Negative Stock Price Reaction Research Articles

Do Investors Value Workforce Gender Diversity?

We examine whether investors value workforce gender diversity. Consistent with the view that investors believe workforce gender diversity can be valuable in major firms, we use event studies to demonstrate that U.S. technology firms and financial firms experience more positive stock price reactions when it is revealed that they have relatively higher (versus lower) workforce gender diversity numbers. For instance, we find that Google’s revelation of relatively low workforce gender diversity numbers triggered a negative stock price reaction, whereas eBay’s revelation of relatively high workforce gender diversity numbers triggered a positive stock price reaction. These stock price reactions are both economically and statistically significant; for example, we estimate that if a technology firm had revealed gender diversity numbers that were one standard deviation higher, its market valuation would have increased by $1.11 billion. Corroborating this plausibly causal field evidence, we also find positive investor reactions to workforce gender diversity in randomized experiments using Prolific participants with investing experience; these reactions seem to be underpinned by investors’ beliefs about potential upsides of diversity for the firm (e.g., reduced legal risks; increased creativity) but not by investors’ beliefs about potential downsides of diversity for the firm (e.g., increased conflict). Our findings highlight the importance of understanding investors’ intuitions or beliefs about major organizational phenomena such as workforce gender diversity. Our results also point toward a new type of business case for diversity, driven by investors: if major firms had more workforce gender diversity, investors may “reward” them with substantially higher valuations. Funding: This research is supported by NUS (National University of Singapore) Startup Grant WBS A-0003900-00-00 to D. P. Daniels.

PUBLIC DISCLOSURE OF INFORMATION SECURITY BREACH INCIDENTS: SHORT-TERM STOCK MARKET REACTION ON INDIAN LISTED FIRMS

ABSTRACT Data breach incidents are growing by the day and firms struggle to detect, defend, and respond to such breaches. Nowadays, security breaches are considered one of the major concerns for corporate organizations around the world. Hence, it is essential to assess the impact of such breaches on organizations. This article reports stock price reaction due to public disclosure of information security breach (ISB) incidents on publicly traded firms of India. Using the event study methodology on a sample of 120 publicly announced ISB incidents between January 2004 and April 2019 pertaining to 69 publicly listed firms of India, we found that exposure to an ISB incident exacerbates negative stock price reactions based on both one-factor market model and Fama-French three-factor model. On average, breached firms lost 0.55% of their market value within two days post the announcement of ISB incidents. Further, we found some factors that significantly negatively impacted Cumulative Abnormal Return (CAR). Important emerging factors such as type of compromised data, sentiment, subjectivity, and remedial strategy significantly impact CAR. According to our study findings, we suggest that firms should mention remedial measures in terms of apology and/or compensation in the ISB disclosure. Furthermore, the result indicates that investors penalize listed firms for subsequent ISB incidents. Thus, our findings may guide Chief Information Officers (CIOs), information security managers, and IT managers of publicly traded firms to devise various strategies in terms of IT security measures and content of the ISB disclosure.

Do share offerings increase payouts?

This paper investigates the effects of pure secondary share offerings, which decrease ownership concentration without raising funds, to highlight the corporate governance effect of equity offerings. We find that firms conducting secondary offerings significantly increase dividend payouts after the transaction. Although the announcement of secondary offerings receives negative stock price reactions in the short run, we witness a reversal and positive performance in the long term. While previous studies commonly suggest equity offerings cause negative stock returns, our results reveal that these transactions make managers care about minority shareholder wealth by unwinding ownership concentration.

Do blockchain capabilities help overcome supply and operational risks: Insights from firm market returns during COVID-19

Uncertainty and risk have become increasingly prominent issues in firm operating environments. Addressing uncertainties and risks brought by the historically disruptive COVID-19 pandemic crisis requires organizations to establish reliable, visible, and traceable information processing and sharing capabilities. Blockchain is a disruptive technology that can build capabilities to support operational resilience where uncertainty may manifest as risk or opportunity. Using an event study, we examine the COVID-19 pandemic relationship to stock returns for 217 blockchain-related firms—those that develop or apply blockchain technology—over five major pandemic life cycle periods. Our results indicate firms with blockchain capabilities have less mean negative stock price reaction—on average, a reduced 8.24 % shareholder value loss across crisis stages. Different blockchain application fields exhibit varied shareholder value effects—in general, production blockchain applications can help firms reduce more negative impact while financial blockchain applications show no significant mitigation effects. We further demonstrate how blockchain operational characteristics affect stock returns. Overall, blockchain technology provides effective risk buffer capabilities and can help manage shifting institutional fields—which the market views as building resilient capabilities resulting in competitive advantage to overcome known and unknown uncertainties and risks.

The reputational costs of corporate environmental underperformance: evidence from China

AbstractThis study evaluates the relative importance of regulative and reputational pressures on corporate environmental performance by exploiting a novel research setting in China, where the financial penalties for corporate environmental wrongdoing are small. Despite the small monetary penalties, we still document a surprisingly strong negative stock price reaction to the news of corporate environmental violations. Additionally, we show that the negative stock market reaction weakens in firms with strong voluntary environmental commitment. But the effect of voluntary environmental commitment is less pronounced in state‐ or foreign‐owned firms. Our study yields important managerial implications: our findings reveal considerable reputational losses associated with environmental misconducts and demonstrate the benefit of voluntary environmental commitment in upholding corporate reputation and helping firms recover during unfavorable environmental crises.

Airline Disasters and the Performance of Tourism and Hospitality Stocks

Prior research examines the link between the airline industry and the tourism industry and shows that the robustness of tourism is heavily dependent upon air transport. To further document the strength of this link, this study examines the impact of major airline disasters on the stock prices of US tourism and hospitality firms. Results show that, relative to the rest of the market, the stock prices of tourism and hospitality firms markedly decrease following major airline crashes. The negative stock price reaction is the most pronounced when examining the September 11, 2001 (9/11) terrorist attacks. However, when excluding this particular event, results continue to show that the stock returns for tourism and hospitality firms are significantly negative surrounding other large-scale airline disasters. Consistent with the existing literature that highlights the association between air transport and the tourism industry, the conclusions from this study seem to indicate that the value of tourism and hospitality firms is particularly sensitive to airline disasters.

The Effects of Foreign Acquisitions on the Value of Industry Peers

Abstract This article studies how industry peers’ stock prices respond when another firm in the industry is acquired by a foreign firm. The average stock price reactions of industry peers in horizontal foreign acquisitions around deal announcements are significantly negative. Peers’ returns are more negative in growing, less specialized, and competitive industries. Moreover, the negative stock price reactions of industry peers are related to future decreases in their operating performance. Overall, these results suggest that foreign acquisitions have strong competitive effects for the industry peers of U.S. target companies.

Strategic Financial Management Part II: Seasoned Equity Offerings, Corporate Payout Policy, and the Case of Regulated Utilities

As discussed in the predecessor to this article that came out roughly two years ago, each of today's three dominant academic theories of capital structure has trouble explaining the financing behavior of public companies making seasoned equity offerings (SEOs) of their own stock. In conflict with the tradeoff theory, the authors' analysis of some 7,000 SEOs by U.S. industrial companies during the period 1970‐2017 finds that the vast majority, or roughly 80%, of them had the effect of moving the companies away from, rather than toward, their target leverage ratios. Inconsistent with the pecking order theory, SEO issuers have tended to be financially healthy companies with considerable unused debt capacity. And at odds with the market‐timing theory, SEOs appear to be driven more by the capital requirements associated with the large investment projects that tend to follow them than by favorable market conditions and overvalued stock prices.Nevertheless, consistent with the tradeoff theory, the authors also find that SEO issuers tend to follow their stock offerings with one or more debt offerings that have the effect of raising their leverage back toward their targets. And whereas all of the three theories are “single‐period models” suggesting some degree of shortsightedness and “opportunism” by financial managers, the authors' findings present a picture of long‐run‐value‐maximizing strategic management of corporate capital structures—one that takes account of the company's current leverage in relation to its longer‐run target, investment opportunities, and long‐term capital requirements, and the costs and benefits associated with alternative sequences of financing transactions.Building on their earlier article, the authors extend their analysis to examine the payout and well as leverage and investment decisions of SEO issuers—and expand their sample of some 7,000 industrial issuers to include another 1,500 SEOs by regulated utilities. In the wake of the SEOs, both dividends and repurchases tend to increase; but the payout rates for utilities were almost eight times higher than for industrials, and overwhelmingly take the form of dividends rather than buybacks.In the final sections of the article, the authors first attempt to explain the negative stock price reactions to the announcements of SEOs, and then speculate about the causes of the even more negative, and puzzling, long‐run stock returns to industrial, but not utility, SEO issuers.

Russia–Ukraine crisis: The effects on the European stock market

AbstractWe examine the effect of the Russia–Ukraine crisis on the European stock markets. Because of increased political uncertainty, geographic proximity and the ramifications of the fresh sanctions imposed on Russia, the European stock markets tended to react negatively to this crisis. We find that on 21 February 2022, when Russia recognized two Ukrainian states as autonomous regions, European stocks incurred a significant negative abnormal return. Moreover, the negative stock price reactions continued in the post‐event period. The magnitude of the stock price reactions to this crisis exhibits considerable variation across industries, countries and size of the company.

Liquidity effects of COVID-19 in the European tourism industry

ABSTRACT We examine the influence of COVID-19 on liquidity of the tourism industry in the UK, Europe and Spain. In the short run, the pandemic causes significant negative stock market reaction in the tourism industry. In the long run, the tourism industry recovers from the fall in returns due to the pandemic. Liquidity significantly decreases due to COVID-19, for the UK, European and Spanish tourism markets, even when we encapsulate the influence of stock prices, trading volume and volatility. Our findings suggest that European equity markets have declined in efficiency due to the pandemic in the tourism industry. Our empirical analysis has important implications for policy makers. Tourism recovery strategies from the pandemic are required with immediate effect in order to restore the valuation of the tourism companies, given that the negative stock price reaction and lack of liquidity significantly reduces market value of the tourism firms across Europe. In order for the tourism industry to fully recover from COVID-19, investors need to have the confidence to buy large volumes of tourism company stocks, which will increase the price and liquidity, leading to a substantial increase in market capitalization.

The Value of the Capital Market Development-Bursa Research Scheme's (CBRS) Recommendation Changes in

This study analyses the changes in analyst recommendations in the Malaysian stock market from 2010 to 2018. Using samples of 668 upgrade recommendations and 495 downgrade recommendations, this study employs event study methodology to examine price performance by predicting abnormal returns using the market model. The findings indicate that significant positive stock price reactions occur following upgrade recommendations and significant negative stock price reactions occur following downgrade recommendations over a short-term and up to six-month period. Further analysis reveals no statistically significant difference in performance between analysts who are participants of the Capital Market Development Fund – Bursa Research Scheme (CBRS) and those who are not. This finding implies that, despite the significant market reaction to both upgrade and downgrade recommendations, CBRS’s financial analysts do not provide better analysis than those of non-CBRS analysts.

Do intangible assets provide corporate resilience? New evidence from infectious disease pandemics

Intangibles provide competitive advantages and enhance productivity and efficiency. We investigate whether accumulated intangible assets mitigate the adverse impact of pandemic shocks on corporate performance. Using a sample of 8738 unique U.S. firms during the period 1985–2020, we find that a firm's pre-pandemic intangible assets mitigate the pandemic-induced negative stock price reaction and operating performance. We also show that the resilience to pandemic shocks is driven by both internally generated and externally acquired intangible assets. Finally, we explore related channels, and find that intangible assets-driven corporate resilience to pandemic shocks is explained by positive investor sentiment, customer loyalty, and managerial ability. Importantly, corporate resilience to pandemic shocks emanating from intangibles holds for non-Covid pandemic periods. Overall, our study documents the critical role of intangible assets in safeguarding firms and investors from epidemic- and pandemic-induced shocks.

Economic links and the wealth effects of layoff announcements along the supply chain

PurposeThis paper investigates the effects of layoff announcement by customers on the valuation and operating performance of their supply chain partners.Design/methodology/approachThe authors collect corporate layoff announcements from 8-K filings submitted by US publicly-traded firms from 2004 to 2017. Using event study methodology, they examine the information externality of corporate layoffs on announcing firms' suppliers.FindingsResults show that suppliers, on average, experience a negative stock price reaction around their major customers' layoff announcements. The negative price effect is exacerbated when industry rivals of layoff-announcing customers also suffer from negative intra-industry contagion effects. Additionally, supply chain spillover effects are asymmetric, with only “bad news” layoff announcements causing significant value implications for suppliers, but not “good news” announcements. Supplier firms also reduce their investments in and sales dependence on layoff-announcing customers in subsequent years.Practical implicationsThis study shows that layoff decisions, often aimed at improving firms' efficiency and effectiveness, create uncertainty for the suppliers' operation and cause negative value implications on firms' upstream partners. Findings should be useful to corporate decision-makers in making layoff decisions.Originality/valueThis paper is one of the first to address the value implications of corporate layoffs on announcing firms' suppliers. It provides a more comprehensive picture of the economy-wide impact of achieving efficiency through employee layoffs.

The Information Content of Publicly Accessible Federal Court Documents

ABSTRACTPrior research documents a negative stock price reaction to initial securities lawsuit filings, on average. Prior research provides no evidence, however, regarding whether and how the market prices information subsequently generated by the litigation process. We examine the market response to a large sample of initial plaintiff complaints and subsequent docket events. Our results are consistent with the market pricing information about issues both systemic to the firm and specific to the pending lawsuit from federal court filings. First, we find the market response to the initial lawsuit filing varies significantly with information about governance and control problems signaled by details of the plaintiff's complaint. Second, we find a significant market response to subsequent court filings that increases with measures of litigation severity and decreases as the litigation progresses over time. Overall, our results highlight the role of federally accessible court filings in facilitating the market's pricing of defendant firms.JEL Classifications: K41; M40; M41; M48.

Banking sector reactions to COVID-19: The role of bank-specific factors and government policy responses

This paper examines the impact of bank-specific factors and variations in the context of stringency of government policy responses on bank stock returns because of the COVID-19 pandemic. A sample of 1,927 publicly listed banks from 110 countries is used for the period of the first major wave of COVID-19, that is, January to May 2020. Our findings indicate that stock returns of banks with higher capitalization and deposits, more diversification, lower non-performing loans, and larger size are more resilient to the pandemic. While banks’ environment and governance scores do not have a significant impact, higher social and corporate social responsibility strategy scores intensify the negative stock price reaction to COVID-19. We further observe that the pandemic-induced reduction in bank stock prices is mitigated as the strictness of government policy responses increases, mainly through economic responses such as income support, debt and contract relief, and fiscal measures from governments.

Using Social Media to Identify the Effects of Congressional Partisanship on Asset Prices

We measure the individual and collective viewpoints of US Congress members on various economic policies by scraping their Twitter accounts. Tweets that criticize (support) a particular company are associated with a significant negative (positive) stock price reaction in a narrow time window around the tweet. A sharp partisan divide emerges, with Republicans and Democrats coordinated in both their support and opposition for different industries emanating from disparate legislative agendas. Members of congress coordinate within parties to push legislation through their social media accounts. As an illustrative and relevant example, we analyze the Tax Cuts and Jobs Act of 2017 and document significant aggregate stock market responses to the real-time evolution of partisan viewpoints about the bill.

Gender Quotas and Support for Women in Board Elections

We study shareholder support for corporate board nominees in the context of the California gender quota, which was passed in 2018. Using hand-collected data for approximately 600 firms, we show that, prior to the quota, female nominees received greater shareholder support than their male counterparts. This is consistent with a pre-quota environment in which female board nominees were held to a higher standard than male nominees. Second, we show that incumbent female directors in the post-quota environment receive greater support than incumbent men, while support for new (mandated) female nominees decreases to the level of support for new male nominees. This indicates that the quota led to a conversion in the bar for men and women to become board nominees, and that it did not lead to new female board nominees being of lower quality than male nominees. We likewise challenge the notion that the negative stock price reaction to the quota reflects value destruction due to an insufficient supply of female directors. Instead, we provide evidence that dysfunctional board dynamics are driving the reaction, in the sense that stock prices reacted negatively to entrenched boards who failed to turn over the least supported directors when adjusting their boards to comply with the new law.

Gender Quotas and Support for Women in Board Elections

We study shareholder support for corporate board nominees in the context of the California gender quota, which was passed in 2018. Using hand-collected data for approximately 600 firms, we show that, prior to the quota, female nominees received greater shareholder support than their male counterparts. This is consistent with a pre-quota environment in which female board nominees were held to a higher standard than male nominees. Second, we show that incumbent female directors in the post-quota environment receive greater support than incumbent men, while support for new (mandated) female nominees decreases to the level of support for new male nominees. This indicates that the quota led to a conversion in the bar for men and women to become board nominees, and that it did not lead to new female board nominees being of lower quality than male nominees. We likewise challenge the notion that the negative stock price reaction to the quota reflects value destruction due to an insufficient supply of female directors. Instead, we provide evidence that dysfunctional board dynamics are driving the reaction, in the sense that stock prices reacted negatively to entrenched boards who failed to turn over the least supported directors when adjusting their boards to comply with the new law. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Spillover Effects of Tax Avoidance on Peers' Firm Value

ABSTRACTThis research examines spillover effects of tax avoidance on peers' firm value using the setting of the European Commission's state aid investigations of private letter rulings. We assume that news about a firm's tax avoidance strategies also reveals information about peers' tax avoidance because investors expect similar firms to use similar strategies. Based on an event study design, we show that news about potential costs of tax avoidance of targeted U.S. multinational firms leads to negative stock price reactions among their peers. Moreover, peers' investors adjust their evaluations upward for news in favor of the targeted firms. Consistent with the level of tax avoidance being indicative of having similar strategies, spillover effects are stronger for firms with the highest levels of tax avoidance when examining a broad set of peers. Our findings suggest the need for a more comprehensive understanding of the costs and benefits of tax avoidance.Data Availability: Data are available from the public sources cited in the text.JEL Classifications: G32; H25; H26.

Shareholder Value Effects of the Volkswagen Emissions Scandal on the Automotive Ecosystem

This study provides empirical evidence on the effect of the September 2015 Volkswagen diesel emissions scandal on the stock prices of publicly traded firms in the global automotive ecosystem. We focus on both the supply chain partners of VW—tier‐1 suppliers; tier‐2 suppliers; and business customers—and three groups of firms that are not VW supply chain partners—other motor vehicle manufacturers; parts manufacturers not identified as VW suppliers; and wholesalers, retailers, and rental agencies not identified as VW customers. We find that tier‐1 suppliers of direct material to VW suffered a mean stock price reaction of ‒2.69% in the week following the scandal, but this effect varied by region. European suppliers were the most impacted with a mean stock price reaction of ‒5.52%. Suppliers with larger revenue dependence on VW experienced greater negative stock price reactions, as did suppliers of components for engines and/or emissions systems. Non‐VW parts manufacturers experienced a positive effect. We find a mean stock price reaction of ‒5.28% to VW’s European customers, but no significant effects for non‐VW customers. European motor vehicle manufacturers experienced a mean stock price reaction of ‒7.60%. Our results suggest that firms should not just focus on selecting and monitoring responsible suppliers but also apply some of the same principles to developing responsible customers. Our work also has implications for industry groups, regulators, and legal systems, entities that have the resources and capabilities to effectively monitor large firms to reduce illegal or irresponsible behavior such as the VW scandal.