Negative Surprises Research Articles

Capital market effects around dividend announcements: an analysis of the Berlin stock exchange in 1895

ABSTRACTThis study analyses share-price and trading effects around dividend announcements of firms listed on the Berlin Stock Exchange in 1895. Based on a sample of 166 firms, I find statistically and economically significant positive (negative) cumulative average abnormal returns following a positive (negative) dividend surprise. The positive price impact evolves in advance, while the price impact of negative surprises arises at the announcement date. Consistent with the dividend-signalling hypothesis, these effects are more pronounced for smaller firms and firms with lower financial reporting transparency. Furthermore, trading increases around announcements. The effect is negatively associated with a firm’s market value. These findings are consistent with a differential belief revision among individual investors.

Asymmetric impact of monetary surprises on exchange rate

ABSTRACTThis paper examines the asymmetric response of exchange rate to monetary surprises. After controlling the type, direction and origin of the news as well as business cycle phase, a new asymmetry is found in the response of the exchange rate to news surprises. In specific, the US Dollar depreciates against major currencies as the response to the negative monetary surprises in the 2001 recession, while the Dollar appreciates responding to similar negative monetary surprises during the 2008 recession. The paper further explores possible causes and finds that time-varying status of the currency with higher financial returns may contribute to the new asymmetry.

The impact of crude oil inventory announcements on prices: Evidence from derivatives markets

This study examines the impact of weekly crude oil storage announcements on oil futures and options prices. We document evidence of a strong announcement day effect on both markets, and find prices to move in anticipation of the inventory surprise. Futures returns significantly decrease with positive surprises and increase with negative surprises. There is no evidence of an asymmetric impact on futures prices. Near‐the‐money options exhibit the greatest price sensitivity, and the magnitude of the price response of both futures and options declines with maturity. The results remain robust even after controlling for various macroeconomic and other storage‐related news variables.

Does the US. macroeconomic news make the south african stock market riskier?

The relationship between macroeconomic risk and security returns has been central to financial economics. A well-known concept in capital asset pricing theory is that only systematic risk factors affect security prices. Macroeconomic news announcements are among the most important systematic risk factors for financial markets because the state of the economy is a major source of non-diversifiable risk. The effects of US macroeconomic news on South African stock markets has received no attention in the domestic or international literature. To fill this gap, this article analyzes the impact of US macroeconomic announcement surprises on the volatility of the South African equity market by employing the asymmetric GJR-GARCH model that allows for both positive and negative surprises about inflation and unemployment rate announcements in the U.S. The study uses daily Johannesburg All Share Index (JALSI) returns from 31 May 1994 to 8 March 2016; and inflation and unemployment rates news surprises about the U.S., where the data on market expectations are obtained from the Money Market Survey, and the Bloomberg Survey expectations. This paper finds that shocks to volatility are persistent and asymmetric. While bad news about US inflation does not affect the volatility of South African stock returns, good news tends to increase the volatility. The South African stock market becomes riskier with an unexpected increase in the US unemployment rate and less risky with an unexpected decrease in the US unemployment rate, with the latter effect being stronger than the former. The unexpected decreases in inflation and increases in unemployment raises stock market volatility in South Africa, which in turn, would imply that financial conditions in South Africa would deteriorate and affect the real economy negatively. This is an important finding for portfolio allocation and asset pricing, as well as for policy makers. The stock market volatility is an important component in measuring the financial conditions scenario for South Africa, and that worsening of the financial conditions negatively affect the real economy, which in turn, requires monetary authorities to pursue expansionary monetary policies. Given this, policy makers need to be aware such a scenario and need to respond with expansionary monetary policies to boost the real economy.

Communication Strategy in Quarterly Earnings Calls: The Importance of Tone and Agenda Setting Theory

This study aims to provide insight into communications strategy through the lens of agenda setting theory. Prior research finds that “positive tone” on an a company’s quarterly earnings call (QEC) can offset a negative earnings surprise; however, the concepts of “Positive” and “Negative” are seldom unpacked and thus difficult to operationalize from a practitioner’s point of view. Utilizing content analysis this paper disaggregates tone into 40 different verbal elements and measures the effectiveness (in terms of short term simple and abnormal returns of company market value) of the usage of these elements in situations when companies either met or underperformed their earnings targets. Additionally, these verbal elements are analyzed for both the prepared remarks and Q&A portions of verbal communication events between company management, analysts and investors. The empirical findings in this study show that communication strategy for the QEC event appears to not differ materially across either positive or negative earnings surprise contexts in either the prepared or spontaneous remarks. Thus, management does not appear to be using the call as a strategic communications opportunity. The results suggest that management is not actively employing agenda setting theory in the calls and as a result may be negatively impacting company value.

Excess Cash and the Effects of Share Repurchases

This study examines the impact of accretive share repurchases, which increases earnings-per share (EPS) at least by one cent to meet or beat analysts’ EPS forecasts, on firm investments, financial performance, and firm value, focusing on excess cash holdings. Employing fuzzy regression discontinuity design, we find that firms with excess cash spend a large amount of cash on accretive share repurchases when they would otherwise have to announce a negative EPS surprise, while firms without excess cash do not. Furthermore, we find that accretive share repurchases have a negative impact on firm investment and financial performance among firms with excess cash, and the value of the excess cash deteriorates when the firm pursues accretive share repurchases using its excess cash. Our findings suggest that holding more cash than necessary causes another agency problem, accretive share repurchase, which leads to a reduction in investments, poor financial performance, and a discount in firm value.

The Impact of Information Releases on Market Uncertainty: An Energy Market Perspective

This paper investigates how information releases impact uncertainty on the crude oil and natural gas markets. We find that uncertainty is largely resolved when information releases, especially when the unexpected information is small and analyst dispersion is low. Further analysis shows that resolution in uncertainty is asymmetric for positive and negative surprises, consistent with a higher risk averse in negative surprises. We confirm what was expected in equity market largely holds in commodity market and the two may have contagion effect.

Earnings Warnings and CEO Welfare

AbstractSome CEOs decide voluntarily to issue a warning when they expect a negative earnings surprise. Prior research suggests that warnings contain incremental information beyond actual earnings; warning firms tend to experience permanent earnings decreases. This paper investigates whether compensation committees take warnings into account in setting CEO compensation. We find that warnings are significantly negatively (positively) associated with CEO bonus (option grants), suggesting that compensation committees adjust CEO compensation towards a more high‐powered structure after warnings. However, the sensitivity of bonus or option grants to earnings and stock returns is not affected except for bonus sensitivity to stock returns. We also find weak evidence of an increase in forced CEO turnover after warnings, accompanied by a significant increase in its sensitivity to stock returns. This benefits CEOs with higher ability but imposes more risk on other CEOs. These findings provide a partial explanation of why not every CEO facing a negative surprise decides to issue a warning. Our results are robust to various specifications. In particular, the impact of warnings on compensation appears invariant to the timing or the number of warnings. Overall, these findings suggest that the signal from warnings is used in determining CEO compensation and retention.

Earnings surprises and the response of CDS markets

Purpose This paper aims to investigate the informational content of earnings surprises and accounting information in credit default swap (CDS) markets. Design/methodology/approach This paper analyzes a sample of 444 US firms and 6,907 earnings announcements. By means of parametric and non-parametric event study analysis, the paper assesses the informational value and the timeliness in the assimilation of earnings surprises by CDS rates. Findings This paper shows that earnings surprises contain material information and that CDS rates are affected by the disclosure of obligors’ financial statements. There is also supporting evidence that positive and negative surprises induce asymmetric reactions on CDS rates, especially after accounting for the credit risk of the obligor and the liquidity of the CDS contract. Finally, and perhaps the most interesting conclusion of the study, there is evidence that earnings disclosed during unstable periods lack informational value, in opposition to normal periods. Originality/value As compared with similar studies, this paper presents three novel contributions. The first concerns the use of non-parametric analysis in parallel with parametric tests to achieve robust conclusions. The second novel contribution resides in assessing whether the liquidity of the CDS contracts affects the information value of earnings surprises or the timeliness at which the information is assimilated into CDS rates. Finally, this paper also contributes to improve our understanding on the relationship between the business cycle and the informativeness of accounting information.

Surprise! We changed the logo

Purpose This paper aims to investigate the impact of brand attachment and familiarity on perceived congruence between the logo and the brand. It explores the role of an under-researched factor, surprise, on perceived congruence in the case of a radical logo change. Design/methodology/approach A study was conducted with 220 students following a university logo change. Perceived congruence between the logos (old and new) and the school brand values was measured for two kinds of students, current and future (i.e. applicants). Findings Results show the importance of surprise in the acceptance of a logo change. Brand familiarity and brand attachment affect surprise in opposite ways, such that higher familiarity increases negative surprise, whereas higher attachment enhances positive surprise. Research limitations/implications This research used a school logo. Because schools represent a particular type of company, brand attachment to another type of brand could be different. The current model needs to be tested in different contexts. Practical implications Companies must pay special attention when communicating with their most attached consumers. In particular, companies that aim to change their logos must prepare for the change by relying on communications that can lead to positive surprise. Originality/value This study was conducted in a real context of logo change. It is the first study to focus on the link among familiarity, attachment and surprise when a radical logo change takes place within a company.

The Influence of Negative Surprise on Hedonic Adaptation

After some time using a product or service, the consumer tends to feel less pleasure with consumption. This reduction of pleasure is known as hedonic adaptation. One of the emotions that interfere in this process is surprise. Based on two experiments, we suggest that negative surprise – differently to positive – influences with the level of pleasure foreseen and experienced by the consumer. Study 1 analyzes the influence of negative (vs. positive) surprise on the consumer’s post-purchase hedonic adaptation expectation. Results showed that negative surprise influences the intensity of adaptation, augmenting its strength. Study 2 verifies the influence of negative (vs positive) surprise over hedonic adaptation. The findings suggested that negative surprise makes adaptation happen more intensively and faster as time goes by, which brings consequences to companies and consumers in the post-purchase process, such as satisfaction and loyalty.

On the impact of macroeconomic news surprises on Treasury-bond returns

This paper investigates the impact of surprises associated with monthly macroeconomic news releases on Treasury-bond returns, by paying particular attention to the moment at which the information is published in the month. Implementing an event study on intraday data, we show that (1) the main bond market movers are based on economic activity and inflation indicators, (2) long-maturity bonds are slightly more impacted by surprises than short-maturity ones, and (3) the bond market is more sensitive to negative surprises than to positive ones. Finally, we find evidence of an empirical monotonic relationship between the surprises’ impact and their corresponding news’ publication date and/or their sign.

The information content of the open interest of credit default swaps

This article addresses the information content of the open interest of CDS markets. Using a panel database of 481 firms, I show that open interest innovations help to predict subsequent CDS rate changes and stock returns. The open interest dynamics appears to convey specific information on the reference entity and common information. On the one hand, there is evidence that positive open interest growth precedes the announcement of negative earnings surprises, and that high open interest growth prior to these events is linked to positive and significant CDS rate changes. This forecasting power relates with proxies of investors’ attention and market frictions. The predictive power on CDS rates is larger for illiquid contracts and for entities with low credit risk, whereas the predictive power over stock returns is larger for entities that display greater open interest outstanding. On the other hand, this article also shows that the aggregate open interest growth has predictive power on the subsequent returns of CDS and bond main indexes, and to a lesser extent on stock market returns.

Surprise-enhanced and technology-mediated learning: a two-country study

We develop a theoretical model of surprise-enhanced technology-mediated learning (STL) that builds on evolutionary biological ideas. The model predicts that in technology-mediated learning tasks made up of several discrete learning modules, the presence of a simulated surprise event eliciting negative emotions immediately before a discrete learning module will lead to enhanced learning associated with the module. An experiment involving 617 participants in two countries, USA and Mexico, is used to test the STL model. The participants reviewed six Web-based learning modules about terms used in international trade transactions and then took a test on what they had learned. Data from three experimental conditions were contrasted: two treatment and one control conditions. The two treatment conditions incorporated negative surprises in the form of Web-based screens immediately before Module 4. The surprise screens showed a snake in attack position and a computer malfunction warning, and were absent in the control condition. The participants in both surprise conditions performed significantly better than those in the control condition for Module 4. The learning enhancements were virtually the same regardless of country and type of surprise stimulus (snake attack or computer malfunction screen).

Monetary Policy Surprises, Positions of Traders, and Changes in Commodity Futures Prices

Using futures data for the period 1990–2008, this paper finds evidence that expansionary monetary policy surprises tend to increase crude and heating oil prices, and contractionary monetary policy shocks increase gold and platinum prices. Our analysis uncovers substantial heterogeneity in the magnitude of this response to positive and negative surprises across different commodities and commodity groups. The results also suggest that the positions of futures traders for the metals and energy commodities strongly respond to monetary policy shocks. The adjustment of the net long positions of hedgers and speculators appears to be a channel through which the monetary policy shocks are propagated to commodity price changes.

Income Expectations and Happiness: Evidence from British Panel Data

We analyze the impact of households’ subjective current and future financial measures on their well-being by using three waves of a longitudinal data set—Understanding Society -from the UK. We use a fixed-effects regression method to get rid of individual heterogeneity, and find that even after controlling for some demographic characteristics, including equivalent household income, subjective measures of current and future financial well-being are still significant correlates of life satisfaction in UK households. The same results hold for income satisfaction and mental health. Our main contribution however is showing that positive surprises in financial expectations decrease the subjective well-being of the household’s, and vice versa for negative surprises. This result shows that even though a household’s expectations of its future financial situation may not be accurate, any unexpected shock regarding household income could be significantly correlated with subjective well-being.

Analyzing the Internet Stocks: As the Next Crisis is Brewing

The crash in 1929 signalled the beginning of the 10-year Great Depression that affected all Western industrialized countries. The US Federal Reserve -- and especially former Chairman Ben Bernanke -- saw in the crisis between 2008 and 2009 great parallels with the crisis of 1929 to 1933. Therefore, it was decided to avoid the mistakes of the 30s. More and more experts recognize that the current market value of stocks is completely covered. Still in the current reporting season, we repeatedly see negative surprises. The next example is the numbers of Twitter, Facebook, Google, Amazon. Greater profit opportunities are unchanged when speculating on rising of the markets. Consequently, call options are better choice and offer the best profit opportunities. To substantiate this, I will show you the chart of the US technology index Nasdaq 100 and discuss the fact that the US Federal Reserve has announced the end of their multi-billion dollar bond purchase program Quantitavie Easing 3 (QE3).

Does U.S. macroeconomic news make emerging financial markets riskier?

This study analyzes the impacts of US macroeconomic announcement surprises on the volatility of twelve emerging stock markets by employing asymmetric GJR-GARCH model. The model includes both positive and negative surprises about inflation and unemployment rate announcements in the U.S. We find that volatility shocks are persistent and asymmetric. Asymmetric volatility increases with bad news on US inflation in five out of the twelve countries studied and it increases with a bad news on U.S. unemployment in four out of twelve countries. Asymmetric volatility decreases with good news about US employment situation in eight countries out of twelve countries. Such markets become less risky with an unexpected decrease in unemployment rate in the US. Our findings are important for demonstrating that USA economic growth and employment situation has an impact on many emerging stock markets and that positive US macroeconomic news in fact make many emerging stock markets less volatile.

Insiders Time Well Both Their Purchases and Sales: They Trade after Large Earnings Announcement Abnormal Returns

This paper conjectures that insiders exploit their stock's mispricing after earnings announcements to make profitable trades. We design two sets of tests to provide evidence of insider trading on mispricing of their stock. First, insiders' purchases and sales are profitable both after positive and negative earnings surprises, which indicates that their trading strategies are superior to simple contrarian or momentum trading strategies. Second, we estimate a model of 'normal' market reaction to an earnings announcement and use the deviation of the fitted value from the realized market reaction as our measure of mispricing after earnings announcements. In line with the mispricing hypothesis, we show that insiders sell (buy) more often after large positive (negative) values of our mispricing measure and earn significant post trading returns.

Commodity futures price behaviour following large one-day price changes

This study examines individual commodity futures price reactions to large one-day price changes, or ‘shocks’. The mean-adjusted abnormal return model suggests that investors in 6 of the 18 commodity futures examined in this study either underreact or overreact to positive surprises. It also detects underreaction patterns in eight commodity future prices following negative surprises. However, after making appropriate systematic risk and conditional heteroscedasticity adjustments, we show that almost all commodity futures react efficiently to shocks.