Post-announcement Abnormal Returns Research Articles

Attention-driven reaction to extreme earnings surprises

We investigate the relationship between investor attention and stock returns in the context of extreme earnings surprises. We propose a novel mechanism that describes this interaction: high attention to very positive and very negative earnings news results in faster incorporation of information into stock prices, an overreaction effect, and a subsequent partial reversal. We test this mechanism using post-announcement abnormal returns and measure investor attention using internet search volume. We confirm that abnormal attention to earnings announcements is positively related to post-announcement abnormal returns when earnings surprises are very positive and negatively related when earnings surprises are very negative. More importantly, we argue that investors exhibit attention-driven overreactions to these extreme earnings surprises since the initial effects of abnormal attention on abnormal returns are subsequently partially reversed.

New Evidence on the Information Content of Earnings Announcements for the Swiss Market

A semi-strong efficient market incorporates relevant new information immediately. Using an event study, we investigate whether and to what extent regular earnings announcements of Swiss companies listed on the Swiss Market Index show the expected effects in share prices. For this purpose, we test for abnormal returns caused by earnings announcements in the period from 2012 until 2022. In contrast to previous studies of the Swiss market, we find that deviations from analysts’ expected earnings lead to pronounced immediate movements in stock prices, as predicted by the semi-strong efficient market hypothesis. Pre- and post-announcement abnormal returns are modest and generally not statistically significant.

Post-earnings announcement drift: Evidence from Turkey

We study the post-earnings announcement drift (PEAD) anomaly and its determinants in Borsa Istanbul using quarterly earnings announcements and three different surprise measures. We find evidence supportive of the existence of PEAD in the Turkish stock market. Sorting stocks each quarter into three quantiles according to an earnings surprise measure based on past earnings, we find both statistically and economically significant difference of 2.9% in average cumulative abnormal return between high earnings surprise firms and low earnings surprise firms in the 60 days following the announcement. The hedge returns obtained using analyst forecast based surprise measure as well earnings announcement return based surprise measure are also significant at 2.9% and 2.2% respectively. The positive relation between post-announcement abnormal returns and the surprise in earnings remain significant after controlling for an extensive list of explanatory variables. Among these explanatory variables, we find that firm size has a negative impact on the magnitude of this positive association between surprise and subsequent equity returns. Finally, using two separate approaches we show that multifactor models fail to explain the return differentials following earnings announcements.

Forecasting index changes in the German DAX family

Combining market data with a publicly available monthly snapshot of Deutsche Börse’s index ranking list, I create a model that predicts index changes in the DAX, MDAX, SDAX, and TecDAX from 2010 to 2019 before they are officially announced. Even though I empirically show that index changes are predictable, they still earn sizeable post-announcement 1-day abnormal returns up to 1.42% and − 1.54% for promotions and demotions, respectively. While abnormal returns are larger in smaller stocks, I find no evidence that they are related to funding constraints or additional risk for trading on wrong predictions. A trading strategy that trades according to my model yields an annualized Sharpe ratio of 0.83 while being invested for just 4 days a year.

Managerial ability and acquirer returns

This paper examines the impact of managerial ability on the profitability of mergers and acquisitions. We find that acquisitions by firms with high managerial ability generate better announcement abnormal returns as well as better post-announcement abnormal returns than deals by firms with low managerial ability. We also find deals with high managerial ability pay significantly lower premiums than deals without. Further, we find that managers with high managerial ability perform better in scenarios with high environmental uncertainty, which suggests that high environmental uncertainty is an important scenario that should be incorporated into studies of the influence of managerial ability.

When do managers listen to the market? Impact of learning in acquisitions of private firms

We study the influence of market signals and agency problems on the decision to cancel an announced acquisition. We find major differences between deals involving private vs. public targets. First, controlling for the value of expected synergies, acquisitions are less likely to be cancelled when the target is private rather than public. This finding supports learning rather than the alternative common-information hypothesis. Second, better manager-shareholder interest alignment makes the cancellation of a “bad” deal more likely only when the target is a private firm. This suggests bidder agency problems have a greater influence on acquisition outcome (i.e., learning) when the target is private. Third, cancellation is more likely for private targets when their post-announcement abnormal returns are low, especially if the method of payment includes stock. This indicates that it is important to control for bidder overvaluation when testing the managerial learning hypothesis. Overall, both the learning and agency hypotheses help explain observed differences in deal completion by target type.

Limited attention and M&A announcements

Abstract We analyze the relationship between investor attention, measured by Google search volume, and M&A performance. On average, we find that investors’ attention to a merging firm increases as the announcement date approaches, peaks on the announcement day, and remains elevated for a few days afterward. More importantly, abnormal attention on the day of the announcement has a heterogeneous relationship with post-announcement abnormal returns, which depends on the amount of news coverage received by the merging firm. The relationship is positive for mergers with higher news coverage and appears to be due to positive price pressure induced by retail investors. In contrast, the relationship is negative for mergers with low news coverage and is likely due to faster assimilation of new information by relatively more sophisticated investors who anticipate that the market generally overvalues M&A transactions. We also address the causal relation between abnormal attention and abnormal returns using a novel instrumental variable.

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.

The post-repurchase announcement drift: an anomaly in disguise?

Purpose – The purpose of this paper is to reexamine the stock price drifts after open-market stock repurchase announcements by differentiating actual repurchases from repurchase announcements and by controlling for the repurchasing firms’ earnings improvement in the announcement year relative to the prior year. Design/methodology/approach – The authors use the calendar-time method and matching method based on different criteria to calculate the post-announcement abnormal returns. Findings – The results show that only firms actually repurchasing their shares exhibit a positive post-announcement drift. More importantly, the authors find that these repurchasing firms have the same post-announcement drift as their matching firms that have similar size and earnings performance but do not repurchase. This supports the argument that the post-repurchase announcement drift found in previous studies is not a distinct anomaly but the post-earnings announcement drift in disguise. Social implications – The post-repurchase announcement drift found in previous studies is the post-earnings announcement drift in disguise. Originality/value – The study shows that because high earnings performance positively relates to real repurchase activities, controlling for earnings performance in examining whether a drift occurs after repurchase announcements.

Informed Trading Before Positive vs. Negative Earnings Surprises

This paper investigates whether institutional investors trade profitably around the announcements of positive or negative earnings surprises. Using Korean data over the period of 2001-2010, we find that information asymmetry is larger before negative earnings surprises (earnings shock) among investors and that the trading volume decreases only before earnings shock announcements due to the severe information asymmetry. We also find that institutions sell their stocks prior to earnings shock announcements whereas individual and foreign investors do not anticipate bad news. Finally, we find that institutional trade imbalance is positively related to the post-announcement abnormal returns of negative events. This study complements and extends prior literature on informed trading around earnings announcements by documenting evidence that domestic institutions exploit their superior information around particularly earnings shock announcements.

Informed trading before positive vs. negative earnings surprises

This paper investigates whether institutional investors trade profitably around the announcements of positive or negative earnings surprises. Using Korean data over the period of 2001–2010, we find that information asymmetry is larger before negative earnings surprises (earnings shock) among investors and that the trading volume decreases only before earnings shock announcements due to the severe information asymmetry. We also find that institutions sell their stocks prior to earnings shock announcements whereas individual and foreign investors do not anticipate bad news. Finally, we find that institutional trade imbalance is positively related to the post-announcement abnormal returns of negative events. This study complements and extends prior literature on informed trading around earnings announcements by documenting evidence that domestic institutions exploit their superior information around particularly earnings shock announcements.

The Stock Market Reaction to Changes to Credit Ratings of US-Listed Banks

In this paper we provide empirical evidence of abnormal returns associated with credit rating changes for a sample of 264 credit ratings announcements by 43 international and US banks between 2000 and 2012. The banks in the sample have either a primary or secondary US listing. We provide evidence using four models for estimating expected returns including the Fama-French Three-Factor model (1992). We find short-term negative abnormal returns are exhibited to downgrades and positive post-announcement abnormal returns are exhibited to both upgrades and downgrades. Cumulative abnormal returns exhibit a positive trajectory following an upgrade announcement whilst cumulative average abnormal returns to downgrades return almost to zero over our event window. In contrast to previous studies, we identify that concurrent announcements impact significantly on reported abnormal returns using our four models and hence we present our results after removal of contaminating effects. Whilst we are hampered by small subsamples in our test data, we are able to identify a significant difference between our subsamples for unanticipated and anticipated ratings announcements. We also provide evidence that US domestic banks experience significantly larger negative abnormal returns to downgrades than international banks listed in the US, which we attribute to the greater impact of a rating change of a US bank on the rest of the local economy. Finally, we report abnormal returns and significance for pre- and post- financial crisis samples, simultaneous and long-term only rating announcements, ratings within and across investment classes, and ratings which cross the investment grade line.

Hidden Addition Acquisitions

This study examines the wealth effects of hidden addition acquisitions, i.e., stock financed acquisitions by S&P 500 acquirers of non-S&P 500 targets. These acquisitions result in a re-balancing of the S&P 500, causing the acquirer’s weight in the index to increase. We classify the acquisitions as either “immediate” of “delayed” based on when the rebalancing occurs. We find that the initial acquirer wealth effect at the announcements of these deals is significantly negative. However, these firms experience a reversal in abnormal returns in the post-announcement period resulting in overall non-significant abnormal returns, with the post-announcement abnormal returns significantly positive in immediate hidden additions. We find that both the overall return and post announcement return are positively correlated with the size of the deal. We find that the reversal in large deals is statistically and economically significantly positive, indicating possible profitable opportunities for even uninformed traders. We investigate the effect of size and timing of returns to provide information for profitable trading opportunities in these deals.

Option trading: Information or differences of opinion?

This paper investigates the motive of option trading. We show that option trading is mostly driven by differences of opinion, a finding different from the current literature that attempts to attribute option trading to information asymmetry. Our conclusion is based on three pieces of empirical evidence. First, option trading around earnings announcements is speculative in nature and mostly dominated by small, retail investors. Second, around earnings announcements, the pre-announcement abnormal turnovers of options seem to predict the post-announcement abnormal stock returns. However, once we control for the pre-announcement stock returns, the predictability completely disappears, implying that option traders simply take cues from the stock market and turn around to speculate in the options market. Third, cross-section and time-series regressions reveal that option trading is also significantly explained by differences of opinion. While informed trading is present in stocks, it is not detected in options.

Insider Trading and Stock Splits

Stock splits have long presented a puzzle in finance. Unresolved questions are why do firms undertake them, and why do they offer abnormal returns both before and after the announcement date? Conventional explanations focus on making stocks more liquid and signaling firm prospects. However, abnormal returns, particularly before the announcement date, should raise strong suspicions of insider trading. We examined 718 split events in the emerging stock market of Vietnam and found evidence indicating illegal insider trading in stock splits by firms more vulnerable to inappropriate insider activity. Such firms were more likely to be split stocks. Their stocks also provided significantly higher returns when they did split than did other stocks. More telling, the abnormal returns prior to the split announcement for these stocks were extremely high, indeed higher than their post-announcement abnormal returns. This is precisely the pattern we would expect if insiders traded on their knowledge. Illegal insider trading, where it is possible to escape penalty, provides a new explanation for stock splits and their abnormal returns.

Option Trading: Information or Differences of Opinion?

This paper investigates the motive of option trading. We show that option trading is mostly driven by differences of opinion, a finding different from the current literature that attempts to attribute option trading to information asymmetry. Our conclusion is based on three pieces of empirical evidence. First, option trading around earnings announcements is speculative in nature and mostly dominated by small, retail investors. Second, around earnings announcements, the pre-announcement abnormal turnovers of options seem to predict the post-announcement abnormal stock returns. However, once we control for the pre-announcement stock returns, the predictability completely disappears, implying that option traders simply take cues from the stock market and turn around to speculate in the options market. Third, cross-section and time-series regressions reveal that option trading is also significantly explained by differences of opinion at ordinary times. While informed trading is present in stocks, it is not detected in options.

Short Selling Around Corporate Acquisitions

Using daily short sale transactions data for firms traded in the Taiwan Stock Exchange (TWSE) from January 1991 to January 2007, we examine the pattern of short selling trading prior to 338 acquisition announcements. Consistent with the view that short sellers act as informed traders, we find that they have the ability to predict and time their trades prior to significant negative acquisition announcements. Specifically, our evidence shows that abnormal short selling prior to acquisition announcements is significantly associated with negative (bad acquisition news) post-announcement abnormal returns. The empirical results also show that short sellers act as specialized monitors who generate and release value-relevant information to the stock market prior to actual bad acquisition events. In addition, we find that short selling is driven by speculative rather than hedging motives. Robustness checks and the undertaking of alternative tests show that daily changes in short sales transactions lead future stock prices, consistent with the notion that the information advantage of short sellers broadens the informational efficiency of stock prices.

Do Corporate Insiders Prefer Nasdaq?

This paper contributes to the corporate governance literature and bears implications for the regulation of insider trading. I examine whether the double-counting of reported trading volume on Nasdaq plays a role in insiders’ decisions to move their firms. Specifically, since volume on Nasdaq is exaggerated and SEC Rule 144 ties the limit on insider selling to total volume, insiders of troubled firms may be able to use private information to take advantage of other shareholders by switching to Nasdaq and unloading more stock. Consistent with the hypothesis, I find that insiders engage in heavy selling of company stock in the months following the move. Post-announcement abnormal returns are strongly negative.

Paying for Coverage: Conflict of Interest Among Company-Sponsored Research Firms

The Securities and Exchange Commission has recommended company-sponsored research to address the need for greater analyst following of smaller companies. Anecdotal evidence suggests company-sponsored research is more optimistic than research from traditional brokerage firms (Kalra 2004; Lee and Metaxas 2004; Richardson 2006). Using a sample of companies with both company-sponsored analysts and traditional analysts, I find that analysts at company-sponsored research firms are more likely to issue positive recommendations than analysts at traditional brokerage firms. Further, while the market reacts to recommendation announcements of traditional analysts, I fail to find a significant market reaction to recommendation announcements of company-sponsored analysts. Interestingly, however, I find significant positive (negative) post-announcement abnormal returns following Strong Buy (Sell) recommendation announcements of company-sponsored analysts. Similar results are observed following traditional analyst Strong Buy recommendations, but I do not find significant negative abnormal returns following their Sell recommendations. These results suggest that the market fails to fully appreciate the information contained in the announcement of company-sponsored and traditional analysts' Strong Buy recommendations, while uniquely failing to appreciate the information contained in company-sponsored analyst Sell recommendations.

Changes in Market Responses to Financial Statement Restatement Announcements in the Sarbanes-Oxley Era

We examine changes in the market's response to financial statement restatement announcements during the Sarbanes-Oxley (SOX) era. We define this era as beginning with the U.S. Department of Justice initiation of a criminal investigation into the collapse of Enron, and its attendant loss of billions of dollars of shareholder value, through the November 15, 2004, requirement that all U.S. companies with market capitalizations over $75 million must comply with SOX Section 404, which deals with corporate internal controls over financial reporting We divided the Sarbanes-Oxley era into pre- and post-SOX periods, with the dividing line concurrent with the signing of the Sarbanes-Oxley Act into law on July 30, 2002. The comparison of pre- and post-SOX periods shows that post-SOX, the negative impact on companies announcing restatements is reduced 71 percent on average (as measured by the cumulative abnormal return on days 0 and 1) and the positive market response to announced restatements is reduced by 33 percent. This translates into a net reduction in lost market value of $207 million per restatement announcement or $74.4 billion in total market value for the two-day announcement event window. We also find that this reduction is not due to the diluting effects of the increased number of statistically insignificant post-SOX market reactions to restatement announcements. Finally, our results indicate that after SOX became law, post-announcement abnormal returns exhibit statistically significant lower volatility and the trend in statistically insignificant market responses to restatement announcements no longer declines, thus indicating less uncertainty on the part of investors regarding the announcements of restating companies, and perhaps because investors believe the disclosed information conveyed by the restated financials is timelier and of higher quality.