Negative Stock Returns Research Articles

Efeito da Lei 11.638/07 sobre o conservadorismo condicional das empresas listadas BM&FBOVESPA

A Lei nº 11.638/07 alterou, substancialmente, as normas e práticas brasileiras de contabilidade e tais mudanças poderão ter impactos significativos no conservadorismo dos resultados contábeis divulgados. Conhecer o papel do conservadorismo e seus determinantes é importante para compreender a natureza, finalidade e implicações das estimativas contábeis. Este estudo teve como objetivo investigar se a promulgação da Lei n º 11.638/07 alterou o grau de conservadorismo contábil condicional de empresas brasileiras listadas na Bovespa e BMF BOVESPA. Para tanto, procedeu-se a uma pesquisa empírico-analítica por meio de coleta de informações relativas às companhias não financeiras de capital aberto que estavam listadas na Bolsa durante o período que compreendeu o primeiro trimestre de 2005 até o terceiro trimestre de 2009, no banco de dados Economática®. O modelo de Basu foi ajustado para medir o efeito da Lei nº 11.638/07 no conservadorismo condicional. Na hipótese de conservadorismo, os ganhos refletem más notícias (retornos negativos) mais rapidamente do que boas notícias (retornos positivos). Nesse modelo, a medida do conservadorismo (tratamento assimétrico dos ganhos e perdas) baseia-se na extensão em que a associação lucro-retorno é mais forte durante os períodos de más notícias, em comparação com os períodos de boas notícias. Para a amostra analisada, não é possível inferir se as novas regras tiveram algum efeito sobre o grau de reconhecimento assimétrico de perdas e ganhos. Todavia, importa observar que, em função do período de tempo abrangido, os resultados apresentados são preliminares e estão limitados pelo modelo de análise de dados adotado e pelas características da amostra utilizada no estudo, não levando em consideração outros importantes aspectos relacionados ao processo de adoção das normas internacionais de contabilidade.

Do Corporate Bond Rating Revisions Convey Information About Earnings?

We study the information content that corporate bond rating revisions convey regarding future earnings. Consistent with previous findings, we find that rating downgrades are associated with negative abnormal stock returns, while rating upgrades appear to be nonevents. For rating downgrades, earnings decline in the two years prior to and in the year of the rating downgrade announcement but increase in the year following the rating downgrade. While rating upgrades follow a period of rising earnings, they do not signal any increase in future earnings. These results, in conjunction with our multivariate regression results, indicate that rating agencies respond more to permanent changes in cash flows and provide little information, if any, about future cash flows.

The CEO pay slice

We investigate the relation between the CEO Pay Slice (CPS)—the fraction of the aggregate compensation of the top-five executive team captured by the Chief Executive Officer—and the value, performance, and behavior of public firms. The CPS could reflect the relative importance of the CEO as well as the extent to which the CEO is able to extracts rents. We find that, controlling for all standard controls, CPS is negatively associated with firm value as measured by industry-adjusted Tobin's q. CPS also has a rich set of relations with firms' behavior and performance. In particular, CPS is correlated with lower (industry-adjusted) accounting profitability, lower stock returns accompanying acquisitions announced by the firm and higher likelihood of a negative stock return accompanying such announcements, higher odds of the CEO receiving a lucky option grant at the lowest price of the month, lower performance sensitivity of CEO turnover, and lower stock market returns accompanying the filing of proxy statements for periods when CPS increases. Taken together, our results are consistent with the hypothesis that higher CPS is associated with agency problems and indicate that CPS can provide a useful tool for studying the performance and behavior of firms.

The Implications Of Accounting Conservatism For The Relation Between Earnings And Stock Returns

<p class="MsoNormal" style="text-justify: inter-ideograph; text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-size: 10pt;"><span style="font-family: Times New Roman;">Characterizing accounting conservatism as the accountants’ tendency to require a higher degree of verification for recognizing good news than bad news, Basu (1997) predicts that the slope coefficient and R<sup>2</sup> in a regression of earnings on concurrent stock returns will be higher for bad news (negative stock returns) than for good news (positive stock returns). However, standard econometric analysis indicates that the R<sup>2</sup> is a function of the sensitivity of earnings to returns and the noise ratio, which is defined as the ratio of the variance of noise in earnings to the variance of noise in returns. I show that the R<sup>2</sup> from the regression of earnings on stock returns is not necessarily higher for bad news than for good news. So the test of R<sup>2</sup> is not a robust test of accounting conservatism. Consistent with the prediction, I find that the slope coefficient is higher for bad news firms reporting losses than for good news firms reporting profits, but R<sup>2</sup> is lower for bad news firms reporting losses than for good news firms reporting profits. </span></span></p>

Corporate Diversification, Manager's Incentive, And Shareholder Wealth

<p class="MsoNormal" style="text-align: justify; margin: 0in 37.8pt 0pt 0.5in; mso-pagination: widow-orphan; tab-stops: -4.5pt .5in 1.0in 1.5in 2.0in 2.5in 3.0in 3.5in 4.0in 4.5in 5.0in 5.5in 6.0in;"><span style="font-family: Batang; font-size: x-small;">This study examines the impact of managers' incentives and corporate diversification on the returns to shareholders of acquiring firms in acquisition activities. Managers' incentives are measured by creating an incentive ratio (IR). The IR is constructed by dividing the market value of the equity holdings of the three managers with the largest equity shareholding within the firm by their annual compensation. We hypothesize that managers with a high IR are more likely to undertake acquisitions that benefit the shareholders of the acquiring firm than are managers with a low IR. We further hypothesize that the acquisition of a firm that is a focused acquisition (i.e., same industry) will produce greater returns to the acquiring firm's shareholders than will diversified acquisitions.<span style="mso-spacerun: yes;">  </span>Results indicate significant positive returns to acquiring firms whose managers have high IRs. While diversified acquisitions produce insignificant negative stock returns, focused acquisitions, on average, generate significant positive stock returns for acquiring firms. Results also suggest that managers with a low IR consistently undertake more diversified acquisitions than focused acquisitions, that the group with the combination of high IRs and focused acquisitions produces the highest returns among four groups, and that the group with the opposite combination produces the lowest returns.</span></p>

An Empirical Assessment Of The Financial Attributes Of Firms Listed On The Athens Stock Exchange

<p class="MsoNormal" style="text-align: justify; margin: 0in 34.2pt 0pt 0.5in; mso-outline-level: 1;"><span style="font-family: Times New Roman;"><span style="color: black; font-size: 10pt; mso-bidi-font-style: italic; mso-bidi-font-weight: bold; mso-font-kerning: 18.0pt;" lang="EN-GB">This paper studies the financial characteristics of firms that are listed on the Athens Stock Exchange. The primary focus of the study is to capture the financial attributes of firms that display </span><span style="color: black; font-size: 10pt; mso-bidi-font-style: italic;" lang="EN-GB">positive and negative stock returns, and firms that display low and high standard deviation in their stock returns. The study also examines the behaviour of firms that belong to ATHEX as well as other market indices, such as FTSE 20, FTSE </span><span style="color: black; font-size: 10pt; mso-bidi-font-style: italic; mso-ansi-language: EN-US;">International</span><span style="color: black; font-size: 10pt; mso-bidi-font-style: italic;" lang="EN-GB">, etc. The study categorises listed firms </span><span style="font-size: 10pt; mso-bidi-font-style: italic;" lang="EN-GB">based on size, growth, profitability, liquidity and leverage, and assesses their financial behaviour and performance.<span style="color: black;"> Firms with high </span>profitability and growth, liquidity and dividend payout<span style="color: black;"> tend to attract investors’ interest and display positive stock returns. Firms with unfavourable financial figures and uncertainty appear to exhibit significant volatility in their stock returns. Firms that are politically and financially visible, either due to size or because they belong to a market index, tend to carefully organise their actions and meet financial analysts’ forecasts. Firms distribute high dividends and pay their creditors timely in order to attract investors, satisfy creditors and favourably affect stock market participants. Overall, firms structure their decision-making so as to improve their financial profile and performance, and influence the picture that the stock market has about their managerial abilities and future prospects.</span></span></span></p>

Short selling and equity returns with full information dissemination

This paper sheds further light on whether short selling can be associated with negative returns in the spot market. It provides evidence for the case of the capital market of the Athens Exchange (ATHEX) that is empirically tested for the first time, during the period 2003–2007. This market possesses certain interesting characteristics, as along with constrained sales it entailed the rare feature of wide short sales transparency. The empirical findings indicate that short selling is associated with subsequent negative abnormal stock returns for the heavily sold short stocks of this market.

Does Mandatory IFRS Adoption Affect Crash Risk?

We examine the impact of mandatory IFRS adoption on firm-level “crash risk,” defined as the frequency of extreme negative stock returns. An important feature of our study is that we separately analyze industrial firms and firms in finance-related industries. This is important because IFRS adoption is likely to affect industrial firms through different mechanisms than financial firms, and as a result may affect crash risk differently. We find that for companies in poor information environments, crash risk decreases among industrial firms and increases among financial firms after the IFRS mandate. We also find that crash risk decreases relatively more among industrial firms where IFRS results in more credible changes to local GAAP, and that crash risk increases relatively more among banks with less restrictive regulations. In addition, we find that earnings volatility declines after IFRS adoption for industrial firms but increases for financial firms. Overall, our findings are consistent with mandatory IFRS adoption decreasing crash risk among industrial firms by improving reporting quality, and increasing crash risk among financial firms by inducing greater volatility and affording more opportunities for manipulation.

Conservatism and Pensions: Why Accounting Matters

Pension accounting is anything but conservative since earnings can be protected from actuarial gains and losses. This paper shows that therefore conservatism measures based on models of the asymmetric relationship between earnings and positive versus negative stock returns are biased downwards. This is because unrecognized actuarial gains and losses are reflected in returns and are also asymmetric. The pension effect can be documented and corrected by adjusting earnings or by extending conservatism models. This finding offers a partial explanation of why large firms are less conservative since firm size and having defined benefit plans are positively correlated. Furthermore, extending conservatism models with dummy interaction terms can be used to parsimoniously estimate a firm-year measure of conservatism which takes the pension and possible other effects into account.

Asset market linkages: Evidence from financial, commodity and real estate assets

We use a general Markov switching model to examine the relationships between returns over three different asset classes: financial assets (US stocks and Treasury bonds), commodities (oil and gold) and real estate assets (US Case–Shiller index). We confirm the existence of two distinct regimes: a “tranquil” regime with periods of economic expansion and a “crisis” regime with periods of economic decline. The tranquil regime is characterized by lower volatility and significantly positive stock returns. During these periods, there is also evidence of a flight from quality – from gold to stocks. By contrast, the crisis regime is characterized by higher volatility and sharply negative stock returns, along with evidence of contagion between stocks, oil and real estate. Furthermore, during these periods, there is strong evidence of a flight to quality – from stocks to Treasury bonds.

Reorganisation resolutions and bank lending relationships in Taiwan

This paper investigates the impact of three different types of final resolutions of a reorganisation plan – reorganisation ratification, out-of-court settlement, and filing dismissal – on the filer's lead lending bank (LLB), on which earlier research is completely silent. Results reveal that LLBs have the largest (least) negative stock returns in response to the announcement of filing dismissal (reorganisation ratification). Moreover, this paper is the first to explore the extent to which the loan-, bank-, and borrower-level variables lead to a predictable valuation effect for the filer's LLB. In addition to contributing to the literature on bank–borrower relationships, this study proposes an innovative application by providing an empirical exposition of the receiver operating characteristic curve analysis and, thus, demonstrates the models' performance in reliability and robustness.

Originator Performance, CMBS Structures, and the Risk of Commercial Mortgages

This article examines information and incentive problems that can exist in the market for commercial mortgages that are pooled and repackaged as commercial mortgage-backed securities (CMBSs). We find that mortgages that are originated by institutions with large negative stock returns in the quarters prior to the origination date tend to have higher credit spreads and default more than other mortgages with similar observable characteristics. Properties financed with these mortgages also exhibit weaker post-securitization operating performance. In addition, stock price loser institutions are anxious to securitize mortgages they originate more quickly. Finally we find that credit rating agencies require higher levels of subordination for CMBS pools (i.e., view these pools as riskier) that include more mortgages originated by underperforming originators. This evidence is consistent with reputation models in which poorly performing originators have less incentive to carefully evaluate the credit quality of prospective borrowers, thereby letting relatively riskier mortgages pass through their weaker screening standards.

EARNINGS MANAGEMENT AT PUBLIC COMPANIES WITH EMPLOYEE STOCK OWNERSHIP PROGRAM (ESOP)

This research investigates the significant differences of discretionary total accrual between ESOP companies and non ESOP ones as listed at Indonesia Stock Exchange (IDX), and significant differences of stock return before and after implementing ESOP as well as the significant differences of stock return in every single stage of ESOP. This research was conducted on 11 companies doing the ESOP and other 11 ones without doing the ESOP during 1999-2004. The test is by means of windows period during three years before the ESOP, in the year of ESOP taking place, and in the three years after the ESOP. The model used for examining earnings management is the modified Jones model. The proxy of earnings management is discretionary total accrual and the measurement of stock price is stock return. This research was analyzed using independent sample t test and paired sample t test. The results showed that the companies as the sample in this research did the earning management increased their income in the period of three to two years before ESOP and increase their income in the period of one year before ESOP and for the following years after the ESOP. Yet, there are no significant differences of discretionary total accrual between these two groups. There was not any evidence of significant differences of stock return before and after time of ESOP and neither significant differences of stock return in every stage of ESOP but found that negative stock return occurred after and during three stages of the ESOP.

Seasoned Equity Offerings on the Nasdaq: New Evidence on the Asymmetric Information Discount

This study investigates the effect of seasoned equity offerings (SEOs) on the NASDAQ. The results confirm that, most of the time, news of a seasoned equity offering is associated with negative stock returns. This is consistent with earlier research that interpreted this effect as indicating the existence of an asymmetric information discount (AsID). However, of the offerings observed in this study, only 65% experienced negative filing-date excess returns and dilutions. This percentage is much lower than the 80% plus reported in earlier studies and falls to approximately 50% by the time issuance take place. Earlier research, furthermore, suggested that these AsIDs were likely to be long lasting. The novelty in this paper is that, in contrast, the discounts that we observe around the SEOs’ filing dates disappear on the average by the time the stock in the SEOs is actually issued. In short, we find that AsIDs on the NASDAQ on the average are short lived and in most cases, are reversed in the relatively brief interval between filing and issuance.

Managerial Entrenchment and Shareholder Wealth Revisited: Theory and Evidence from a Recessionary Financial Market

Does managerial entrenchment create or destroy shareholder value? This Article presents both theory and evidence that the answer to this question is not monolithic, but rather depends on factors that vary greatly with the macroeconomic climate, such as firm profitability, takeover frequency, and valuation of takeover premiums. The mainstream view, both of academics and market participants, is that entrenchment reduces accountability to shareholders and amplifies agency costs, thus decreasing shareholder wealth. Two influential studies (Bebchuk, Cohen & Ferrell (2009) and Gompers, Ishii & Metrick (2003)) present empirical evidence consistent with this conclusion, finding statistically significant negative correlations between entrenchment and stock returns during the historic bull market of the 1990s. However, there is no a priori reason to conclude that these effects will persist. Rather, a close examination of first principles suggests that the benefits attributable to the market for corporate control are substantially minimized during recessions. Testing this hypothesis using data from the recent economic crisis, this Article finds that the previously identified, statistically significant correlations between high entrenchment and negative stock returns disappeared entirely during the recent financial crisis, even for the most and least entrenched companies. In fact, the opposite effect was observed: firms with above-average levels of entrenchment outperformed less entrenched firms during the sample period. A portfolio buying firms with above-average entrenchment while simultaneously shorting firms with below-average entrenchment would have generated statistically significant annualized abnormal returns of 5.2%. Moreover, companies that entrenched themselves the most in the year prior to the current crisis outperformed companies that either reduced, maintained, or slightly increased their level of entrenchment. While correlation is not causation, these findings are consistent with the theory that there are significant costs, not just benefits, to exposing managers to an unfettered market for corporate control.

The hot-growth companies: How well do analysts predict their performance?

We assess several aspects of analysts’ forecasting performance for stocks included in Business Week's annual list of 100 “hot-growth” companies. We find that analysts underestimate earnings before stocks are included in the list, and they tend to overestimate them afterward. However, analysts revise their earnings estimates downward after stocks are included in the list, and the largest downward revisions are followed by significant negative stock returns. We conclude that analysts correctly assess the diminished prospects of stocks designated as “hot-growth” companies and that their forecast revisions have significant predictive power and value.

In Search of Money Illusion in CEE Stock Markets: The CAPM Approach

We investigate whether the hypothesis of money illusion can explain the negative or non-existent stock returns and inflation co-movement, and lead to deviations from the CAPM-implied risk-return relation in ten Central Eastern European (CEE) markets. We employ the Cohen, Polk and Vuolteenaho (2005) methodology which allows us to test the hypothesis by utilizing the cross-sectional implications of the Modigliani and Cohn (1979) proposition, and thus avoids the need to discriminate between competing rational explanations. The hypothesis of no money illusion cannot be rejected in any of the researched CEE equity markets. Conversely, we find no significant inflationary effect on the Security Market Line (SML) in eight markets, indicating that the stock return and inflation relationship requires alternative explanations. In Lithuania and Poland inflation positively affects the SML, making safe (risky) stocks relatively underpriced (overpriced) in comparison to the market.

Stock returns and inflation revisited: An evaluation of the inflation illusion hypothesis

Several hypotheses have been proposed to explain the stock return–inflation relation. The Modigliani and Cohn’s inflation illusion hypothesis has received renewed attention. Another hypothesis is the two-regime hypothesis. We reexamine these hypotheses using long sample data of the US and international data. We find that the inflation illusion hypothesis can explain the post-war negative stock return–inflation relation, but it is not compatible with the pre-war positive relation. Using a structural VAR identification method, we show that there are two regimes with positive and negative stock return–inflation relations not only in each period of the US but also in every developed country we consider. This seems inconsistent with the inflation illusion hypothesis that predicts only a negative relation.

Financial risk of the Biotech Industry versus the Pharmaceutical Industry

The biotech industry now accounts for a substantial and growing proportion of total R&D spending on new medicines. However, compared with the pharmaceutical industry, the biotech industry is financially fragile. This article illustrates the financial fragility of the biotech and pharmaceutical industries in the US and the implications of this fragility for the effects that government regulation could have on biotech firms. Graphical analysis and statistical tests were used to show how the biotech industry differs from the pharmaceutical industry. The two industries' characteristics were measured and compared, along with various measures of firms' financial risk and sensitivity to government regulation. Data from firms' financial statements provided accounting-based measures and firms' stock returns applied to a multifactor asset pricing model provided financial market measures. The biotech industry was by far the most research-intensive industry in the US, averaging 38% R&D intensity (ratio of R&D spending to total firm assets) over the past 25 years, compared with an average of 25% for the pharmaceutical industry and 3% for all other industries. Biotech firms exhibited lower and more volatile profits and higher market-related and size-related risk, and they suffered more negative stock returns in response to threatened government price regulation. Biotech firms' financial risks increase their costs of capital and make them more sensitive to government regulations that affect their financial prospects. As biotech products grow to represent a larger share of new medicines, general stock market conditions and government regulations could have a greater impact on the level of innovation of new medicines.

Explaining the Disconnection between Stock and Accounting Performance for Individual Acquisitions

While empirical studies that use event-study methodology find on average that the combined gains from mergers and acquisitions are positive, those focusing on accounting figures tend to find a significant drop in performance. Whereas some (see e.g. Bruner (2004)) explain these conflicting results by the different perspectives underlying stock returns and account performance, we argue that each of the four possible combinations between positive or negative abnormal stock returns and accounting performance is due to a distinct motive. We find empirical evidence in support of this claim.