Post-announcement Stock Returns Research Articles

Bank Networks and Acquisitions

Does the predeal geographic overlap of the branches of two banks affect the probability that they merge, postannouncement stock returns, and postmerger performance? We compile information on U.S. bank acquisitions from 1984 through 2016, construct several measures of network overlap, and design and implement a new identification strategy. We find that greater predeal network overlap (1) increases the likelihood that two banks merge; (2) boosts the cumulative abnormal returns of the acquirer, target, and combined banks; and (3) reduces employment, boosts revenues, reduces the number of branches, improves loan quality, and expedites executive turnover. This paper was accepted by Tomasz Piskorski, finance.

Bank Networks and Acquisitions

Does the pre-deal geographic overlap of the branches of two banks affect the probability that they merge, post-announcement stock returns, and post-merger performance? We compile information on U.S. bank acquisitions from 1984 through 2016, construct several measures of network overlap, and design and implement a new identification strategy. We find that greater pre-deal network overlap (1) increases the likelihood that two banks merge, (2) boosts the cumulative abnormal returns of the acquirer, target, and combined banks, and (3) reduces employment, boosts revenues, reduces the number of branches, improves loan quality, and expedites executive turnover.

When does the bond price reaction to earnings announcements predict future stock returns?

In this paper I show that the bond price reaction to earnings announcements has predictive power for post-announcement stock returns and that this predictive ability is driven by the bonds of non-investment grade firms. I find that bonds’ predictive ability is more pronounced in firms that have a lower level of institutional shareholder ownership and whose bonds are more liquid. This paper enhances our understanding of the relation between the stock and bond markets and complements the literature which documents whether, and under what circumstances, various accounting-based measures and financial statement components predict post-announcement stock returns.

ARE SHORT SELLERS INFORMED? EVIDENCE FROM CREDIT RATING AGENCY ANNOUNCEMENTS

AbstractAlthough constrained by rules and regulations, informed short selling (tipping) is present before negative credit watch and certain types of rating downgrade announcements. Using entity credit rating and daily short sale data from April 2004 to December 2009, we find that preannouncement abnormal short selling significantly increases toward the announcement dates and is negatively related to postannouncement stock returns. Furthermore, short selling driven by tipping is more pronounced before more severe and more surprising rating downgrades. This study provides evidence favoring the private information hypothesis (tipping) in the ongoing debate of the informational advantage of short sellers.

Executive compensation and informed trading in acquiring firms around merger announcements

This paper analyzes informed trading in acquiring firms through (stock) merger announcements. We show that pre-announcement abnormal option volumes in acquiring firms strongly increase ahead of a stock merger (by approximately 300%). Furthermore, we show that the direction of option trades (puts or calls) prior to an announcement can predict post-announcement stock returns. Our results also indicate that higher wealth-to-performance sensitivities of top executives are related to higher abnormal put than call option trading before stock merger announcements. Overall, our results support the view that top executives have a hedging motive. They tend to purchase protection against, e.g., confounding (negative) information policies and/or empire-building mergers with negative NPVs, in order to avoid short-term salary losses (lower bonuses, lower stock options, etc.).

An Analysis of Short Selling, Margin Purchasing, and Bid-ask Spreads around Illegal Insider Trading: Evidence from Taiwan

This study examines margin trading activities and bid-ask spreads around companyspecific news announcements, in which insiders were convicted of illegal trading on nonpublic information in the Taiwan stock market. We find significant excess short sales (margin purchases) before bad (good) news announcements. Results indicate that abnormal short selling (margin trading) is significantly and negatively (positively) related to postannouncement stock returns. Furthermore, our results show that short selling and margin purchasing increase pre-announcement bid-ask spreads and decrease market liquidity.

Executive Compensation and Informed Trading in Acquiring Firms Around Merger Announcements

This paper analyzes informed trading in acquiring firms through (stock) merger announcements. We show that pre-announcement abnormal option volumes in acquiring firms strongly increase ahead of a stock merger (by approximately 300%). Furthermore, we show that the direction of option trades (puts or calls) prior to an announcement can predict post-announcement stock returns. Our results also indicate that higher wealth-to-performance sensitivities of top executives are related to higher abnormal put option trading before stock merger announcements. Overall, our results support the view that top executives have a hedging motive. They tend to purchase protection against, e.g., confounding (negative) information policies and/or empire-building mergers with negative NPVs, in order to avoid short-term salary losses (lower bonuses, lower stock options, etc.).

The Credibility of Open Market Share Repurchase Signaling

AbstractOpen market share repurchase announcements are commonly associated with equity undervaluation, but their signal about firm value can often be misleading. We conjecture that executives who buy shares of their firm before an announcement add credibility to the undervaluation signal. Consistent with this hypothesis, we find that announcement returns are positively related to past insider purchases, especially for firms that are priced less efficiently. Firms whose insiders bought more shares are also more likely to complete their repurchase plans. Finally, we find that insider purchases predict post-announcement stock returns.

Opinion Divergence and Post-Earnings Announcement Drift

This paper examines the relationship between divergent opinions and post-earnings announcement drift. We provide an improved measure of opinion divergence constructed from the dispersion of order flow across Nasdaq market makers that captures the breadth of divergence that is lost by volume-based measures. We find evidence that both limited participation (in the form of delayed price reaction and short sale constraints) and divergent opinions contribute significantly to drift. We also find that earnings surprises induce permanent upward shifts in opinion divergence, trading volume, and return volatility that last up to nine months following the announcement. Our results suggest that opinion divergence elicits added risk in the form of increased volatility with the resulting returns comprising a component of drift. We document that daily opinion divergence is a priced risk factor over the nine month drift period. The persistence of these relationships suggests that opinion divergence represents a fundamental change in the market's assessment of the announcing firm that extends beyond the announcement period and influences post-announcement stock returns.

Evidence that Capital Markets Learn from Academic Research: Earnings Surprises and the Persistence of Post-Announcement Drift

We investigate the relation between earnings surprises and post-announcement stock returns for 1991-1997, and show that the profit opportunities previously associated with simple trading strategies designed to exploit the drift phenomenon have now been substantially eliminated. This profitability decline does not appear to be due to increased earnings noise from transitory items or to structural changes in the serial correlation of earnings surprises. The post-announcement drift persists where arbitrage costs are highest; that is, among small NYSE/AMEX firms, and among firms with little or no analyst following or with low stock prices. The evidence is consistent with the notion that investors used earnings surprise trading strategies to arbitrage the drift once the phenomenon had been well documented in academic research.