Negative Market Reaction Research Articles

The market values of Chinese energy firms during COVID-19 pandemic

This paper studies the impact of coronavirus disease 2019 (COVID-19) on Chinese energy firms’ market values by using event study approach. First, we find that the cumulative abnormal return (CAR) of energy firms significantly decreases 2.7–10.6% on average due to the negative shock of COVID-19 on energy market. Second, we present that Corporate Social Responsibility (CSR) performance could significantly reduce the negative market reaction of energy firms during COVID-19. Finally, in using the intervention policy of various cities as exogenous shocks, we provide evidence that stock returns of energy firms significantly increase after cities where firms located in issued lockdown policies.

The market response to mandatory disclosure of payments to foreign governments

This study examines how the equity market responds to the mandated disclosures made under the Canadian Extractive Sector Transparency Measures Act (ESTMA). We studied a sample of 1,559 company-year-country disclosures from 937 extractive firms listed, or conducting business, in Canada between 2016 and 2018, and controlled for corruption perception and bribe indices in the host country. We found that ESTMA disclosures are associated with a negative market reaction, implying that the market perceives a net loss to firms as a result of the costs of compliance and risks associated with ESTMA. It appears that the reaction is stronger and more negative for ESTMA reports that provide more information, as well as for firms that report higher payments than expected. Furthermore, we have found that the ESTMA disclosures garner a stronger market reaction for firms that are more prone to corruption or have weak governance. This study contributes to the important discussion regarding the use of transparency measures to address the issues related to human rights in the business environment. Our results confirm that transparency is costly for shareholders, and it is, therefore, important for policymakers to consider the costs, benefits, and potential unintended consequences of their measures.

Chief Financial Officer Turnover, Sarbanes–Oxley, and Market Reactions

We argue that forced CFO turnover has a complex relation with SOX reports of internal control problems. Sometimes forced turnover precedes an adverse SOX report whereas, in other cases, forced turnover follows the unfavorable SOX opinion. Further, financial markets are aware of this complex relation. Using a large sample collected over eight years, we find evidence to support our arguments. Regarding market reactions, we find that upon the announcement of CFO turnover, cumulative abnormal returns (CAR) are negative and significant for forced resignations. This reaction is mitigated if an unfavorable SOX opinion had been issued for the prior year. We also find that negative market reactions to adverse SOX reports are attenuated, in part, by whether the company previously forced the CFO to leave.

The Effect of Listed Companies’ Social Responsibility on the Market Reaction to Violations

This study investigates whether the listed company’s social responsibility will impact investors and regulators after corporate frauds. Does the corporate social responsibility (CSR) performance bring about the “compensation” effect or the “reputation collapse” effect? Using the cumulative abnormal return to characterize the market reaction, our results based on the Chinese listed firms that have committed violations throughout 2010-2020 show that the announcement of violation enforcement will produce significantly negative market reaction, and the more serious the type of violation enforcement, the greater the negative market reaction. Further, we find that the corporate social responsibility (CSR) performance will not directly affect the market reaction of the announcement of punishment for violations, but it will increase the severity of the company’s punishment for violations, thus indirectly bringing more negative market reaction. Overall, our findings suggest that the listed company’s social responsibility (CSR) performance before violation cannot play a “compensation” effect to offset the negative impact caused by its violation, it may bring more serious administrative punishment to the company due to the “reputation avalanche” effect inversely, thus leading to more negative economic consequences, and is not conducive to the sustainable development of the company.

Characteristics of firm misconduct and effects on capital market reactions

This article replicates earlier literature on capital market reactions to firm misconduct with rarely used Continental European data, after the financial crisis, and combines characteristics that previous literature has analyzed separately. We hand-collect press articles on 96 illegal misconducts of German firms between 2010 and 2019 and use the content of those articles to determine the misconduct type, misconduct characteristics, and information characteristics. Short-term cumulative abnormal returns (CARs) proxy for market reactions. We hypothesize and find negative market reactions that are stronger when the misconduct harms connected (vs. third) parties and when it primarily benefits the firm (vs. the offending individual). For information characteristics, we only find support for the prediction that markets react more negatively to confirmed misconduct (vs. suspicions). Some results are sensitive to including both misconduct and information characteristics or excluding financial statement fraud. Earlier research rarely tests for such sensitivity. Our research shows that market reactions to illegal misconduct are robust overall, but robust common determinants of effect strength are difficult to establish. These insights are of relevance for researchers when using capital market reactions to study misconduct implications and when referencing earlier research in this area.

Attention: The impact of media attention on market reaction to corporate violations

Reducing market volatility and achieving high-quality development are important tasks for the Chinese capital market at the present stage. Based on the asset pricing role of media, this study used the event study to empirically examine the impact, as well as the heterogeneity from type and emotional tendency, of media attention on the market reaction to corporate violations from the perspective of limited attention. The results showed that the media’s prior attention to the listed company has a significantly negative impact on the market reaction after the company’s violation. The attention of network media and policy-oriented media has a significantly negative correlation with the market reaction after the company’s violation, while market-oriented media has no significant impact. Compared with neutral media attention, negative and positive media attention trigger more severe negative market reaction after company violations. Furthermore, the negative impact of media attention on the market reaction after corporate violations is mainly manifested in non-state-owned enterprises. The results demonstrate the important role of media attention in asset pricing and have important practical significance for better playing the role of the media, protecting the rights and interests of investors and achieving high-quality development of the capital market.

Impact of risk-taking on enterprise value under extreme temperature: From the perspectives of external and internal governance

Climate change leads to the frequent occurrence of extreme weather, which has become an important risk factor for enterprises. Based on panel data of Chinese A-share manufacturing enterprises from 2000 to 2019, this study examines the impact and influence mechanism of extreme temperature on risk-taking and enterprise value. The results reveal that risk-taking level increases under extreme temperatures but does not enhance enterprise value. Further analysis shows that the endowment effect of risk-taking level plays an important role: when the existing risk-taking is below the optimal level, the extreme temperature increases the enterprises’ risk-taking, which then increases the market value; otherwise, the extreme temperature reduces risk-taking and has a negative impact on enterprise value. The mechanism test reveals that external supervision by market participants aggravates the negative market reaction to an increase in risk-taking under extreme temperatures and reduces enterprise value, whereas good internal governance of enterprises enhances their market value. This study expands the literature on the effect of extreme weather on the risk behavior of listed companies, provides micro-empirical evidence that extreme weather risks transmit to the capital market and impair enterprise value, and serves as an empirical reference for enterprise climate risk management.

Boundary objects in complex governance systems: collective action clauses in European sovereign debt governance

ABSTRACT This contribution argues that policymakers instrumentalise legal ambiguity to provide solutions to crises and achieve their preferences in complex governance systems. It looks at the Eurozone crisis and the introduction of sovereign debt restructuring as part of the policy solution. Despite initial opposition from the European Central Bank (ECB) and European Commission (EC), as well as negative market reactions, Greece’s debt was restructured in 2012. The notion of collective action clauses (CACs)—a private contractual term in bond documentation that enables bondholder coordination—was promoted as the credible tool for enabling sovereign debt restructuring. However, this paper argues that the success of CACs is related to how it functions as a boundary object, enabling a shared space of interpretive flexibility that allows policymakers to interpret CACs in terms of their preferences, despite a lack of consensus on the permissibility of future Eurozone sovereign debt restructurings. While enabling cooperation, this interpretive flexibility leads to different iterations of CACs—the Euro-CAC and Greece’s retrofit-CAC—which connects EU fiscal policy to monetary policy in a way that induces legal uncertainty as to the viability of future debt restructurings vis-à-vis the ECB’s bond-buying programmes.

Market Reaction to the Introduction of K-IFRS 1116

This study examines the Korean stock market reaction to the introduction of K-IFRS 1116 (IFRS 16 equivalent) which effectively eliminates the operating lease and requires all lease contracts to be considered as finance leases. An event study is conducted whereby abnormal returns around the standard announcement are examined in conjunction with selected firm characteristics. We find that the level of operating lease usage and extent of financial constraint are negatively associated with the market reaction following the announcement of the K-IFRS 1116. However, an interaction effect between the two variables is found to be absent. Additionally, we find that this negative market reaction to financial constraint is mostly led by severely financially unhealthy firms that disregard operating lease usage. We interpret the results of operating lease usage and financial constraint to demonstrate the effects of the deprival of off-balance-sheet benefits and an expectation adjustment in investors' perceived future cash flow prospects, respectively. These findings are consistent with the impact of capitalizing leases on financial ratios and risk assessment of affected companies. We contribute to the literature and practice by providing evidence on the market participants' perception of the implementation of revised lease accounting standards.

Impact of Changes in Membership on Prices of a Unified Carbon Market: Case Study of the European Union Emissions Trading System

Using the event study methodology, the paper studies the effects of 22 key events in countries’ process of entering and exiting the European Union on returns of European Union Allowance (EUA) future prices in the EU Emissions Trading System (EU ETS). The events include 17 entry events concerning the signing of relevant agreements, becoming a candidate or potential candidate country, the process of a negotiation and formally entering the EU, and five exit events including the process of Brexit and the suspension of Iceland. The results show that two entry events involving Albania and Ukraine, respectively, have a significant positive impact, and five entry events have a significant negative impact. Among the exit events, the announcement of the Brexit referendum results causes significant negative market reaction. Most events regarding small carbon emitters entering the EU lead to negative cumulative abnormal returns (CAR) of EUA prices, and a significant negative correlation between the countries’ annual average carbon emissions and CAR is found, while the change of national allocation plans does not affect the market reaction notably. In the process of establishing a unified carbon market, regulators should carry out appropriate policy arrangements of emission allowances allocation when new members join, in order to guide market expectations and enhance market stability.

Effects of supply chain disruptions due to COVID-19 on shareholder value

PurposeThe purpose of this research work is to examine the financial effect of supply chain disruptions (SCDs) caused by coronavirus disease 2019 (COVID-19) and how the magnitude of such effects depends on event time and space that may moderate the signaling environment for shareholder behaviors during the pandemic.Design/methodology/approachThis study analyses a sample of 206 SCD events attributed to COVID-19 made by 145 publicly traded firms headquartered in 21 countries for a period between 2020 and 2021. Change in shareholder value is estimated by employing a multi-country event study, followed by estimating the differential effect of SCDs due to the pandemic by event time and space.FindingsOn average, SCDs due to pandemic decrease shareholder value by −2.16%, which is similar to that of pre-pandemic SCDs (88 events for 2018–2019). This negative market reaction remains unchanged regardless of whether stringency measures of the firm's country become more severe. Supply-side disruptions like shutdowns result in a more negative stock market reaction than demand-side disruptions like price hikes. To shareholder value, firm's upstream or downstream position does not matter, but supply chain complexity serves as a positive signal.Originality/valueThis study provides the first empirical evidence on the financial impact of SCDs induced by COVID-19. Combining with signaling theory and event system theory, this study provides a new boundary condition that explains the impact mechanism of SCDs caused by the pandemic.

Stock market reaction to mandatory ESG disclosure

Employing an event-study approach, we examine stock market reaction to the enactment of the Environmental, Social and Governance (ESG) Disclosure Simplification Act of 2021 by the United States House of Representatives. The Act mandates disclosure of standardized ESG metrics among American public companies. A significantly negative reaction of -1.1% is documented across all firms, which does not recover until the fifth day. Carbon-intensive firms and industries are more vulnerable to the negative market reaction. The negative reaction attenuates among firms with higher ESG scores.

ANALYSIS OF STOCK MARKET REACTION TO LARGESCALE SOCIAL RESTRICTIONS POLICY ANNOUNCEMENT

This study aims to analyze stock market reactions to large-scalesocial restrictions policy implementation announcements. Themethod used is event study. This study used 7, 5, and 3 daysevent window and 120 days estimation window for calculatingabnormal return. The samples of this study are 32 companies inthe tourism, hotel, and restaurant sub-sector listed in IndonesiaStock Market which were determined by purposive samplingmethod. The results of this study indicate that 1) there was nosignificant negative market reaction indicated by negative andinsignificant average abnormal return and accumulation averageabnormal return around the announcement date of the Large-ScaleSocial Restrictions (PSBB) policy implementation which meansthat the market does not react to the event and 2) there was nosignificant difference in average abnormal return before and afterthe announcement of the Large-Scale Social Restrictions (PSBB)policy implementation.

AN EXAMINATION OF MARKET REACTION WHEN NEGATIVE EMOTIONS RUN HIGH AMIDST A TROPICAL CYCLONE

We find evidence of negative returns, greater volatility, higher turnover, and lower liquidity around a tropical cyclone. Before the land warnings are issued, there is significant under-reaction by investors. Throughout the storm, market volatility increases with negative returns. This leverage effect is similarly present in liquidity before and after the storm. The abnormal returns, volatility, and activities are not related to the characteristics of the storm and exist after the weather effect and various determinants have been accounted for. These findings strongly suggest that underlying all the negative market reaction is the prevalent emotional distress, anxiety, and fear among investors evoked by the destructive and deadly forces of the storm. These negative emotions presumably are stronger when faced with stronger storms and may be managed with better preparedness. This is indeed the case given that we find evidence of more significant market reaction to moderate and severe typhoons and in the early years than in recent years.

Summaries of Papers In This Issue

Summaries of Papers In This Issue

A reexamination of investors' reaction to tax shelter news: Evidence from the Luxembourg tax leaks

This study examines the stock market reaction to the unprecedented leaks of confidential advance tax rulings between Luxembourg and multinational corporations—also known as the “LuxLeaks.” Contrary to the negative market reaction to tax shelter news documented in prior research, we find that investors responded positively to these leaks. This reaction is concentrated among U.S. firms. Furthermore, we document a positive association between abnormal returns and the reduction in firms' tax uncertainty, consistent with a downward revision in investors' perception of the tax uncertainty associated with the firms' Luxembourg operations. We also investigate other firm characteristics and find that, among U.S. firms, investors' reaction is weaker for those over-invested in tax avoidance. Among non-U.S. firms, the market response is muted by concerns about the quality of governance. In summary, our results suggest that investors' reaction to tax shelter news is conditional on their reassessment of the firms' tax uncertainty.

Market response to stock exchange listing deficiency notices: Evidence from Nasdaq

The Securities and Exchange Commission (SEC) requires Form 8-K filings of quantitative deficiency notices. This study examines whether investors use these 8-K filings in a way that influences their investment decisions. Using abnormal returns, I show that investors react negatively to these 8-K filings. Reactions to filings are less negative for firms with more institutional investors. I also find that firms with more analyst following experience less negative market reaction, supporting the notion that 8-K filings are more informative when the firm's information environment is poor. I further document that equity and multiple deficiency notice filings elicit more negative reactions and are also more likely to result in actual delisting compared to bid price deficiency notice filings. Together, these results help us understand investors' perceptions and delisting risks associated with quantitative deficiency notice filings.

Do She-EOs Still Experience Gender Bias? Examination of Market Reactions to Female CEO Appointments

We conduct replication and extension of Lee and James (2007) study on market reactions to female CEO appointments. Utilizing the same time period (1990-2000), we replicate the findings of market bias against female CEOs. We then extend the replication to a broader and more recent time period (2000-2019) and find evidence of a negative market reaction to female CEO appointments. Yet, this bias disappears in more recent years suggesting that temporal context serves as an important contingency affecting how investors view female CEO appointments.

Conservative versus Liberal CEOs: Shareholder Reactions to New CEOs’ Political Ideologies

CEO political ideology is more visible now than ever. We ask whether shareholders react differently depending on the conservatism or liberalism of a new CEO. We suggest that more conservative CEOs will be positively received by shareholders and more liberal CEOs negatively. In addition, we theorize that the negative market reaction to a new CEO’s liberalism is stronger when 1) more security analysts cover the firm, 2) pre-succession financial performance is worse, and 3) pre-succession social performance is better. Using a large sample of S&P 1500 firms between 2001 and 2019, we find support for our theoretical expectations. This study highlights the importance of individual political ideologies of new CEOs to the market. It also advances strategic leadership research by showing the effect of CEO political ideology on market valuation, beyond its effect on strategic decisions of CEOs.

Investor Reactions to Corporate Misconduct: The Moderating Role of Firm Reputation

Corporate misconduct research has observed negative market reactions following misconduct. Drawing on signaling theory, this study considers misconduct as a negative signal and links misconduct severity to market reactions. We argue that severity level decides signal strength and increases market reaction magnitude. However, it is unclear why different firms are punished to varying degrees for similar misconduct. We therefore demonstrate how perceptual biases distort investors’ perceived severity and describe how the effect of severity is moderated by firm reputational signals, including moral, technical, and leadership capital. This study is supported by an empirical analysis of 344 Chinese listed firms that engaged in financial misconduct during 2009–2019. Accordingly, we facilitate a more fine-grained understanding of the relationship between corporate misconduct and market reactions.