The stock performance of America's 100 Best Corporate Citizens

We consider the stock performance of America's 100 Best Corporate Citizens following the annual survey by Business Ethics. We examine both possible short-term announcement effects around the time of the survey's publication, and whether longer-term returns are higher for firms that are listed as good citizens. We find some evidence of a positive market reaction to a firm's presence in the Top 100 firms that are made public, and that holders of the stock of such firms earn small abnormal returns during an announcement window. Over the year following the announcement, companies in the Top 100 yield negative abnormal returns of around 3%. However, such companies tend to be large and with stocks exhibiting a growth style, which existing studies suggest will tend to perform poorly. Once we allow for these firm characteristics, the poor performance of the highly rated firms declines. We also find companies that are newly listed as good citizens and companies in the Top 100 but outside the S&P 500 can provide considerable positive abnormal returns to investors, even after allowing for their market capitalization, price-to-book ratios, and sectoral classification.     

Impact of Environmental Performance on Firm Value for Sustainable Investment: Evidence from Large US Firms

This research examines the impact of environmental performance on firm value, applying the event study methodology to Newsweek’s ‘Green Rankings’ announcement of 2012 for large US firms. Specifically, it analyzes the impact of the absolute green score and green rank of firms on their performance in the stock market. We found that investors perceive the announcement as positive news, leading to significant positive standardized cumulative abnormal returns (SCARs). After controlling for industry‐ and firm‐specific effects, we observed that firms with repeated green rankings for enhancing environmental performance showed significantly higher SCARs than those with either reduced or unchanged environmental performance. In addition, the environmental impact score measuring environmental damage from a firm's operational activities was found to be the most influential factor in improving the firm's value. Our findings are beneficial to managers in allocating resources to different types of environmental initiative, and provide valuable insight for sustainable environmental investment. Copyright © 2014 John Wiley & Sons, Ltd and ERP Environment     

Price and volume effects associated with changes in the Dow Jones Averages

This study compares the price and volume responses associated with changes in the roster of the Dow Jones Industrial and Transportation Averages with previous research investigating changes in the rosters of the Standard and Poor's stock indices. Event period abnormal returns and daily trading volume for firms added to the Averages are consistent with Merton's (1987) attention hypothesis. Firms added to the roster of the Industrial Average experience positive significant abnormal returns and significantly greater trading volume on the event date. Firms added to the Transportation Average, an event which receives much less media attention, experience neither event period abnormal returns nor increased trading volume. Firms dropped from both Averages experience neither event period abnormal returns nor increased trading volume.     

Are institutional investors colluding with manipulators?

This paper examines the trading behavior of institutional investors in Taiwan before, during, and after a manipulation event and determines whether institutional investors benefit from their trading behavior during the period from the year 2000 to 2020. We find that stocks with a low turnover and small market capitalization are the main targets of price manipulators. In addition, the stock price of manipulated firms increases from the start date of the manipulation event, peaks at the end of the event, then falls after the event. Foreign institutions collude with manipulators to exaggerate stock prices for self-benefit. In contrast, securities dealers counter the trading behavior of manipulators and act as market stabilizers, causing them to suffer losses. Moreover, foreign institutions earn higher returns on stocks of manipulated firms with a low turnover during and soon after manipulation; however, they earn a higher return on stocks of manipulated firms with a high turnover in the long run after manipulation.     

On the differential market reaction to dividend initiations

The finance literature documents substantial positive stock price reaction to dividend initiations. Most dividend initiation studies focus on the average positive reaction; however, 40 percent of the firms that initiate dividends experience negative abnormal returns at announcement. This paper focuses on the apparent heterogeneity in the stock price reaction to dividend initiation. I find that the observed negative market reaction reflects the market’s economic assessment of the impact of the event on these firms, and that it is not caused by anticipation or confounding events. The result is also supported by the fact that the market reaction to dividend initiation for these firms is negatively related to initial dividend yield. Both the positive and negative observed reactions are consistent with conventional arguments regarding the information content of dividends, and their role in mitigating agency problems.     

Trading cost expectations: Evidence from S&P 500 index replacement stock announcements

This paper tests the effect on stock value of an expected change in future trading costs. The capitalized value of a reduction in trading costs is hypothesized to increase the stock value, a trading cost effect. Improved liquidity reduces trading costs. Inclusion as an S&P 500 Index replacement stock is an event hypothesized to increase liquidity. We use 114 observations between January 1, 1983 and October 12, 1989 of stocks added to the Index as replacements for stocks removed. The abnormal return of each stock is regressed against the ratio of the bidask spread to the price of the stock, the change in trading volume of the stock, and the open interest in the Index futures contracts at the close of the month prior to the replacement announcement. We find that the positive abnormal returns for replacement stocks are related to increased daily trading volume after inclusion in the Index. Further, the trading cost effect is proportional to percentage bid-ask spreads prior to inclusion. The trading cost effect increases as trading in derivatives of the Index increases. The volume and stock price changes after replacement are not transitory, indicating an improvement in liquidity. Three alternate hypotheses suggested in prior research to explain the abnormal returns for replacement stocks are tested. Testing each of the three models previously considered: price pressure, inelastic demand curves, and information, we find that none can be accepted with statistical confidence. The abnormal returns of Index replacement stocks are consistent with rational pricing of an anticipated reduction in future transaction costs. This anticipated reduction is capitalized in the value of the stock at the time of the replacement announcement. These results are consistent with a trading cost effect.     

Market effects of private equity placement: Evidence from Chinese equity and bond markets

Research has provided empirical evidence for the stock market reaction toward private placement; however, similar research has not been conducted in terms of the bond market. Using the event study method, we empirically examine the explanatory power of the signaling, free cash flow, and wealth transfer hypotheses based on the reaction of the stock market, bond market, and firm abnormal returns to the private placement announcement. The results show that the stock market has a negative reaction toward private placement, whereas the bond market has a positive reaction. The results also show that the scale of private placement is correlated with the severity of the market reaction. Abnormal returns indicate no significant change both before and after the private placement, and they are unaffected by the scale of private placement. These results are consistent with the wealth transfer hypothesis; however, the market reaction is not attributable to the signaling hypothesis and the free cash flow hypothesis. Extensive research shows that the abnormal returns of private placement change dramatically in non-state-owned enterprises and firms with low credit rating bonds, whereas the bond maturity has no significant impact on the abnormal returns—the wealth transfer effect of private placement is stronger in non-state-owned enterprises and firms with low credit rating bond.     

Acquiring firms' stock returns: Methods of payment,change in leverage,and management ownership

This study examines the effects of the method of payment, change in leverage, and management equity ownership on the acquiring firm's stock returns around the initial announcement date of the merger. Results indicate that stockholders of mergers financed with stocks suffer significant losses. These losses are larger when management ownership is low and smaller in mergers that resulted in acquiring firm leverage decreases. Stockholders of acquiring firms involved in cash mergers gain significant abnormal returns, provided that acquiring firms increase their leverage and that managerial ownership is high. When management equity ownership is low, leverage has no effect on stock returns. When management ownership is high, mergers which resulted in acquiring firm leverage increases have significant positive effects, and those which resulted in acquiring firm leverage decreases have negative but insignificant effects.     

Abnormal research and development investments and stock returns

We investigate the relation between abnormal research and development (R&D) investments change and expected stock returns. We provide evidence that firms that abnormally increase their R&D investments (RDI) earn higher returns in comparison to the market portfolio. Specifically, our findings document an economically significant annual positive abnormal RDI returns that ranges from 3.2% to 11.5%. These findings are robust to well-established risk factors in the literature and suggest that the abnormal increases in RDI impacts stock returns.     

Forecasting abnormal stock returns and trading volume using investor sentiment: Evidence from online search

We examine the ability of online ticker searches (e.g. XOM for Exxon Mobil) to forecast abnormal stock returns and trading volumes. Specifically, we argue that online ticker searches serve as a valid proxy for investor sentiment — a set of beliefs about cash flows and investment risks that are not necessarily justified by the facts at hand — which is generally associated with less sophisticated, retail investors. Based on prior research on investor sentiment, we expect online search intensity to forecast stock returns and trading volume, and also expect that highly volatile stocks, which are more difficult to arbitrage, will be more sensitive to search intensity than less volatile stocks. In a sample of S&P 500 firms over the period 2005-2008, we find that, over a weekly horizon, online search intensity reliably predicts abnormal stock returns and trading volumes, and that the sensitivity of returns to search intensity is positively related to the difficulty of a stock being arbitraged. More broadly, our study highlights the potential of employing online search data for other forecasting applications.     

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

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.     

Neighborhood effect on stock price comovement

We investigate how the geographic distance between firms’ headquarters affects their stock price comovement. Our results show that a firm's stock return has stronger comovement with the returns of nearby firms than with those of distant firms. Being in the same state and/or in the same industry strengthens the return comovement, but does not substitute for the negative effect of geographic distance on price comovement. Firms of similar share price and size also show stronger return comovement, but these factors do not mitigate the negative distance impact. Consistent with investor home bias and neighborhood effect literature, our results suggest that investors’ preference for local stocks and their interactions lead to correlated trading in local stocks and therefore stronger local price comovement.     

Priced risk and asymmetric volatility in the cross section of skewness

We investigate the sources of skewness in aggregate risk factors and the cross section of stock returns. In an ICAPM setting with conditional volatility, we find theoretical time series predictions on the relationships among volatility, returns, and skewness for priced risk factors. Market returns resemble these predictions; however, size, book-to-market, and momentum factor returns are not always consistent with our predictions. We find evidence that size and book-to-market may be priced post-crisis but not in the decade before. Momentum does not appear priced by our test. We link aggregate risk and skewness to individual stocks and find empirically that the risk aversion effect manifests in individual stock skewness. Additionally, we find several firm characteristics that explain stock skewness. Smaller firms, value firms, highly levered firms, and firms with poor credit ratings have more positive skewness.     

The Signaling Effects of the US Food and Drug Administration Fast‐Track Designation

Pharmaceutical firms are reluctant to disclose proprietary information about a drug's likelihood of approval by the U.S. Food and Drug Administration (FDA) for fear of losing their competitive advantage. Instead, firms may use signals, like the FDA fast‐track designation, to indicate to investors the likelihood of a drug's approval. This analysis uses an event study methodology, with stock and market data from the Center for Research in Security Prices. The results show that the fast‐track designation is a strong, positive signal to investors (1998–2015), but its strength has markedly decreased over time. Results also show that the signal is strongest for the smallest firms. Copyright © 2016 John Wiley & Sons, Ltd.     

The reaction of security prices to tracking stock announcements

This paper provides some empirical evidence on a relatively new and increasingly prevalent form of equity restructuring called tracking stock. We identify the effects associated with tracking stock announcements by excluding from our sample those announcement events that include other significant news announcements on the event date, such as announcements of acquisitions and earnings. For the 35 announcement events that fit this criteria, we find a mean abnormal return of over 3 percent in the two-day period surrounding the announced proposal to issue a tracking stock, with 30 of the 35 firms in the sample earning positive abnormal returns. The views expressed in this paper are that of the author(s) and do not reflect the views or opinions of Deutsche Bank Securities Inc. or any of its affiliates.     

Do investments in intangible customer assets affect firm value?

This paper develops a simple model of investment by service firms in intangible customer assets, and tests whether the model identifies some critical drivers of firms’ stock returns. Similar to firms with significant research and development (R&D) expenditures, we argue that firms in fast-growing service industries with few tangible assets can increase firm value by investing in customer acquisition and service (A&S) expenditure. Using a unique hand-collected data set, we show that per-customer changes in firms’ revenues, customer acquisition costs, and customer service costs help to explain their abnormal stock returns.     

Long-term stock performance following extraordinary and special cash dividends

Using essentially all declared extraordinary and special cash dividends between 1926 and 2001 which are not preceded or followed by the same for a period of three years, we find no robust post-declaration long-term abnormal stock returns, even in sub-samples defined by the special dividend yield, the bang-for-the-buck, the declaration-period abnormal return, the sub-sampling period or the stock market condition at declaration. Only event firms in the smallest CRSP market capitalization quintile display significant positive abnormal returns during the first-year following the declaration. However, these latter are not robust across sub-sampling periods. Overall, there is no compelling evidence that investors under- or over-react to extraordinary or special cash dividends.     

New evidence on shareholder wealth effects in bank mergers during 1980-2000

This paper employs two unique bank event study methodologies to calculate abnormal returns for bidder, target and combined firms. The first methodology is a modified market model that controls for shocks common to the banking industry. The second is an EGARCH (1, 1) model that adjusts for the violated regression assumptions of the traditional market model event study. The results of both methodologies reveal that target shareholders enjoy significantly positive abnormal returns, whereas the bidder shareholders experience significantly negative abnormal returns. Overall, announcements of bank mergers generate positive wealth effects for the combined shareholders. However, the evidence presented in this paper underscores the importance of the choice of models describing stock returns in examining the impact of bank mergers.     

Long-term valuation effects of stock splits

This study attempts to determine if stock splits affect the long-term stock performance of forms, and to explain cross-sectional variation in this performance proxy among firms. The consequences of both higher percentage transaction cost following a stock split and an investor overreaction hypothesis are expected to render negative effects on stock values. The consequences of any earnings and dividend signaling accompanying splits are expected to have a positive impact on stock values. The results of the analysis suggest that the cumulative abnormal returns (CARs) are positive and statistically significant through the eleventh month after a stock split. The CARs then decrease nearly monotonically through the thirty-sixth month after the split (CAR=?8.23%). This indicates that initially the signaling effects dominate, but later the consequences of investors' downward revisions of previous expectations and the increase in percentage transaction cost dominate. The cross-sectional results indicate that firms with higher earnings-growth rates exhibit higher CARs, and firms with higher share prices just before the split exhibit lower CRRs.     

Stock Market’s responses to intraday investor sentiment

We investigate the effect of intraday sentiment on subsequent stock returns. Mispricing caused by intraday sentiment is not corrected immediately; rather, it lasts for about 30 min. After 30 min, however, investor sentiment negatively affects stock returns, suggesting that mispriced stocks are at least partially but not entirely adjusted back to their fundamental values. We also show that the effect of intraday sentiment depends on the degree of arbitrage. Intraday sentiment has little effect on firms that are easy to arbitrage. For these firms, the difference in the one-minute returns of firms with high and low sentiment is nearly zero, implying that any mispricing caused by intraday sentiment is immediately corrected for this group of firms. In contrast, among firms that are hard to arbitrage, the difference in the returns of firms with high and low sentiment lasts for about half an hour. This difference in the effect of intraday sentiment is not caused by the firms’ liquidities.