Significant Negative Market Reaction Research Articles

Impact of Changes in Membership on Prices of a Unified Carbon Market: Case Study of the European Union Emissions Trading System

Using the event study methodology, the paper studies the effects of 22 key events in countries’ process of entering and exiting the European Union on returns of European Union Allowance (EUA) future prices in the EU Emissions Trading System (EU ETS). The events include 17 entry events concerning the signing of relevant agreements, becoming a candidate or potential candidate country, the process of a negotiation and formally entering the EU, and five exit events including the process of Brexit and the suspension of Iceland. The results show that two entry events involving Albania and Ukraine, respectively, have a significant positive impact, and five entry events have a significant negative impact. Among the exit events, the announcement of the Brexit referendum results causes significant negative market reaction. Most events regarding small carbon emitters entering the EU lead to negative cumulative abnormal returns (CAR) of EUA prices, and a significant negative correlation between the countries’ annual average carbon emissions and CAR is found, while the change of national allocation plans does not affect the market reaction notably. In the process of establishing a unified carbon market, regulators should carry out appropriate policy arrangements of emission allowances allocation when new members join, in order to guide market expectations and enhance market stability.

Is Cybersecurity Risk Factor Disclosure Informative? Evidence from Disclosures Following a Data Breach

By examining managers’ decisions about disclosing updated assessments of firms’ risks, we present evidence that the risk factor disclosures are informative. We use the setting of cybersecurity risk factor disclosures after a data breach because data breaches, especially severe breaches, serve as a natural experiment where an exogenous shock to managers’ assessment of their firm’s cybersecurity risks occurs. We analyze the topic from the perspective of two different theoretical lenses: the economic lens of optimal risk exposure and the ethical lens of stakeholder theory. Using a sample of firms experiencing data breaches, we find that firms experiencing a data breach increase the amount of cybersecurity risk factor disclosures compared to matched firms with no data breach. Further investigation reveals that the severity of data breaches affects the results; cybersecurity risk factor disclosures increase only after severe data breaches. While there is no significant market reaction if breached firms’ subsequent annual reports include increased cybersecurity risk factor disclosures, a significant negative market reaction occurs if breached firms decrease cybersecurity risk factor disclosures, regardless of the severity of the breach, implying that the market anticipates increased disclosures after data breaches.

The Effects of Reputational Sanctions on Culpable Firms: Evidence from China's Stock Markets

Reputational sanctions are widely used as a regulatory tool to curb corporate misconduct. However, existing literature on its workings and effectiveness is largely limited to developed economies. We thus examine the case of China, focusing on an important yet understudied form of reputational sanction there, namely public criticisms imposed on culpable firms by the two Chinese stock exchanges in Shanghai and Shenzhen. We construct a unique dataset of all public criticisms announced by the two Chinese stock exchanges from 2013 to 2018, and find significantly negative cumulative abnormal returns around the announcement date. Cross-sectional regression analysis finds that there are several factors affecting the short-term market reaction to public criticisms, including financing propensity, governance mechanism, and equity nature. However, further tests show that the significant negative market reaction to public criticism only appears in the firms relying on external financing and those not controlled by state ownership. Importantly, the market reaction is not significant in cases where the firm had already self-exposed misconduct before the announcement of public criticisms by the stock exchange. To have a more complete picture of the effectiveness of public criticism, our paper is the first of its kind to examine other effects of public criticism. We find that public criticism does not improve firms’ long-term values, nor produce strong deterrence to change their behaviour. Overall, the evidence of the effects of public criticism on culpable firms is mixed, suggesting that reputational sanction is a weak, if not ineffective, instrument of market regulation in China.

Market Response to Audited Internal Control Weakness Disclosures

ABSTRACT To help guard against weaknesses in internal control over financial reporting (ICFR), the Sarbanes-Oxley Act of 2002 requires certain filers to have their ICFR assertions audited. Beneish et al. (2008) show that market participants fail to react negatively to adverse ICFR audit opinions. This is puzzling because weak ICFR heightens the risk of fraud or materially misstated financial statements. Our study reexamines this issue for the time periods covered by Auditing Standard No. 2 (AS2) and Auditing Standard No. 5 (AS5). We too find no significant negative market reaction to the disclosure of adverse ICFR audits in the AS2 era. However, we show that markets react negatively for first-time disclosures of adverse ICFR audits after the adoption of AS5. Furthermore, in the AS5 regime, markets seem to differentiate between entity-wide versus account-specific ICFR weaknesses. We also show that correcting previous ineffective ICFR results in a positive market reaction. Data Availability: Data are available from sources cited in the text.

A closer look at politically connected corporations: evidence from Citizens United

PurposeThe purpose of this paper is to examine the effects of political connections surrounding an exogenous Supreme Court decision (Citizens United) that lifted long-standing restrictions on corporate political contributions.Design/methodology/approachThis study examines key characteristics of politically connected firms compared to non-politically connected firms, including their market reaction to Citizens United, as well as cash holdings levels and governance characteristics before vs after the landmark decision.FindingsThe results indicate a significant negative market reaction to politically connected firms surrounding the announcement of Citizens United. Additionally, there is a significant increase in the cash holdings of politically connected firms relative to before the event and relative to non-politically connected firms. For politically connected firms, this result is exacerbated by poor corporate governance quality. Collectively, these findings are consistent with a positive association between agency costs and political connections.Originality/valueThis study provides novel evidence by exploiting an exogenous enhancement in the implications of political connections that accompanied the Citizens United decision. The use of this quasi-natural experiment offers an ideal research setting to extract fresh insights into the effects of corporate political connections.

Market reaction to the European antitrust investigations in the payment card industry

This paper aims to analyse the stock price reaction of European banks involved in antitrust authority interventions regarding the payment card business. The main objective is to assess whether market discipline is effective and able to complement regulation (Berger et al., 2000) despite the opacity of the business (Morgan, 2002). To this end, we collect all interventions made by both domestic antitrust authorities and by the European Commission to investigate and/or sanction anticompetitive behaviour in the payment card sector over the period 2004-2015. This results in a sample of 24 events, involving 135 listed banks operating in the EU-27 area. We run an event study analysis based on a traditional market model in order to estimate cumulated abnormal returns (CARs), considering both the date when the formal investigation is open and the date when the outcome of the procedure is communicated to the market. Our findings provide weak evidence in favour of the effectiveness of market discipline, with a significant (negative) market reaction only for investigations involving a small number of well-identified banking institutions, while procedures involving large banking associations or payment networks do not generate any relevant reaction.

Mandated Social Disclosure: An Analysis of the Response to the California Transparency in Supply Chains Act of 2010

In this study, we examine investor and firm response to the California Transparency in Supply Chains Act (CTSCA) of 2010. The CTSCA requires large retail and manufacturing firms to disclose efforts to eradicate slavery and human trafficking from their supply chains and is a rare example of mandated corporate social responsibility disclosure. Based on a sample of 105 retail companies subject to the CTSCA, we find a significant negative market reaction to the passing of the CTSCA. Furthermore, we find that the reaction is significantly more negative for larger firms and companies facing greater supply chain risks (apparel and footwear retailers), suggesting investors negatively value exposure to legitimacy threats in the social domain. With respect to company disclosure response, we document relatively high compliance with the legislation, although we also find that the disclosure response appeared to be more symbolic than substantive in nature. Finally, our analysis indicates that both disclosure choice and disclosure extensiveness were significantly higher for the high supply chain risk companies, suggesting the response was influenced by concerns with strategic legitimation. Overall, the limited quality of disclosure suggests that, without additional rules and guidance, mandates alone may not lead to meaningful social disclosure.

Does the Market Price Demographic Diversity in the Boardroom? Evidence from an Emerging Market

In this study, we investigate the market reaction to the appointments/departures of directors from various demographic backgrounds to/from the boards of public firms listed at the Borsa Istanbul between 2012 and 2014, via a unique handcollected dataset. Our findings suggest that investors in Turkish capital markets do not appear to value the gender or nationality of members of board of directors. However, they appear to value the age of directors. When relatively older directors leave the boards of public firms, significant negative market reaction is observed.

How Did Markets React to Stress Tests?

We use event study methods to compare the market reaction to U.S. and EU-wide stress tests performed from 2009 to 2013. Typically, stress tests have a positive impact on stressed banks’ returns. While the 2009 U.S. stress test had a large positive outcome, the impact of subsequent U.S. exercises decreased over time. The 2011 EU exercise is the only EU-wide stress test that resulted in a significant negative market reaction. Comparing past exercises suggests that the qualitative aspects of the governance of stress tests can matter more for stock market participants than technical elements, such as the level of the minimum capital adequacy threshold or the extent of data disclosure.

Investors׳ reaction to the use of poison pills as a tax loss preservation tool

The recent economic downturn resulted in firms generating significant tax losses, which they risked losing if they experienced an ownership change. In response, a number of loss firms adopted poison pill plans. We document a significant negative market reaction to the announcement of 62 poison pill adoptions related to net operating losses (NOLs), suggesting that in general investors do not consider management׳s claim that the pills are adopted to preserve a valuable tax asset to be credible. However, we find cross-sectional variation consistent with investors considering whether a pill is legitimately adopted to preserve the NOL or to entrench management.

Distracted Directors: Does Board Busyness Hurt Shareholder Value?

This paper examines the impact of independent director busyness on firm value in a setting that addresses a key challenge that the board of directors is an endogenously determined institution. We use the deaths of directors and CEOs as a natural experiment to generate exogenous variation in the time and resources available to independent directors at interlocked firms. The sudden loss of such key co-employees is an ‘attention shock’ because it increases the board committee workload for some independent directors at the interlocked firm – the ‘treatment group’, but not others – the ‘control group’. In a hand-collected sample of 2,551 (592) firms that share a non-deceased independent director with 633 (189) firms subject to director (CEO) deaths, difference-in-differences estimates reveal that investors react negatively to these attention shocks. There is a significant negative stock market reaction of -0.79% (-0.95%) for director-interlocked firms in the treatment group, but no reaction for those in the control group. The treatment effect is significantly magnified by interlocking directors’ busyness (e.g., board size and number of outside directorships), the importance of their roles in the firm (e.g., type of committee membership), and their degree of actual independence (e.g., board classification). Overall, these results provide endogeneity-free evidence that independent directors’ busyness is detrimental to board monitoring quality and shareholder value.

Wealth effects of REIT property-type focus changes: evidence from property transactions and joint ventures

Using a sample of 678 property portfolio changes (acquisitions, dispositions and joint ventures) of the US Real Estate Investment Trusts (REITs) during 1990–2009, we investigate how investors react to changes in a REIT’s property-type focus. We find a significant negative market reaction to acquisition and acquisitional Joint Venture events that decrease property-type focus. We also find some statistically insignificant evidence of a wealth benefit from dispositional events that increase property-type focus. Overall, our findings are consistent with explanation for the lack of diversification in REITs; investors prefer to make their own diversification decisions using narrowly focused REITs.

Market Reactions to Departures of Audit Committee Directors

SYNOPSIS:The composition and functioning of audit committees have come under increasing scrutiny from legislators and regulators in recent years. We examine the market reaction to 107 audit committee director departures that occur (without any concurrent appointment to the board or other contemporaneous news) during 2005 to 2008. We find that there is a significant negative market reaction to the departure of accounting experts, but not for the departures of other types of experts or non-expert directors. Considering a subsample of expert director departures, we find that the market reaction is significantly negative for the departure of short-tenured directors, but not for the departure of long-tenured directors.

Effects of Illegal Behavior on the Financial Performance of US Banking Institutions

This study investigates whether financial performance is affected by corporate violations of laws and regulations. In a sample of 128 publicly traded banks that were subject to enforcement actions by US regulatory authorities over a 20-year period, we observed a significant negative market reaction pursuant to the violations. However, the market reaction did not vary meaningfully in accordance with the severity or repetitiveness of the violation. The results of this study are in conformity with previous research on industries other than banking, notably with regard to negative market reaction. This confirms that shareholders in the banking industry react in a manner considerably similar to their counterparts in other industries.

Market Reaction to the PCAOB's Inability to Conduct Foreign Inspections

This paper investigates the potential costs to investors of the Public Company Accounting Oversight Board’s (PCAOB’s) inability to conduct inspections of foreign audit firms. Specifically, we examine the stock market reaction of companies audited by non-inspected foreign audit firms to a series of disclosures by the PCAOB relating to its difficulties in conducting foreign inspections in European Union countries, Switzerland, China, and Hong Kong. We find a significant negative stock market reaction, in both the univariate and multivariate settings, to the PCAOB’s initial disclosure in August 2009 of the names of foreign auditors that had not been inspected by the PCAOB. These results are driven by companies with a China-based auditor. Further, we find univariate and multivariate evidence of a significant negative market reaction to the Board’s February 2010 disclosure of additional audit firm names (i.e., not named in the August 2009 disclosure) that had not been inspected by the PCAOB. In addition, we find univariate, but not multivariate, evidence of a significant negative market reaction to the Board’s May 2010 disclosure of company names whose auditor is located in a country that does not permit PCAOB inspections. Finally, in both the univariate and multivariate settings, we find evidence of a significant positive market reaction to the PCAOB’s January 2011 disclosure that registered U.K. audit firms would now be subject to inspection. Together, the negative market reactions to the Board’s disclosure of its inability to inspect audit firms located in certain foreign countries and the positive market reaction to the Board’s subsequent disclosure that inspections would now be permitted in a country (U.K) that previously blocked inspections provide evidence that the significant resources devoted by the PCAOB to its inspection program are valued by market participants.

Size does matter! The intra-industry effect of bank loan ratings

We observe an intra-industry effect following a bank loan rating downgrade announcement, which differs for large and small competitors. A significant negative market reaction occurs between smaller competitors and rated firms, indicating the presence of a contagion effect; while significantly positive market reactions for larger competitors of rated firms indicate a competitive effect is present. We compare the size of rated firms with a corresponding competitor at firm level instead of aggregating at an industry level. This approach indicates an intra-industry effect is present, which differs depending on the relative size of competitors to the announcing firm. Our results confirm that rating agencies offer valuable information to the marketplace.

An empirical investigation of environmental performance and the market value of the firm

This paper analyzes the shareholder value effects of environmental performance by measuring the stock market reaction associated with announcements of environmental performance. We examine the market reaction to two categories of environmental performance. The first category includes 417 announcements of Corporate Environmental Initiatives (CEIs) that provide information about self-reported corporate efforts to avoid, mitigate, or offset the environmental impacts of the firm's products, services, or processes. The second category includes 363 announcements of Environmental Awards and Certifications (EACs) that provide information about recognition granted by third-parties specifically for environmental performance. Although the market does not react significantly to the aggregated CEI and EAC announcements, we find statistically significant market reactions for certain CEI and EAC subcategories. Specifically, announcements of philanthropic gifts for environmental causes are associated with significant positive market reaction, voluntary emission reductions are associated with significant negative market reaction, and ISO 14001 certifications are associated with significant positive market reaction. The difference between the market reactions to the CEI and EAC categories is statistically insignificant. Overall, the market is selective in reacting to announcements of environmental performance with certain types of announcements even valued negatively.

Pengaruh Dividen Inisiasi dan Dividen Omisi terhadap Return Saham di Bursa Efek Indonesia

The objective of this study is to determine the effect of dividend initiations and dividend omission of stock returns in Indonesia Stock Exchange (BEI). Variables in this study consist of dividends, dividend announcements, and a significant stock return on dividend announcement reflected the presence of abnormal return during the event period. This study employs the company's shares listed on Indonesia Stock Exchange and are actively traded. Samples used as many as 50 companies, where 37 companies as a dividend initiation and 13 companies as a dividend omission. The sample selection was done by purposive sampling method that is research based on certain criteria. Results of analysis testing the effect of the abnormal return of dividend announcements indicate a significant influence. Announcements of dividend initiations have significant positive influence, while the announcements of dividend omissions have significant negative market reaction. That means the announcement of dividend initiations have a signal or a specific information content that causes the market to react more than normal state of the information, while the announcement of dividend omissions affect investors to remove their stock price moves down or there is a significant abnormal return. Keywords: dividend initiation, dividend omission, dividend announcement, stock return

Economic consequences of increasing the conformity in accounting for uncertain tax benefits

Commentary during the development of FASB Interpretation no. 48 suggests the interpretation could be costly for firms because new disclosure requirements could be used by the IRS to more effectively challenge uncertain tax positions. Stock returns around FIN 48 pronouncements suggest investors were not concerned about an increase in tax costs, and investors responded favorably to initial disclosures required under FIN 48. However, we document a significant negative market reaction to subsequent news of a Senate inquiry into these disclosures consistent with investors revising their beliefs over the potential for additional tax costs.

An Empirical Investigation of Environmental Performance and the Market Value of the Firm

This paper analyzes the shareholder value effects of environmental performance by measuring the stock market reaction associated with announcements of environmental performance. We examine the market reaction to two categories of environmental performance. The first category includes 430 announcements of Corporate Environmental Initiatives (CEIs) that provide information about self-reported corporate efforts to avoid, mitigate, or offset the environmental impacts of the firm's products, services, or processes. The second category includes 381 announcements of Environmental Awards and Certifications (EACs) that provide information about recognition granted by third parties specifically for environmental performance. Although the market does not react significantly to the aggregated CEI and EAC announcements, we find statistically significant market reactions for certain CEI and EAC subcategories. Specifically, announcements of philanthropic gifts for environmental causes are associated with significant positive market reaction, voluntary emissions reductions are associated with significant negative market reaction, and ISO 14001 certifications are associated with significant positive market reaction. The difference between the market reactions to the CEI and EAC categories is statistically insignificant. Overall, we find that the market is selective in reacting to announcements of environmental performance with certain types of announcements even valued negatively.