Significant Cumulative Average Abnormal Returns Research Articles

Shareholder activism: Further evidence on the relationship between activists’ demands and shareholder value creation

AbstractThis research article analyses activist hedge fund campaigns and studies both shareholder value effects around the announcement of a campaign and the value creation over the entire campaign period. Further, we analyze observable returns by campaign objectives. We examine a sample of 197 international activism campaigns, initiated between 2014 and 2019. Significant Cumulative Average Abnormal Returns (CAARs) can be observed in both the short‐term and the entire engagement period event windows. The results from activism differ by an activist investor's objectives and demands. CAARs related to elimination of a general undervaluation, a maximization of shareholder value, and an adjustment of a target firm's capital structure are the highest in our sample. We do not find empirical evidence that board representation or proxy fights increase the CAARs of activist investors’ campaigns. Our study adds to the existing literature by analyzing abnormal returns not only around the announcement of the campaign but also over the entire campaign. We are of the opinion that relying exclusively on short‐term returns poses significant limitations to inferences on shareholder value from activism and therefore applying a longer‐term observation period is warranted.

The COVID-19 pandemic and stock market performance of transportation and travel services firms: a cross-country study

This paper examined the firm-specific abnormal returns of transportation and travel services sectors from the USA, UK, France, China, India, Mexico, Turkey, and Thailand in response to Coronavirus Disease 2019 (COVID-19) using event study methodology. Our results revealed that investors in developed countries provide significant long term abnormal returns for the first 101 days. Furthermore, no significant cumulative average abnormal returns (CAAR) were found in response to the COVID-19 outbreak, travel restrictions, lockdown, stimulus package, and historical decline in oil prices except in the case of the USA. It is concluded that with the gradual increase in new cases and deaths, abnormal returns are also adjusted, making the effects of these events insignificant at the time of their occurrence. Results also showed that firms in developing countries recognized significant negative abnormal returns in response to the second wave of COVID-19. These results are useful for investors in devising investment strategies relevant to contextual settings.

Effect of Mergers and Acquisitions on Stock Returns: Evidence from a Frontier Market

This study examines the mergers and acquisitions on stock returns in the Sri Lankan context. The main objective of this study is to investigate the effects of mergers and acquisitions on stock returns of Sri Lankan companies and establish whether there is any relationship between mergers and acquisitions on stock returns. For the intended purposes, the impact of mergers and acquisitions on stock returns, the secondary data is used from 10 listed companies for the period from 2010 to 2019. The event study methodology is used to examine the reaction of investors to the announcement of mergers and acquisitions. The event window was 80 days, which is 40 days before and after the announcement date. The result indicates that mergers and acquisitions announcements generate positive significant Cumulative average abnormal returns (CAAR) at the event date. However, after the event date, acquirer companies exhibit very low CAAR close to zero or sometimes negative value and not statistically significant. Thus, findings suggest that the shareholders' reaction to the information content of mergers and acquisitions limited to event day. After the announcement date, the CAAR takes a gradual declining trend.
 Keywords: Acquisition, Colombo Stock Exchange, Event Study analysis, Merger, Stock Return

Disclosures of ESG Misconducts and Market Valuations: Evidence from DAX Companies

Environmental, social and governance (ESG) factors have become an important topic on capital markets amid an increasing interest in responsible investing. Despite this fact, public companies have been involved in a number of ESG misconducts in recent years, which were often against the interests of their stakeholders. In our research, we refer to stakeholder theory in order to show how disclosures of social misconducts against the companies’ stakeholders have affected market valuation of listed companies, which we treat as one of the measures of shareholders’ wealth. We conduct an event study on 235 ESG misconducts related to DAX companies. The data sample of ESG news was hand collected in a thorough content analysis in the period of 2000-2019. The main findings reveal that investors’ reactions were more severe for ESG news released after 2009 than before this date as illustrated by negative and significant cumulative average abnormal returns (CAARs) in different event windows, while before 2009 CAARs were insignificant. We also found out that investors reacted stronger to governance- rather than social or environmental news. Our results provide a guidance for listed companies on how ESG mismanagements might affect their market value, and for investors who intend to incorporate ESG factors in their investment decision processes.

Impact of ETF Listing on the Returns Generated by Underlying Stocks: Indian Evidence

The advent of exchange traded funds (ETFs) has rendered index trading much affordable compared to their futures counterparts. The present study attempts to examine the impact of ETF listing on the price of the constituent securities of the index that it aims to track. The sample comprises of all the equity ETFs listed in India from 1 January 2002 to 31 March 2019. Event study analysis has been used to examine whether listing of ETFs bore any price impact on the constituent stocks of ETFs. To account for robustness, both parametric and non-parametric tests have been employed. The estimates obtained from event study analysis revealed that the constituent stocks generated insignificant returns for the period extending from January 2002 to March 2009 and April 2009 to March 2013 but positive and significant cumulative average abnormal returns (CAARs) post ETF listing for the period ranging from April 2013 to March 2019, thus providing evidence in support of positive price impact. The permission granted to pension funds, insurers and Employees’ Provident Fund Organisation (EPFO) to invest their funds in ETFs as well as reduction in Securities Transaction Tax (STT) account for the observed price differential. An analysis of the factors accounting for the variation in valuation effects ascertained that the stocks that were traded thinly prior to ETF listing and those forming part of ETFs with larger asset base experienced positive price impact following ETF listing. JEL Codes: G11, G14

AVRUPA’DAKİ HAVA YOLU PAY SENETLERİNİN COVID-19 PANDEMİSİNE TEPKİSİ: OLAY ÇALIŞMASI METODOLOJİSİ

The COVID-19 pandemic has struck all life, global economy, and financial markets. It stopped airline transportation in Europe and many regions of the world for a certain period as well as affecting many businesses negatively. In this process, naturally, excessive losses occurred in stock markets. Airline stocks were among the most affected by this situation. From this point of view, this study analyzes 38 airline stocks traded in the stock markets of 14 European countries with “the event study methodology”. The main purpose is to compare the reaction of the airline stocks traded in the stock markets of these countries to the pandemic and to determine whether a statistically significant cumulative average abnormal return is provided from them. Accordingly, event windows are determined as short and long windows within the scope of the event study. The findings show that a statistically significant cumulative average abnormal returns for airline stocks in all countries occurred in the -50 +50 event window. Besides, in short event windows around the pandemic announcement on March 11, which is accepted as the event date in this study, airline stocks in some countries respond to the pandemic significantly, while others do not.

The Rich Get Richer and the Poor Get Poorer: Behavior of Investors in Pharmaceutical Firms Post-IPOs

This paper analyzes stocks’ price behavior after IPO events in the pharmaceutical sector and explores the role of social media in determining this behavior. The results indicate positive and significant cumulative average abnormal returns (CAAR) of 3.70% in the first 20 days following an IPO until the end of quiet period, and a decline of tens of percent over the next three years. However, when dividing the sample into two sub-samples according to firm size, using a separation market value of $500 million, the overall picture changes dramatically. Firms with a market value lower than $500 million yielded a positive yet not significant CAAR 20 days post-IPO and a significant negative CAAR from day 50 onwards. Firms with a market value higher than $500 million experienced a significant positive CAAR from day 20 after the IPO and throughout the following year. These findings can be attributed to the limited attention of investors. Attention to the new IPOs increases until the end of quiet period and, in the case of small-sized firms, diminishes during the post-IPO years. An examination of social media and share returns demonstrates a robust correlation between the two, which may indicate that investors’ attention to these firms is also reflected in social media.

Share price reaction to financial and integrated reports

This study analyses whether significant cumulative average abnormal returns (CAAR) are observed before and after the release of financial results and integrated reports. The study was completed through the use of event study methodology, based on the capital asset pricing model for the top 40 companies listed on the Johannesburg Stock Exchange, over the period from 2012 to 2015. The study finds evidence of statistically significant CAAR. Furthermore, there appears to be stronger market reaction to the release of financial results than integrated reports. The resulting conclusion highlights the lagging trend of share price movements in relation to financial statement releases, while clarifying the lack of any noticeable reaction to the release of integrated reports. The study provides insight into market reaction and, given the increased research on the value of the integrated report, creates an awareness that is important for application of accounting practice.

Do Acquisitions Create Value for Acquirer Companies in India? An Empirical Study

This paper examined the shareholder wealth effects of acquisition announcements in India using a sample of 349 acquisition announcements made by 219 BSE 500 companies during the period from January 1, 2005 to December 31, 2014. We employed event study methodology to measure shareholder wealth effects of acquirer companies on acquisition announcements. The study found that shareholders of the Indian acquirer companies involved in acquisitions experienced significant abnormal returns of 0.37% on the day of the announcement. We also found negative cumulative average abnormal returns (CAARs) during the longer event window of 61-day, 41-day, and post-event window of 30 days, and positive CAARs during the event window of 31-day, 21-day, 11-day, 5-day, 3-day, pre-event window of 30 days, and the pre-event window of 20 days. However, CAARs were not significant at the 5% level of significance for any of the event windows except for post-event window of 20 days (+1, +20). We observed significant negative CAAR of 1.21% during the post-event window of 20 days (+1, +20). Hence, we concluded that announcement of acquisitions does not create value for the acquirer company shareholders. Moreover, negative significant CAAR during the post-event window of 20 days (+1, +20) suggested that acquisitions reduce wealth significantly during the post-event period.

The efficacy of market abuse regulation in the UK

Purpose The purpose of this paper is to ascertain the efficacy of Financial Services and Markets Act (FMSA) (2000) in deterring illegal insider trading in target companies around the time of a merger and aquisition announcement. Design/methodology/approach The author uses an event study to measure the cumulative average abnormal returns (CAARs) around both the announcement and rumour date for a sample of UK takeovers between 2001 and 2010. Findings Statistically significant CAARs prior to the event date are observed across the sample. Research limitations/implications It is not possible to link unknown instances of illegal insider trading with pre takeover residuals, therefore explaining the residuals remains a deductive process. Practical implications Pre-event abnormal returns may indicate that trading on material nonpublic information is still a contributory factor in the run-up proportion of takeover premiums. Social implications This draws a question over the efficacy of the regulatory system. Originality/value This study provides evidence which points to insider trading activity ahead of Mergers in a post FMSA 200 UK context.

Stocks’ prices manipulation around national elections?

Purpose The purpose of this paper is to examine the influence of major non-economic events such as the results of five Greek national Parliamentary elections during 1996-2009 on the Greek banks’ stocks. Design/methodology/approach Using daily data from the Athens Stock Exchange, event study methodology and market model, the results of this paper claim that the five Greek national Parliamentary elections during the 1996-2009 period had no statistically significant effect on the Greek banks’ stocks. The results show that cumulative average abnormal returns (CAARs) were slightly positive or negative for Greek banks’ stocks but not statistically significant at 5 and 10 per cent confidence levels. Findings Investors were not surprised and the political information caused no change and no influence on the future and course of the stock market. Expected winning political party was the same as the actual winning political party. Results showed that during pre-event period of 2000 and 2004 Greek national Parliamentary elections, CAARs for Greek banks’ stocks were slightly positive and after the event period were slightly negative but not statistically significant at all periods. During 2007 Greek national Parliamentary elections, the effect of elections changed because CAARs were generally slightly negative during the pre-event period and positive after the event period. Also, non-statistically significant CAARs indicate that there is no evidence that either political party was able to manipulate bank stocks’ prices for election purposes. Originality/value The main contribution of this paper is to provide evidence about effects of national elections to bank stocks’ prices which have important implications for stockbrokers, investors, politicians and political analysts.

A Study of Wealth Effects of Takeover Announcements in India on Target Company Shareholders

The business strategy of inorganic growth is carried out by companies by resorting to actions which prominently include mergers, takeovers, and strategic alliances. There is a rapid growth of both mergers and takeovers in India subsequent to the economic liberalization. The companies consider takeover activity as the quickest means of corporate growth to enhance their size and face the domestic and global competition. In spite of several decades of vast research, researchers have not come to the final conclusion on the wealth effect of announcements of takeovers on the shareholders of participating companies. While some studies justify takeover as a socially productive activity which creates value for the shareholders, others provide contrary evidences to show that they destroy value for the shareholders. In India, only some studies have analysed the impact of M&A announcements on the stock return performance of companies involved and there is lack of evidences on wealth effects on shareholders. Therefore, this paper assesses the impact of takeover announcement on the stock price performance of target companies by taking a sample of 227 companies which received takeover bids during 1998–2007. The stock price reaction is examined for a period of 61 days surrounding the bid announcement day employing standard market model. BSE- 200 index is used as a proxy for the market. The regression co-efficient and the constant terms are estimated over a period of 250 days (-280 to -31) and the statistical significance of the results of the study is determined by non-standardized and standardized abnormal return methods. Both raw returns and log returns are examined. Results of the study show that target company shareholders experience substantial and statistically significant cumulative average abnormal returns (CAARs) of 27-37 percent — 37 percent when raw returns are employed and 27 percent when log returns are employed. The conclusions remain unchanged irrespective of the testing procedure used (i.e., non-standardized or standardized abnormal returns method) and even for several shorter event window periods within a broader event window of 61 days. The results for target companies are consistent with the evidence of extant research that major benefits from M&As accrue to target company shareholders. The practical implication of the study is that there is a large and significantly positive wealth effect on the target company shareholders in response to the announcement of takeovers. Takeovers offer an opportunity to shareholders of target companies and general investors to make profits both in the period before and after the announcement of the takeover bid.

Are Managers’ Perceptions that Investors are Myopic Justified? - A Comparison of the Market’s Assessment of the Returns to Expenditures on R&D, IT and CAPEX

We study whether managers’ are correct in their perception that investors are myopic towards more ‘innovative’ investments, defined in this paper as those in research and development (R&D) and information technology (IT). We first examine the stock market’s relative response to investments using a novel dataset that tracks all investments in R&D, IT and capital expenditures (CAPEX) made by Australian listed firms over the period 1994 to 2006. Continuous disclosure rules in Australia help ensure that the sample is less affected by endogeneity concerns, in which companies might ‘select’ which announcements to make, giving rise to a sample selection bias. We report positive and statistically significant cumulative average abnormal returns (CAARs), ranging from 1.65% to 4.45%, which are higher than those reported by previous studies. Investments in R&D and IT generate significantly higher CAARs, even after controlling for the Dotcom bubble period. Long-run value tests also confirm that the marginal value of an additional dollar spent on R&D significantly exceeds that of CAPEX. The results suggest that investors do not react myopically to more ‘innovative’ investments. We next examine the determinants of announcement returns, and find some support for firm size, free cash flow, growth options, industry concentration, and whether the firm is a serial announcer. We also show that while investments in R&D and IT result in greater investor uncertainty, controlling for this in our regression models confirms that they continue to generate significantly higher returns than CAPEX. Robustness tests indicate that the higher returns reported for R&D and IT investments cannot be explained by sample specification issues, or potential inherent or omitted risk factors.

Does the Market Value Innovative Investments? A Comparison of CAPEX with Investments in R&D and IT

The paper examines the stock market’s relative response to innovative investments using a novel dataset that tracks all R&D, IT and capital expenditures (CAPEX) made by Australian firms over the period 1994 to 2006. Continuous disclosure rules in Australia help ensure that the sample is less affected by endogeneity issues, where companies may ‘select’ which announcements to make, giving rise to a sample selection bias. We report positive and statistically significant cumulative average abnormal returns (CAARs) of between 3.03% and 5.24%, which are substantially higher than those reported by comparable US studies. Investments in R&D and IT generate higher CAARs, particularly on a value-weighted basis, indicating positive benefits to scale in undertaking innovative investments. On a per-dollar spent basis, innovative investments return, on average, about 85 cents per dollar, compared to 64 cents for CAPEX. Cross-sectional regressions show firm size, growth options, leverage, and investor uncertainty as key drivers in explaining announcement returns. Consistent with the view that innovative investments involve greater uncertainty for investors, compared to CAPEX, we report a significantly higher dispersion of investor opinion around their announcement, which also has a larger negative impact on their value. Collectively, the results suggest that markets do not react myopically to innovative expenditures. Our findings run counter to claims by some managers that markets are inherently myopic, and who use this perception to justify underinvestment in strategic-type investments.

Stock Returns before and After Calls of Convertible Bonds

Ofer and Natarajan (1987) report negative, statistically significant cumulative average abnormal returns over five years following convertible bond calls. We show that these results are obtained only if returns preceding the call dates are used for market model parameter estimation. Returns preceding calls tend to be positive and unusually large. This means that predicted post-call returns, based on pre-call parameter estimates, are biased upward. Consequently, the corresponding abnormal returns are biased downward. We also discuss a corrected test statistic. We conclude that the evidence does not indicate market inefficiency in the stock price reaction to convertible calls.