Stock Market Event Studies Research Articles

Data Breach Announcements and Stock Market Reactions: A Matter of Timing?

Although firms’ announcement of data breaches can lead to reputational or operational damages, extant research suggests that stock markets are relatively unresponsive to such announcements. We investigate whether markets’ unresponsiveness can be explained by firms strategically timing the announcement to coincide with busy days in the media, thereby reducing attention and, ultimately, attenuating market reactions. We leverage novel data on data breach announcements in the United States between 2008 and 2018 and create a measure of busyness in the trade press—news pressure—based on the Wall Street Journal. To investigate, we conduct two complementary studies. In Study 1, we employ an instrumental variable approach to assess whether announcements coincide with days of predictably high news pressure. We find that this is the case. On days with a one-standard-deviation-higher predictable news pressure, 4.44% more data breaches are announced (or approximately 19.024 data records). Strategic timing is more prevalent for breaches that are severe, that have firm-internal causes, and that leak healthcare data or credentials. In Study 2, we utilize a stock market event study to assess market reactions conditional on news pressure on the announcement day. We find that data breach announcements are associated with negative market reactions, yet these are attenuated by higher news pressure on the announcement day. If news pressure is on its empirical mean (respectively, one standard deviation above), we estimate a median decline in market capitalization of $347 (respectively, $85) million. We conclude that firms’ strategic timing might explain inconsistent findings in prior work. This paper was accepted by Chris Forman, information systems.

Hiding in the Herd: The Product Recall Clustering Phenomenon

Problem definition: Product recalls have serious consequences for firms and consumers. Little is known, however, about how firms manage the timing of recalls and how this timing influences the financial consequences of recalls. In this study, we provide evidence for a previously unknown phenomenon: recall clustering, a collection of recalls within close temporal proximity in which a leading recall (the first recall in a cluster) excites following recalls (subsequent recalls in a cluster). We also investigate how the stock market penalizes firms differently depending upon their position within the recall cluster. Academic/practical relevance: By demonstrating that auto firms cluster their recalls and that the market penalizes firms differently based on the position of a recall within a cluster, we contribute to the literature that investigates recall timing and stock market event studies and provide guidance for regulators who oversee auto recalls and managers who make recall decisions. Methodology: We first develop analytical predictions using a dynamic game theoretic model to motivate our hypotheses. We then examine empirical support for our hypotheses by analyzing 3,117 auto recalls across 48 years using a Hawkes process model. Hawkes process models are designed to examine self-excitation of events across time and can be used to investigate recall clustering, while categorizing recalls as leading or following within a cluster. Finally, we use the leading and following recall designations obtained from the Hawkes process model in an event study to examine how the stock market effects of a recall vary depending on its position within a cluster. Results: We find that 73% of recalls occur in clusters, and they form after a 16-day gap in recall announcements. On average, clusters last for 34 days and are comprised of 7.6 following recalls announced after the leading recall. Leading recalls are associated with as high as a 67% larger stock market penalty than following recalls. Further, we find that the stock market benefit realized by a following recall weakens as the time since the leading recall increases and that the stock market penalty faced by a leading recall grows as the time since the end of the last cluster increases. Managerial Implications: Our findings lead to a key implication for regulators who oversee auto recalls by demonstrating evidence of recall clustering and the underlying stock market effects that are attributable to it. We provide a cost-neutral policy recommendation for the National Highway Traffic and Safety Administration that should limit recall clustering.

Predicting Merger Outcomes: The Accuracy of Stock Market Event Studies, Market Structure Characteristics, and Agency Decisions

Merger analysis is an exercise in prediction. This paper analyzes the accuracy of two leading methods of predicting merger outcomes—stock market event studies and an approach using market structure criteria—as well as the accuracy of antitrust agencies’ decisions about challenging mergers. The basis for these evaluations is a database of price effects of 41 mergers compiled from published retrospective studies of mergers. This paper finds that event studies systematically underpredict the incidence of anticompetitive outcomes, while market structure criteria overpredict competitive problems. Agency decisions correct much of that overprediction, however, which suggests that structural criteria may serve as an appropriate first screen.

An Event Study of the US Airways-American Airlines Merger

The recent merger between US Airways and American Airlines was approved by federal and state antitrust authorities, after the merging parties agreed to divest slots and gates at certain “constrained” airports to low cost carriers. By analyzing the stock-market returns of rival airlines, we find some evidence that stock market investors anticipated anticompetitive effects from this merger. The economics literature offers many reasons why such stock-market event studies should not be used to infer competitive effects from mergers. For example, abnormal returns for rivals might arise for reasons unrelated to competitive harms, such as when a merger changes expectations that one or more rivals will be “in play” (i.e., a potential future acquisition target). However, we argue that, for certain cases and conditions, event studies can inform a competition analysis, and that the US Airways – American merger might well be one such case.

Strategic Responses to Regulatory Threat in the Credit Card Market

In November 1991, federal lawmakers threatened to place a binding cap on credit card interest rates. I find that credit card rates declined following the regulatory threat, more so for larger and more politically visible credit card issuers. A set of stock market event studies reveals that interest rate cuts announced after the threat led to positive abnormal returns, both for announcing issuers and their rivals. This pattern does not exist for similar rate cuts made outside the period of regulatory threat. The results suggest that firms may experience private benefits to price-cutting when doing so mitigates regulatory threat, and spillover benefits when another firm cuts prices in order to ease regulatory threat.

Predicting Merger Outcomes: How Accurate are Event Studies, Market Structure Determinants and Agency Decisions

Merger analysis is an exercise in prediction. This paper analyzes the accuracy of two leading methods of predicting merger outcomes – stock market event studies, and a market-structure/Merger Guidelines approach – as well as the accuracy of antitrust agencies’ decisions whether or not to challenge mergers. The basis for these evaluations of accuracy is a data base of actual price effects of some forty mergers compiled from published merger retrospectives. This paper finds that event studies systematically underpredict the incidence of anticompetitive outcomes, while market structure criteria overpredict competitive problems. Since market structure serves primarily as an initial screen for agency analysis,initial over-inclusiveness may be the optimal first stage of the process of policy determination.

The Private and Social Costs of Patent Trolls

In the past, non-practicing entities (NPEs) - firms that license patents without producing goods - have facilitated technology markets and increased rents for small inventors. Is this also true for today’s NPEs? Or are they “patent trolls” who opportunistically litigate over software patents with unpredictable boundaries? Using stock market event studies around patent lawsuit filings, we find that NPE lawsuits are associated with half a trillion dollars of lost wealth to defendants from 1990 through 2010, mostly from technology companies. Moreover, very little of this loss represents a transfer to small inventors. Instead, it implies reduced innovation incentives.

Is the event study methodology useful for merger analysis? A comparison of stock market and accounting data

This paper presents empirical evidence about the ability of event studies to capture mergers’ ex-post profitability as measured by accounting data. We use a sample of large horizontal concentrations during the period 1990–2002 involving 482 firms either as merging firms or competitors, and contrast a measure of the mergers’ profitability based on stock market event studies with one based on balance sheet profit data. We show that using a long window around the announcement date (25 or 50 days before the event) increases the ability to capture the ex-post merger effect: the pairwise correlation coefficient is positive and highly significant.

Stock Market Event Studies and Competition Commission Inquiries

Event study analysis is a branch of econometrics which attempts to measure the effects of economic events on the value of firms by examining stock market data. Providing that share prices reflect the underlying economic values of assets, changes in equity values will properly capture expected changes in the economic profitability of the firm. This paper considers the effect on stock prices of announcements relevant to Competition Commission references, using established event study methodology.

The Private Costs of Patent Litigation

This paper estimates the total cost of patent litigation to alleged infringers. We use a large sample of stock market event studies around the date of lawsuit filings for US public firms from 1984-99. We find that the total costs of litigation are much greater than legal fees and costs are large even for lawsuits that settle. Lawsuits cost alleged infringers about $28.7 million ($92) in the mean and $2.9 million in the median. Moreover, infringement risk rose sharply during the late 1990s to over 14% of R&D spending. Small firms have lower risk relative to R&D.

Sudden changes in property rights: the case of Australian native title

Recent High Court decisions in Australia relating to Aboriginal native title have the potential to provide insights to the origins of property rights and the possible costs of changes to those rights. This paper investigates these issues by analyzing the court judgements and by means of a stock market event study. It seems that neither the naı̈ve view nor the legal centralist view of property rights can adequately explain Australian native title. Further we do not find significant costs resulting from the change in property rights.

Investor Expectations and the North American Free Trade Agreement

The paper uses a stock market event study to examine investors’ expectations of NAFTA's effect on the profitability of manufacturing industries in the USA, Canada, and Mexico. The main finding is that factor intensity, specifically a measure of the industry–wide labor–capital ratio, is the most significant determinant of excess returns. The results suggest that investors believed the NAFTA would favor industries that used abundant factors intensively and reduce profitability in industries that relied heavily on scarce factors; and, more generally, that factor intensity is a primary source of comparative advantage. No significant relationship was found between the relative scale of industries among the three countries and the NAFTA's expected influence on profitability.

Are stock market event studies affected by the price range of shares? The Canadian experience

This study uses event date methodology to examine whether low priced and high priced shares respond differently to market events. Our results indicate that in response to takeover announcements, low priced shares are more price volatile and unlike higher priced shares decline after the event date. Recognition of share prices should therefore be considered in event studies and in particular when comparing the results of different studies.

Dividend Taxation and Equity Value: The Canadian Tax Changes of 1986

The 1986 Canadian federal budget, which increased the tax rate on dividends vis-a-vis capital gains, provides a natural experiment for examining the relationship between taxation and asset values. The authors employ a stock market event study to investigate the differential impact of this tax change on high- and low-dividend securities. To control for other new information contained in the budget, they focus on companies that issue both preferred (high-dividend) stocks and common (low-dividend) stocks. The authors find that abnormal returns are negatively related to dividend yields, which provides support for the hypothesis that taxes affect stock prices.

Trade liberalization, comparative advantage, and scale economies stock market evidence from Canada

The Canada-United States Free Trade Agreement (FTA) provides an excellent opportunity to analyze the impact of a comprehensive trade liberalization. In this paper, a stock market event study is employed to capture investors' expectations about the consequences of this agreement for manufacturing firms in Canada. The primary question addressed is whether abnormal stock market returns corresponding to news about the FTA are consistent with hypotheses based on comparative advantage and economies of scale. The results indicate that both comparative advantage and scale economies played a role in determining investors' perceptions of the impact of the FTA.

The Anticipated Sectoral Adjustment to the Canada - United States Free Trade Agreement: An Event Study Analysis

In this paper, a stock market event study is employed to investigate investors' expectations about the consequences of the Canada-U. S. Free Trade Agreement for manufacturing industries in Canada. The author finds that industry-level abnormal returns corresponding to only one event, reaching the agreement in October 1987, are jointly significant and consistent with prior hypotheses about the impact of the agreement. Although only a few of these abnormal returns are statistically significant, all of them have the anticipated signs and some are quite large, suggesting substantial profits and losses during the adjustment to free trade.