Negative Stock Returns Research Articles

Impact of Financial Risk and Macro-Economic Variable on Stock Return: Evidence from Commercial Banks of Nepal

This paper examines the impact of financial risks and macroeconomic variables on the stock returns of commercial banks in Nepal. The study focuses on four main types of financial risks: credit risk, market risk, capital risk, and liquidity risk, alongside bank size, return on assets (ROA), and dummy variables for COVID-19 and earthquake impacts. Additional macroeconomic variables include economic growth, inflation, and interest rates. Using panel data regression on yearly data over 11 years for 20 commercial banks, the study investigates these factors' causal impacts on stock returns. The findings indicated that capital risk and liquidity risk negatively affect stock returns, suggesting that higher capital adequacy ratios limit high-risk, high-return investments, and higher liquidity risks lead to financial instability. Credit risk and market risk, however, did not impact stock returns. Larger banks faced negative stock returns, likely due to management complexities and inefficiencies. Economic growth and inflation positively impacted stock returns, reflecting economic optimism and increased activities, while higher interest rates negatively affected returns by increasing borrowing costs. The COVID-19 pandemic had a positive impact due to increased stock market activity amid limited investment opportunities, whereas the 2015 earthquake negatively affected returns as efforts focused on rebuilding. These insights underscore the need for robust risk management and consideration of broader economic conditions in investment and policy decisions.

Inflation and stock return volatility in selected African countries: A GARCH-MIDAS approach

Amidst persistent inflationary pressures in Africa and central banks raising rates to counter inflation, leading to a shift from stocks to alternative assets and impacting stock return volatility, this paper investigates the influence of inflation on stock return volatility in five African countries using the GARCH-MIDAS approach, using mixed data of daily and monthly frequencies. We observe that inflation is important for stock return volatility, as higher inflation increases volatility and reduces returns. Our results provide a better understanding of the dynamics of stock market volatility while accounting for the role of inflation, using the natural frequencies of the variables. Our findings encourage monetary authorities to communicate their inflation expectations to the market participants/investors to moderate negative stock return volatility.

Meeting Targets in Competitive Product Markets

ABSTRACTWe show that public banks face negative stock return jumps after missing their earnings per share (EPS) targets, and theoretically and quantitatively link these jumps to bunching behavior in the EPS surprise distribution. Bunching banks cut deposit rates to meet their targets, but do so at the expense of deposit outflows and franchise value losses. Local competitors, including private banks unexposed to capital market pressure, increase deposit rates, compensating depositors for switching. Our results provide new evidence that performance targeting incentives can affect consumer product prices, and suggest that competition may provide a check on public firms' targeting efforts.

Effects of customer unionization on supplier relationships and supplier value

This study examines whether suppliers modify trading strategies upon their customers’ unionization. The study demonstrates that when customers unionize, suppliers experience negative stock returns and rely less on the unionized customers for sales. Results are robust for alternatively using a regression discontinuity design. Suppliers reduce their exposure to unionized customers due to the demand uncertainty arising from potential labor disruptions, the customers’ reduced competitiveness in the product market, and customers’ potential shifting of unionization costs to suppliers. Furthermore, suppliers with unionized customers mitigate risks by seeking new customers and diversifying their customer concentration.

COAALA: A Novel Approach to Understanding Extreme Stock–Bond Comovement

Abstract This article proposes a novel copula model to understand the dependence between extreme variations in stock and government bond returns. This model is used to introduce a tail-based extension of the safe haven concept, which we refer to as a tail risk dampener. Our findings reveal significant cross-country differences in stock–bond local tail dependence and tail risk dampening abilities. Some countries’ bond market can lessen the impact on portfolio returns of extreme negative stock returns, while for others no such negative tail comovement is found. This tail comovement is also not always aligned with global comovement between stocks and bonds. The article concludes that a comprehensive understanding of the comovement and the resulting diversification potential between stock and bond returns necessitates complementing global measures of dependence with local tail measures.

The asset growth return premium and anchoring on the 52‐week high

AbstractResearch shows that year‐over‐year growth in a firm's assets is associated with a negative stock return premium. A possible explanation for this premium is based on mispricing correction, due in part to investors' overvaluation related to investment. In this article, we argue that a correction of any type is more likely to occur when stock prices are further away from their 52‐week high. To the extent that the 52‐week high acts as a viable anchor, when stocks are closer to this anchor, investors might become less inclined to contribute to the typical downward correction for these types of growth firms. In several tests, we find that stocks that are furthest away exhibit the strongest return premium. The return premium, however, begins to disappear as stocks approach their 52‐week high. These results are robust to various risk factors and cross‐sectional tests that include several firm‐specific characteristics.

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.

The impact of COVID-19 on stock markets: A systematic literature review

This research investigates the disruptive impact of COVID-19 on the financial performance of stock markets in the United States of America (USA), Asia (China, Japan, South Korea, India), and the Middle East and North Africa (MENA) region context being the sample region. The research aim is to reveal the impact of COVID-19 on stock market returns in the sample regions. prior research suggests that 74 percent (Rakshit & Neog, 2022) of the global stock markets reported negative stock returns, increased volatility, and cumulative abnormal returns during the pandemic. The research considers an empirical approach that employs event studies, panel data regression models, and paired sample t-tests. In so doing this research considers the objective impact of the COVID-19 phenomenon. The results suggest that only 5 percent suggested stock returns indicated positive effects on stock market return and volatility, while 21 percent indicated mixed positive and negative impacts. The pandemic led to negative stock market returns in the sample region. The research reveals the negative impact was primarily due to government intervention in stock markets. The research adds support to current findings that encourage governments to swiftly adopt proactive measures to minimize the disruptive impact of stock markets.

Divesting under Pressure: U.S. firms’ exit in response to Russia’s war against Ukraine

We explore the determinants and consequences of U.S. corporations limiting their business operations in Russia in the immediate aftermath of the 2022 Russian invasion of Ukraine. Firms with Russian exposure experience slightly worse stock market returns when the invasion begins on February 24, 2022. Russia-exposed firms with worse stock-price reactions to the war and greater share of operations in Russia are more likely to subsequently remain in Russia, while firms with milder ex ante exposure are more likely to withdraw or suspend their Russian operations. When U.S. firms announce exits from Russia in the aftermath of the invasion, there are no adverse announcement effects on their returns. Instead, exit announcements are preceded by a negative trend in abnormal returns that ends immediately on the day of the announcement. In regression analyses, immediately preceding negative stock returns are the strongest predictor of firms’ decisions to exit Russia, after size and industry. These results are consistent with firms choosing to limit their Russian presence in response to operational impact and reputational pressure, and the damage to stock returns stops immediately after the exit announcements.

Measuring the Expected Effects of the Global Tax Reform

Abstract Over 140 countries agreed on a fundamental corporate tax reform in 2021 to be implemented in 2023 and beyond. To measure its potential effects, we study asset price changes within minutes of the reform announcements. We construct proxies for the reform’s costs regarding U.S. companies’ tax burdens and countries’ public finances. Likely exposed companies exhibit significant negative stock returns. Our lower-bound estimates indicate total shareholder value losses of $112.6 billion one day after the reform announcements. Further, likely exposed countries experience increases in sovereign debt credit risk. Our findings inform the cost-benefit analysis of a historical international tax reform. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

How important are semi‐annual earnings announcements? An information event perspective

AbstractUsing a method that avoids the need to specify earnings expectations, we demonstrate that the period surrounding the semi‐annual announcement of Australian firms' earnings is, on average, an important source of information. Although there is substantial year‐to‐year variation, we observe no evidence of any significant time trend, and also conclude that a shift from Australian domestic generally accepted accounting principle to International Financial Reporting Standards did not impact the association between earnings announcement windows and stock returns. We also find no evidence that the informativeness of earnings announcements varies systematically with firm size, analyst following or economic news (i.e., positive vs. negative stock returns, profits vs. losses), although we do observe significant variation across industries. Our conclusion is further supported by contrasting the earnings release date with the days immediately prior to release, or high information days other than earnings announcement windows. Using a more precise event window relative to prior studies (i.e., 3 h vs. 3 days), we confirm that earnings announcements contain significant new information about fundamentals.

The impact of Bank of Japan’s exchange-traded fund purchases

The Bank of Japan (BOJ) enhanced its large-scale asset purchases in October 2010 by purchasing equity exchange-traded funds (ETFs). This study is the first to demonstrate that the BOJ provides downside protection for stock prices through the countercyclical purchase of ETFs. The BOJ responds to a large negative stock return during the overnight and morning periods, and submits purchase orders during lunchtime. Using the BOJ’s March 2020 announcement of doubling the annual purchase amount during the COVID-19 pandemic, this study also finds that the announcement effect is small and temporary. In contrast, the flow effect of the actual purchases is significant and increases. The BOJ’s countercyclical ETF purchase prevents equity risk premia from rising during an economic downturn.

Political connections and short sellers

This study finds that politically connected firms, comparing with their non–connected peers, are less likely to be targeted by short sellers, especially during the periods of market turmoil. Short sellers’ avoidance of politically connected firms can be attributed to the implicit government guarantee, which significantly increases the target firms’ information complexity and decreases short sellers’ expected risk–adjusted profits. The absence of short sellers consequently results in less negative stock returns for politically connected firms as compared to their non–connected peers. Our findings extend Boehmer et al.(2010) by showing that the absence of short sellers may not necessarily indicate good news but can be attributed to the presence of political connections. This study sheds some light on the sources of market value of political connections.

Strategic emphasis and accounting conservatism

PurposeThe authors examine how a firm's strategic emphasis (SE) on value appropriation (VA) over value creation (VC) is associated with accounting conservatism.Design/methodology/approachTo examine the effect of SE on a firm's adoption of conservative accounting practice, the authors measure SE as advertising expenses minus research and development (R&D) expenses scaled by total assets. The authors rely on the asymmetric timeliness of earnings from Basu (1997) to measure conditional conservatism and investigate how the incremental sensitivity of earnings to negative stock returns varies with the SE.FindingsSE on VA over VC is found to be positively related to accounting conservatism since they want to deter entrants (i.e. competition adjustment) and to accommodate the tighter monitoring over the financial reporting system from stakeholders (i.e. risk adjustment). This argument is also supported by the additional cross-sectional tests based on the different level of market competition and external monitoring environment. In addition, the positive association between SE on VA over VC and accounting conservatism is less pronounced when managerial overconfidence is high.Research limitations/implicationsImplication is that two important decisions (i.e. SE and accounting conservatism) are related with each other since both are to create competitive advantage and to maintain financial stability for a firm, and the relation differs by managerial characteristics.Originality/valueThis study highlights the differential roles of SE in shaping the conservatism in financial reporting and the importance of overconfidence in driving conservative accounting.

COVID-19, Supply Chain Breakdowns, and Firm Value

ABSTRACT By exploiting the lockdown of Wuhan on January 23, 2020, during the COVID-19 pandemic and the disclosure of public firms’ top five suppliers, we examine the impact of a supply chain disruption on stock returns. Our findings suggest that firms with major suppliers in Wuhan experience significantly worse cumulative abnormal returns than those whose suppliers are not located in Wuhan. The results are robust to alternative estimation methods, event windows, and supply chain disruption metrics. Our findings suggest that supply chain disruption contributes to negative stock returns and highlight the importance of supply chain disruption on firm value.

Investor Tastes, Corporate Behavior, and Stock Returns: An Analysis of Corporate Social Responsibility

We classify institutions into socially responsible investors (SRI) and not socially responsible investors using the value weighted corporate social responsibility (CSR) scores of their portfolio holdings. We find that firms that exhibit increases in SRI ownership tend to increase future CSR scores. Our analysis of stock price responses to the revelation of SRI ownership changes indicates that the revelation of higher SRI ownership is associated with negative stock returns. These effects are particularly strong when we focus on SRI-activists, who tend to target firms with low CSR scores and lobby to increase them over time. These observations are consistent with the hypothesis that anticipated increases in CSR activities reduce firm values. This paper was accepted by David Simchi-Levi, finance.

Quantile Risk–Return Trade-Off

We investigate the risk–return trade-off on the US and European stock markets. We investigate the non-linear risk–return trade-off with a special eye to the tails of the stock returns using quantile regressions. We first consider the US stock market portfolio. We find that the risk–return trade-off is significantly positive at the upper tail (0.9 quantile), where the upper tail is large positive excess returns. The positive trade-off is as expected from asset pricing models. For the lower tail (0.1 quantile), that is for large negative stock returns, the trade-off is significantly negative. Additionally, for the median (0.5 quantile), the risk–return trade-off is insignificant. These results are recovered for the US industry portfolios and for Eurozone stock market portfolios.

The asymmetric effect of warranty payments on firm value: The moderating role of advertising, R&D, and industry concentration

Changes in firms’ warranty payments are informative signals that enable investors to form timely expectations about potential changes in product quality. The authors’ survey shows that warranty payments affect potential investors’ product quality assessments and stock investment likelihood. Their quantitative analysis reveals an asymmetric stock market reaction: unanticipated increases in warranty payments (which signal quality “losses”) lower stock returns but unanticipated decreases do not affect stock returns. Two important factors moderate this relationship. First, boosting advertising spending attenuates the negative stock return effect of unanticipated increases in warranty payments. Second, unanticipated decreases in warranty payments, which signal quality “gains”, translate into higher stock returns when the industry has become less concentrated. Interestingly, changes in R&D spending do not moderate investors’ response to unanticipated increases or decreases in warranty payments. The authors advise firms to use advertising to lessen the harm from warranty payment increases and to strongly communicate warranty payment decreases in the face of intensified competition. The authors also caution that offering warranties in general does not ensure greater firm value as declining quality firms that myopically offer warranty programs experience lower firm value than those that do not provide warranties.

THE NEWS EFFECT OF COVID-19 ON GLOBAL FINANCIAL MARKET VOLATILITY

This study investigates whether the coronavirus (COVID-19) pandemic caused a contagion and negatively affected the stock market. Using data from the 10 worst-hit countries over the period from December 2019 to May 2020 and an EGARCH model, the study shows that market speculations lead to negative stock returns and higher stock market volatility. Further, estimates of both bivariate time-series regression and random-effects panel regression show significant effects of COVID-19 related media coverage on the stock market.

Narrative disclosure quality and the timeliness of goodwill impairments

This paper studies the relation between the quality of corporate narrative disclosure and the timeliness of goodwill impairments. We combine five measures of the linguistic content of annual report narratives to generate a proxy for narrative disclosure quality. To measure the timeliness of impairments, we deploy a model that relates observed goodwill impairments to the main determinants of impairments identified by prior literature, focusing especially on current period negative stock returns. We hypothesise and find that the impairments of firms with low-quality narrative disclosures are less timely than the impairments of firms with high-quality disclosures. In addition, using a signalling argument, we hypothesise, and find that the market response to goodwill impairments is more negative for firms with low disclosure quality.