Significant Negative Market Reaction Research Articles

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.

The Impairment of Purchased Goodwill: Effects on Market Value

This paper examines the value relevance of goodwill impairment and the information content of impairment announcements with the introduction of Financial Reporting Standard (FRS) 11 in the UK in 1998 which allowed an annual impairment review as an alternative to capitalisation and subsequent systematic amortisation of goodwill. In contrast to systematic amortisation of capitalised goodwill, our results suggest that goodwill impairment is associated with economically significant reductions in market value. We also find evidence of a significant negative market reaction to goodwill impairment announcements. The negative impact is greater for firms with a higher proportion of assets carried as goodwill and for firms that release little information prior to the announcement. Our results also confirm previous findings that capitalised goodwill is significantly associated with market value in the year of acquisition, but weakens thereafter; and that systematic amortisation of capitalised goodwill is not value-relevant.

Capital market reaction to defective IT products: The case of computer viruses

Studies in various industries indicate that market reaction to recall announcements is used as a catalyst to control the creation of substandard products. In the IT industry, flawed software is being blamed for the increasing numbers of computer viruses that plague information systems and the escalating costs to repair these viruses. This paper examines whether the market penalizes firms that produce substandard IT products. We use the event study methodology to assess the impact of public virus announcements on the stock prices of responsible IT vendors between 1988 and 2002. The results show that the market reacts negatively to the production of flawed Information Technology in approximately 50% of the cases. However, this negative market reaction is not statistically significant over extended periods and is limited to announcements involving certain types of defects (i.e., IT products that contain computer viruses). There was no statistically significant negative market reaction for announcements involving IT products that are susceptible to computer viruses. Our analysis implies that unlike in other industries, market forces alone cannot be used as an effective control mechanism for the production of substandard IT products. The study concludes that under these present conditions, IT vendors have little economic incentives to invest in defect-free computing.

The Information Content of Administration and Administrative Receivership Filings in the UK

This study investigates the stock price performance of all listed firms that filed for Administration and Administrative Receivership in the UK between 1996 and 2003. Using event study methodology, we find a significant negative market reaction to Administrative Receivership filings but not to Administration filings. The evidence points to some degree of anticipation by the market participants given the large incidence of pre-filing warnings (e.g., profit and liquidity warnings) in our sample. The results are consistent with a less lenient treatment of shareholders in Administrative Receivership compared to Administration.

The economic cost of publicly announced information security breaches: empirical evidence from the stock market*

This study examines the economic effect of information security breaches reported in newspapers or publicly traded US corporations. We find limited evidence of an overall negative stock market reaction to public announcements of information security breaches. However, further investigation reveals that the nature of the breach affects this result. We find a highly significant negative market reaction for information security breaches involving unauthorized access to confidential data, but no significant reaction when the breach does not involve confidential information. Thus, stock market participants appear to discriminate across types of breaches when assessing their economic impact on affected firms. These findings are consistent with the argument that the economic consequences of information security breaches vary according to the nature of the underlying assets affected by the breach.

The Effect of 10K Restatements on Firm Value, Information Asymmetries, and Investors' Reliance on Earnings

Restating 10-Ks has become an increasingly common phenomenon in financial reporting. Restatements clearly signal that the firm's prior financial statements were not credible and were of relatively lower quality. In this study, we examine the effect of restatements on investors' and dealers' perceptions of the firm. First, we examine the market returns and the bid-ask spread effects at the announcement of the accounting problem that leads to restatement. We find negative market returns for accounting problem announcements, and we find that the negative reaction is most pronounced for firms with revenue recognition issues. We also find an increase in spreads surrounding the announcement of revenue recognition problems. Second we examine returns and spreads from the announcement of the restatement to the filing of the restated financial statements. We find a significant negative market reaction and a larger negative reaction for firms with revenue recognition problems. We find no change in spreads from before the announcement of the accounting problem to after the restatement is filed. Finally, we examine the effect of the restatement on earnings response coefficients, and find that the market reacts less to earnings after a restatement than to earnings prior to a restatement. In general, these results indicate that investors and dealers react negatively to restatements and are more concerned with revenue recognition problems than with other financial reporting errors.

Share Price Reaction To Security Offerings By Hospitality Firms

This study examines the share price reaction to security offering announcements by hospitality firms. Results indicate that a significant negative market reaction is triggered on average when firms announce new equity issues. However, no significant share price reaction occurs when firms announce new debt issues. Cross-sectional analyses of announcement period abnormal market returns indicate that the market's reaction to equity issuance announcements is more favorable or less unfavorable for larger firms. The impact of security offerings is important to investors, managers, creditors, and other stakeholders, as security offerings can have a significant impact on the value of the firm and on the firm's cost of capital.

Voluntary Income‐Increasing Accounting Changes*

Abstract. This article presents an explanation of the reasons that managers might elect to change accounting methods. Facing adversity with a nontrivial probability of technical default on the debt covenants, the manager is motivated to effect an income‐increasing accounting change to circumvent a technical default. Under rational expectations, if investors do not have any prior information about the firm's adversity, the market reaction on an accounting change announcement is predicted to be negative. We postulate that the market impact on the date of change announcement is negatively correlated with the amount of information the investors may have. A sample of 77 firms was selected to test the economic arguments. Investors' reaction to the accounting change was tested by abnormal returns on dates of announcement. Cross‐sectional tests associate the investors' reaction with their prior information about the financial status of the sample firms. On the date of the change announcement, the sample firms did not experience a statistically significant negative market reaction. However, in a cross‐sectional analysis, the market impact parameter was found to be significantly correlated in a negative manner with the prior information proxy variable.

EQUITY ISSUES AND TOBIN'S Q: NEW EVIDENCE REGARDING ALTERNATIVE INFORMATION RELEASE HYPOTHESES

AbstractAnnouncements of seasoned equity offerings are associated with a statistically significant negative market reaction. This finding is consistent with both the cash flow signaling and the free cash flow hypotheses. We test these hypotheses by examining whether revisions in analyst earnings forecasts and abnormal stock returns associated with equity offering announcements are related to the issuing firm's q‐ratio. We find an inverse relation between revisions in analysts' earnings forecasts and q‐ratios, and no relation between announcement‐period abnormal returns and q‐ratios. These findings provide direct evidence of the cash flow signaling hypothesis and, at best, indirect evidence of the free cash flow hypothesis.

A market test of investor reaction to disagreements

The SEC currently requires that firms disclose recent disagreements with their auditors over accounting or auditing matters when a change in auditor is reported. The effectiveness and usefulness of requirements to disclose disagreements have been questioned, and previous empirical research on the issue has been inconclusive. This study investigates the information content of disclosure of the auditor-firm disagreements. The analysis indicates a significant negative market reaction in the week that the Form 8-K is filed with the SEC. This finding is consistent with the position that the disclosure provides information useful to investors.