Positive Abnormal Stock Returns Research Articles

Corporate power purchase agreements and the value of decarbonization

PurposeThe purpose of this paper is to examine if the announcement of corporate power purchase agreements (PPAs) induce significant effects on the electricity buyers' stock returns.Design/methodology/approachThis is an event study based on the Fama French Five Factor Model which uses several significance tests and robust regression approaches.FindingsThe announced closing of corporate PPAs induces significant positive abnormal stock returns. This announcement effect is even more pronounced in case of virtual PPAs.Originality/valueTo the best of the author‘s knowledge, this study is the first which explictly investigates the announcement effects of corporate PPAs, which are closed between the owner of the renewable energy asset and the institutional end consumer. In addition, this study extends the event study approach by robust regression methods.

I Feel Your Pain: The Effect of Regulator as a Minority Shareholder on Merger and Acquisition Performance

We examine the effect of a regulator‐led advocate for minority shareholders on merger and acquisition (M&A) performance in China. In recent years, the China Securities Regulatory Commission established the China Securities Investor Services Center (CSISC), which began its ownership of 100 shares of public firms in 2016. The CSISC advocates for the interests of minority shareholders proactively. Focusing on abnormal stock returns in M&A announcements, we find that acquirers that have the CSISC as a shareholder (CSISC acquirers) exhibit higher positive abnormal stock returns than non‐CSISC acquirers. Cross‐sectional analysis suggests that the core results are mainly driven by firms with severe agency problems and weak external/internal monitoring, and those not controlled by the state. In addition, we find that CSISC acquirers have better long‐term performance and encounter more M&A failures than non‐CSISC acquirers. Our findings indicate that although the CSISC only holds 100 shares of listed companies, it plays an effective role in monitoring and driving firms to make appropriate M&A decisions.

CEO Political Leanings and Store-Level Economic Activity during the COVID-19 Crisis: Effects on Shareholder Value and Public Health.

ABSTRACTMaintaining economic output during the COVID‐19 pandemic results in benefits for firm shareholders but comes at a potential cost to public health. Using store‐level data, we examine how a CEO's political leaning impacts this trade‐off. We document that firms with a Republican‐leaning CEO experience a relative increase in store visits compared to firms with a Democratic‐leaning CEO. The increase in store visits is associated with higher sales and positive abnormal stock returns. However, we also document higher COVID‐19 transmission rates and more employee safety complaints in communities where establishments with higher store traffic are managed by a Republican‐leaning CEO.

What does corporate social advocacy signal? Evidence from boycott participation decisions

PurposeThis paper explores how a firm's public stand on a social-political issue can be a salient signal of the firm's values, identity and reputation. In particular, it investigates how boycott participation–conceptualized as a cue of a corporation's stand on important social-political issues–may affect the stock market valuation of that corporation, as well as how corporations legitimise their stand on the issues.Design/methodology/approachThe authors employ a mixed-methods design that uses both qualitative techniques (content analysis) and quantitative methods (event study methodology) to examine a sample of US firms who participated in a boycott campaign that sought to call attention to issues of hate speech, misinformation and discriminatory content on social media platform Facebook.FindingsFindings from the qualitative content analysis of company statements show that firms legitimise their stand on, and participation in, the boycott by expressing altruistic values and suggesting to stakeholders that their stand aligns not only with organizational values/convictions but also with the greater social good. Importantly, the event study results show that firms who publicly announced their intention to participate in the boycott, on average, earn a statistically significant positive abnormal stock return of 2.68% in the four days immediately after their announcements.Research limitations/implicationsFindings relate to a specific case of a boycott campaign. Also, the sample size is limited and restricted to US stocks. The signalling value of corporate social advocacy actions may vary across countries due to institutional and cultural differences. Market reaction may also be different for issues that are more charged than the ones examined in this study. Therefore, future research might investigate other markets, use larger sample sizes and consider a broader range of social-political issues.Practical implicationsThe presence of significant stock price changes for firms that publicly announced their decision to side with activists on the issue of hate propaganda and misinformation offers potentially valuable insights on the timing of trades for investors and arbitrageurs. Insights from the study also provide a practical resource that can be used to inform organizations' decision-making about such issues.Social implicationsTaking the lead to push on social-political issues, such as hate propaganda, discrimination, among others, and communicating their stands in a way that speaks to their values and identity, could be rewarding for companies.Originality/valueThis study provides novel evidence on the impact that corporate stances on important social-political issues can have on stock market valuation of firms and therefore extends the existing related research which until now has focused on the impact on consumer purchasing intent and brand loyalty.

What If Dividends Were Tax-Exempt? Evidence from a Natural Experiment

Abstract We study the effect of dividend taxes on the payout and investment policies of publicly listed firms. We exploit a unique setting in Switzerland where, following the corporate tax reform of 2011, some but not all firms were suddenly able to pay tax-exempt dividends. We show that treated firms increase their dividend payout by around 30$\%$ after the tax cut. The effect on payout is less pronounced for firms prone to agency conflicts. We find a significant positive abnormal stock return after the announcement of the payment of a tax-exempt dividend. However, reducing dividend taxes does not boost investment.

Geographic Proximity in Short Selling

Geographic proximity is associated with significantly higher returns from short selling within London and the UK. Short trades by funds near the target headquarters are followed by larger negative abnormal returns. Proximity matters more for stocks that are smaller, more volatile, and less actively covered by sellside analysts, and less for large trades and trades following more proximate institutions' trades. Short trades are correlated geographically, with proximate funds more likely to short the same stocks. Geographically closer short trades predict more negative earnings surprises. Covering of short positions by more proximate institutions is followed by more positive abnormal stock returns.

Bad News for Announcers, Good News for Rivals – Are Rivals Fully Seizing Transition-Period Opportunities Following Announcers’ Top Management Turnovers?

Research summary. This study analyzes whether and how the disruption of top management turnovers can affect not only turnover firms but also their intra-industry rivals. It thus adds to the literature on both leader life cycles and competitive dynamics. Using a U.S. sample of 857 CEO turnovers, we find a period of relative stagnation for announcing companies following top management turnovers. We also find that intra-industry rivals can use this period to their advantage. Semi-structured interviews with seasoned CEOs, CFOs, and a board member from large publicly listed firms, as well as an extensive news search, support this notion. Intra-industry rivals gain a competitive advantage that can result in positive abnormal stock returns and accounting performance. The intra-industry outperformance is greater for forced turnovers. Managerial summary. The departure of a company’s CEO, forced or not, is usually a disruptive event for a company, as the successor must adapt to the new environment before undertaking any major strategic changes. Rivals can seize an opportunity during the transition period of the announcing company because they remain fully operational. They can thus actively exploit the relative inability of turnover companies to react by, e.g., launching sales initiatives or increasing M&A activity. This interpretation is supported by internal and external evidence. Investors on average also recognize this situation, and stock prices react accordingly.

Stock market reactions to different types of oil shocks: Evidence from China

AbstractThis study utilizes a novel method of isolating oil‐price shocks into demand and supply driven contributors to analyze their impacts on stock returns in China. Empirical results suggest that oil shocks related to supply limitations generate positive abnormal stock returns for industries that can help alleviate these constraints. Conversely, demand‐driven oil shocks have mixed effects on industries which may relate to the uncertain impact of increasing demand for goods and higher production costs. These results are robust to alternative specifications of country‐specific control factors and provide evidence that different types of oil shocks have distinctive impacts on industries.

Bad news for announcers, good news for rivals: Are rivals fully seizing transition‐period opportunities following announcers' top management turnovers?

AbstractResearch summaryThis study analyzes whether and how the disruption of top management turnovers can affect not only turnover firms but also their intra‐industry rivals. It thus adds to the literature on both leader life cycles and competitive dynamics. Using a U.S. sample of 857 CEO turnovers, we find a period of relative stagnation for announcing companies following top management turnovers. We also find that intra‐industry rivals can use this period to their advantage. Semi‐structured interviews with seasoned CEOs, CFOs, and a board member from large publicly listed firms, as well as an extensive news search, support this notion. Intra‐industry rivals gain a competitive advantage that can result in positive abnormal stock returns and accounting performance. The intra‐industry outperformance is greater for forced turnovers.Managerial summaryThe departure of a company's CEO, forced or not, is usually a disruptive event for a company, as the successor must adapt to the new environment before undertaking any major strategic changes. Rivals can seize an opportunity during the transition period of the announcing company because they remain fully operational. They can thus actively exploit the relative inability of turnover companies to react by, for example, launching sales initiatives or increasing M&A activity. This interpretation is supported by internal and external evidence. Investors on average also recognize this situation, and stock prices react accordingly.

CEO Political Leanings and Store-Level Economic Activity during COVID-19 Crisis: Effects on Shareholder Value and Public Health

Maintaining economic output during COVID-19 pandemic results in benefits for a firm’s shareholders but comes at a potential cost to public health. Using store-level data, we examine how a CEO’s political leanings impact this tradeoff. We document that firms with Republican-leaning CEOs experience a relative increase in store visits compared to firms with Democratic-leaning CEOs. The increase in store visits is associated with higher sales and positive abnormal stock returns. However, we also document higher COVID-19 transmission rates and more employee safety complaints in communities where establishments with higher store traffic are managed by Republican-leaning CEOs.

Hedge Fund Activists: Value Creators or Good Stock Pickers?

This paper considers two competing hypotheses for the positive abnormal stock returns of firms targeted by activist hedge funds in both the short term and the long term: are they value creators or good stock pickers? Using matching to mitigate selection effects, we find that activists’ targets do not outperform ex ante similar control firms; this suggests that activists are good stock pickers, not value creators. We also observe abnormal returns around filings disclosing material changes in activist ownership. This too supports good stock picking as the more plausible hypothesis. Overall, our evidence indicates that hedge fund activism does not seem to benefit the buy-and-hold shareholders of targeted firms.

All the president's friends: Political access and firm value

Using data on White House visitors from 2009 through 2015, we find that corporate executives’ meetings with key policymakers are associated with positive abnormal stock returns. We also find evidence suggesting that firms receive more government contracts and are more likely to receive regulatory relief (as measured by the tone of regulatory news) following meetings with federal government officials. Using the 2016 presidential election as a shock to political access, we find that firms with access to the Obama administration experience significantly lower stock returns following the release of the election result than otherwise similar firms. Overall, our results provide evidence suggesting that political access is of significant value to corporations.

Do mega-mergers create value? The acquisition experience and mega-deal outcomes

Existing literature shows that mega-M&A deals valued over $500mil end up destroying the shareholder value of acquirers on a significant scale. Our paper considers mega-deal as a dependent event and examines the role of acquirer’s previous acquisition experience playing in the outcome of mega-deals. We find that mega-deals conducted by firms with a high level of acquisition experience, i.e. a firm completed at least 12 transactions before, are more likely to be completed. In addition, more experienced acquirers of mega-deals generate positive abnormal stock returns for shareholders in both short-run and long-run, with a dollar value gain of $50.6 million around deal announcement. We also find that more experienced acquirers are better at managing the post-acquisition integration process and enjoy a significant improvement in operating performance.

Buying Manipulation around Seasoned Equity Offerings

We show that seasoned equity offerings (SEOs), in which secondary share-offering size greatly exceeds market share turnover, provide a unique opportunity for stock price manipulation by speculators holding restricted shares. The proposed new theory is consistent with several puzzling empirical findings, for example, the positive abnormal stock return between announcement and issuance and the long-term poorer returns of issuing firms after SEOs. The manipulation is characterized by a strong buying in the secondary market prior to the issuance, which drives up the market price and thereby the offering price of restricted shares, and a large amount of liquidation of restricted shares in the SEO. Our model predicts that favorable market reactions with speculator's manipulative intent after SEO announcement could occur, which naturally leads to a successful issuance and over-investment based long-term underperformance after SEO.

Earnings management and convertible preferred stock calls

The impact of convertible calls on stock returns and operating performance has intrigued researchers for many years. Many studies have examined this issue, but the evidence is not conclusive. In this study, we provide a comprehensive review of the literature and examine earnings management around calls of convertible preferred stock. We find that pre-call abnormal accruals are significantly positive. Coupled with the well-documented significantly positive abnormal stock returns during the pre-call period, this evidence raises the question of whether earnings are managed upward to boost stock prices and ensure conversion of called securities. However, our overall findings do not support the argument that high accruals in the pre-call period reflect deliberate earnings management to entice investors to convert their securities into equity ahead of subsequent poor performance.

Inventor Chief Executive Officers and Firm Innovation

ABSTRACTUsing a novel, manually collected dataset, we find that firms whose chief executive officer (CEO) is an inventor experience significantly better innovation outcomes, as measured by patents and future citations. We obtain these results in models with firm fixed effects, in difference‐in‐difference analysis of transitioning CEOs that controls for the CEO fixed effects, and among firms with founder CEOs. Firms led by an inventor CEO also exhibit greater tolerance for failure as indicated by a greater number of both highly cited and uncited patents, and engage more in explorative search strategies that exploit new technological trajectories. Stock market, however, seems unable to fully capture the positive impact of inventor CEOs on future innovation: firms whose CEO transitions to be an inventor experience positive abnormal stock returns, especially during the early years following the transition.

Managing Negative Celebrity Endorser Publicity: How Announcements of Firm (Non)Responses Affect Stock Returns

Celebrity endorsers can cause negative publicity that can spill over to the endorsed brand. However, little is known about the economic effects of firm reactions to these events. This study fills this gap and estimates how announcements of firms’ reactions (yes versus no), timing (slow versus fast), and type (maintain/suspend versus no reaction) affect daily abnormal stock returns (ARs) following negative publicity. Using 128 events of negative endorser publicity between 1988 and 2016 affecting firms in 230 cases, this study offers new and economically relevant insights. The most surprising finding is that firms can gain value depending on their response. Announcements of firms’ reactions positively affect ARs, especially if they occur quickly after negative publicity surfaces. The analyses reveal that fast (slow) announcements of firms’ reactions increase (decrease) firm value by 2.10% (−1.88%) over the next four trading weeks. Results also show that issuing statements suspending or maintaining the endorser both yield more positive ARs than not reacting at all. Further analyses identify conditions under which the stock market rewards maintaining or suspending an endorser. Firms have more positive ARs when they (1) suspend higher-blame endorsers, (2) suspend endorsers whose negative publicity is related to their occupation, (3) maintain endorsers with a high product fit, and (4) do not suspend apologetic endorsers. This study discusses implications for theory and practice and provides a strong empirical foundation for understanding the consequences of firm reaction announcements to negative celebrity endorser publicity.This paper was accepted by Juanjuan Zhang, marketing.

Informed Trading of Options, Option Expiration Risk, and Stock Return Predictability

This paper considers a plethora of option-based measures of stock mispricing introduced by previous literature. These measures are based on differences between implied and actual stock prices, differences in implied volatilities across options, and on option trading volume. We show that stocks that these measures indicate are mispriced are small and/or hard to borrow. When small and hard-to-borrow stocks are omitted, returns to short selling are insignificant for some of the measures and greatly diminished for others. Three of the nine measures, however, predict positive abnormal stock returns for value-weighted portfolios without obvious market frictions, suggesting that they constitute investment opportunities.

Inventor CEOs and Firm Innovation

Using a novel, manually-collected dataset, we find that firms whose chief executive officer (CEO) is an inventor experience significantly better innovation outcomes, as measured by patents and future citations. We obtain these results in models with firm fixed effects, in difference-in-difference analysis of transitioning CEOs that controls for the CEO fixed effects, and among firms with founder CEOs. Firms led by an inventor CEO also exhibit greater tolerance for failure as indicated by a greater number of both highly cited and uncited patents, and engage more in explorative search strategies that exploit new technological trajectories. Stock market, however, seems unable to fully capture the positive impact of inventor CEOs on future innovation: firms whose CEO transitions to be an inventor experience positive abnormal stock returns, especially during the early years following the transition.

The effects of executive compensation and outside monitoring on firms’ pre-repurchase disclosure behavior and post-repurchase performance

We show that corporate governance mechanisms play an important role in controlling managers’ opportunistic behavior. Low executive equity compensation and a high intensity of outside monitoring help to discourage undesirable self-interested disclosure decisions by management before share repurchases. Corporate governance mechanisms also have a significant impact on long-run abnormal stock prices and operating performance. Firms that manipulate pre-repurchase disclosures experience positive long-term abnormal stock returns. However, we do not find that these firms experience positive long-run operating performance. Corporate governance mechanisms significantly attenuate the tendency toward negative pre-repurchase disclosures and their effects on stock prices and operating performance.