Negative Average Abnormal Returns Research Articles

Does financial stability communication affect financial asset prices? Evidence from the Bank of England's communication experiment

AbstractThis paper examines the Bank of England's (BoE) communication on financial stability between 2013 and 2018. We apply an event study to determine the communication effect on financial institutions' stock market returns. We find that the BoE's announcements generate negative average abnormal returns for non‐banking and banking systems, including the Global Systemically Important Banks. The same effect emerges when we consider the communication's tone. Furthermore, we construct a macroprudential decision communication index and show that the negative impact of the BoE's tone is significant only when the decision communication index value is above average. Moreover, we find evidence that negative abnormal returns tend to appear after the Brexit referendum, while we find positive abnormal returns before that date. Besides, we do not identify a noticeable effect related to communication practices.

Reaksi Pasar Saham di Indonesia terhadap Keterbukaan Informasi Terkait Transaksi Afiliasi

Affiliated transaction or also known as related party transaction (RPT) refers to a transaction involving two or more parties with a special or related relationship. Due to this relationship, the transactions may not be conducted according to the arm's length principle or cause a potential agency problem. Therefore, information disclosure to the public is necessary to provide a material information regarding affiliated transactions and as a key aspect of adhering to principles of good corporate governance. The aim of this study is to analyze whether there is a significant and positive impact on Indonesian stock market, in response to the RPT Announcements by issuers in Indonesia. Despite the prevalence of affiliated transactions among group companies in Indonesia, there is little research focused on the impact of RPT announcements on stock market reactions in Indonesia. Using event study as the method, in this study assess whether stock prices adjust in a timely manner upon the arrival of new public information. The results indicate that there is a significant and positive average abnormal return on the third trading day before RPT Announcement, and a significant and negative average abnormal return on the fourth trading day after RPT Announcement. 
 
 Keywords: Stock market reaction, RPT announcement, affiliated transaction, event study

Performance of the African stock market amid COVID-19 global health crisis: empirical analysis using four events

The study employs the market model and event study approach with four events to examine the performance of the African stock market amid COVID-19 global health crisis. We use daily stock market data from 14 African countries (as a proxy for the African market) spanning September 2019 to June 2021 and COVID-19 data to estimate average abnormal returns for Africa. The results show significant positive average abnormal returns in Africa when the WHO announced COVID-19 as a global health epidemic. The events of infections and deaths generated significant negative average abnormal returns while the event of vaccination did not generate any significant average abnormal returns in the market. In as much as pandemics are unpredictable, the African market quickly recovers as depicted by COVID-19; therefore, we recommend to investors, speculators, and portfolio managers not to quickly exit the continent during pandemics.

Asian perspective of capital market performance amid the COVID 19 pandemic

PurposeThe purpose of this research is to investigate the short-term capital markets' reactions to the public announcement first local detection of novel corona virus (COVID 19) cases in 12 major Asian capital markets.Design/methodology/approachUsing the constant mean return model and the market model, an event study methodology has been implied to determine the cumulative abnormal returns (CARs) of 10 pre and post-event trading days. The statistical significance of the data was assessed using both parametric and nonparametric test statistics.FindingsFirst discovery of local COVID 19 cases had a substantial impact on all 12 Asian markets on the event day, as shown by statistically significant negative average abnormal return (AAR) and cumulative average abnormal return (CAAR). The single factor ANOVA result has also demonstrated that there is no variability among 12 regional markets in terms of short-term market responses. Furthermore, there is little evidence that these major Asian stock market indices differ significantly from the FTSE All-World Index which might suggest possible spillover impact and co-integration among the major Asian capital markets. The study further discovers that market capitalization and liquidity did not have any significant impact on market reaction to announcement.Research limitations/implicationsThe study's contribution might have been compromised by the absence of socio-demographic, technical, financial and other significant policy factors from the analysis.Practical implicationsThese findings will be considerably helpful in tackling this unprecedented epidemic issue for personal and institutional investors, industrial and economic experts, government and policymakers in assessing the market in special circumstances, diversifying risk and developing financial and monetary policy proposals.Originality/valueThis paper is the first to examine the effects of local COVID 19 detection announcement on major Asian capital markets. This study will add to the literature by investigating unusual market returns generated by infectious illness outbreaks and the overall market efficiency and investors' behavioral pattern of major Asian capital markets.

INDONESIAN CAPITAL MARKET INVESTORS’ REACTION TO THE EVENTS OF THE COVID-19 PANDEMIC

This study aims to analyze which sectors are affected by the announcement of the first Covid-19 patient and the announcement of the new normal in terms of abnormal returns, trading volume activity, market capitalization, and net foreign sell. The samples used were stocks included in the Kompas 100 index. Data were analyzed using an event study non-parametric statistical approach to Corrado rank test, Wilcoxon Sign Rank test, and statistically parametric paired sample t-test using Microsoft Excel and SPSS version 26 applications. The results of the study show that the announcement of the first Covid-19 patient did not have a significant impact on the average abnormal stock return in all business sectors. However, on the fifth day after the event, there was a significant negative abnormal return in all sectors other than the technology sector. The cyclical consumer sector and the non-cyclical consumer sector were the most affected with a negative average abnormal return. The non-cyclical consumer sector also experienced an increase in net foreign sell. Furthermore, these two sectors experienced a good recovery at the time of the announcement of the implementation of the new normal policy in terms of increasing the average transaction volume in the cyclical consumer sector, and in terms of increasing market capitalization in the noncyclical consumer sector. The technology sector was the only sector that was not significantly affected on the fifth day after the announcement of the first Covid-19 patient.

The effect of the imposition of a public reprimand on the stock price of companies in Malaysia

PurposeThis paper aims to examine the effect of the imposition of public reprimands on the underlying stock prices of companies in Malaysia.Design/methodology/approachData on 148 companies that received public reprimands during the period from 2007 to 2013 were collected from the Bursa Malaysia website to analyse the market reactions to the imposition of public reprimands.FindingsBased on a market model of abnormal returns, the empirical result showed that the imposition of a public reprimand had a negative impact on a company’s stock price. Moreover, when a market model of average abnormal returns (AAR) was used, the result indicated that companies that had received a public reprimand had a negative AAR value.Research limitations/implicationsThe findings from this study have implications for shareholders in making their investment decisions because they can switch their investments to other companies and markets after a company in which they are interested or have made an investment has received a public reprimand.Originality/valueThere is limited research on the imposition of public reprimands and the effect that it has on companies in developing countries. Hence, this study contributes to research in this area by providing evidence on the effect of public reprimand on stock price reactions in the context of a developing country, namely, Malaysia.

The impact of fintech M&A on stock returns

Technological development and digitalization plays a crucial role in financial sector by allowing firms to create value in a rapidly changing environment. The acquisitions of firms related to financial technologies are one of the ways to obtain vital knowledge. In order to identify the fintech companies we are looking at firms that are involved in business activities in both the IT and financial sectors. By examining the growing role of fintech firms in the recent mergers and acquisitions from an investor point of view, this paper contributes to the existing literature by investigating the post-acquisition performance of the acquirer firms measured by abnormal returns. We discovered significant positive average abnormal return after acquisition of fintech companies in the short-term and negative average abnormal return in the long-term using event study methodology. The specifics of cross-border acquisitions, the level of the domestic market development of the acquirer, and other characteristics of M&A deals are considered in order to explain the reaction of investors to announcements of fintech firms’ acquisitions. The determinants of corresponding M&A deals in emerging and developed markets were revealed.

Correlated Trading by Life Insurers and Its Impact on Bond Prices

AbstractOur evidence indicates that U.S. life insurers’ decisions to buy and sell individual corporate bonds are correlated across companies within the life insurance industry. On average, the correlation in sell decisions is greater in smaller bonds, bonds with lower ratings, bonds that have been downgraded, and bonds that have recently experienced relatively large abnormal returns. Correlated trading was also elevated during the financial crisis. In addition, correlated buying and selling are greater when insurers designated as systemically important financial institutions are actively trading. We also find that the bonds that insurers sell in a correlated manner exhibit negative average abnormal returns during the quarter in which insurers are selling. One explanation is that insurers’ correlated selling is temporarily pushing bond prices below their fundamental value. In this case, we would expect prices to bounce back in the subsequent quarter. However, we do not find a rebound in prices and therefore our evidence supports the alternative explanation that insurers’ correlated selling is impounding information into bond prices.

Three Decades of IPO Markets in Canada: Evolution, Risk and Return

AbstractThis article explores the extent that the long‐run returns following initial public offerings (IPOs) can explain the asserted decrease in IPOs in Canada. The causes of such a decrease remain controversial, in part because of our limited knowledge of this market. We first describe in detail the evolution of Canadian IPOs on the senior and the venture stock exchanges over three decades (1986–2016). This evolution differs considerably between natural resource and non‐natural resource firms. Second, using other junior markets as a benchmark, we show that the Canadian IPO market is very particular, mainly because it lists very small firms at an early development stage. Third, using 2,145 Canadian IPOs, we provide evidence that these IPOs generate three‐year negative average abnormal returns, and more than 70 percent report negative abnormal returns. Large issuers reporting profits constitute the only subsample that provides fair returns, but they account for less than 5 percent of IPOs. Such a market probably survived for many decades because of investors' preference for skewness and the characteristics of the returns' distribution. We observe a high level of skewness of abnormal returns, consistent with the behavioral finance proposition that investors are often unduly optimistic when valuing lottery stocks.

Stock Market Reaction to Impairment Announcement of Listed Manufacturing Companies in Sri Lanka

This study investigates the reaction of market and efficiency of market to announcement of impairment loss write down in Colombo Stock Exchange (CSE) from 2008 to 2014. This research is identified fifty-eight events of twenty listed manufacturing companies in CSE. The existent study used the standard event study approach to find the results. The hypotheses of operational were framed and results discovered that 55% of Average Abnormal Return (AAR) are positively and 45% of AARs are negatively on the occasion day “0” (event day). The results reveal negative AARs of -0.37% and impact of negative significant on Share Price (SP) (t=-1.6682) at 10% level which incurred on the impairment loss announcement date. These results shows that impairment loss writes down events indicate significant negative information to the CSE. End of the windows period abnormal returns are gained by market as positive return of CAAR of 9.15% during the windows period of 61 days. It reveals that CSE has not supported to the semi-strong form market efficiency which is run on publicly available information on CSE. Study focused that the CSE was not semi-strong efficient market. The outcome of the research will help to identify the market efficiency of CSE and do the necessary action by the Sri Lankan government and CSE to protect the investors and support to the economic growth of the country.

The effect of growth opportunities on the market reaction to dividend cuts: evidence from the 2008 financial crisis

Dividend cuts are typically associated with a negative stock price reaction. We contend that the market’s reaction to dividend cuts depends on the reason for the cut and the economic environment. Specifically, we posit that when external financing is constrained, firms that cut dividends and have high growth opportunities are better off than dividend cutters with low growth opportunities. We test this growth opportunities hypothesis by examining stock price reactions to dividend cuts around the 2008 financial crisis. Not surprisingly, we find negative average abnormal returns around the announcement day. However, consistent with our hypothesis, we find that firms with high growth opportunities experience higher abnormal returns. We also find that firms with high growth opportunities are more likely to resume the dividend payment within 5 years of the dividend cut and firms that resume their dividends have significantly higher long-term returns than non-resumers. Taken together, our evidence provides strong support for the growth opportunities hypothesis.

Reaksi Pasar Saham Terhadap Peristiwa Politik di Parlemen Indonesia Tahun 2014 (Studi Peristiwa Pada Perusahaan yang Terdaftar di BEI)

Many political events occur in the parliament over 2014, namely announcement of “UU No. 17 Tahun 2014 about MD3” on July 8th, “RUU Pilkada” on September 26th, and People’s Representative Council (DPR) election on October 2nd. The events are considered as information that could affect compay’s stock price on Indonesia Stock Exchange, which will be reacted by the investor if the information is relevant. So, the objective of this research is to observe stock market reaction around the announcement date of political event in the parliament of Indonesia. Event study is applied to each announcement, 310 samples for “UU No. 17 Tahun 2014 tentang MD3”, 322 samples for “RUU Pilkada”, and 284 samples for People’s Representative Council (DPR) election. Using seven days length for window event period, three days before the event, during the event, and three days after the event. By using one-sample t-test for AAR as measuring indicator, there are significant negative AAR at t+1 of the three events. Meanwhile by using CAAR as an indicator, negative result was significant only at the announcement of “UU No. 17 Tahun 2014 about MD3”, but positive significant on “RUU Pilkada” and People’s Representative Council (DPR) election.
 Key words: politics, parliament, event study, average abnormal return (AAR), cumulative average abnormal return (CAAR)

Market Reaction to Stock Dividends: Evidence from India

Theoretically, stock dividends have no impact on financial position of the announcing company as net worth and total assets remain the same, though empirical evidence across the globe shows that markets react to stock dividend announcements. The present study analyses the market reaction pertaining to stock dividend decisions in the Indian context. Market reaction has been captured in terms of impact on returns, liquidity, and risk. The sample includes 51 ‘pure’ stock dividend announcements from January 1, 2002 to June 30, 2010. The study finds that the announcement of stock dividends induces an increase in the wealth of the shareholders in India. A consistent pattern of positive average abnormal returns during the pre-announcement window till the announcement day and a pattern of negative average abnormal returns during the post-announcement window have been observed. On cumulating these results, the shareholders of the companies that issued stock dividends gain significant returns. The justification for such results seems to be that the information about the stock dividends announcement reaches the investors prior to the decision date as it is manda-tory for the issuing company to inform the exchange (where it is listed) about the date of the board meeting. It has been observed that the companies usually inform the exchange seven days prior to the day of the board meeting. In most of the cases, the companies provide the agenda item information along with the board meeting date to the exchange. In such a situation, the moment this information about the agenda item is given to the exchange, this becomes public information and investors start reacting to it. The cumulative average abnormal return values over various size event windows depict that an investor can earn substantial returns if he purchases the shares on the day the news of board meeting (to announce stock dividends) comes to the market and sells them one day after the announcement day. The investor can also gain if the shares are purchased one day prior to the announcement day and are sold one day after the announcement day. The trading quantity reduces significantly immediately after these decisions are announced. On a short-term basis, the investors seem to perceive that the announcement of stock dividends provides signals about the firm's bright future prospects. This leads to a decline in trading quantity as investors, who own the shares at the time of announcement, prefer to hold the shares expecting an increase in their wealth in future. In the long-run, a marginally positive impact has been observed. The announcement of stock dividends reduces variability of returns in the short-run as well as in the long run, lending price stability to the stocks of the announcing companies.

Dividend Announcement and Market Response in Indian Stock Market: An Event-Study Analysis

Event study has remained one of the highly pursued areas of research in corporate finance. Studies reported in this realm empirically show that the economic model or the capital asset pricing model (CAPM) yields relatively better results with respect to the abnormal return of stocks preceded by dividend announcement by the dividend payers as compared to the statistical model, namely, constant return or market model approaches. Both models are incorporated in the study to triangulate the outcomes more accurately. A few hypotheses posited in this paper are namely, there will be significant differences in share prices of sampled companies mediated (moderated) by dividend announcement, and there will be significant differences between positive and negative average abnormal returns along with the ranks of firms.

Informational Efficiency of Merger and Acquisitions: A Study of Indian Stock Market

The present study is conducted is to measure the change in share prices after the merger announcement date by using event study methodology and is based on a database consisting 515 sample companies taken from CMIE-Prowess for the period of five years i.e. 2005 to 2013. The standard event methodology using Sharpe Single Index and Capital Asset pricing Model (CAPM) is used to calculate abnormal returns. The t-test has been used to study the statistical significance of average abnormal returns (AARs). Capital market is said to be semi strong efficient if AARs are zero. The results shown in different tables depicts that AARs are significant for few days for all the five years but it is the year 2009-10 which is having significant abnormal return on event day. But positive AARs are less significant rather than negative AARs. For the year 2007-08 and 2008-09, it is clear that negative AARs are significant and also less in numbers with a comparison to other three years. Therefore, the presence of significant AARs make mandatory for the study that null hypothesis can’t be accepted for any one of the year. This indicates that delayed in share prices adjustment contradicts with the semi strong form of efficient market hypothesis.

The Effect of Auditor Reputation on Stock Returns - The Case of Arthur Andersen

We examine the consequences for the stock price movement of Andersen's German clients of several news events during the Enron crisis that were potentially damaging to the reputation of Enron's auditor Andersen. It seems to be likely that there may not only have been reputation-damaging effects of the selected events for the US arm of Andersen but also negative reputation spillovers to Andersen's worldwide organisation. Contrary to the results of several US-studies there is no indication of significant negative average abnormal returns around the announcement of the shredding of Enron-related documents by Andersen in January 2002. However, our empirical evidence suggests that the share prices of Andersen's German clients were on average negatively affected by the event in December 2001 when Andersen's CEO Berardino admitted an error in judgement concerning the Enron audit in the US-Congress. Our results further suggest that in Germany the other Top Tier auditors' reputation was negatively affected by the Andersen specific event in December 2001 as well, although to a lesser extent than Andersen's reputation. However, contrary to Andersen's reputation, it seems as if the other Top Tier auditors' reputation suffered an additional erosion around the announcement of the indictment against Andersen in March 2002.

Equity Ownership and Firm Value: Evidence from Targeted Stock Repurchases

AbstractIn contrast to the negative average abnormal return associated with the announcement of a control‐related targeted repurchase (greenmail transaction), we find that the announcement of a noncontrol‐related targeted repurchase is associated with a positive and significant average abnormal return. Cross‐sectional analysis indicates that the change in firm value at the announcement of a noncontrol‐related targeted repurchase is negatively related to the resulting changes in both insider ownership and outside blockholdings. We also find significant differences in announcement‐period stock price effects depending on the identity of the selling shareholder.

The Value of Olympic Sponsorships: Who is Capturing the Gold?

In recent years, corporate sponsorship has become an increasingly important element of the marketing communications mix. This paper uses data from the 1996 Atlanta Summer Olympic Games to measure the value of Olympic sponsorship. Using stock return data, we find that the shareholders of sponsoring firms earn negative average abnormal returns around announcement of Olympic sponsorship agreements. This finding, consistent with an agency cost explanation of corporate investment practices, is robust to variation in a number of firm- and sponsorship-specific variables. In addition, cross-sectional analysis supports the monitoring hypothesis, as significant equity ownership by institutional investors is positively related to abnormal returns around announcement. Our results suggest that utilizing Olympic sponsorships in the marketing communications mix may not be value-enhancing.

Determinants of Market Reactions to Restatement Announcements

We examine the market reaction to a sample of 403 restatement announcements made from 1995 to 1999. We find significantly negative average abnormal returns of about 9 percent over a two-day announcement window. We also document substantial variance in the abnormal returns. Our analysis indicates that more severe reactions are related to indications of management fraud, more material dollar effects and restatements that are attributed to auditors. We hypothesize that the negative signal associated with fraud and auditor-initiated restatements is associated with an increase in investors' expected monitoring costs, while higher materiality is associated with greater revisions of future performance expectations.

Defense Procurement Fraud, Penalties, and Contractor Influence

Press reports of investigations of fraud, indictments, and suspensions in military procurement are associated with significantly negative average abnormal returns in the stocks of affected firms. Abnormal stock returns are significantly less negative, however, for firms ranking among the top 100 defense contractors than for unranked contractors, even after one controls for firm size, the frauds' characteristics, and the firm's recidivism. Unranked contractors are penalized heavily for procurment frauds, experiencing both a decline in market value and a subsequent loss in government‐derived revenues. Furthermore, these losses are related to the percentage of the firm's revenues that derive from government contracts. Influential contractors, in contrast, are penalized lightly, experiencing negligible changes in share value and government contract revenue.