Does prior record matter in the wealth effect of open-market share repurchase announcements?

This study investigates whether prior experience of share repurchases matters in the market reactions to the subsequent repurchase announcements. Specifically, we study the prior record on actual buybacks and post-announcement stock performance. We find that upon the announcement of share repurchases, stock markets not only respond more positively to those made by firms that have better record on actual buyback following their previous repurchase plan announcements, but also experience a stronger reaction for announcing firms with better stock performance after prior repurchase announcements. These results hold even after controlling for other variables that are found important in influencing the market reactions to repurchase announcements.     

Unexpected Share Repurchase Announcements

Abstract

Open-market stock repurchase announcements are generally perceived by the stock market as a signal of firm undervaluation. Our study shows that repurchase announcements that were preceded by SEOs of other firms in the same industry within the prior six months (namely SEO-RPs) are more likely the result of lacking investment opportunities than signaling undervaluation, especially in concentrated industries. Specifically, we find investors response negatively to SEO-RP announcements while react positively to regular repurchase announcements. The higher the intensity of SEO activities in the industry, the more negative market reaction to SEO-RP announcements. We argue that the market doesn’t expect a repurchase announcement when other rival firms are raising more capital via SEOs. These SEO-RPs represent a negative surprise to the market and lead to a downward adjustment in value of the repurchasing firms in the announcement window. In the three-year post-announcement periods, the SEO-RP firms underperform regular repurchasing firms in both stock return and operating performance. Moreover, while regular repurchasing firms gradually increase their capital expenditures, SEO-RP firms significantly reduce their capital expenditures. These findings support our arguments that repurchase announcements that immediately follow SEOs of rival firms (SEO-RPs) more likely indicate the announcing firms entering a slower growth rate with fewer investment opportunities than signal the undervaluation problem. The underperformance in stock return and operation combined with a significant reduction in capital expenditures in the post-announcement periods are consistent with this logic and also explain why the market reacts negatively to SEO-RP announcements.     

Social Mood and Financial Economics

The general level of optimism/pessimism in society is reflected by the emotions of financial decision-makers. Because these emotions are correlated across economic participants, our hypothesis leads to three important outcomes. First, social mood determines the types of decisions made by consumers, investors, and corporate managers alike. Extremes in social mood are characterized by optimistic (pessimistic) aggregate investment and business activity. Second, due to the efficient and emotional nature of stock transactions, the stock market itself is a direct measure or gauge of social mood. Third, since the tone and character of business activity follows, rather than leads, social mood, stock market trends help forecast future financial and economic activity. Specific predictions about stock market levels and trading volume, market volatility, firm expansion, leverage use, and IPO and M&A activity are also given.     

Investment banks' stock ratings,call warrant issuance,and responses from heterogeneous investors: Evidence from Taiwan

We investigate the responses of the different types of investors on stock rating change announcements made by investment banks around call warrant issuances in Taiwan. The unique characteristics of the Taiwan warrants market allow investment banks to make stock rating change announcements around call warrant issuances for the same stocks they rate. In Taiwan, investment banks are also dealers of call warrants, and thus, the profit and loss results from their warrant business are potentially in conflict-of-interest for their stock ratings. Another feature of the Taiwan stock market allows us to disentangle the types of investors initiating the stock trades. We identify three types of investors: institutional investors, experienced retail investors, and ordinary retail investors. Our findings suggest that institutional investors are able to “see-through” the conflict-of-interest in investment banks; experienced investors are able to partially “see-through” the conflict-of-interest, and ordinary retail investors are unable to “see-through” the conflict-of-interest of investment banks.     

Does Analyst Optimism About Future Earnings Distort Stock Prices?

Monthly returns to firms with optimistic expectations are 1.5% lower versus firms with pessimistic expectations, while annual buy-and-hold returns to firms with optimistic expectations are 20% lower. The optimistic component of stock prices lingers months after the optimism is revealed to the market. It also exists separately from the component related to analyst forecast dispersion. The possibility that forecast dispersion is related to transitory versus permanent earnings is proposed.     

How stock markets react to regulatory sanctions? Evidence from France

Our study of how the stock market reacts to sanction announcements by the French financial regulator from 2004 to 2017 finds that the market reacts negatively when a sanction is announced in the press. Cross-sectional regression models show that the penalties are too low to influence market reactions. Our results suggest that after the financial crisis of 2008, a plethora of news on financial wrongdoings has desensitized markets to announcements of sanctions against large companies.     

Do political connections decrease the accuracy of stock analysts' recommendations in the Chinese stock market?

This paper studies the association between the accuracy of analysts' recommendations and political connections in the Chinese stock market. As most brokerage firms in China are state-owned, it raises concerns about conflicts of interest among their employed analysts issuing recommendations for Chinese state-owned enterprises. Based on 8469 analysts' recommendations with different ratings for both state-owned and non-state-owned enterprises from 74 brokerage firms, we document that analysts' recommendations are less accurate for Chinese state-owned enterprises, which supports the hypothesis that conflicts of interest create recommendation biases. Political connections encourage analysts to be more optimistic on SOEs and even to generate misleading “Buy” and “Hold” recommendations. Our results demonstrate the existence of an optimism bias among politically connected analysts on state-owned enterprises in China.     

Intermarket sweep order trade size clustering around corporate announcements

Investors have different trade size preferences depending on their information advantage. Using intermarket sweep orders (ISOs), we find that investors appear to prefer using small, round lot trades around corporate events with higher announcement frequency and more predictable timing, such as earnings announcements. Around these corporate events, information is revealed, and analyst estimates are confirmed or rejected. Conversely, share repurchase announcements happen less frequently and the timing of these announcements are unpredictable. Relative to earnings announcements, share repurchase announcements create more uncertainty than they resolve. We find that when investors have less information, they tend to use costlier, larger trade size multiples. We further support the extant finding that trade sizes are smaller with the advent of high-frequency trading.     

Pro-cyclical effect of sovereign rating changes on stock returns: a fact or factoid?

This article examines the effect of changes in sovereign credit ratings and their outlook on the stock market returns of European countries at different phases of business cycle. Using standard four-factor model, it records a significant average marginal effect of credit rating announcements on stock market returns. Both magnitude and significance of the effect vary with business cycle and across announcement types. However, we do not find evidence of pro-cyclical effect of sovereign rating and outlook changes on stock returns. Our results show that stock markets react more negatively to rating downgrades in recovery phases and more positively to rating upgrades in contractionary period. Both results are statistically significant and robust to various sensitivity tests.     

The formation of public utility holding companies and their subsequent diversification activity

This paper examines the stock market reaction to announcements that utilities are converting to utility holding companies. There are negative abnormal returns associated with these announcements. Holding companies permit these utilities to diversify beyond the utility industry, and the announcements of their formation may signal the market of their intentions to diversify. The negative abnormal returns associated with these announcements and the negative abnormal returns associated with subsequent announcements of acquisitions are consistent with other research showing that diversifying bidders lose more (or gain less) than non-diversifying bidders.     

Information advantage,short sales,and stock returns: Evidence from short selling reform in China

We study short selling around earnings announcements and examine the potential sources of their information. Using unique daily aggregate short selling transactions in China, we find that short sellers significantly increase (decrease) their short positions before negative (positive) earnings surprise. In addition, abnormal high short selling is significantly associated with negative post-earnings announcement stock returns. The findings suggest that short sellers, on average, are informed and sophisticated traders and they can exploit profitable opportunities contained in earnings announcements. Finally, we find that stocks with poor governance or more insiders have higher (lower) abnormal short selling in negative (positive) earnings surprise, indicating private information leakage from firms with weak governance; which is consistent with the tipping argument. Our findings have important policy implications for capital market regulation in China.     

分析师利益冲突、乐观偏差与股价崩盘风险

"股价崩盘风险"是当前金融危机背景下财务学的一个研究热点。本文使用2003-2010年中国A股上市公司的数据,研究分析师乐观偏差是否影响上市公司股价崩盘风险,并考察分析师面临的"利益冲突"是否会加剧乐观偏差对股价崩盘风险的影响。研究发现:(1)分析师乐观偏差与上市公司未来股价崩盘风险之间显著正相关,且此关系在"牛市"更为显著;(2)机构投资者持股比例越高,机构投资者数量越多,公司存在再融资行为,以及来自前五大佣金收入券商的分析师比例越高,分析师乐观偏差与崩盘风险之间的正向关系就更为显著,说明"利益冲突"会加剧两者的关系。本文的研究对于全面认识分析师在资本市场中的作用,以及如何降低我国股价崩盘风险、促进股市平稳发展具有重要的理论和现实意义。     

Foreign News and Spillovers in Emerging European Stock Markets

We analyze foreign news and spillovers in the emerging EU stock markets (the Czech Republic, Hungary, and Poland). We employ high‐frequency five‐minute intraday data on stock market index returns and four classes of EU and US macroeconomic announcements during 2004–07. We account for the difference of each announcement from its market expectation and we jointly model the volatility of the returns accounting for intraday movements and day‐of‐the‐week effects. Our findings show that intraday interactions on the new EU markets are strongly determined by mature stock markets as well as the macroeconomic news originating thereby. We show that strong contemporaneous links across markets are present even after controlling for macroeconomic announcements. Finally, in terms of specific announcements, we are able to show the exact sources of macro news spillovers from the developed foreign markets to the three new EU markets under research.     

The effects of optimism bias in teams

This article imports a behavioural perspective into a team context to study the effort-coordination problem among agents. Specifically, we investigate how the presence of optimism bias impacts the severity of the free-rider problem, the organizational structure of the team and the compensation contracts offered to agents in equilibrium. The results indicate that all agents become more reluctant to exert effort and the team welfare decreases when some of its agents are optimistic, suggesting that optimism aggravates the free-rider problem in teams. Appointing a team leader makes all agents work harder, and the team benefits more by having the optimistic agent as its leader. These findings are in sharp contrast to the effects of overconfidence as identified in the literature. It is advisable to pay the optimistic agents less than the rational agents. Encouragingly, optimistic agents can learn about their own bias in the long run, leaving their team without too much detriment of optimism.     

Payout and asymmetric information

This article investigates the effects of payout policy on the level of asymmetric information in the market for common equity shares. The results suggest that higher dividend levels are associated with lower price impact, both as a percentage of economic value and as a percentage of the spread. And greater share repurchase ratios are associated with lower price impacts as a percentage of the spread. Overall, the results suggest that managers may have more than the choice of market settings as a means to improve the quality of the market for their stock and the efficiency of price.     

Earnings management by firms announcing earnings after SEC filing

This study examines motivation and stock market reactions of firms announcing earnings in the Wall Street Journal (WSJ) after filing with the Security Exchange Commission (SEC). Most firms announce earnings in the WSJ before SEC filing. Firms that reverse this sequence are voluntarily delaying public earnings announcements. The authors find that these firms are not only poor financial performers but also engage in earnings managements. They are delaying their WSJ announcements to postpone announcing bad news. The authors find significant stock price reactions to both the SEC filing and the WSJ announcement. The price reaction to earnings is incomplete at the SEC filings. The market continues reacting to firms' subsequent WSJ announcements as if the SEC filing fails to communicate earnings information to some investors.     

How do investors respond to Green Company Awards in China?

We find that firms winning Green Company Awards in China from 2008 to 2011 experienced on average insignificant and in some cases significantly negative effects on shareholder value. Various robustness checks suggest that these findings are not driven by the inefficiency of the Chinese stock market or a lack of perceived credibility of the award. In addition, we find important variation in the responses across firms: shareholders of firms in low-pollution industries and firms with primarily private ownership responded more negatively to award announcements. Furthermore, the peers of winning firms showed higher announcement returns than the award winners. Our results suggest that a key benefit of corporate environmentalism in China comes through building stronger relationships with government, and that otherwise the market generally discourages firms from environmental leadership.     

Monetary Policy Announcements,Communication, and Stock Market Liquidity

Using the high‐quality intraday transaction data from 2001–2012, we investigate changes in stock market liquidity in response to the monetary policy announcements of the Bank of Korea (BOK). We find that liquidity impairment associated with informed trading occurs prior to the announcements but it disappears subsequent to the global financial crisis. In addition, liquidity impairment appears to become more severe with insufficient experts' predictability and accuracy rather than with policy rate change itself and unscheduled announcements. Finally, the Federal Open Market Committee (FOMC) announcements, changes in the Volatility Index (VIX), and trading by foreign investors play a limited role in explaining stock market liquidity changes. Overall, results indicate that central bank communication plays a significant role in reducing liquidity impairment by enhancing the predictability of policy actions, and therefore, mitigating information asymmetry.     

Overflow effect of credit rating announcements on stock exchange based on event study

This study is aimed to identify the impact of credit rating announcements on the stock returns in stock markets and for this purpose, four different sectors of Pakistan stock exchange were selected and from each of these four sectors, different business organizations were selected, i.e. total 32 business organizations were selected. The credit rating announcement data were collected for these 32 business organizations belonging to four different sectors. Totally 101 credit rating announcements were selected and the time period for which the credit rating warnings were selected include last three years period, i.e. from 2014 to 2016. The collected data were analysed by calculating abnormal returns for each of the selected security and average abnormal returns, and cumulative average abnormal returns were calculated for four different sectors. Event study methodology was applied, and t-test and t-stats value were calculated and results were analysed on the basis of t-statistics. The results of analysis identified that credit rating announcements have a significant impact on stock prices and investors and other market participants are earning abnormal returns during two-day period after the announcements are made. In addition, these abnormal returns were either negative or positive, depending upon the nature of credit ratings announced. If the credit rating announced was upgraded, investors enjoyed positive abnormal returns while in case when credit rating announcements were downgraded, then investors bear negative abnormal returns. Finally, the findings of the study identified the applicability of random walk hypothesis on the Pakistan Stock Exchange and Pakistan Stock Exchange confirms the efficient market hypothesis with its semi-strong form of efficiency.     

中国银行体系关系型信贷的有效性——基于宣告效应的研究

在不对称信息下,关系型银行可以利用信息优势参与借款企业治理,降低代理成本.文章实证分析了1996-2008年中国上市公司发布获得银行信贷公告后的市场反应,发现上市公司发布获得银行授信和债务重组公告引起股价显著上涨,表明中国银行体系自1996年以来有意识地建立长期稳定的银企合作关系的政策具有治理效应.文章还发现,信息不对称程度越高、公司治理越差的公司,治理效应越显著.这种效应主要体现在贷前甄别企业质量和贷后救助方面,而在贷中监督企业机会主义行为,降低代理成本方面则没有体现.