results show that both the magnitude of abnormal return and the temporal variation in the information content of annual general meetings depend on a number of firm characteristics that capture firms' information environment.

Insider Trading and the Market Abuse Directive: Are Voluntary and Mandatory Takeover Bids Different?

This study analyzes the effectiveness of the Market Abuse Directive (MAD) in reducing possible profits from insider trading during takeover bids. Exploiting the quasi-experimental setting provided by the introduction of the MAD, our event-study analysis on the Italian market suggests that the new regulation did produce effects, for mandatory offers, on the magnitude of abnormal returns and volumes noted before their announcement. Instead, we find no effect for voluntary offers, which prove to be intrinsically different from the latter ones. Multivariate econometric analyses based on regression and matching methods confirm this result. We interpret our results in light of the choice problem of the optimal amount of insider trading, based on the comparison of marginal costs and benefits of the illegal activity, after considering the differences between voluntary and mandatory offers.

Price Response to Factor Index Decompositions

textabstractAbnormal price reaction around S&P 500 index changes has been considered as strong evidence that long term demand for stocks is downward sloping. This notion, however, has recently lost popularity due to the evidence that new additions are accompanied with a contemporaneous change in future earnings expectations. In this study we show that factor index rebalancing is a true information free event. The cumulative abnormal return from announcement to effective day is 1.07% for new additions and -0.91% for new deletions and around two-thirds of this effect is permanent. We find a direct relationship between the magnitude of abnormal returns and the abnormal volume coming from index funds. The documented effect results in a direct loss to index fund investors of 16.5 bps per annum.

Market Abuse Directive and Insider Trading: Evidence from Italian Tender Offers

This study analyzes the effectiveness of the Market Abuse Directive (MAD) in reducing possible profits from insider trading during voluntary tender offers with the purpose of delisting initiated by controlling shareholders. Exploiting the quasi-experimental setting provided by the introduction of the MAD, our event-study analysis on the Italian market suggests that the new regulation did not produce appreciable effects on the magnitude of abnormal returns and volumes noted before the announcement of a tender offer. Multivariate econometric analyses based on regression and matching methods confirm this result. However, poolability tests reveal that the MAD has changed the manner in which corporate characteristics influence the capacity of insiders to make profit. We interpret our results considering the choice problem of the optimal amount of insider trading, when comparing the marginal costs and benefits of the illegal activity.

The impact of analyst recommendations on stock prices in Austria (2000–2014): evidence from a small and thinly traded market

Using a individually collected database for stock recommendations with more than 8,000 research reports issued over the period 2000–2014 on stocks listed in the Austrian Traded Index, we examine short-term market reactions. Besides traditional clustering of recommendation changes (upgrade, and downgrade) we take previous recommendations into account to get a very detailed subset of different event types. In order to consider Austrian market characteristics, we use an ARMA-market-GARCH model in addition to the market model to compare estimation results for abnormal returns. For the most extensive recommendation changes, from SELL to BUY, we document an abnormal return of 1.232 % and from BUY to SELL, $$-$$ 1.534 % compared to pure BUY or SELL recommendations with 0.436 and $$-$$ 0.672 %, respectively. Furthermore we are able to show that the magnitude of abnormal returns on the day of the event depends on the firm size and the delta between the target price of the recommendation and the actual price of the stock. Although we detect higher abnormal returns during the crisis, we do not find statistical evidence that investors tend to trust analysts’ opinions more during turbulent times. We conclude that the more sophisticated model does not improve the outcome and therefore a simple market model is sufficient to study events in the Austrian market.

Stock Market Returns and Clinical Trial Results of Investigational Compounds: An Event Study Analysis of Large Biopharmaceutical Companies

BackgroundFor biopharmaceutical companies, investments in research and development are risky, and the results from clinical trials are key inflection points in the process. Few studies have explored how and to what extent the public equity market values clinical trial results.MethodsOur study dataset matched announcements of clinical trial results for investigational compounds from January 2011 to May 2013 with daily stock market returns of large United States-listed pharmaceutical and biotechnology companies. Event study methodology was used to examine the relationship between clinical research events and changes in stock returns.ResultsWe identified public announcements for clinical trials of 24 investigational compounds, including 16 (67%) positive and 8 (33%) negative events. The majority of announcements were for Phase 3 clinical trials (N = 13, 54%), and for oncologic (N = 7, 29%) and neurologic (N = 6, 24%) indications. The median cumulative abnormal returns on the day of the announcement were 0.8% (95% confidence interval [CI]: –2.3, 13.4%; P = 0.02) for positive events and –2.0% (95% CI: –9.1, 0.7%; P = 0.04) for negative events, with statistically significant differences from zero. In the day immediately following the announcement, firms with positive events were associated with stock price corrections, with median cumulative abnormal returns falling to 0.4% (95% CI: –3.8, 12.3%; P = 0.33). For firms with negative announcements, the median cumulative abnormal returns were –1.7% (95% CI: –9.5, 1.0%; P = 0.03), and remained significantly negative over the two day event window. The magnitude of abnormal returns did not differ statistically by indication, by trial phase, or between biotechnology and pharmaceutical firms.ConclusionsThe release of clinical trial results is an economically significant event and has meaningful effects on market value for large biopharmaceutical companies. Stock return underperformance due to negative events is greater in magnitude and persists longer than abnormal returns due to positive events, suggesting asymmetric market reactions.

Stock price response to S&P 500 index inclusions: Do options listings and options trading volume matter?

This study investigates the stock price response to Standard & Poor's (S&P) 500 index inclusions during the period 1996–2010 and the role of options listings and options trading volume with regard to the information content of index inclusion announcements. Specifically, we address the following questions: (1) Is the magnitude of abnormal returns from the announcements of S&P 500 inclusions significantly lower for stocks with options listings? and (2) Is the magnitude of abnormal returns from the announcements of S&P 500 inclusions significantly lower for stocks with a high level of options trading volume? Our findings indicate that options listings themselves are not related to the magnitude of abnormal returns from the announcements of S&P 500 inclusions. We also find that greater levels of options trading volume do not convey private information about the S&P 500 index changes. We document that any measurable impact of options trading on the stock price response to S&P 500 inclusion announcements lies primarily in the level of abnormal options trading volume in the period immediately preceding the announcements.

Institutional Trading Around Earnings Announcements

This study utilizes a unique database comprising the daily transactions of institutional Australian equity managers to examine whether active investment managers realize abnormal returns from earnings announcements, the nature of the trading strategies employed to generate these abnormal returns, and the magnitude of abnormal returns. We examine three strategies. First, whether fund managers realize abnormal returns from earnings announcements portfolio positions that most likely reflect fundamental analysis. Second, whether fund managers realize abnormal returns from trades immediately prior to the announcement, which most likely reflect short term-profiteering due to information leakage. Third, we examine whether fund managers realize abnormal returns from trades during the announcement period that most likely reflect superior interpretation of the actual earnings announcement. We find that fund managers realize abnormal returns from all three strategies. In addition, we also examine whether fund managers are rational in constructing their trading strategies, and find no evidence of the disposition effect. When investment managers have executed incorrect bets prior to earnings announcements, they subsequently reverse their trades once the public information is released.

The relevance of value‐at‐risk disclosures: evidence from the LTCM crisis

PurposePrevious studies have established that the failure of the hedge fund, long‐term capital management (LTCM), was associated with significant negative abnormal returns for many US banks, especially around September 2, 1998, when LTCM announced its failure. This study attempts to examine whether bank value‐at‐risk (VaR) disclosures were used by investors to assess the potential trading loss that a bank could suffer at that time.Design/methodology/approachThis study examines whether there was any association between disclosed VaR and the magnitude of abnormal returns and trading volume surrounding the announcement date.FindingsThe results indicate that there was no such association which suggests that investors did not use the VaR information to assess the potential trading losses of exposed banks. Banks that formed part of the LTCM bailout consortium and those with larger amounts of notional derivatives faced the largest negative reaction at the time of the failure announcement.Originality/valueVaR disclosures are costly to prepare and complex to interpret. The study finds no benefits of VaR disclosures to bank investors.

Factors Associated With Differences in the Magnitude of Abnormal Returns Around NYSE Versus Nasdaq Firms' Earnings Announcements

This study provides an explanation for the puzzle documented in prior accounting research. Grant (1980) finds that the magnitude of earnings announcement week abnormal returns is higher, on average, for firms traded over-the-counter than for NYSE firms. Atiase (1987) shows that this incremental persists even after controlling for firm size. We investigate potential explanations for this incremental exchange effect. We first show that even after controlling for differences in firm size, Nasdaq firms have less rich information environments and enjoy greater growth opportunities than NYSE firms. We then investigate whether differential predisclosure information environments and/or growth opportunities can explain the incremental exchange effect. The results indicate that although the absolute magnitude of the earnings announcement-related abnormal returns is inversely related to proxies for the amount of predisclosure information, the incremental exchange effect cannot be explained by differences in the predisclosure information environment. In contrast, after controlling for differences in growth opportunities across NYSE versus Nasdaq firms, and investors' heightened sensitivity to Nasdaq firms' growth opportunities in particular, there is no significant incremental exchange effect (whether or not we control for predisclosure information). These results suggest that the incremental exchange effect puzzle documented in prior research is more likely to reflect growth-related phenomena than differences in the predisclosure information environment.

Factors Associated with Differences in the Magnitude of Abnormal Returns Around NYSE Versus Nasdaq Firms’ Earnings Announcements

This study provides an explanation for the ‘exchange effect’ puzzle documented in prior accounting research. Grant (1980) finds that the magnitude of earnings announcement week abnormal returns is higher, on average, for firms traded over‐the‐counter than for NYSE firms. Atiase (1987) shows that this incremental ‘exchange effect’ persists even after controlling for firm size. We investigate potential explanations for this incremental exchange effect. We first show that even after controlling for differences in firm size, Nasdaq firms have less rich information environments and enjoy greater growth opportunities than NYSE firms. We then investigate whether differential predisclosure information environments and/or growth opportunities can explain the incremental exchange effect. The results indicate that although the absolute magnitude of the earnings announcement‐related abnormal returns is inversely related to proxies for the amount of predisclosure information, the incremental exchange effect cannot be explained by differences in the predisclosure information environment. In contrast, after controlling for differences in growth opportunities across NYSE versus Nasdaq firms, and investors’ heightened sensitivity to Nasdaq firms’ growth opportunities in particular, there is no significant incremental exchange effect (whether or not we control for predisclosure information). These results suggest that the incremental exchange effect puzzle documented in prior research is more likely to reflect growth‐related phenomena than differences in the predisclosure information environment.

Discussion of Factors Associated with Differences in the Magnitude of Abnormal Returns Around NYSE Versus Nasdaq Firms’ Earnings Announcements

<i>Discussion of</i> Factors Associated with Differences in the Magnitude of Abnormal Returns Around NYSE Versus Nasdaq Firms’ Earnings Announcements

STUDI TERHADAP PENGUKURAN KINERJA AKUNTANSI PERUSAHAAN PROSPEKTOR DAN DEFENDER, DAN HUBUNGANNYA DENGAN HARGA SAHAM: ANALISIS DENGAN PENDEKATAN LIFE CYCLE THEORY

The objective of the study is to empirically examine the difference from accounting performance measures that implicated by prospector and defender strategies, and to examine the differences between market reactions to both organizational strategies. Variables that implicated by organizational strategy are income growth, sales growth, and dividend pay out. Life cycle theory is used to analyze the difference from accounting performance measures. Four variables are used to determine prospector and defender firms: the price-to- book value ratio, the ratio of employees to sales, the ratio of capital expenditure to market value of equity, and the ratio of capital expenditure to total asset. These variables are analyzed by common factor analysis. Based on the common factor analysis, 25 prospector and 25 defender firms are derived from 74 manufacturing public firms at Jakarta Stock Exchange. The empirical results show that income and sales growth of prospector firms are greater than that of defender firms (significant at 0.01 level). Dividend pay out and market reaction, however, are not significantly difference between prospector and defender firms. Multivariate test was employed to understand more the differences between prospector and defender firms in relation to the stock prices. The results show that the magnitude of income and sales growth of prospector firms significantly affects the magnitude of abnormal return (significant at 0.05 and 0.10 level, respectively). While, at defender firms, only the magnitude of income growth significantly affects the magnitude of abnormal return. Dividend pay out does not affect the magnitude of abnormal return for both prospector and defender firms. However, the effects of the magnitude income and sales growth to the magnitude of abnormal return between prospector and defender firms are not significantly difference.

The Wealth Effects of Voluntary Foreign Divestitures: The UK Evidence

The primary purpose of this study is to examine the impact of UK voluntary foreign divestitures on the shareholder wealth of selling firms. In addition to employ the conventional OLS market model as the returns-estimation tool, the GARCH market model is also used to test the validity of the underlying statistical assumptions of the conventional market model in event studies. This paper further analyses several factors that are hypothesised to have an impact on the magnitude of abnormal returns from UK foreign divestitures. Empirical evidence shows that UK foreign divestitures provide significant positive abnormal returns to the selling firms, irrespective of the returns-estimation approaches employed. The findings also indicate that the shareholders of UK divesting firms are better served when financially healthy firms sell off relatively large foreign assets to the buyers from non-English speaking host countries.

The Relation Between Investor Uncertainty and Market Reactions to Earnings Announcements: Evidence from the Property-Casualty Insurance Industry

This paper examines the association between pre-disclosure uncertainty and investor reliance on reported earnings. Our study is unique because it incorporates both context-specific and forecast-based measures of uncertainty. The analysis is based on data for 118 publicly-traded property and casualty insurers for the period 1989 through 1998. We find significantly positive correlations among loss exposure, our context-based measure of uncertainty, and more general measures of uncertainty based on analysts' forecasts. Further, each uncertainty measure considered individually is significantly associated with the magnitude of abnormal returns around subsequent earnings announcements. However, the relation between loss exposure and abnormal returns is nonlinear. Although the market response to earnings generally increases with the firm's exposure to losses in the prior period, that effect is attenuated when the loss is very large. Simultaneous consideration of contextual and forecast-based measures of uncertainty indicates that, once forecast-based measures are taken into account, our contextual measure of uncertainty provides little incremental explanatory power for abnormal returns. The fact that generalized uncertainty measures based on analysts' forecasts apparently outperform a context-specific variable is good news for empirical researchers confronted with samples drawn from diverse industry settings. Taken together, our results provide compelling support for the view that investor reliance on reported earnings increases in periods of heightened uncertainty about the firm's prospects.

Uniformly least powerful tests of market efficiency

Defenders of market efficiency argue that anomalies involving long-term abnormal returns are not robust to alternative methodologies. We argue that because various methodologies use different weighting schemes, the magnitude of abnormal returns should differ, and in a predictable manner. Three problems are identified that cause low power in value-weighted three-factor time series regressions when abnormal returns following managerial actions are being estimated. We illustrate the sensitivities in the context of the new issues puzzle as well as with simulations. More generally, multifactor models as currently used do not, and cannot, test market efficiency.