Stock Price Performance Of Firms Research Articles

Bank Structure and Liquidity Shocks: Evidence from Emerging Markets During the 2008 Financial Crisis

There is ample evidence on how bank structure (bank concentration, development of the banking sector, and presence of foreign banks) is related to credit supply and economic growth. However, little is known about how bank structure affects credit supply when the banking sector itself is in crisis and thus credit supply is impaired. The paucity of studies in examining the relationship between bank structure and credit supply during financial crisis is probably due to the complication that bank structure itself is significantly related to financial crisis. In this study, we avoid the endogeneity problem caused by the correlation between bank structure and financial crisis by studying the stock price performance of firms in 20 emerging countries during the 2008 financial crisis because the financial hardship in these countries was caused exogenously by the crisis originated from the U.S. We find firms that are more dependent on external financing tend to suffer greater stock price declines. However, the severity of the decline is significantly smaller for firms in countries with higher level of bank concentration, greater advancement in banking sector, and higher level of foreign bank presence. The results suggest that bank concentration, bank development, and foreign bank presence all contribute to the alleviation of liquidity crunch caused by crisis transmitted from other countries.

Factors Associated With and Long Term Stock Price Performance of Firms Making Disclosures of Auditor-Client Frictions

Financial Reporting Release (FRR) No. 31 (SEC 1988) changed the disclosure requirements about auditor-client frictions (i.e., disagreements and reportable events) in auditor change announcements. The first goal of the study is to document factors associated with an auditor change sample disclosing auditor-client frictions compared with an auditor change sample not making such disclosures in auditor change announcements. We use 5,128 observations of auditor changes obtained from a sample period following enactment of FRR No. 31. In the fiscal periods in which the frictions are reported to have occurred, firms disclosing auditor-client frictions tend to have (1) higher levels of audit risk, (2) deteriorating financial condition, (3) higher levels of growth, (4) higher incidence of new going-concern audit opinion, (5) more auditor resignations, (6) greater incidence of Big 5/6 predecessor auditors, and (6) lower incidence of Big 5/6 successor auditors. We also find that auditor change firms with disclosures of auditor-client frictions tend to be (7) younger firms, (8) exhibit higher audit risk, and interestingly, occur in (9) larger firms with (10) increasing levels of institutional ownership. The second goal of the study is motivated by a growing body of empirical evidence from a variety of contexts that indicates market participants under-react to certain disclosures. Also, the SEC (1988) suggests that both types of auditor-client frictions may be potential early warning signs of trouble. We find that firms disclosing auditor-client frictions exhibit long-run drift in stock prices in the same direction as the initial price reaction. Stock prices indicate that investors under-react to disclosures about auditor-client frictions in auditor change announcements. The evidence of under-reaction to the auditor change sample disclosing auditor-client frictions is robust to alternative asset pricing models and tests suggested by the literature documenting appropriate research design choices for long-run stock price tests.

Technology transactions, announcement effect, and reversal: Dissecting an anomaly

Abstract We examine the short term stock price performance of firms that acquire or sell technology rights. We find significant positive announcement-period abnormal returns to the acquirers and sellers. However, the price increases reverse during the subsequent twenty trading days. These quick fortune reversals cannot be attributed to methodology; they prevail in the late 1970s through the 2000s, in bear and bull stock markets, and in both high and low technology industries. Upon splitting the sample into two subsamples comprised each of stocks with either pre-announcement price run-up or decline; we find that the abnormal return reversal is confined to the latter subsample. Stocks that witness price run-up prior to the announcement do not reverse to original prices but lose the momentum right after the announcement-period. We believe this is caused by the combination effect of the momentum prior to-and the impact of the announcement.

Motives and consequences of IPOs in cold periods

• We model the factors that could motivate firms to go public in a cold. • We compare the long-term performance of hot and cold period IPOS. • We find the firms go public in cold periods when their future earnings are likely to decline. • We find the cold period IPO firms are more likely to have managed their earnings. • We find that cold period IPO firms underperform hot period IPO firms in the long run. We analyze the motives and long-term stock price performance of firms that pursue IPOs in cold IPO periods. We find that firms are more likely to engage in an IPO during a cold period when their earnings are relatively high and are expected to decline in the future. We also find that IPO firms during a cold period are more likely to have managed their earnings prior to the IPO. Furthermore, we find that cold IPO firms experience significantly weaker stock price performance than hot IPO firms, and results are robust to different criteria for defining hot and cold IPO periods, different measures of stock price performance, and different investment holding periods. We find that investment opportunities, the backing of a venture capitalist, and an increase in earnings in the year of the IPO lead to significantly higher long term stock price performance of IPO firms. Our multivariate models confirm the adverse cold IPO period effect on stock price performance even after controlling for the IPO motives and the firm's earnings performance. Our results also hold within the post-Sarbanes-Oxley (SOX) era.

Corporate governance and stock price performance of firms during the crisis: evidence from the MENA region

This paper examines the impact of corporate governance mechanisms on stock price performance of firms in the MENA region, i.e., Morocco, Egypt, Saudi Arabia, United Arab Emirates, Jordan, Kuwait, and Bahrain, during the recent financial crisis. Using dividend policy, choice of auditors, and transactional complexity as proxies for corporate governance, we document better stock price performance for firms with superior governance mechanisms. Our results show that firms with one of the big–four auditors, firms paying dividends, and firms with lower transactional complexity are associated with superior stock price performance. We argue that lower agency problems that accompany firms with better corporate governance mechanisms make it hard for controlling shareholders to expropriate, thereby improving stock price performance. Our results are important in a way that they highlight the power that individual firms have in resisting adversities of financial crisis.

Bad News Do Not Always Travel Slowly: The Bankruptcy Case

This paper tests to what extent the Hong and Stein (1999) model explains the stock price performance of firms filing for Chapter 11 bankruptcy. In line with the model’s main prediction, I find that the market severely misprices (correctly prices) the bankrupt firms for which information is likely to diffuse slowly (rapidly) across investors. My key finding is robust to a range of alternative methods for adjusting for risk and different periods for computing the abnormal stock returns. My innovative framework provides an acid test of the predictive ability of the Hong and Stein (1999) model, with my results suggesting that it offers important insight into the workings of financial markets, even in the very extreme setting I consider.

The long-run performance of firms emerging from Chapter 11 bankruptcy

In this article, we assess the stock price performance of 184 firms emerging from Chapter 11 bankruptcy between 1980 and 2006. We find their mean post-bankruptcy performance to be similar to the performance of their size and-book-to-market control firms, as well as to the performance of their respective New York Stock Exchange–American Stock Exchange (NYSE–AMEX) beta decile-portfolio. We also analyse the effects of the bankruptcy process, new equity ownership and Chief Executive Officer (CEO) changes on the stock price performance of firms that emerged from Chapter 11. We find that being incorporated in the state of Delaware, the bankruptcy duration, a prepackaged bankruptcy, and the proportion of equity retained by the pre-Chapter 11 shareholders positively influence stock price performance. We also find that filing Chapter 11 with the Delaware Bankruptcy District Court, a change in the company's name, equity ownership by management, and the experience of the new CEO leading the firm out of bankruptcy do not lead to improved performance post-bankruptcy.

Information‐based early exercise of US employee stock options

PurposeThis paper aims to show that tax‐motivated early exercise of US employee stock options can be, in principle, rationalized for bullish executives. The paper aims to show empirical evidence consistent with private positive information guiding the timing of the exercises.Design/methodology/approachThe paper uses conventional event study methodology to examine the long‐run relative stock price performance of firms in which executives early exercise and maintain the acquired shares. The long‐run analysis adopts the cumulative abnormal return as well as the buy‐and‐hold methodological approach.FindingsTax‐motivated early exercise may be justified on the grounds that future stock appreciation can be converted to long‐term capital gains if the shares are held for over one year while, should the stock decline, shares can be sold within a year to count for short‐term losses. The empirical results reveal that executives who early exercise and continue to hold a majority of the shares acquired do so before performance in their company stock is significantly better than a benchmark.Practical implicationsInformation‐based early exercise is not a harbinger of poor firm performance, as prior research has suggested. This paper illustrates that private positive information can motivate tax‐based early exercise of employee stock options. Prior research has mostly suggested it cannot. Stock retention upon early exercise indicates the optimism of the exerciser.Originality/valueThe first modeling of an exploitable tax asymmetry upon exercise of US employee stock options. The explicit separation of exercises likely based on positive inside information from those likely based on negative information or other non‐informative reasons.

Earnings Management and the Long-Run Performance of Spanish Initial Public Offerings

The poor stock price performance of firms conducting initial public offerings is one of the recent puzzles in financial literature. We detect this market anomaly for Spanish IPO firms and we investigate whether earnings management around the time of the offering can explain these results. Consistent with this explanation, we notice that issuing firms make use of discretionary accruals to report higher earnings in the IPO year. Moreover, firms with higher level of discretionary accruals experience more negative long-run abnormal returns. Thus, this evidence suggests that opportunistic earnings management explains, at least partially, the IPO anomaly in Spain.

Earnings Management as an Explanation of the Equity Issue Puzzle in the Spanish Market

The poor stock price performance of firms that raise capital through seasoned equity offerings is one of the recent puzzles in financial literature. In this study we investigate whether pre-issue earnings management can explain these results for rights issues in Spain. Consistent with this explanation, we notice that firms' issuing rights make use of discretionary accruals to report higher earnings at the time of the offering decision. Most interestingly, firms with higher level of discretionary accruals seem to experience more negative long-run abnormal returns.

Long-run abnormal performance following convertible preference share and convertible bond issues: New evidence from the United Kingdom

We study the long-run abnormal performance of a sample of U.K. firms following convertible preference share and convertible bond issues over the period 1982–1996. We are the first to study, as far as we are aware, the long-run stock price performance of firms following convertible preference share issues. Furthermore, our data set has been extracted from original sources and thus mitigates to some extent concerns about data-snooping biases. We measure long-run abnormal performances both prior to and following the issuance of convertible bonds and convertible preference shares and by the method of the issue used. Using a range of metrics to assess the robustness of long-run abnormal performance, we find evidence of pre-offer overperformance and post-offer underperformance using buy-and-hold abnormal returns (BHARs). However, post-offer underperformance is statistically significant in the case of convertible preference share issuers. Implementing a calendar-time approach, we again find underperformance for convertible preference share issuers. We do not find any evidence of long-run stock price underperformance for firms following the issuance of convertible bonds.

Long-Run Abnormal Performance Following Convertible Security Issues: New Evidence from the UK

We study the long-run abnormal performance of a sample of UK firms following convertible security issues over the period 1982-1996. We make the following contributions relative to prior research. We are the first to study long-run stock price performance of firms following convertible preference share issues. Our data set has been extracted from original sources and thus mitigates to some extent concerns about data-snooping biases. Second, we study long-run abnormal performance both prior to and following the issue of convertible bonds and convertible preference shares. Our research complements previous research on announcement day wealth effects. Third, we apply a range of metrics to assess the robustness of long-run abnormal performance. We find significant evidence of negative post-offer abnormal performance using buy-and-hold abnormal returns calculated relative to a stock index and a size/book-to-market matched portfolio. However, using a calendar-time approach with the Fama-French three-factor and the Carhart four-factor model, the significance of the abnormal performance decreases. Finally, using a conditional asset pricing model, we find that the unconditional abnormal return following convertible preference share issues fades away. Our results show that estimates of long-run abnormal returns are sensitive to the methodology used and are not a stylised feature of our data.

The Long-Run Stock Price Performance of Firms with Effective TQM Programs

This paper documents the long-run stock price performance of firms with effective Total Quality Management (TQM) programs. The winning of quality awards is used as a proxy for effective TQM implementation. We compare stock price performance of award winners against various matched control groups for a five-year implementation period and a five-year postimplementation period. During the implementation period there is no difference in the stock price performance, but during the postimplementation period award winners significantly outperform firms in the various control groups. Depending on the control group used, the mean outperformance ranges from 38% to 46%. Our results clearly indicate that effective implementation of TQM principles and philosophies leads to significant wealth creation. Furthermore, our results should alleviate many of the concerns regarding the value of quality award systems. Overall, these systems are valuable in terms of recognizing TQM firms and promoting awareness of TQM.

The Long-Run Stock Price Performance of Firms with Effective TQM Programs

This paper documents the long-run stock price performance of firms with effective Total Quality Management TQM programs. The winning of quality awards is used as a proxy for effective TQM implement...

The Private Securities Litigation Reform Act of 1995: the stock market casts its vote…

In December 1995, Congress overrode a presidential veto to enact the Private Securities Litigation Reform Act. This legislation was aimed at curbing abuses in class action securities litigation, and providing firms with relief from frivolous lawsuits brought on the basis of stock price volatility. While the intent of lawmakers in drafting this legislation was clear, the impact of the Reform Act for shareholders of firms that are likely targets of securities litigation was uncertain. In particular, it was unclear if the cost savings from reduced litigation would outweigh the potential losses due to decreased protection from fraudulent managers, and it was also unclear if the impact of the legislation would differ for firms with different governance structures. This paper provides an economic answer to these questions by analyzing the stock market's response to the initial passage, the veto, and subsequent veto override of the Reform Act. We examine the stock price performance of firms in four industries—biotechnology, computers, electronics, and retailing—that are likely to be affected by securities litigation reform. We document a significantly negative stock price response to rumors of the presidential veto and a significantly positive response to the subsequent House override vote, indicating that investors agreed with Congress that the positive effects of the Act predominate. We also examine reactions across subsets of firms with different levels of institutional ownership, different levels of insider ownership and with different board structures, and find evidence that the positive factors outweigh any increased susceptibility to managerial fraud or inability to bring meritorious suits, even among firms with weak internal governance structures. © 1997 John Wiley & Sons, Ltd.

THE FINANCIAL IMPACT OF THE END TO SOUTH AFRICAN SANCTIONS: AN EVENT HISTORY ANALYSIS.

In this paper we investigate the stock price performance of firms with equity interests in South Africa after Nelson Mandela's call for an end to sanctions. These firms significantly outperformed t...

Survival

ABSTRACTEmpirical analysis of rates of return in finance implicitly condition on the security surviving into the sample. We investigate the implications of such conditioning on the time series of rates of return. In general this conditioning induces a spurious relationship between observed return and total risk for those securities that survive to be included in the sample. This result has immediate implications for the equity premium puzzle. We show how these results apply to other outstanding problems of empirical finance. Long‐term autocorrelation studies focus on the statistical relation between successive holding period returns, where the holding period is of possibly extensive duration. If the equity market survives, then we find that average return in the beginning is higher than average return near the end of the time period. For this reason, statistical measures of long‐term dependence are typically biased towards the rejection of a random walk. The result also has implications for event studies. There is a strong association between the magnitude of an earnings announcement and the postannouncement performance of the equity. This might be explained in part as an artefact of the stock price performance of firms in financial distress that survive an earnings announcement. The final example considers stock split studies. In this analysis we implicitly exclude securities whose price on announcement is less than the prior average stock price. We apply our results to this case, and find that the condition that the security forms part of our positive stock split sample suffices to explain the upward trend in event‐related cumulated excess return in the preannouncement period.