Positive Stock Price Reaction Research Articles

Capital Market Response to the Change in the Dividend Policy: The Case of Slovenian Stock Market

<p>The three basic dividend policy theories have a completely different approach to describing the influence of dividends payment on stock price, and on the value of the company. Numerous studies conducted in this area have led to almost as many derived dividend policy theories, which are more or less related to the basic three. As one of them Wang, Manry & Wandler (2011) specify the dividend signalling theory, which is based particularly on the assumption of the asymmetry of information between the company management and the shareholders and in recent decades it has been studied by many authors, who mostly concluded that dividend increase has a positive stock price reaction, and vice versa, that dividend decrease results in stock price falls (as cited in Ross, 1977; Leland and Pyle, 1977; Grinblatt et al., 1984; Baker and Phillips, 1993; Rankine and Stice, 1997; Bechmann and Raaballe, 2007). For the purposes of our analysis we adopted the methodology of foreign researches and checked the existence of the dividend signalling theory in the Slovenian stock market. The Slovenian stock market is one of developing markets, and is particularly specific due to its small size and illiquidity. Our research resulted in no statistically significant stock price increases from company dividend increases, whereby we have refuted the research hypothesis and, consequently, the dividend signalling theory in the Slovenian stock market in the described period.</p>

Are Corporate Tax Reductions Real Benefits under Imputation Systems?

Imputation systems integrate corporate and shareholder personal income taxes to alleviate double taxation of dividend income. In this study, we empirically examine whether a corporate tax rate reduction under an imputation tax system benefits shareholders. Using Taiwan as a setting, our analyses indicate that decreasing the corporate tax rate is associated with an increase in dividend payout ratio and foreign investment. Moreover, the increase in dividend payout ratio is even greater for firms that have a higher increase in foreign ownership. Additionally, the market reacts positively to an announcement of a tax rate reduction; specifically, positive stock price reactions are stronger for firms that experienced a greater increase in foreign ownership in response to the tax rate reduction, for firms with greater liquidity constraints and more growth opportunities before the tax rate reduction, and for firms with a bigger decrease in effective tax rates after the tax rate reduction. Overall, we provide evidence that a tax rate reduction is associated with economic impacts and that foreign shareholders appear to be the main beneficiaries of a tax rate reduction under an imputation tax system.

Do the FASB's Standards add Shareholder Value?

We examine the cost effectiveness, from the shareholders’ perspective, of the accounting standards issued by the FASB during 1973-2009. In particular, we evaluate (i) the stock market reactions of firms affected by the standards surrounding the events that changed the probability of issuance of these standards; and (ii) whether the market reactions are related, in the cross-section, to affected firms’ agency problems, information asymmetry, proprietary costs, contracting costs, and estimation risk changes. The average standard is a non-event from the investors’ perspective. We find that 104 of the 138 standards we examine are associated with no change in shareholder value. Thirty-four standards are associated with significant abnormal returns. Of these 19 (15) are shareholder value decreasing (increasing). Thus, a mere 11% of the standards improve shareholder value. The fair value pronouncements (SFAS 105, 107, 115) and the R&D expensing standard (SFAS 2) cause the highest negative stock price reaction whereas standards related to the securitization of mortgage backed securities (SFAS 134) and the disclosure of derivative instruments (SFAS 119) are associated with the highest positive returns. Surprisingly, 25 standards are associated with an increase in estimation risk. Stock returns associated with standards are higher for affected firms that experience a decrease in estimation risk. Principles-based standards are associated with more positive stock price reactions relative to rules-based standards. However, standards that involve more managerial estimates are associated with negative stock price reactions.

The Financial Impact of Firm Withdrawals from “State Sponsor of Terrorism” Countries

Using an event-study framework, we examine the stock market reaction to the announcement of firm withdrawal from countries designated as “State Sponsors of Terrorism” by the U.S. Department of State. We find that such announcements are, on average, linked to a statistically significant increase in firm value -- an effect which starts already a few days before the announcement date. The observed abnormal returns are positively associated with U.S. domicile, the intensity of a firm’s engagement in a designated country, the number of countries that it withdraws from as well as with a withdrawal from Iran compared to a withdrawal from other countries. Evidence suggests an increase in demand for stocks of withdrawing firms as a plausible cause of the positive stock price reaction. Pension and endowment funds are significantly less likely to own majority stakes in firms with intensive involvements in countries designated as “State Sponsors of Terrorism”. We find some statistical evidence that firms remaining active in such countries have abnormally positive returns in the long run.

When IT capabilities are not scale-free in merger and acquisition integrations: how do capital markets react to IT capability asymmetries between acquirer and target?

In mergers and acquisitions (M&A), a primary objective of acquirer is to integrate IT resources of the target with its own. IT M&A integration is assumed to create synergies, which in turn increase shareholder wealth by making the value of the merged firm greater than the sum of the standalone values of the two firms. In this study, we challenge this assumption and argue that IT M&A integration does not always lead to greater value creation. Prior research on IT M&A integrations indicates that IT resources are often not scale-free in M&A: that is, they do not transfer easily and costlessly from an acquirer to its target or vice versa. In fact, IT M&A integration can destroy value rather than create it when IT resources are not scale-free. We theorize about the contingencies under which IT M&A integration can create value for shareholders of acquirers. We test our hypotheses in a sample of 549 M&A transactions between 1998 and 2007. We find that, on average, capital markets react negatively with M&A announcements of acquirers whose IT capabilities are superior relative to those of the targets. The superiority of the acquirer’s IT capabilities signals that the acquirer is likely to rip and replace IT resources of the target. This IT M&A integration approach increases risks of disruption to target’s operations and revenue growth. Capital markets take such risks into account and reduce the stock price of the acquirer. One contingency that reduces the negative reactions of capital markets is industry relatedness of target. In a same-industry acquisition, an acquirer and its target have similar operating models, competitive dynamics, and regulatory context. Thus, ripping and replacing weaker IT resources of the target with superior IT resources of the acquirer creates expectations of more efficient operation, engenders positive stock price reactions, and increases shareholder wealth. Another contingency that reduces the negative reactions of capital markets is the acquirer’s track record in profitable growth. A profitably growing acquirer that has superior IT capabilities increases the confidence of capital markets that it can minimize potential disruption risks of IT integration, continue its profitable growth pattern with newly acquired target, engender positive stock price reactions, and create shareholder wealth. These findings indicate that IT M&A integration does not always lead to greater value creation in M&A. The study makes a contribution by identifying the contingencies under which IT M&A integration creates wealth for acquirer’s shareholders.

Stock Market Reaction to Firm Withdrawal from State Sponsor of Terrorism Countries − Punishment for Foregone Business Opportunities or Reward for Ethical Behaviour?

Using an event-study framework, we examine the stock market reaction to the announcement of firm withdrawal from countries designated as “State Sponsors of Terrorism” by the U.S. Department of State. We find that such announcements are, on average, linked to a statistically significant increase in firm value -- an effect which starts already a few days before the announcement date. The observed abnormal returns are positively associated with U.S. domicile, the intensity of a firm’s engagement in a designated country, the number of countries that it withdraws from as well as with a withdrawal from Iran compared to a withdrawal from other countries. Evidence suggests an increase in demand for stocks of withdrawing firms as a plausible cause of the positive stock price reaction. Pension and endowment funds are significantly less likely to own majority stakes in firms with intensive involvements in countries designated as “State Sponsors of Terrorism”. We find some statistical evidence that firms remaining active in such countries have abnormally positive returns in the long run.

The Effect of State Pension Cut Legislation on Bank Values

This study provides an empirical analysis of the impact of Wisconsin and Ohio pension cut legislation on values of banks operating in Wisconsin and Ohio, banks operating in other states in which pension cut legislation was being considered as Wisconsin and Ohio went through its legislative process, and all publicly traded U.S. banks. We find that banks doing business in Wisconsin and Ohio experience positive (negative) stock price reactions to announcements that indicate an increased (a decreased) probability of pension cut legislation. The stock price reactions are positively related to the extent to which banks operate in Wisconsin and Ohio. Stock price reactions are rarely evident for banks in the other thirteen states that were considering pension cut legislation during the period of analysis. We also find municipal bond spreads tighten and bank credit supply increases with pension cut legislation. Overall, the findings suggest states’ budget cuts affect bank values and credit supply through their municipal bond holdings.

Debt Raising and Refinancing by Japanese REITs: Information Content in a Credit Crunch

This paper examines the information content of debt raising and refinancing activities of Real Estate Investment Trusts (REITs) in normal and tight credit markets. Based on a sample of 340 debt announcements made by REITs in Japan (J-REITs) between 2002 and 2011, we observe that they are associated with a positive stock price reaction, averaging 1.05 % over a 4-day window. Stratifying the sample into debt raising and debt refinancing, we find strong evidence that the positive economic gains associated with debt announcements flowed from the pool of debt refinancing announcements. They registered a significant mean return of 1.20 % over the 4-day window, as opposed to 0.07 % for the pool of debt raising activities. Further investigation shows that the positive market reaction to debt refinancing is more pronounced during the credit crunch of 2007 to 2009. Although debt refinancing does not lead to any change in the firm’s capital structure, it still contains valuable information about the firm’s prospect, especially in tight credit markets.

International investors’ reactions to cross-border acquisitions by emerging market multinationals

How do international investors react to announcements of cross-border mergers and acquisitions (CM&As) by emerging market multinational enterprises (EMNEs)? Using a unique and manually-constructed firm-level dataset, this paper examines the stock price reactions to CM&A announcements made over the period 1991–2010 by Chinese MNEs listed on the Hong Kong Stock Exchange and the wealth impacts of their corporate governance. Our empirical findings confirm a positive stock price reaction on average, and suggest that international investors react positively to the presence of large shareholders, but negatively to the presence of institutional shareholders. There is a negative impact if the largest shareholder is either the State or the corporate founder. We suggest that this is because the international investors perceive potential principal–principal conflicts in such ownership/control constellations and discount equity prices accordingly. We also find that Board size and independence have positive effects on the price reaction, but that large supervisory boards engender negative reactions.

Short and long-term performance analysis of banks Ms&As in Europe

Based on a sample of 152 European banks Ms&As deals during the period 1996-2010, we probe into the short-term reaction of stock prices around the Ms&As announcement day by calculating abnormal returns for acquirers and targets. We also analyze the long-term value creation of combined entities by calculating buy-and-hold returns over two years subsequent to Ms&As. We find stock price erosions in the post-event 10-day period for the overall sample of acquirers. This finding is particularly evident in the case of low profitability bidder firms. We also detect a significantly positive stock price reaction of target bank shares for the 3-day event window around the Ms&As announcement day. This major finding remains unquestionable, throughout domestic and cross-border deals and irrespective of prior profitability of target banks

Agency conflicts and the wealth effects of proxy contests

We examine the shareholder wealth impact of proxy contests and find that over the three years preceding the contest, target stock prices significantly underperform their industry peers. In addition, consistent with the monitoring role of proxy contests, the announcement and full contest periods result in a positive stock price reaction suggesting that the market views the initiation of a proxy contest as good news. Interesting differences emerge between firms in which dissidents win seats and those where they do not win seats. While target firm stock prices appreciate for all firms at the announcement, such wealth gains are permanent only for the subsample of targets which not only are afflicted with elevated levels of agency problems but also make significant reduction in discretionary expenditures. When dissidents do not win seats, no attempt to reduce agency costs is apparent, and as a result, these firms experience a sustained wealth loss over the years surrounding the contest. The steps taken to reduce agency costs primarily in firms in which dissidents win seats suggests that proxy contests fulfil their intended role of disciplining the board and improve firm performance.

Where are the Women? Board Decisions and Female Director Location

Using the addresses of over 4,000 directors on the boards of S&P 1500 firms, we document that female board members tend to live closer to large metropolitan areas than do male board members. Nearly 53% of the female directors in our sample reside in five metropolitan areas. The combined statistical area of Washington DC/Baltimore/Arlington by itself accounts for nearly 21% of all female directors. In contrast, only 36% of male directors reside in the top five metropolitan areas. We hypothesize that this geographic clustering constrains the supply of qualified female board members who can be located close to corporate headquarters. Consistent with this hypothesis, we find that, in most regions of the U.S., women directors tend to reside farther than male directors from corporate headquarters. We also hypothesize that the differences in geographic distances from corporate headquarters will influence how female and male directors use information. To test this hypothesis, we examine whether director location and gender diversity affect board decision-making. We find that gender-diverse boards rely more heavily on stock price performance when determining CEO compensation and when deciding whether to dismiss the CEO. However, these effects largely disappear when we control for directors’ geographic distance from headquarters. Moreover, we find a positive stock price reaction to public announcements of female director appointments when these female directors are proximate to headquarters. We do not document a reaction to the appointment of distant female directors or male directors. Thus, the geographic remoteness of female directors, rather than gender-based differences in monitoring per se, can explain why gender-diverse boards are tougher monitors. More generally, our results suggest that it is important to consider local supply constraints created by geographic clustering when evaluating the effects of gender diversity on the operations of boards of directors.

The Effects of Cash, Debt, and Insiders on Open Market Share Repurchases

The findings of the authors' recent study suggest, on balance, that stock repurchases function much like tax‐efficient special dividends, increasing when free cash flow is large and when debt levels are low, but not replacing regularly scheduled dividends. Repurchasing companies experience median event returns of about 2% around the repurchase announcements, with a related mean effect of roughly 3%. Companies with greater free cash flow and less debt are more likely than otherwise comparable companies to repurchase their shares. Furthermore, repurchasing companies that exhibit substandard preannouncement stock price returns and seek to buy back higher percentages of shares tend to elicit more positive stock price reactions.At the same time, the study provides some evidence that corporate managers attempt to use their inside information to profit from buybacks. For example, managing insiders in repurchasing firms decrease their selling activity and increase their buying activity two weeks before repurchase announcements to a greater extent than non‐managing insiders. But perhaps the most remarkable finding from this part of the study is how little insiders as a group seem to profit from their short‐term trading behavior—a finding that suggests that the market appears to anticipate much of this behavior.

Stock Price Reactions To Debt Initial Public Offering Announcements

We examine the valuation effect of initial public debt offers on issuing firms common stock for the period 1970 to 2010. In contrast to findings for seasoned debt offerings, we find a statistically significant cumulative abnormal return of -0.24 percent over the three-day announcement period for the overall sample of 1,207 debt IPOs. Consistent with the prediction of the adverse selection model of Myers and Majluf (1984), the significant negative valuation effect of debt IPOs is only associated with risky issues that are assigned a high-yield bond rating. The announcements of low-risk investment grade debt IPO issues are associated with insignificant positive stock price reaction. In addition to the certifying effect of investment grade rating, the market also reacts favorably to successful debt IPOs issued under challenging conditions.

Equity Carve-Outs in Taiwan

This paper examines a sample of 129 equity carve-outs in Taiwan between 1994 and 2007. The study first finds evidence that there are significantly positive stock price reactions during initial announcements of equity carve-outs, which is consistent with the evidence discovered in Europe, U.S., and Singapore. The sources of wealth effect due to equity carve-outs are also identified using univariate and multivariate regressions. The combined evidence indicates that the market in Taiwan reacts positively to the announcement of equity carve-outs because the perceived wealth gains could be attributable to higher parent ownership that signals a better quality firm, divesting unrelated businesses, and using the proceeds to undertake new investments.

Financial Misrepresentation and Its Impact on Rivals

This paper examines how the announcement of an accusation of fraudulent financial misrepresentation affects industry rivals of the accused firm. Consistent with the importance of the industry competition effect, we find that rivals in less competitive industries benefit from the event. However, in competitive industries, the information spillover effect dominates the competition effect, resulting in negative returns to rival shareholders following the event. The spillover effect increases in importance with the severity of the accusation and is more important for opaque rivals and for rivals that had positive stock price reactions to past positive earnings surprises of the accused firm.

Share Repurchase Reasons and the Market Reaction to Actual Share Repurchases: Evidence from Australia

AbstractUsing repurchase reasons provided by Australian companies for their stock repurchase programs, we ask if the market's response is different across repurchase motivations by examining actual daily share repurchases. We find that firms with the undervaluation motive experience a more positive stock price reaction when they report their repurchases to the market. We show that undervaluation motive firms repurchase fewer shares and have a lower program completion rate than other motives firms. During the 1‐year period following the repurchases, undervaluation motive firms do better than their control sample firms whereas other motive firms do not perform better or worse than their control sample firms. Overall, our results suggest that the undervaluation motive is a stronger signal than other repurchase motives, and contrary to the predictions of the standard signaling theories, management statements carry some value for the market. We also present some evidence suggesting that a costly action may not be needed for a signal to be credible.

Schedule UTP: Stock Price Reaction and Economic Consequences

ABSTRACT: In 2010, the Internal Revenue Service (IRS) announced the requirement to disclose uncertain tax positions (UTP) on a new schedule (Schedule UTP) to be filed with federal corporate income tax returns. Schedule UTP could increase a firm's tax burden by providing a roadmap for the IRS to identify firms' tax-planning strategies. We find that stock returns around the development of Schedule UTP are negative, consistent with investors' concern that Schedule UTP would impose costs on firms. However, we document a significant positive stock price reaction to the release of the final draft of Schedule UTP in which the IRS relaxed many of the controversial provisions of Schedule UTP. Additionally, we find this positive reaction is incrementally larger for more tax-aggressive firms. Finally, we find a significant decrease in reported unrecognized tax benefits (UTBs) and additions to UTBs after the adoption of Schedule UTP in 2010.

Corporate Philanthropic Giving: Active Responsibility Or Passive Ingratiation? Evidence From Chinese Family-Controlled Listed Companies

This paper examines the impact of political connection on family-controlled listed firms philanthropic giving activities toward the 2008 Wenchuan Earthquake in China, and stock price reactions to such activities. Using the 542 Chinese listed companies controlled by private owners as the sample, it was found that firms with political connection are more likely to donate. Besides, focusing on the 244 donating firms, it was found that there is a positive impact of the donation amount on stock price response. Whats more, the positive stock price reactions toward the donation announcement made by firms with political connection are not as strong as that of firms without such connection. Regression results indicate that although family-controlled firms with political connection are more likely to donate, their activities can not generate as much positive stock price effect as their no-political connection counterparts. These results reveal that both political interferences and market mechanisms have critical impact on corporate philanthropic behavior in China.

Non-audit services and financial reporting quality: evidence from 1978 to 1980

We provide evidence on the long-standing concern about the potential conflicts of interest of auditors that provide clients with non-audit services using rarely explored non-audit services fee data from 1978 to 1980. In this setting, we find evidence of improved earnings quality when auditors provide non-audit services, especially those related to information services. This is consistent with better audit quality resulting from knowledge spillovers in the joint offering of audit and consulting services. Events related to the 1982 repeal of mandatory non-audit services disclosures are associated with a small positive stock price reaction, suggesting that the disclosure repeal has no adverse economic consequences. Furthermore, following the repeal we find no change in the earnings quality of client firms. In sum, our data suggest that non-audit services offered by audit firms can be associated with improved audit and reporting quality in client firms via auditors’ reputational incentives, synergies, and knowledge transfers.