Negative Market Reaction Research Articles

The impact of monetary policy on M&A outcomes

Monetary policy influences a wide range of Mergers and Acquisitions (M&A) outcomes. First, an increase in the federal funds rate predicts a negative market reaction to M&A announcements, an increase in the likelihood of deal withdrawal, and significant financing challenges for the acquirer in the post-acquisition phase. Second, M&As announced during periods of high monetary policy uncertainty are associated with significant declines in acquirer value. This negative market reaction reflects a unique discount to compensate for the high riskiness of M&As in an uncertain monetary environment. Finally, we show that monetary contraction, rather than monetary policy uncertainty, is a key contributor to the decline in the aggregare M&A activity.

Encouraging Long-Term Shareholders: The Effects of Loyalty Shares With Double Voting Rights

The 2014 passage of the Florange Act in France changed an opt-in provision for loyalty shares (allocating a second voting right for shares held at least two years) to an opt-out provision with shareholder approval. We find that before 2014, loyalty shares were popular among small family firms. Following the Act, firms with a one share – one vote structure that announced they would opt out of the law incurred a negative market reaction, suggesting that shareholders have a positive perception of loyalty shares. It appears that by encouraging costly monitoring by long-term shareholders, loyalty shares can potentially benefit all shareholders.

Stock Market Reactions and CSR Disclosure in the Context of Negative CSR Events

This paper analyses stock market reactions after the occurrence of major negative corporate social responsibility (CSR) events and the possibility of mitigating these effects through the upfront provision of CSR information in firms’ annual reports. For this purpose, we follow a three-step procedure. First, we analyse the major concerns gathered from REPRisk® data via event study analysis. Herein, we cover a window of 5 to 20 days. Second, we analyse all annual reports of the firms mentioned in the covered period over the entire time horizon and conduct a textual analysis to examine firms’ disclosure of CSR information. Finally, we draw conclusions from the two approaches and show that firms with more upfront CSR information suffer from stronger negative market reactions after the occurrence of a negative CSR event. Herein, we show that if the occurrence of a negative CSR event conflicts with investors’ expectations, then it leads to an important update of investors’ beliefs about firms’ prospects. Our results also confirm that such an event leads to an adjustment of the subsequent year’s CSR disclosure in the annual reports.

What is the role of the board‐level technology committee?

AbstractThe board‐level technology committee (TC) could play a significant role in enterprise risk management. Unfortunately, only about 10 % of public companies have chartered such a committee. There is evidence that the TC mitigates the negative market reaction to data breaches (Higgs et al. 2016), suggesting that investors expect TCs to control operational IT risk—the risk associated with technology that facilitates the company's core operations, including external risk such as data breaches. Based on a review of 50 existing TC charters, we find that TCs today focus instead mainly on strategic risk—the risk associated with strategic product technology development—with under half of TCs including operational risk management in their charters. We see this as a potential disconnect between stakeholder expectations of risk management and company delivery on that expectation.

The Market Response to Mandatory Conflict Mineral Disclosures

This paper examines the market response to the events leading up to the passage of Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act) to explore whether investors value mandatory human rights disclosures of conflict mineral usage. Using a sample of 3639 US registrants from January 1, 2008 to September 30, 2014, we document a significant negative stock market reaction to the passage of the Act. Using a sample of 1206 filers, we also find a negative market reaction to conflict mineral disclosures under the Act. The market reaction is more negative and limited to companies that source their minerals from the DRC and adjoining countries, companies with prior records of human rights violations, and companies with ambiguous disclosures. However, the market appears to reward firms that use risk-mitigation strategies. This paper provides preliminary evidence that the mandatory disclosure of conflict mineral information on Form SD poses a threat to firms’ legitimacy, resulting in a net cost to investors. The results of this study provide economic justification for companies with poor records of conflict mineral sourcing to improve their practices for the purpose of avoiding the high costs that will arise if they are forced to disclose human rights abuses related to conflict mineral use.

The influence of China Environmental Protection Tax Law on firm performance – evidence from stock markets

ABSTRACT This study examines the influence of China Environmental Protection Tax (EPT) Law on firm performance, which is proxied by stock prices. Using the event study methodology, we find that most sectors experience negative market reactions, indicating that the EPT Law will increase environmental costs and hurt firm performance. Firms’ political connections and fundamentals are related to the market reactions. The different impacts of political connections on market reactions have been detected between the two events related to the EPT Law. Our results are robust to diverse fixed effects and potential endogeneity issues.

Equal opportunity market

PurposeThis paper aims to compare US market reactions to the restatement announcements of foreign firms listed in the USA and those of US firms by applying the Capital Market Liability of Foreignness (CMLOF) concept. It further investigates the incremental effect of an improved information environment, proxied by analyst following, on mitigating the negative market reaction to a restatement for foreign vs domestic firms.Design/methodology/approachRegression tests are performed on a matched-sample, which matches foreign and domestic firms based on industry and firm size. Market reaction is defined as three-day abnormal stock returns calculated using a market model. The sources of CMLOF are defined as institutional distance, information costs, unfamiliarity costs and cultural distance.FindingsResults suggest that, on average, the magnitude of the market reaction to a restatement is 1.8 per cent lower for foreign firms than for domestic firms. Information and unfamiliarity costs contribute to the differing market reactions. In addition, it appears that the improved information environment created by a higher analyst following is more important for foreign firms who face CMLOF than for domestic firms.Originality/valueWhile prior research establishes a negative market reaction to restatement announcements, comparing the market reactions for foreign and domestic firms provides evidence regarding whether US investors treat foreign and domestic firms differently. Additionally, to the best of the authors’ knowledge, this is the first study that examines CMLOF using restatement announcements.

Fair value and economic consequences of financial restatements

This study finds that negative market reactions to restatement announcements are more severe when firms disclose higher ratios of Level 3 fair values. In addition, this negative association is stronger during financial crisis periods, showing that market investors prefer conservative fair values.

Market Reaction to Mandatory Nonfinancial Disclosure

We examine the equity market reaction to events associated with the passage of a directive in the European Union (EU) mandating increased nonfinancial disclosure. These disclosures relate to firms’ environmental, social, and governance (ESG) performance, and would be applicable to firms listed on EU exchanges or with significant operations in the EU. We predict and find (i) an average negative market reaction of –0.79% across all firms, (ii) a less negative market reaction for firms having higher predirective nonfinancial performance, and (iii) a less negative reaction for firms having higher predirective nonfinancial disclosure levels. In addition, results are accentuated for firms having the most material ESG issues, as well as investors anticipating proprietary and political costs as a result of the mandated disclosures. Finally, we find that the negative market reaction is concentrated in firms with weak preregulation ESG performance and disclosure, which exhibit an average return of –1.54%; in contrast, firms with strong preregulation disclosure and performance exhibit an average positive return of 0.52%. Overall, the results are consistent with the equity market perceiving net costs (benefits) for firms with weak (strong) nonfinancial performance and disclosure around key events surrounding the mandatory disclosure regulation of nonfinancial information. This paper was accepted by Shiva Rajgopal, accounting.

The value of academics: Evidence from academic independent director resignations in China

In this paper, we use academic independent director resignations induced by the introduction of the Regulation 11 prohibiting academics from holding positions in Chinese public companies to examine their contribution to firm value. We document a negative market reaction to the issuance of the Regulation 11 and to the academic director resignations. The negative market reaction to academic director resignations is sizeable and hold when we further control for the influence of director, board, and firm characteristics. We next use heterogeneity in the market response to academic director resignations to study what the market values in academic directors. We find supportive evidence of a monitoring contribution and mixed evidence of advising and networking contributions. Finally, we show that in the two years following the issuance of the Regulation 11, companies with at least one academic director on their board prior to Regulation 11 underperform relative to companies without any academic directors. Overall, our results are consistent with a positive contribution of academic independent directors to firm value.

The Impact of Acquisition on Stock Value in Case of Warsaw Stock Exchange

Abstract Research purpose: Seven of 10 companies that have won the Polish Forbes edition Merge & Acquisition 2018 Ranking are listed on Warsaw Stock Exchange. The aim of the conducted research was to test if the biggest acquisitions have an impact on stocks value and is it possible for typical investor to create extra profit by using knowledge of acquisition based on public information. Design/Methodology/Approach: Using data from Warsaw Stock Exchange (quotations), typical measures such as rate of return, standard deviation (risk), correlation and transaction volume changes were calculated. Each of the case results obtained for the company was compared with the result for stock market indexes: WIG (Warszawski Indeks Giełdowy – main WSE index), WIG20 (WSE sub-index of the 20 largest companies), mWIG40 (WSE sub-index of 40 medium companies) and sWIG80 (WSE sub-index of 80 small companies). In addition, the outcomes were confronted with public news (from WSE Electronic System for Information Transfer). Findings: Conducted research has shown that generally successful finalisation of acquisition results in changes of stock prices behaviour. Unfortunately, observed reactions were not the same. Acquisitions induced both increases and decreases in stock prices; there was also no rule in case of risk change. Generally, acquisitions and merges had rather good influence in banking sector (which is still concentrating), but there was no common reaction in other sectors. Originality/Value/Practical Implications: The results will be useful for investors acting on Warsaw Stock Exchange, especially for individual investor who are not able to carry out detailed analyses. The research provides results including possible pre-effects and after-effects of making big acquisition by a large company. The negative market reactions were also shown.

View from practice: Stock market reaction to sukuk credit rating changes in Malaysia

AbstractDocumented evidence on conventional bond markets shows negative market reaction to bond credit rating downgrade and no reaction to credit rating upgrade. Despite the fact that sukuk issuances make up more than 58.8% of the value of outstanding bonds in the country and Malaysia issues at least half of the world's sukuk and is widely recognized as a leader in the sukuk space, there is no documented evidence on the stock market reaction to sukuk credit rating changes. This study analyzed the wealth effect of sukuk credit rating changes in Malaysia using 16 sukuk upgrades and 20 sukuk downgrades for the period 2000–2014. The evidence shows negative market reaction to downgrades and positive significant reaction to sukuk rating upgrade. This symmetrical market reaction to sukuk credit rating changes implies the market was indifferent between bonds and sukuk from the credit rating perspective. This finding supports the notion that the credit rating agencies are Shariah‐neutral when rating these capital market instruments.

Why haven’t U.S. GAAP and IFRS on insurance contracts converged? Evidence from an unsuccessful joint project

This study examines the FASB’s and IASB’s unsuccessful joint project on accounting for insurance contracts. It highlights the divergent views the Boards may hold on certain fundamental accounting issues. Further, this study examines how the costs and benefits of accounting standard convergence can vary within an industry, conditional on factors such as prior accounting standards and firms’ global operations. Empirically, U.S. insurers’ negative market reactions to the joint insurance project suggest U.S. investors perceived net costs would outweigh net benefits. This study also finds that market reactions of U.S. insurers were more negative than those of European insurers. The results of cross-sectional analyses indicate that U.S. life insurers perceived higher net costs associated with the joint project, while European insurers with more global revenue perceived higher net benefits. This work illuminates some of the challenges facing standard setters when attempting to develop a globally acceptable set of financial reporting standards.

A closer look at politically connected corporations: evidence from Citizens United

PurposeThe purpose of this paper is to examine the effects of political connections surrounding an exogenous Supreme Court decision (Citizens United) that lifted long-standing restrictions on corporate political contributions.Design/methodology/approachThis study examines key characteristics of politically connected firms compared to non-politically connected firms, including their market reaction to Citizens United, as well as cash holdings levels and governance characteristics before vs after the landmark decision.FindingsThe results indicate a significant negative market reaction to politically connected firms surrounding the announcement of Citizens United. Additionally, there is a significant increase in the cash holdings of politically connected firms relative to before the event and relative to non-politically connected firms. For politically connected firms, this result is exacerbated by poor corporate governance quality. Collectively, these findings are consistent with a positive association between agency costs and political connections.Originality/valueThis study provides novel evidence by exploiting an exogenous enhancement in the implications of political connections that accompanied the Citizens United decision. The use of this quasi-natural experiment offers an ideal research setting to extract fresh insights into the effects of corporate political connections.

Does R&D expenditure explain the stock market reaction to M&As? Evidence from the Chinese A-share market

ABSTRACTWe explore the impact of acquiring and acquired firms’ R&D expenditure on the market reaction to M&As. Using a sample of 9 739 Chinese M&A deals announced between 2009 and 2017, we find that acquired firms spending more on R&D expenditure react negatively to M&As, while acquiring firms with high R&D expenditure react positively to M&As. We further discuss the impact of R&D on market reactions when acquiring firms pay an offer premium, and we find that the premium leads acquired firms to react positively to M&As but results in negative market reactions to acquiring firms. Our results hold after we conduct robustness tests.

Analyst Promotions within Credit Rating Agencies: Accuracy or Bias?

We estimate Moody’s preference for accurate versus biased ratings using hand-collected data on the internal labor market outcomes of its analysts. We find that accurate analysts are more likely to be promoted and less likely to depart. The opposite is true for analysts who downgrade more frequently, who assign ratings below those predicted by a ratings model, and whose downgrades are associated with large negative market reactions. Downgraded firms are also more likely to be assigned a new analyst. These patterns are consistent with Moody’s balancing its desire for accuracy against its corporate clients’ desire for higher ratings.

Pollution and corporate valuation: evidence from China

ABSTRACTEnvironmental pollution brings severe challenges in the context of a high growing economy of China. Pollution events bring serious ecological cost to the environment, direct costs from sanction, and reputational damage to the listed firms. We study the market reaction to 145 pollution events in China during Jan 2008 and Feb 2015. We find that the 2-day cumulative abnormal returns (CARs) of pollution events are significantly negative, which shows the disciplining effect of the stock market on the listed firms. In addition, pollution events with sanctions have lower CARs than otherwise, which are heterogeneous among different sanction types such as shutting down, fines and rectification. Finally, water pollution has lower CARs than other pollution types. We find that direct economic loss is an important reason for the negative market reactions to pollution events.

Mandated social disclosure

PurposeThis paper investigates the market response to the poor quality of reporting on the first mandated set of conflict minerals disclosures in the US setting. The authors examine the reaction for both filing firms at their filing date and non-filing companies at the filing deadline.Design/methodology/approachThe authors use standard market model methods to capture investor response and test for differences across reactions using comparisons of means and regression models. The authors also code reports for a sub-sample of firms and test for the relation between disclosure and market reactions.FindingsThe authors document a significant negative reaction for both filing and non-filing firms, with the latter group suffering a more negative reaction than the filers. The authors also find more extensive disclosure is associated with less negative market reactions. Finally, the authors provide evidence supporting the argument that the more pronounced reaction for the non-filers is due to concerns with incremental implementation costs for these firms.Research limitations/implicationsThe results extend prior research into investor perceptions of exposures to social and political costs. The findings suggest that investors view both poor quality disclosure and lack of response to mandated requirements as increasing such exposures.Practical implicationsThe negative market response could be expected to exert additional pressures on companies to better assess and report on conflict mineral exposures in their supply chains.Social implicationsThe findings suggest investors pay attention to the corporate response to mandated social disclosure requirements, an important finding as mandates for similar types of disclosure appear to be in the offing.Originality/valueThis study is the first to extend the social and political cost exposure literature to analysis of mandated social disclosures.

SENTIMENT MARKET ANALYSIS ON REPLACEMENT ANNOUNCEMENT OF CHIEF EXECUTIVE OFFICER (CEO)

This study examines the market reaction to the announcement of Chief Executive Officer (CEO) measured by abnormal return. The study sample consisted of 55 CEO turnover announcements using the t-test to test information content of the announcement. The author groups the changes into two factors: (1) change process (routine and non-routine) and (2) substitute origin (inside and outside). The market reacts significantly positively to the announcement of CEO turnover routinely with the origin of the replacement from inside (inside) the company. Different reactions occur in the announcement of routine outside and non-routine insidediary CEO turnover where announcements are responded negatively and significantly. The market does not react to the announcement of non routine outside CEO changes. These results show that investors in Indonesia react positively to routine CEO turnover inside because investors believe that new CEOs will continue their strategy and leadership style and have lower levels of uncertainty. Negative reactions to routine outside CEO turnover are caused by the market belief that the successor will not continue the previous CEO's strategy and has a high degree of uncertainty. The cause of a negative market reaction to the announcement of a non-routine inside CEO turnover is that a replacement CEO will continue the old leadership style and jointly be responsible for the company's poor performance.

Market reaction to the European antitrust investigations in the payment card industry

This paper aims to analyse the stock price reaction of European banks involved in antitrust authority interventions regarding the payment card business. The main objective is to assess whether market discipline is effective and able to complement regulation (Berger et al., 2000) despite the opacity of the business (Morgan, 2002). To this end, we collect all interventions made by both domestic antitrust authorities and by the European Commission to investigate and/or sanction anticompetitive behaviour in the payment card sector over the period 2004-2015. This results in a sample of 24 events, involving 135 listed banks operating in the EU-27 area. We run an event study analysis based on a traditional market model in order to estimate cumulated abnormal returns (CARs), considering both the date when the formal investigation is open and the date when the outcome of the procedure is communicated to the market. Our findings provide weak evidence in favour of the effectiveness of market discipline, with a significant (negative) market reaction only for investigations involving a small number of well-identified banking institutions, while procedures involving large banking associations or payment networks do not generate any relevant reaction.