Information asymmetry and investor trading behavior around bond rating change announcements

This study examines stock market reactions to public announcements (corporate bond rating changes), including changes in stock prices and investor behavior in terms of trading volumes and patterns. Abnormal returns, abnormal volumes, and net order imbalances are estimated using high-quality stock transaction data from Korean firms, whose bonds were rated by Korea's leading credit rating agencies between 2000 and 2015. We find positive (negative) abnormal stock returns around upgrades (downgrades), although the stock price reactions to downgrades are more statistically significant than those to upgrades. Significant abnormal volumes and order imbalances are found around rating changes, and the extent to which each investor group (domestic individuals, domestic institutions, or foreign investors) reacts to a rating change varies. Our analyses also support that foreign and domestic institutional investors are better informed than individual investors.     

Internet Search Intensity and Its Relation with Trading Activity and Stock Returns*

Using Google search volume as a proxy for investor attention, this paper provides evidence on the role attention plays in financial markets. We first show that abnormal Google search volume (ASVI) helps explain cross‐sectional variations in trading activity, even after controlling for its important determinants. Specifically, ASVI is positively related to trading volume, order imbalance and liquidity. When the relation between stock returns and ASVI is examined, we find a strong positive relation in the month after attention shocks and a reversal over a longer holding period. We further conjecture that the attention effect is more pronounced in stocks with higher limits to arbitrage. For this purpose, we construct a limits‐to‐arbitrage index and show that limits to arbitrage play an important role in explaining the attention effect.     

Fallout from the Mutual Fund Trading Scandal

In September 2003, several prominent mutual fund companies came under investigation for illegal trading practices. Allegations suggested these funds allowed certain investors to profit from short-term trading schemes at the expense of other investors. Surprisingly, regulatory authorities have known for more than two decades of the potential for such abuses, yet have taken limited steps to correct the problem. We explore investor reaction to the scandal by measuring assets under management, stock returns, and performance. Mutual funds managed by investigated firms show a substantial decline in post-announcement assets under management. These firms also experienced significantly negative announcement-period returns. Finally, we discuss several policy suggestions to prevent future trading abuses and provide direction for future research.     

Dispersion in Analysts’ Earnings Forecasts and Market Efficiency

Recent studies show that firms with higher analysts’ earnings forecasts dispersion subsequently have lower returns than firms with lower forecasts dispersion. This paper evaluates alternative explanations for the dispersion–return relation using a stochastic dominance approach. We aim to discriminate between the hypothesis that some asset pricing models can explain the puzzling negative relation between dispersion and stock returns, and the alternative hypothesis that the dispersion effect is mainly driven by investor irrationality and thus is an evidence of a failure of efficient markets. We find that low dispersion stocks dominate high dispersion stocks by second‐ and third‐order stochastic dominance over the period from 1976 to 2012. Our results imply that any investor who is risk‐averse and prefers positive skewness would unambiguously prefer low dispersion stocks to high dispersion stocks. We conclude that the dispersion effect is more likely evidence of market inefficiency, rather than a result of omitted risk factors.     

Stock return predictability of the cumulative abnormal returns around the earnings announcement date: Evidence from China

We find that cumulative abnormal returns adjusted by size, book-to-market, and momentum around the earnings announcement date (DGTW_CAR3 hereafter) significantly and positively predict stock returns in the 6-month period from May 2005 to October 2020 in the China's A-shares market. The monthly equally-weighted DGTW_CAR3 premiums are 0.47% and 0.67% after risk adjustment. Although stock price delay fails to fully account for the DGTW_CAR3 premium, we find that the DGTW_CAR3 premium is more significant for illiquid stocks and during periods with high investor sentiment. This result suggests that market inefficiency explains the DGTW_CAR3 premium. Further analysis shows that, in addition to earnings information, the optimism reflected in the management discussion and analysis section of the annual or half-year report also contributes to the DGTW_CAR3 premium. This finding implies that DGTW_CAR3 may contain new fundamental information that correlates significantly and positively with future stock performance. Finally, we find that the institutional ownership change of a stock associated with DGTW_CAR3 also significantly and positively predicts the stock's return, suggesting that institutional investors adjust their holdings according to DGTW_CAR3 and consequently influence the demand for the stock in the China's A-shares market.     

Do cross-border mergers and acquisitions increase short-term market performance? The case of Chinese firms

Despite the new momentum in cross-border mergers and acquisitions (M&As) by emerging market firms, we have a limited understanding of the impact of these activities. Drawing on signalling theory and the institution-based view, this paper examines the extent of stock market reactions to the announcement of cross-border M&A deals, based on an event study of a sample of Chinese firms during the period 2000–2012. The findings indicate that the announcement of cross-border M&As results in a positive stock market reaction; this effect is more significant in the mainland Chinese stock markets (Shanghai and Shenzhen) than that in the Hong Kong market. The shareholders of Chinese firms that acquire a target firm in a host country with a low level of political risk gain higher cumulative abnormal returns than those firms targeting companies in countries with a high level of political risk. The shareholders of Chinese state-owned enterprises experience lower abnormal returns compared with those of Chinese privately owned firms when engaging in cross-border M&A deals.     

中国股票市场行为与投资者情绪

The relationship among stock returns, market volatilities and individual investor sentiment is an important topic in behavioral economics and finance. This paper uses a unique data set—China’s newly opened stock trading accounts to test the relationships among stock returns, volatilities and individual investor sentiment in the Chinese stock market. It is found that there is a positive relationship between shifts in sentiment and stock returns, and that shifts in sentiment are negatively correlated with market volatility, that is to say, volatility increases (decreases) when investors become more bearish (bullish).      

Effect of R&D and Market Concentration on Merger Outcomes – An Event Study of US Horizontal Mergers

This study examines the pattern of abnormal returns for merging companies and rivals, to determine investor expectations regarding the impact of horizontal mergers challenged by the government. Prior studies have indicated that the government may have challenged efficiency-enhancing mergers, as evidenced by the pattern of abnormal returns to rivals during merger events. This study uses a two-stage regression approach to examine those patterns, using challenged mergers from 1997 to 2007, and finds evidence of potential price effects from approved mergers. The results also show the mergers to have differential effects depending on the level of R&D, market concentration, and product sales.     

Innovation source,advancement stage and company stock returns

The purpose of this paper was to measure the short- and long-term impact of innovation announcements on the stock returns of service companies. In order to study the predictors of the abnormal stock returns, the study takes the adoption and diffusion theory as its conceptual background. The research was based on an event study and buy-and-hold methods. It encompassed 398 announcements released for 121 companies in EU member states between February 2011 and December 2016. The study deepens the dialogue on the role of the source of innovation and its advancement stage. It indicates a positive market reaction to high innovation advancement stage announcements in comparison to low advancement stage ones. Furthermore, it suggests a positive market reaction to in-house development in comparison to collaborative development and copying. Finally, the research signals that the innovation advancement stage complements its source by clarifying its relationship with abnormal market value changes.     

Asymmetric Relationship between Investors' Sentiment and Stock Returns: Evidence from a Quantile Non‐causality Test

This study investigates the causal relationship between investor sentiment and stock returns in the USA by conducting a quantile Granger non‐causality test. Employing two proxies for investor sentiment – the sentiment index developed by Baker and Wurgler in 2007 and the University of Michigan Consumer Survey, a consumer confidence index – we find that the causal relationship between investor sentiment and stock returns strengthens when a tail quantile interval is considered. This finding implies that the investor sentiment could provide the incremental predictability for the stock returns under the extreme market situation, which cannot be found using a traditional Granger causality test. Interestingly, the findings can be explained by investors' loss aversion and herding behavior.     

It pays to pay attention: How firm's and competitor's marketing levers affect investor attention and firm value

Investors' attention to a firm's stock has been demonstrated to influence stock returns (Da et al., 2011). But does a firm's marketing information draw attention to a firm's stock? Research in finance, accounting, and marketing has investigated advertising as one potential driver of investors' attention to a firm's stock. How about other potential marketing drivers? The authors develop hypotheses related to the impact of the changes in four marketing levers: advertising, product development announcements, WOM, and customer satisfaction on the change in investor attention to a firm's stock. Furthermore, they investigate the moderating role of competitors' marketing levers in these relationships.To test the hypotheses, they compile a panel dataset with 349 firms covering the 2007–2017 period. The results suggest that the changes in the focal firm's advertising and WOM have a positive and significant impact on the changes in investor attention to the focal firm’s stock. Furthermore, these effects are amplified when there is an increase in competitors' advertising spending and WOM, respectively. For the customer satisfaction lever, the results suggest that the change in competitors' customer satisfaction enhances the impact of the change in focal firm's customer satisfaction on investor attention. Collectively, the results suggest that investors attend to the firm's and its competitors' marketing information in a much more nuanced manner than previously thought.     

Technology-investing countries and stock return predictability

For 77 technology-investing countries we test whether their stock market returns are predictable. We find that exchange rate returns and U.S. stock excess returns predict stock market returns for most countries in our sample, while crude oil and inflation predict returns of less than 40% of countries. While in out-of-sample tests the evidence of predictability declines, U.S. returns still beat the constant returns model for three-quarters of countries in our sample. A portfolio of all 77 countries offers a mean-variance investor annualized profits of between 5.7% and 8.0%, and profits are maximized when return forecasts are based on U.S. returns.     

客户重要性与审计质量：基于投资者保护视角

本文探讨投资者保护条款的完善与执行、客户重要性与审计质量之间的关系,利用我国证券市场2003~2005年的数据研究发现：（1）客户重要性对审计质量并没有产生负面影响,事务所审计质量普遍有所提高;（2）随着法律责任的加重,法律保护条款的完善与盈余管理空间显著负相关,然而法律执行越严的省区,上市公司的盈余管理却越强烈,这表明中国证券市场出现了法律条款的完善与执行逆向起作用的＂背驰效应＂;（3）审计师对盈余管理方向的关注与国外文献的发现不一致,审计师能够关注重要客户操纵盈余减少的行为,但却无法控制重要客户操纵盈余增加的行为;（4）相对于规模较小的事务所而言,投资者保护条款的完善对规模较大的事务所提高审计质量具有更明显的促进作用。     

The Asian flu and Russian virus: the international transmission of crises in firm-level data

This paper examines how the Asian and Russian crises affected different types of firms around the world. It constructs a new data set of financial statistics, industry information, geographic data, and stock returns for over 10?000 companies in 46 countries. Results show that firms competing with exports from the crisis countries, or with direct sales exposure to the crisis countries, had significantly lower abnormal stock returns. Firms with higher debt ratios, however, did not experience lower abnormal returns. Country-specific effects, although important determinants of company stock returns, are generally less important than firm-specific characteristics. These results suggest that trade channels are important factors determining how crises are transmitted internationally.     

Political connections,political cycles and stock returns: Evidence from Iran

We examine the effect of political connections and political cycles on stock returns of listed companies in Iran. Using 1146 firm-year observations derived from firms listed on the Tehran Stock Exchange (TSE) for the period 2005–2017, we find that political connections are positively associated with firms' annual actual returns and annual abnormal returns. Presidential elections strengthen the positive relationship between political connections and cumulative abnormal returns. Transfer of power to the Moderation (Principlist) party in 2013 (2005) strengthened (weakened) the positive relation between political connections and cumulative abnormal returns. Several sensitivity tests show that the results are not materially different from the main findings. Consistent with the political economy perspective, the findings suggest that political connections in a centrally planned economy are valuable for both parties and they become even more valuable in election years. Moreover, consistent with rational partisan theory, results suggest that investors react to political uncertainties stemming from presidential elections and transfer of power, even in emerging market economies like Iran.     

股票送转、除权日异常收益与分析师关注度

本文使用事件研究的方法,利用1999年到2009年的中国股市上市公司的股票送股、转增事件的相关数据,分析发现这些股票会由于除权日时间而获得正的异常收益,这一结果不随着不同的统计假设、送转事件是否伴随着现金红利以及按照送股与转增的比例、现金红利数量划分的子样本而改变。探究这种异常收益的来源,发现分析师关注度(下文以分析师关注度来代替)会正向显著的影响异常收益;每多一名分析师关注这支送转的股票会在除权日多带来0.2元的异常收益,并且这种关系是稳健的,进一步通过工具变量回归解决了分析师关注的内生性。     

CEO turnover,political connections,and firm performance: Evidence from China

In our analysis of 5738 CEO turnover events among A-share listed companies in China over the period of 1993 to 2019, we find that CEO turnovers on average hurt companies' market performance with significant negative abnormal returns in the event window. We then group the companies into four types based on whether the outgoing and successor CEOs have political connections, and then calculate the abnormal returns in the event windows of CEO turnovers once announced. We find that companies generally enjoy positive abnormal returns if they replace politically non-connected CEOs with connected ones. Such a positive effect is more evident among non-state-owned enterprises (non-SOEs), companies with worse performance, and companies with higher financial constraints. However, abnormal returns derived from hiring politically connected successor CEOs turn to negative following China's massive anti-corruption campaign in 2012. Our findings provide direct estimations of the economic value of CEOs' political connections for A-share listed companies in China and reveal boundary conditions that moderate the influence of hiring politically connected CEOs.     

What is the value of corporate sponsorship in sports?

This paper investigates the stock market reaction to investor mood swings resulting from the Indian Premier League (IPL) cricket matches. We find that stocks listed on the Bombay Stock Exchange (BSE) that sponsor the IPL cricket are unaffected by the cricket matches. This finding is robust along two lines: (a) the effect is insignificant both statistically and economically which we demonstrate using a simple trading strategy; and (b) results hold across a wide range of portfolios. Our results, both statistical and trading strategy-based, suggest that the portfolios of companies that sponsor cricket in India are efficient. Our findings stand in sharp contrast to the evidence obtained by the broader sports literature suggesting that sports actually impact stock returns, driven principally by psychological factors.     

The capital market spillover effect of product market advertising: Evidence from stock price synchronicity

We analyze whether product market advertising has a spillover effect on stock price synchronicity by transmitting firm-specific information to the capital market and attracting more investor attention. Using a sample of Chinese listed firms from 2009 to 2017, we find that firms with greater advertising expenditures have lower stock price synchronicity. The results are robust after we address endogeneity concerns. In accord with our hypothesis that product market advertising increases the amount of firm-level information capitalized into stock prices through the information channel, we find that the impact of advertising on synchronicity is more pronounced for firms with a higher degree of information asymmetry and firms in the consumer-product industry. Further tests show that product market advertising enhances the ability of current period returns to reflect future earnings, and thus rules out that the negative relationship between advertising and synchronicity is driven by noise trading. Our results imply that product market advertising plays an informative role and improves information efficiency in a capital market.     

Negativity Bias in Attention Allocation: Retail Investors’ Reaction to Stock Returns

We argue that negative stock market performance attracts more attention from retail investors than comparable positive performance. Specifically, we test and confirm the hypothesis that retail investors pay more attention to negative extreme returns than positive ones. We present a measure of attention at the aggregate and company‐specific levels using Google's internet search volume indexes. These measures correlate with, but are different from, existing proxies of attention. Our empirical results strongly support the position that investors display a negativity bias in attention allocation with respect to extreme stock returns. Across all specifications, lagged negative extreme returns are stronger predictors of high attention at the individual‐stock and stock market levels than positive ones.