Negative Stock Price Reaction Research Articles

Does financial reporting misconduct pay off even when discovered?

Experts and popular belief contend that it pays to engage in financial misconduct. We hand-collect data on three subsamples of severe misconduct cases, between 2003 and 2016: a sample of 37 (100) SEC enforcement actions (class action lawsuits) that explicitly allege fraud and a sample of 100 restatements with the most negative stock price reaction in which investors presumably suspect fraud. We then compare estimates of the benefits from reporting misconduct to top managers against estimates of the costs of its discovery. We find that 32.9% of perpetrators experience an overall net benefit from discovered misconduct. The percentage of officers who benefit is highest for the restatement subsample (43.5%), followed by the class action lawsuit subsample (27.7%), and is the lowest for the SEC enforcement subsample (8.1%). Stated differently, if we assume that the probability of detection is 31%, as conjectured in the literature, more than half of the perpetrators in our sample would benefit from engaging in financial reporting misconduct. Hence our evidence suggests that financial reporting misconduct can pay off for perpetrators.

Earnings Surprises and Stock Price Reactions of Quoted Companies in Nigeria

This study focuses on examining the relationship between stock prices and earnings surprises in quoted companies of Nigeria. This study applied a longitudinal research design which studies the effect of earnings surprises on stock prices using panel data. A sample of 64 companies was chosen to study in all sectors of the Nigerian Stock Exchange. The research data were obtained from secondary sources of the annual reports for the selected companies covering the period from 2013 to 2017. The measurement for earnings surprises used in the study is the residual or unexplained component of earnings persistence model commonly referred to as first-order autoregressive AR (1) regression of reported earnings. Were, the data analysis was carried out by regression using the generalised least squares technique. The regression results for positive earnings surprise shows that share prices react negatively to positive surprises with a coefficient of (-2.4109) in tandem with the return news hypothesis which suggests that positive earnings news results in a negative stock-price reaction. The negative earnings surprise results show that stock prices react positively to negative earnings surprises with a positive coefficient of (0.1136). This is in line with the premise of return news, which indicates that negative earnings news leads to a positive reaction to the share price. The study recommends that there is a need to regulate the stock market to improve the level of market efficiency in stock markets. This will improve the rate at which earnings news will be reserved at stock prices. Secondly, there is a need to improve investor confidence in the disclosed profits made by companies.

Is COVID-19 An Indiscriminate Tsunami? Bank Immunity and Variation in Government Policy Responses

This paper examines the impact of bank-specific factors and variation in the stringency of government policy responses on bank stock returns as a response to the COVID-19 pandemic. We use a sample of 1927 publicly listed banks from 110 countries for the period of the first major wave of the COVID-19: January to May 2020. Our findings indicate that stock returns of banks with higher capitalization, more diversification, higher deposits, lower non-performing loans, and larger size are more resilient to the COVID-19 pandemic. While the environment and governance scores of banks do not have a significant impact, higher social and corporate social responsibility (CSR) strategy scores of banks intensify the negative stock price reaction to the 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 &contract relief, and fiscal measures from governments.

Name and shame? Evidence from the European Union tax haven blacklist

I study publication of the European Union (EU) tax haven blacklist on December 5, 2017, to examine whether and how the use of recognized tax havens affects firm value. I find that the tax haven naming and shaming by the EU was associated with a negative stock price reaction of firms with tax haven subsidiaries. Overall, publication of the blacklist erased $56 billion in market capitalization among the implicated firms. The largest reaction was for those tax havens, for which it was not foreseeable that they would be included in the blacklist. Retail firms experienced a larger decrease in share price than firms in other industries, which is consistent with a potential consumer backlash. Also more tax-aggressive firms faced more negative returns, which suggests that investors expect firms might be audited or fined for past or overly aggressive tax avoidance. The negative reaction was less pronounced in countries with low levels of investor protection and weakly governed firms with substantial conflicts of interest between principals and shareholders. This is consistent with increased scrutiny and potential for countermeasures associated with the blacklist, which reduce opportunities for managerial wealth diversion.

Does Government Report Readability Matter? Evidence from Market Reactions to AAERs

We investigate whether market reactions to Accounting and Auditing Enforcement Releases (AAERs) of the U.S. Securities and Exchange Commission (SEC) vary with different levels of readability in the AAERs. After controlling for the complexity of an AAER report and the severity of the enforcement case, we find that when the AAER is more difficult to read, with readability measured based on the directives of the Plain Writing Act of 2010, markets react more negatively to the AAER announcement. Cross-sectional tests indicate that the effect of AAER readability is attenuated by investor sophistication and firm visibility, whereas the effect is more pronounced when AAER firms are exposed to greater uncertainty. Contrary to conventional wisdom that linguistically complex disclosures receive reduced market reactions, our results suggest that complex AAER announcements could trigger more negative stock price reactions, since investors under uncertainty and ambiguity tend to assume the worst and bid down the market value of AAER firms. Our study offers meaningful implications for regulators concerned with writing clarity in government documents.

Does government report readability matter? Evidence from market reactions to AAERs

We investigate whether market reactions to Accounting and Auditing Enforcement Releases (AAERs) of the U.S. Securities and Exchange Commission (SEC) vary with different levels of readability in the AAERs. After controlling for the complexity of an AAER report and the severity of the enforcement case, we find that when the AAER is more difficult to read, with readability measured based on the directives of the Plain Writing Act of 2010, markets react more negatively to the AAER announcement. Cross-sectional tests indicate that the effect of AAER readability is attenuated by investor sophistication and firm visibility, whereas the effect is more pronounced when AAER firms are exposed to greater uncertainty. Contrary to conventional wisdom that linguistically complex disclosures receive reduced market reactions, our results suggest that complex AAER announcements could trigger more negative stock price reactions, since investors under uncertainty and ambiguity tend to assume the worst and bid down the market value of AAER firms. Our study offers meaningful implications for regulators concerned with writing clarity in government documents.

Numerosity: Forward and Reverse Stock Splits

Individuals have a tendency to fixate on large numbers and ignore other relevant information in their decision making process. The numerosity heuristic, a cognitive bias, is the first behavioral hypothesis to explain why investors prefer to receive more shares (rather than less shares) in a stock split even though the aggregate economic value is the same. For forward splits, after controlling for the positive signaling of improved earnings growth and liquidity from the split announcement, the stock price reacts positively to the larger number of shares issued. More importantly, the use of a dual class numerosity model can explain why most conventional hypotheses fail to explain the negative stock price reaction to reverse splits. Given a typical bearish outlook associated with a reverse stock split, investors’ cognitive resources have already been conditioned to derive a systematic conclusion to sell the stock at the higher price. Focusing only on large stock price numerosity, investors are incorrectly inferring a higher investment value. As the high numerosity encourages bearish investors to sell at the higher perceived investment value, the stock returns react more negatively to the higher post-reverse split price level. In both forward and reverse split cases, investors react to high numerosity.

Voluntary, Self-Regulatory, and Mandatory Disclosure of Oil and Gas Company Payments to Foreign Governments

SYNOPSISConcerns about high rates of government corruption in resource rich countries have led transparency advocates to urge oil and gas firms to disclose payments to host governments for natural resources. Transparency, they argue, can increase government accountability and mitigate corruption. However, we find a low frequency of voluntary disclosures of payments by oil and gas firms, and negative stock price reactions for affected firms at the announcement of regulations mandating disclosure. This suggests that sample firm managers and their investors perceive that such disclosures generate private costs, despite any public benefits. We document that industry self-regulation has generated information to substitute for the gap in voluntary company disclosure and that such disclosures are accompanied by lower country corruption ratings. This suggests that collective action could be an effective way for companies to manage the private costs of disclosure and respond to public pressure for transparency that could provide public benefits.JEL Classification: M441; M48; H41; G38.

Downsides of Corporate Political Connections: Evidence from Mass Shootings

This paper studies the negative impacts of corporate political connections on firm outcomes. Employing 20 years of mass shootings, I find that when mass shootings take place, companies that primarily support gun-rights politicians experience negative stock price reactions and worse operating performance. Depending on the number of fatalities in a mass shooting, one-week cumulative abnormal returns are about 1% to 2.5% lower for these firms. The operating performance of these firms also shows a substantial decline after mass shootings. The decline lasts for at least one year. After mass shootings, firms significantly reduce corporate political donations to gun-rights politicians. Further tests suggest that damage to corporate reputations rather than loss of corporate political connections to gun-rights politicians explain the findings.

Bankruptcy Spillover Effects on Oil and Gas Industry

This paper studies bankruptcy spillover effects onto portfolios of non-bankrupt firms in oil and gas industry. Using hand-collected data on bankruptcy filings in oil and gas industry from 2000 to 2017, I find that, on average, the value-weighted portfolios of non-bankrupt oil and gas firms experience a negative stock price reaction 4-day around a bankruptcy filing announcement in the industry. This negative stock price reaction is not only statistically significant at 1% but also economically significant as the 4-day cumulative abnormal losses are averagely calculated at $4.47 billion. Further analyses on oil and gas sub-industries lead to the findings that while the Oil & Gas Production Portfolio and Oil & Gas Field Machinery & Equipment Portfolio are the most affected, the Petroleum Refining Portfolio and Petroleum Products Wholesalers Portfolio show very little to no evidence of being affected by bankruptcy filing announcements within the industry wide. I also find that the magnitude of spillover effects is conditional on the size of bankrupt firms and the degree of competition of sub-industries but not on the chapters of the filing and the sub-industry leverage. These findings are robust after controlling for sub-industry-specific factors and market-wide factors.

Does Financial Reporting Misconduct Pay Off Even When Discovered?

Experts and popular belief contend that it pays to engage in financial misconduct. We hand collect data on three subsamples of severe misconduct cases, between 2003 and 2016: a sample of 37 (100) SEC enforcement actions (class action lawsuits) that explicitly allege fraud and a sample of 100 restatements with the most negative stock price reaction in which investors presumably suspect fraud. We then compare estimates of the benefits from reporting misconduct to top managers against estimates of the costs of its discovery. We find that 32.9% of perpetrators experience an overall net benefit from discovered misconduct. The percentage of officers who benefit is highest for the restatement subsample (43.5%), followed by the class action lawsuit subsample (27.7%), and is the lowest for the SEC enforcement subsample (8.1%). Stated differently, if we assume that the probability of detection is 31% as conjectured in the prior literature, more than half of the perpetrators in our sample would find it beneficial to engage in financial reporting misconduct. Hence, our evidence suggests that financial reporting misconduct can pay off for a significant portion of the perpetrators. We discuss several implications of our results to academics, practitioners and policymakers.

Stock market reaction to cash dividends: evidence from the Nigerian stock market

PurposeVery little is known about the effect of dividend announcements on stock prices in Nigeria, despite the country’s unique institutional environment. The purpose of this paper is, therefore, to provide empirical evidence on this issue by investigating the stock price reaction to cash dividends by companies listed on the Nigerian Stock Exchange.Design/methodology/approachStandard event study methodology, using the market model, is employed to determine the abnormal returns surrounding the cash dividend announcement date. Abnormal returns are also calculated employing the market-adjusted return model as a robustness check and to test the sensitivity of the results to β estimation. The authors also examine the interaction between cash dividends and earnings by estimating a regression model where announcement abnormal returns are a function of both dividend changes and earnings changes relative to stock price.FindingsThe study find support for the signaling hypothesis: dividend increases are associated with positive stock price reaction, while dividend decreases are associated with negative stock price reaction. Companies that do not change their dividends experience insignificant positive abnormal returns. The results also suggest that both dividends and earnings are informative, but dividends contain information beyond that contained in earnings.Research limitations/implicationsThe sample for the study includes only cash dividend announcements occurring without other corporate events (such as interim dividends, stock splits, stock dividends, and mergers and acquisitions) during the event study period. The small firm-year observations may limit the validity of generalizations from these conclusions.Practical implicationsThe findings are useful to researchers, practitioners and investors interested in companies listed on the Nigerian stock market for their proper strategic decision making. In particular, the results can be used to encourage transparency and good governance practices in the Nigerian stock market.Originality/valueThis paper adds to the very limited research on the stock market reaction to cash dividend announcements in Nigeria; it is the first of its kind employing a unique cash dividends data.

Economic Links and the Wealth Effects of Layoff Announcement Along the Supply Chain

This paper examines whether suppliers suffer from information externalities when their major customers make layoff announcements. We find suppliers, on average, experience a negative stock price reaction around their major customers’ layoff announcements. Furthermore, the negative price effect is exacerbated when the industry rivals of layoff-announcing customers also suffer from negative intra-industry contagion effects, indicating that the interaction of vertical and horizontal effects can have an impact on the magnitude of supply chain information externalities. Additionally, our results show that the 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 and sales dependence on layoff-announcing customers and experience a higher profit margins and investment profitability in the subsequent years.

Impact of Emotional Harassment on Firm's Value.

The activities and consequences of workplace bullying and harassment have been widely explored in the literature but mainly studied within the scope of individuals or at the team level. Taking a holistic approach, we associate the concept of bullying with firm-level performance as well as stakeholders’ responses in the market. In this paper, we examine whether and how market investors react to the news of corporate harassment by top officials of publicly listed firms in Korea. Using a standard event study methodology and multiple regression analysis with matched sample, we find significantly negative stock price reactions to news of corporate bullying. We also find that the impact is more salient if emotional bullying is involved and discuss both the theoretical and practical implications of these findings.

Equity Rights Issue and Dilutive Effect: Evidence from Italian Listed Companies

This article studies the stock price reaction to Seasoned Equity Offerings (SEOs) through the right issue technique, for Italian listed companies in the period between 2007 and 2016. A few days before the starting date of the capital increase operation, investors are provided with a complete information set of the final characteristics of the equity offerings. The study investigates whether this further information is price sensitive. An event study analysis is performed around two price sensitive dates: the “announcement date” of the equity issue and the “communication date” of its final characteristics. It also focuses on the reasons underlying the offer and on the industry effect. The findings show a significant negative abnormal return at the communication date for the full sample and for companies collecting financial resources for “Corporate Finance Transaction”, for "Capital Adequacy" and for “Restructuring”. A negative market reaction for all sectors is observed as well. Eventually, the article examines the possible causes underlying the negative stock price reaction at the communication date. The results suggest that the dilutive effect is the main explanation to the stock price overreaction.

The market response to implied debt covenant violations

AbstractPrevious research documents a negative stock price reaction to the announcement of a debt covenant violation (DCV). However, managers of firms that violate a covenant often obtain waivers and renegotiate debt contracts with lenders before the SEC requires them to disclose a violation. Firms therefore may not report some covenant violations, and prior research has not documented their cost to shareholders. Exploiting the fact that over half of all private debt contracts contain a debt covenant reliant on some variation of accounting earnings, I construct a sample of firms with debt contracts that contain at least one earnings‐based covenant. Combining earnings‐based‐covenant contract values from debt agreements with information publicly available at the earnings announcement date, I predict firms in violation of a debt covenant and provide evidence that equity investors react negatively to these implied violations, regardless of whether managers ever disclose that a violation occurred. In additional tests, I find no evidence of a negative stock price reaction to a firm disclosure of a DCV that market participants could infer from previously reported earnings, but I demonstrate that equity investors do react to the disclosure of a violation of a balance‐sheet covenant that would not have been inferable. This study complements previous research on DCVs by documenting the costliness to shareholders of violations subsequently resolved with lenders but not disclosed.

Do politically connected independent directors matter? Evidence from mandatory resignation events in China

This paper investigates the contributions of politically connected independent directors to shareholder value by examining stock price reactions to their mandatory resignations. Employing an event study, we find that, if a private firm loses its politically connected independent director due to mandatory resignation, its stock price drops 4.61% on average within ten trading days, compared with control firms. We observe that, compared with independent directors from academia, politically connected independent directors are absent from more board meetings and are reluctant to express dissenting opinions even if they attend meetings. So the negative stock price reaction cannot be mainly explained by the loss of supervisory functions after politically connected independent directors were forced to resign from positions. By employing DID estimation, we further find that the economic benefits obtained by private firms decrease after the mandatory resignation. The heterogeneity and robustness checks further confirm that private firms indeed were unable to get the same amount of economic benefits from the government as before, which provides a reasonable explanation for the negative stock price reaction after mandatory resignations of politically connected independent directors.

Why Do U.S. Securities Laws Matter to Non-U.S. Firms? Evidence from Private Class-Action Lawsuits

A continuing controversy is whether U.S. securities laws are enforced against foreign firms, since public enforcement actions by the SEC are infrequent and often result in insignificant penalties. We examine private enforcement actions of U.S. securities laws and find that 269 securities class-action lawsuits were filed against foreign firms from 1996 to 2008. We document the severity of the penalties imposed on foreign firms and show that while firms paid a total of $9 billion to settle lawsuits brought against them, the monetary penalties levied by the market are even larger. During the three-day period surrounding the lawsuit filing date, there is a significant negative stock price reaction of -6.16%, which translates to an average loss of $392 million dollars. Aggregating over all firms, the total dollar loss is $73 billion. Even foreign firms without significant U.S. assets experience significant valuation losses. Moreover, insiders of the firm bear direct financial losses through their shareholdings. Our results provide evidence that enforcement actions of U.S. securities laws against foreign firms are neither uncommon nor economically insignificant events.

The Retention Effects of Unvested Equity: Evidence from Accelerated Option Vesting

We document that firms can effectively retain executives by granting deferred equity pay. We show this by analyzing a unique regulatory change (FAS 123-R) that prompted 723 firms to suddenly eliminate stock option vesting periods. This allowed CEOs to keep 33% more options when departing the firm, and we find that voluntary CEO departure rates subsequently rose from 5% to 21%. Our identification strategy exploits FAS 123-R’s almost-random timing, which was staggered by firms’ fiscal year-ends. Firms that experienced departures suffered negative stock price reactions, and responded by increasing compensation for remaining and newly hired executives.

Name and Shame? Evidence from the European Union Tax Haven Blacklist

I study publication of the European Union (EU) tax haven blacklist on December 5, 2017 to examine whether and how the use of recognized tax havens affects firm value. I find that the tax haven naming and shaming by the EU was associated with a negative stock price reaction of firms with tax haven affliates. The largest reaction was for those tax havens, for which it was not foreseeable that they would be included in the blacklist. Retail firms experienced a larger decrease in share price than firms in other industries, which is consistent with a potential consumer backlash. Also more tax aggressive firms faced more negative returns, which suggests that investors expect firms might be audited or fined for past or overly aggressive tax avoidance. The negative reaction was less pronounced in countries with low levels of investor protection and weakly-governed firms with substantial conflicts of interest between principals and shareholders. This is consistent with increased scrutiny and potential for countermeasures associated with the blacklist, which reduce opportunities for managerial wealth diversion.