Positive Abnormal Stock Returns Research Articles

INVESTOR RESPONSE TO FOOD NUTRITION LABELING REGULATION IN CHINA

INVESTOR RESPONSE TO FOOD NUTRITION LABELING REGULATION IN CHINA

Option-implied Tail Risk and Stock Returns Around Earnings Announcements

We show that option-implied jump tail risk estimated prior to earnings announcements strongly predicts post-earnings risk-adjusted abnormal stock returns. The predictive power of implied jump tail risk is particularly strong on extreme abnormal stock returns whose absolute values exceed 10%. The finding is robust to various event windows and after controlling for model-free implied moments of variance, skewness and kurtosis. We argue that the tail risk implied from options preceding earnings news releases reflects a sudden flood of information of informed traders and investors, and this results in the tail risk usefully predicting abnormal stock returns. Finally, we show that upside and downside tail risk contain distinctive predictive information, with upside (downside) tail risk strongly predicting positive (negative) abnormal stock returns.

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

We study the effect of dividend taxes on the payout and investment policies of publicly listed firms. To do so, 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 to their shareholders. Using a difference-in-differences specification, we show that treated firms swiftly and permanently increase their dividend payout by around 30% compared to control firms after the tax cut. When studying the effect of agency conflicts, we show that the impact on the payout is less pronounced for firms in which the controlling shareholders have more voting rights than cash-flow rights. 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. This is due to a significant drop in retained earnings and to the fact that equity issuances do not surge after the tax cut. Our evidence is consistent with models where the marginal source of finance is retained earnings, and inconsistent with the neoclassical theory of dividend taxation.

Political connections and firm performance: Evidence from government officials' site visits

This study uses government officials' corporate site visits as a measurement of political connection and examines how political connection affects firm performance. Using a novel dataset on government officials' site visits from 2004 to 2014, we find that firm performance increases following corporate site visits by government officials. This study finds that firms obtain more new investment projects and bank loans, improve corporate governance, and decrease information asymmetry as well. Government officials' site visits are also associated with positive abnormal stock returns, indicating that investors interpret government officials' site visits as a signal of government endorsement and support. Using China's recent anti-corruption campaign as an exogenous shock, we find that political connections are more valuable in the absence of political corruption.

Identity change vs. strategy change: the effects of rebranding announcements on stock returns

Firm rebranding efforts are inevitable; however, we have a limited understanding of the nature and performance implications of those rebranding decisions. This research contributes to our understanding of this process by identifying two fundamental dimensions of rebranding decisions: brand identity change and brand strategy change. More importantly, we identify and empirically test the conditions under which brand identity change and brand strategy change have either strong or weak (even negative) influences on firm value. Specifically, the results from analyzing 215 rebranding announcements suggest that (1) rebranding decisions, on average, are associated with positive abnormal stock returns in the (−5, +5) event window, and (2) investors use cues, like the fit among rebranding dimensions, firm competitive position, and industry competitive intensity, to make informed evaluations of firm future cash flows.

After-Hours Block Trading, Short Sales, And Information Leakage: Evidence From Korea

We investigate the impact of insider trading in after-hours block market on stock price and short sales volume, before and after the trading becomes public information. During pre-announcement period, positive (negative) abnormal stock return is generated when insiders buy (sell) their shares but does not when quasi-insiders trade, implying that stock price reflects long-lived private information of corporate governance structure. The impact is most prominent when ownership shares are transferred to (from) corporate insiders. In contrast, short sales volume generally does not depend on the identity of block holders. Short sales volume has a negative correlation with abnormal stock return only during the transaction date, indicating that a short-sale decision of tippees is based on their sole expectation on instantaneous stock returns. We also find evidence that insiders select the timing of their trades with respect to maximizing their realized profits or minimizing their purchasing costs.

The impact of reshoring decisions on shareholder wealth

Interest in reshoring, defined as the return of manufacturing and service operations from previously offshored locations to the U.S., has gained momentum recently. Yet, there is no academic evidence on the shareholder value implications of reshoring decisions. This paper analyzes the shareholder wealth effects of 37 reshoring decisions announced by U.S. firms during 2006–2015. Our results indicate that reshoring announcements result in positive abnormal stock returns. Mean (median) abnormal stock returns on reshoring announcements are 0.45% (0.29%), corresponding with a mean (median) market value change of $322.57 million ($31.60 million). Our findings imply that the benefits associated with the reshoring tend to outweigh the costs. This finding is relevant for firms faced with the decision of whether to move business activities from offshore to domestic locations. It is also of interest to policy makers who may seek to further stimulate the reshoring phenomenon.

Market effects of SEC regulation of short-term borrowing disclosure

Purpose The purpose of this paper is to offer an alternative approach to measure the cost-benefit tradeoff, by analyzing stockholders’ reactions to the announcement and vote on the proposed rule. More specifically, the authors use event study methodology to investigate the stock price reaction on two key dates; that is, the announcement date and the voting date of the proposed short-term borrowing disclosure regulation, and argue that positive abnormal stock returns indicate that the expected benefits of the regulation outweigh the compliance costs. A negative reaction would indicate that, in the eyes of investors, the costs of compliance exceed the expected benefits. Design/methodology/approach The authors use event study analysis and apply the market model to equal-weighted portfolios of 2,450 financial and 3,985 non-financial US firms to calculate mean cumulative abnormal stock returns (MCARs, hereafter) on the announcement and voting dates. Then, the authors conduct mean difference tests on firm-level MCARs across three event windows, that is, (−30,−1), (0,+1) and (+2,+30), to confirm if the MCARs of financial firms are different from those of non-financial firms on both the announcement and the voting dates. Finally, robustness tests are performed with alternate benchmark, using value-weighted portfolios, for the market. Findings The authors find that the market reaction is positive and significant at the announcement date and negative and significant at the voting date of the proposed regulation of short-term borrowing disclosure regulation. Overall, the paper documents a positive market reaction, indicating the usefulness of the disclosure from the vantage point of users. Examining and comparing the results for various subsets, including commercial banks and saving institutions, bank holding companies, size quartiles, and exchange listed and OTC registrants, the authors find that a “one-size-fits-all” approach to regulation is undesirable. Originality/value This is first empirical study, to best of the authors’ knowledge, to explore stockholder reaction to a proposed, rather than an enforced, Securities and Exchange Commission (SEC) regulation and may contribute to the SEC’s final decision on the rule. Second, given a dissimilar reaction from investors of different firms, the results suggest that the SEC needs to reconsider its one-size-fit-all approach for the proposed rule. Finally, because the proposed disclosure would affect all SEC registrants, the economic implications of the findings are important not only for stockholders, but also for regulators, as they attempt to manage systematic risk and optimize the level of market intervention.

The long-term performance of new product introductions

This study investigates the long-term stock market performance of firms following announcements of new product introductions (NPIs). We find that firms announcing NPIs experience significantly positive abnormal stock returns in the three- and five-year post-announcement periods. Further, firms’ marketing capabilities and industry background, firm size, and the timing new products are introduced significantly affect shareholder gains from NPIs. The Carhart four-factor model, the zero-investment portfolio method, and the buy-and-hold return procedure yield consistent results. Our findings show that investors on average do not fully capture the valuation impact of new products nor incorporate the information contained in the initial announcements.

Customer Satisfaction and Long-Term Stock Returns

The authors reexamine the relation between customer satisfaction (measured by the American Customer Satisfaction Index) and long-term stock returns using statistical tests that are well specified in the presence of industry clustering. Their results are consistent with those of Fornell, Morgeson, and Hult (2016) , who find positive abnormal stock returns for companies with high levels of customer satisfaction. However, the authors also identify three caveats that could affect the robustness of this conclusion. First, the results critically depend on the manner in which industry is defined. Second, because Fornell, Morgeson, and Hult use a proprietary trading strategy that has not been disclosed to the general public, the authors are unable to discern what fraction of their reported performance is due to customer satisfaction as opposed to other characteristics of the trading strategy. Finally, because the authors also find positive abnormal returns for the entire American Customer Satisfaction Index sample, at least some of the performance reported by Fornell, Morgeson, and Hult might be driven by sample characteristics unrelated to customer satisfaction. This article also provides useful guidance for measuring long-term abnormal returns in the presence of industry clustering.

Announcement Effects of Contingent Convertible Securities: Evidence from the Global Banking Industry

AbstractThis paper investigates the announcement effects of CoCo bonds issued by global banks between January 2009 and June 2014. Using a sample of 34 financial institutions, we examine abnormal stock price reactions and CDS spread changes before and after the announcement dates. We find that the announcement of CoCos correlates with positive abnormal stock returns and negative CDS spread changes in the immediate post‐announcement period. We explain these effects with a set of theories including the lowered probability of costly bankruptcy proceedings, a signaling framework based on pecking order theory and the cost advantage of CoCos over equity (tax shield).

The Effects of Executive Compensation and Outside Monitoring on Firmss Pre-Repurchase Disclosure Behavior and Post-Repurchase Performance

Using a sample of management forecasts, we find that higher CEO and CFO equity compensation and lower institutional ownership concentration, percentage of independent director, and number of analyst following induce managers to release significantly more bad news, downward biased management earnings forecasts, and withhold good news before share repurchases. These manipulating firms experience positive post-repurchase long-term abnormal stock returns, but have no operating performance improvement. In contrast, lower executive equity compensation and higher intensity of outside monitoring constrain the pre-repurchase management opportunism. These non-manipulating firms do not have post-repurchase long-run stock anomaly, but experience superior operating performances. Our findings show that the corporate governance mechanism has a significant impact of on pre-repurchase managers' opportunistic behavior and post-repurchase stock prices and operating performances.

Were U.S. Banks Exposed to the Greek Debt Crisis? Evidence from Greek CDS Spreads

This study provides an empirical analysis of the impact of the Greek debt crisis on stock returns of U.S. commercial banks. We find that good (bad) news events pertaining to the Greek debt crisis, identified by large changes in the Greek CDS spread, produce insignificant positive (negative) abnormal stock returns. While banks were exposed to Greek debt, their exposure was such that it did not result in any abnormal fluctuations in bank values at the height of the crisis. When we measure the sensitivity of bank returns to changes in the Greek CDS spread in an effort to measure banks’ exposure to the crisis, we find that changes in the Greek CDS spread provide no additional explanatory power for bank returns beyond what a U.S. market index does. Finally, we find no bank characteristic that allows us to consistently predict the effect of the Greek crisis on specific banks.

Announcement Effects of Contingent Convertible Securities: Evidence from the Global Banking Industry

This paper investigates the announcement effects of contingent convertible securities (CoCo bonds) issued by global banks between January 2009 and June 2014. Using a sample of 34 financial institutions and 87 CoCo bond issues, we examine abnormal stock price reactions and CDS spread changes before and after the announcement dates. We find that the announcement of CoCo bonds correlates with positive abnormal stock returns and negative CDS spread changes in the immediate post-announcement period. The effects are most pronounced for first-time issues. We explain the CDS spread changes by the lower probability of costly bankruptcy proceedings and the abnormal stock returns by a signaling framework that is based on pecking order theory and the cost advantage over equity (tax shield). We also examine the factors that are associated with the post-announcement abnormal stock returns and find that the existence of issuer call provisions reduces the positive abnormal returns.

Have the anomalies following share buybacks disappeared?

AbstractAlthough several empirical studies report significant positive long-run abnormal stock returns following share buybacks, a recent event study paper claims that such anomalies have disappeared in the most recent decade and this disappearance of abnormal performance is not sensitive to the methods used. The present paper makes an attempt to investigate this claim using 63 Indian share buybacks which took place between July 2008 and June 2012. We consider the application of several event study methods and our findings are a bit mixed. We conclude that the long-run anomalies following stock repurchases in India are still sensitive to the employed methodologies.

Is the New CEO 'Bath' Real?

Following a change in CEO, US firms manage earnings downward by adjusting real business activities and accruals. The magnitude of real earnings management is more than double that of accrual-based earnings management. These earnings “baths” are more pronounced after non-routine and external CEO successions. Because CEO turnover and restructuring are often concurrent, negative real earnings management measures can be confounded with legitimate restructuring. Our results suggest that the new CEO real earnings bath is real. A real earnings bath in the first year of CEO tenure reverses strongly, causing a temporary and significant improvement in earnings in the second year. This systematic reversal pattern is consistent with earnings management. In addition, real earnings management in the first year of CEO tenure is not associated with long-term performance improvements or positive abnormal stock returns, contrary to what would be expected in a successful restructuring. JEL classifications: C23, G30, M41

Timing Stock Trades for Personal Gain: Private Information and Sales of Shares by CEOs

We investigate the determinants of gains to CEOs from large stock sales. Consistent with the literature, we find that some CEOs benefit from inside information by strategically timing sales. We also find that internal accounting information can be used to predict such timing. Furthermore, sales executed under plans that conform to SEC Rule 10b5-1 tend to follow positive abnormal stock returns, but do not, on average, precede abnormal declines. In contrast, sales that do not conform to the requirements of Rule 10b5-1 tend to follow smaller positive abnormal stock returns, but, on average, precede large abnormal declines. Board and CEO characteristics are related to the magnitude of the post-transaction abnormal returns. Overall, the evidence suggests that Rule 10b5-1 plans do not prevent CEOs from timing large sales or the release of discretionary information around them.

The resolution of failed banks during the crisis: Acquirer performance and FDIC guarantees, 2008–2013

Abstract We find that winning bidders in FDIC failed bank auctions from 2008 to 2013 experience substantial positive abnormal stock returns. Returns are inversely related to bid amounts after controlling for bid determinants, consistent with wealth transfers from the FDIC providing implicit subsidies to acquirers. The results challenge arguments that wealth transfers in earlier crises stemmed from since-eliminated bidding restrictions, but support the prediction of cash-in-the-market pricing theory that during crises, resolution through acquisition requires subsidization. Winning bid amounts are related to proxies for cash-in-the-market pricing. FDIC loss sharing, not widely used before the recent failure wave, is an important influence on bids.

The Resolution of Failed Banks during the Crisis: Acquirer Performance and FDIC Guarantees, 2008-2011

We find that winning bidders in FDIC failed bank auctions from 2008 to 2013 experience substantial positive abnormal stock returns. Returns are inversely related to bid amounts after controlling for bid determinants, consistent with wealth transfers from the FDIC providing implicit subsidies to acquirers. The results challenge arguments that wealth transfers in earlier crises stemmed from since-eliminated bidding restrictions, but support the prediction of cash-in-the-market pricing theory that during crises, resolution through acquisition requires subsidization. Winning bid amounts are related to proxies for cash-in-the-market pricing. FDIC loss sharing, not widely used before the recent failure wave, is an important influence on bids.

R&D Increases and Long‐Term Performance of Rivals

AbstractWe examine how a firm's research and development (R&D) increases affect its intra‐industry competitors in the long run. Consistent with the R&D spillover hypothesis, when a firm unexpectedly increases its R&D spending, its intra‐industry competitors experience improvements in operating performance and analyst forecast revisions and earn positive abnormal stock returns in the long run. The industry concentration, which is related to the firm's strategic reaction, is crucial in determining the magnitude of the R&D spillover effect.