Positive Stock Price Reaction Research Articles

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.

Cross-Border Mergers and Acquisitions: The Role of Private Equity Firms

We show that it is a signal of deal quality in cross-border M&A if acquirers have private equity firms as owners (‘PE backing’). As such, announcements of cross-border M&A deals by PE-backed acquirers are associated with positive stock price reactions, but only if targets are in poor information environments. We show that PE backing is a positive market signal because of PE firms’ experience and networks that result from prior deals in target countries. We close by documenting that the market correctly anticipates that operating performance of PE-backed acquirers increases as a result of cross-border M&A.

Say on Pay Votes and CEO Compensation: Evidence from the UK*

We examine the effect of say on pay regulation in the UK. Consistent with the view that shareholders regard say on pay as a value-creating mechanism, the regulation’s announcement triggered a positive stock price reaction at firms with weak penalties for poor performance. UK firms responded to negative say on pay voting outcomes by removing controversial CEO pay practices criticized as rewards for failure (e.g., generous severance contracts) and increasing the sensitivity of pay to poor realizations of performance.

Schedule UTP: Stock Price Reaction and Economic Consequences

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 firm's tax burden by providing a roadmap of tax planning strategies directly to the IRS. 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 uncertain tax benefits (UTBs) and additions to UTBs after the adoption of Schedule UTP in 2010.

Revealing the Family Name: Valuation Effects of Name Changes for Chaebol-Affiliated Firms

We examine the stock market reaction to announcements of corporate name changes for fi rms belonging to Korean chaebols. We fi nd that chaebol-affiliated fi rms changing their non-chaebol-name (a name not including the name of a chaebol) to a chaebol-name (a name including the name of a chaebol) experience a positive stock price reaction on the announcement date. Another noteworthy finding is that the fi rms also earn a statistically signifi cant excess return on the effective date of a name change, as well as on the announcement date. The stock price reaction on the effective date is stronger among stocks experiencing a larger increase in their investor base.

Fit, Style, and the Portability of Managerial Talent

How portable are top management skills? Should (and do) firms care about firm-manager fit when they hire new managers? How is fit related to managerial 'style'? We hypothesize that if firms and managers are matched with each other on the basis of fit on multiple dimensions, then firms that employ the same manager at adjacent points of time should have similar characteristics. We find strong evidence that firms that employ the same manager sort on a number of characteristics. Our empirical design ensures that these results are not explained by managerial style, or by moves among firms of similar size, or within the same industry. We construct a measure for the quality of fit. We find that a worse fit leads to less positive stock price reaction to the announcement of managerial appointments, lower managerial pay, and shorter tenure for the manager, suggesting that management skills do not necessarily transfer from one firm environment to another. We also find evidence that when the firm and the manager do not fit well, managers influence several firm-specific variables, consistent with managerial style.

Non-Audit Services and Financial Reporting Quality: Evidence from 1978-1980

We provide evidence on the long standing concern on auditor conflicts of interest from providing non-audit services (NAS) to audit clients by using rarely explored NAS fee data from 1978-80 Using this earlier setting, we find cross-sectional evidence of improved earnings quality when auditors provide NAS, especially those related to information services. This is consistent with better audit quality from knowledge spillovers due to the joint offering of audit and consulting services. Events related to the repeal of these NAS disclosures in 1982 are associated with a small positive stock price reaction suggesting no adverse economic consequences of withdrawing NAS disclosures. Further, following the repeal of disclosure requirements we find no change in the earnings quality of client firms. In sum, data drawn from an earlier time period suggest that auditors’ reputational incentives, possible synergies and knowledge transfers imply that NAS offered by audit firms can be associated with improved audit and reporting quality in client firms.

The valuation effects of equity carve-outs

In an examination of 136 equity carve-outs in Taiwan in 1994–2007 we first find significantly positive stock price reactions associated with the announcements, consistent with the global findings. We further examine the sources of wealth gains on the basis of the asymmetric information hypothesis (Nanda, 1991) and the divestiture gains hypothesis (Schipper and Smith, 1986) and find that the results lend more support to the latter than the former. Specifically, two ramifications of the divestiture gains hypothesis are supported: firms that divest unrelated business (refocusing strategy hypothesis) and use the proceeds to undertake new investments (the investment strategy hypothesis) draw favourable market appraisals.

U.S.-Style Investor Activism in Japan: The First Ten Years

This paper provides a comprehensive look at the first decade of U.S.-style investor activism in Japan, the second largest stock market in the world with many underperforming and cash-rich firms. Barriers to shareholder activism have historically been high but we document an unprecedented wave of block acquisitions by hedge fund and other investors with a total of 916 stakes reported in the period between 1998 and 2009. There is, on average, a positive stock price reaction to the announcement of activist investments, particularly for events involving hostile funds. The long-run returns on activism are positive only for events involving hostile funds. We find that activists have forced target firm managers to increase their payouts compared to peer firms, and there is some evidence of change in corporate governance. Finally, after 2006 there was a widespread adoption of poison pills by firms, particularly those targeted by activists, and a subsequent drop in investor activism. Our paper shows how U.S.-style activist investors are responsible for the import of corporate governance mechanisms from the U.S. into a foreign market.

Asymmetric Stock Price Reaction to Good vs. Bad Earnings News: Short Sale Constraints vs. Managers’ Incentives to Withhold Bad News

The negative stock price reaction to bad news disclosures is much larger in magnitude than the positive stock price reaction to good news disclosures. Diamond and Verrecchia (1987) posit that short-selling restrictions cause this asymmetry while Kothari, Shu, and Wysocki (2009) interpret it as evidence that managers withhold bad news and leak good news. This study explores the merits of these two explanations in a joint framework. Two popular measures of short-sale constraints based on institutional ownership and short interest ratios have no incremental power in explaining the asymmetry when factors that influence managers’ incentives to disclose news in a timely fashion are controlled for. Only, the Prob-measure advocated by Ali and Trombley (2006) is incrementally significant in explaining the larger stock price reaction to bad news. Moreover, the fraction of bad news reflected in stock prices prior to bad news disclosures is significantly higher for more short-sale constrained stocks.

Market Reactions To Company Layoffs: Evidence On The Financial Distress Versus Potential Benefit Hypothesis And The Effect Of Predisclosure Information

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-family: "Times New Roman","serif"; text-shadow: none;"><span style="font-size: x-small;">The current study extends theory developed by Malatesta and Thompson (1985) to the area of corporate downsizing, and finds that the magnitude of the stock price reaction to announcements of corporate layoffs is a function of two factors, (1) the economic impact of the announced layoff, and, (2) the degree to which the announcement and signal about the underlying conditions related to the announcement have been anticipated by investors and incorporated previously into the stock price (predisclosure information).</span></span></p><p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-family: "Times New Roman","serif"; text-shadow: none;"><span style="font-size: x-small;"> </span></span></p><p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-family: "Times New Roman","serif"; text-shadow: none;"><span style="font-size: x-small;">For firms experiencing a negative overall stock price reaction at the date of a layoff announcement, the larger the layoff (proxy for economic impact), the more <strong style="mso-bidi-font-weight: normal;"><span style="color: black;">negative</span></strong> the stock price reaction.<span style="mso-spacerun: yes;">  </span>Also for these firms, the smaller the firm size (proxy for the level of predisclosure information), the more <strong style="mso-bidi-font-weight: normal;"><span style="color: black;">negative</span></strong> the stock price reaction. This provides evidence that for some firms, the financial distress effect dominates, and the market incorporates previously unknown negative information into the stock price, which results in the negative stock price reaction.<span style="mso-spacerun: yes;">  </span>For these firms, the larger the impact and the less the event is anticipated, the more negative is the stock price reaction.</span></span></p><p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-family: "Times New Roman","serif"; text-shadow: none;"><span style="font-size: x-small;"> </span></span></p><p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-family: "Times New Roman","serif"; text-shadow: none;"><span style="font-size: x-small;">For firms experiencing a positive overall stock price reaction at the date of a layoff announcement, the larger the layoff (proxy for economic impact), the more <strong style="mso-bidi-font-weight: normal;"><span style="color: black;">positive</span></strong> the stock price reaction.<span style="mso-spacerun: yes;">  </span>Also for these firms, the smaller the firm size (proxy for level of predisclosure information), the more <strong style="mso-bidi-font-weight: normal;"><span style="color: black;">positive</span></strong> the stock price reaction. This provides evidence that for some firms, the potential benefit effect dominates.<span style="mso-spacerun: yes;">  </span>The market has previously incorporated negative information associated with the conditions leading up the layoff, and is now incorporating positive information about the benefits to be achieved by the layoff, which results in the positive stock price reaction.<span style="mso-spacerun: yes;">  </span>For these firms, the larger the impact and the less the event is anticipated, the more positive is the stock price reaction.</span></span></p><p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-family: "Times New Roman","serif"; text-shadow: none;"><span style="font-size: x-small;"> </span></span></p><p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-family: "Times New Roman","serif"; text-shadow: none;"><span style="font-size: x-small;">In this study, hypotheses are developed which combine the effects of both economic impact and predisclosure information with the financial distress and potential benefit hypotheses developed in prior research in corporate downsizing.<span style="mso-spacerun: yes;">  </span>Instead of offering the these two hypotheses as competing and mutually exclusive, evidence is provided that supports the conclusion that these hypotheses simultaneously explain <span style="color: black; mso-bidi-font-style: italic;">concurrent</span> and <span style="color: black; mso-bidi-font-style: italic;">additive</span><span style="color: black;"> effects on the stock price reaction to announcements of company layoffs.<span style="mso-spacerun: yes;">  </span>Finally, results indicate that the relationship between economic impact, predisclosure information and stock price reaction to layoff announcements depends on the relative dominance of the signals provided by the layoff about both financial distress and potential benefit.</span></span></span></p>

An Empirical Study of the Differential Market Reaction to Open-Market Stock Repurchase Announcements

<p class="MsoBodyText2" style="text-align: justify; margin: 0in 0.5in 0pt; tab-stops: .5in;"><span style="font-size: 10pt;"><span style="font-family: Times;">Significant positive stock price reaction to stock repurchase announcements has been well documented in the finance literature.<span style="mso-spacerun: yes;">  </span>Most studies on repurchase focus on the average positive reaction; however, 30 percent of the repurchasing firms experience negative abnormal returns at announcement.<span style="mso-spacerun: yes;">  </span>This study examines the apparent heterogeneity in the stock price reaction to stock repurchase.<span style="mso-spacerun: yes;">  </span>The results show that the market reaction to repurchase announcements is determined by firm specific factors and is based on the overall costs and benefits analysis by the market of the stock repurchase program.<span style="mso-spacerun: yes;">  </span>The results are consistent with conventional signaling models and agency theories.</span></span></p>

Stock Price Reaction to Supervisory Board Interventions: Empirical Evidence from Germany

Within the discussion about an efficient corporate governance system, considerable attention has been paid to the supervisory board’s responsibility to monitor top executives raising the question about the value relevance of supervisory board’s actions (i.e., control). We conduct an event study analyzing the effect of supervisory board interventions on the value of publicly listed firms in Germany between 2000 and 2006. With our study, we are among the first to empirically test two suppositions by Hermalin Weisbach (1998) which propose a negative stock price reaction when the CEO is fired based on private information of the supervisory board and a positive stock price reaction when the CEO is fired based on public information. Assuming that the amount of information available to the public increases with the media coverage of a company, we expect effects to differ depending on the company’s level of media coverage. This is confirmed by our empirical results: Looking at companies receiving low media coverage, we find a negative and significant effect of supervisory board interventions on firm value. Focusing on companies with high media coverage we find that supervisory board interventions have a positive effect on stock prices which is also significant when returns are cumulated over several days. These results supporting the predictions of Hermalin Weisbach (1998) prove to be robust when controlling for company characteristics (in particular size) in a multivariate regression setting.

Is Carl Icahn Good for Long‐Term Shareholders? A Case Study in Shareholder Activism

The increase in activist campaigns by entrepreneurial investors and hedge funds in the past decade has raised considerable debate about their benefits for average shareholders. Although critics have longed charged that the proposals for change by such active investors typically do not increase the longer‐run efficiency and values of the targeted companies, more recent studies have provided evidence of success, both in terms of increasing the market value of such companies and achieving at least some of the investors' expressed objectives.This article attempts to add to these findings by examining the case of a single well‐known investor, Carl Icahn, whose career as a shareholder activist now spans at least three decades. The authors report, first of all, that Icahn's targets have included companies from a remarkable variety of industries, and that his stated objectives have varied with the industries of the targets. Although more of Icahn's targets appear to have been overleveraged than underleveraged, a significant minority have had payouts ratios that were judged to be too low and more cash than they needed.In terms of Icahn's effect on other shareholders, the authors report a significant positive stock price reaction—on the order of 10%—to the announcement of Icahn's taking a position in the target firm. When examining the subsequent performance of the target firms, the authors found a very large difference between those firms that were either taken private or acquired (within 18 months)—over a third of the target companies—and those that remained independent. The authors report that although the acquired group achieved significant positive stock market returns, the firms that remained independent suffered very negative (‐60%) returns. Although Icahn's proposed changes could be responsible, as critics charge, for the performance of the latter group, the authors suggest that the success of many of these companies in fending off Icahn without enacting most of his proposed reforms is a more plausible explanation. At the same time, the authors report that Icahn was successful in achieving at least one of his stated objectives in well over half of the cases in which the target companies remained independent.

The New Game in Town: Competitive Effects of IPOs

ABSTRACTWe analyze the effect of initial public offerings (IPOs) on industry competitors and provide evidence that companies experience negative stock price reactions to completed IPOs in their industry and positive stock price reactions to their withdrawal. Following a successful IPO in their industry, they show significant deterioration in their operating performance. These results are consistent with the existence of IPO‐related competitive advantages through the loosening of financial constraints, financial intermediary certification, and the presence of knowledge capital. These aspects of competitiveness are significant in explaining the cross‐section of underperformance as well as survival probabilities for competing firms.

The Availability Heuristic and Investors' Reaction to Company-Specific Events

Contemporary research documents various psychological aspects of economic decision making. The main goal of our study is to analyze the role of the availability heuristic (Tversky and Kahneman [1973, 1974]) in financial markets. The availability heuristic refers to people's tendency to determine the likelihood of an event according to the easiness of recalling similar instances and, thus, to overweight current information as opposed to processing all relevant information. We define and test two aspects of the availability heuristic, which we dub outcome and risk-availability. The former deals with the availability of positive and negative investment outcomes and the latter with the availability of financial risk. We test the availability effect on investors' reactions to analyst recommendation revisions. Employing daily market returns as a proxy for outcome availability, we find that positive stock price reactions to recommendation upgrades are stronger when accompanied by positive stock market index returns, and negative stock price reactions to recommendation downgrades are stronger when accompanied by negative stock market index returns. The magnitude of the outcome availability effect is negatively correlated with firms' market capitalization, and positively correlated with stock beta, as well as with historical return volatility. Regarding risk availability, we find that on days of substantial stock market moves, abnormal stock price reactions to upgrades are weaker, and abnormal stock price reactions to downgrades are stronger. Both availability effects remain significant even after controlling for additional company-specific and event-specific factors, including market capitalization, stock beta, historical volatility of stock returns, cumulative excess stock returns over one month preceding the recommendation revision, rating category before the revision, and number of categories changed in the revision.

The effect of state antitakeover laws on the firm's bondholders

We examine how state antitakeover laws affect bondholders and the cost of debt, and report four findings. First, bonds issued by firms incorporated in takeover-friendly states have significantly higher at-issue yield spreads than bonds issued by firms in states with restrictive antitakeover laws. Second, firms in takeover friendly states have significantly higher leverage than their counterparts in restrictive law states. Third, bond issues are associated with negative average stock price reactions among firms in takeover-friendly states, but positive stock price reactions among firms in restrictive law states. Fourth, existing bond values increase, on average, upon the introduction of Business Combination antitakeover law. These results indicate that state antitakeover laws tend to decrease bond yields and increase bond values, which is the opposite of their effect on equity values. This, in turn, implies that state laws help mitigate the agency cost of debt by shielding bondholders from expropriation in takeovers. Overall, the empirical evidence suggests that the effect of antitakeover provisions on firm value must take into account the impacts of both bondholders and stockholders.

TERRORISM AND THE RETURNS TO OIL

The effect of terrorism on global oil prices has been largely explained through demand‐side effects. We estimate an empirical model to re‐examine the effect of terrorism on the price of global oil stocks across oil market regimes that reflect different supply constraints. We believe that terrorism will have larger impacts when global capacity is tight (i.e. when global demand is close to global supply). This means that any shock to capacity (say by conflict) should have the largest impact on profits before the first OPEC shock in the early 1970s. Since then, conflict shocks would not allow firms to exploit production in the same way, thus reducing the available profits that could be garnered by such production manipulation. If capacity constraints are binding when a conflict occurs, then we predict that a positive stock price reaction can be expected for oil firms from such a shock. We exploit a new panel dataset to investigate the relationship between oil profitability and conflict, using conflict data from the top 20 oil producing and exporting countries in the world. We show that in the later part of our sample, 1974–2005, as cartel behavior of OPEC member countries has diminished and as conflict has become more regular and thus the information surrounding it noisier, oil stock prices do not increase in response to conflict. However, in earlier capacity constrained eras, we find that oil stocks can in fact increase in response to conflict. In some cases, the impact of conflict may cause the return of oil stocks to increase by as much as 10 percentage points.

Does institutional activism increase shareholder wealth? Evidence from spillovers on non-target companies

This paper presents evidence of the shareholder wealth effect of institutional activism using its spillovers on non-target companies. The spillovers are instructive because they are a response to an exogenous shock and thus create an environment to conduct a clean event study. In particular, we examine the spillover effects of the first target announcement of the Korea Corporate Governance Fund. As the very first sign of institutional activism in the country, this announcement creates an expectation of similar governance efforts even in non-target companies, especially in those companies whose governance is currently poorer and thus the scope for future activism is greater. Consistent with institutional activism contributing to shareholder wealth, we find that, among non-targets, those firms granting fewer rights to outside shareholders experience a more positive stock price reaction. Further analysis lends additional support to the positive wealth effect of institutional activism.

The New Game in Town: Competitive Effects of IPOs

We analyze the effect of Initial Public Offerings (IPOs) on industry competitors and provide evidence that firms experience negative stock price reactions to completed IPOs in their industry and positive stock price reactions to IPO withdrawals. Following a successful IPO in their industry, firms show significant deterioration in their operating performance. These results are consistent with the existence of IPO related competitive advantages through the loosening of financial constraints, financial intermediary certification, and the presence of knowledge capital. These aspects of competitiveness are significant in explaining the cross section of underperformance as well as survival probabilities for competing firms.