Options trading volume and stock price response to earnings announcements

We examine the effect of options trading volume on the stock price response to earnings announcements over the period 1996–2007. Contrary to previous studies, we find no significant difference in the immediate stock price response to earnings information announcements in samples split between firms with listed options and firms without listed options. However, within the sample of firms with listed options stratified by options volume, we find that higher options trading volume reduces the immediate stock price response to earnings announcements. This conforms with evidence that stock prices of high options trading volume firms have anticipated and pre-empted some earnings information in the pre-announcement period. We also find that higher abnormal options trading volume around earnings announcements hastens the stock price adjustment to earnings news and reduces post-earnings announcement drift.     

Risk,Mispricing, and Value Investing

We evaluate the stock return performance of a modified version of the book-to-market strategy and its implications for market efficiency. If the previously documented superior stock return of the book-to-market strategy represents mispricing, its performance should be improved by excluding fairly valued firms with extreme book-to-market ratios. To attain this, we classify stocks as value or glamour on book-to-market ratios and accounting accruals jointly. This joint classification is likely to exclude stocks with extreme book-to-market ratios due to mismeasured accounting book values reflecting limitations underlying the accounting system. Using both 12-month buy-and-hold returns and earnings announcement returns, our results show that this joint classification generates substantially higher portfolio returns in the post-portfolio-formation year than the book-to-market classification alone with no evidence of increased risk. In addition, this superior stock return performance is more pronounced among firms held primarily by small (unsophisticated) investors and followed less closely by market participants (stock price <$10). Finally, and most importantly, financial analysts are overly optimistic (pessimistic) about earnings of glamour (value) stock, and for a subset of firms identified as overvalued by our strategy, the earnings announcement raw return, as well as abnormal return, is negative. These last results are particularly important because it is hard to envision a model consistent with rational investors holding risky stocks with predictable negative raw returns for a long period of time rather than holding fT-bills and with financial analysts systematically overestimating the earnings of these stocks while underestimating earnings of stocks that outperform the stock market.     

Convertible calls and corporate taxes under asymmetric information

This paper develops a signalling model of call of convertible securities (bonds or preferred stock) in the presence of corporate taxes and asymmetric information about future earnings. In equilibrium, managers with relatively unfavorable information call to force convertible holders to convert to common stock (in spite of the loss of corporate tax benefits if the convertibles are bonds), while those with relatively favorable information do not call. The model predicts that the announcement period common stock returns are more negative at the call of convertible bond than at the call of convertible preferred stock. Furthermore, we predict that when the importance of the tax deductibility of interest differs among firms, so does the stock price reaction to the announcement of convertible debt call. Specifically, the loss of equity value at the announcement decreases with the amount of non-debt tax shield that the calling firm owns, decreases with the book value of convertible debt called, and increases with corporate taxes.     

Stock Dividends,Stock Splits,and Signaling

This paper provides evidence that firms signal their private information about future earnings by their choice of split factor. Split factors are increasing in earnings forecast errors, after controlling for differences in pre-split price and firm size. Furthermore, price changes at stock dividend and split announcements are significantly correlated with split factors, holding other factors constant, and with earnings forecast errors. These correlations suggest that management's choice of split factor signals private information about future earnings and that investors revise their beliefs about firm value accordingly. The analysis also suggests, however, that announcement returns are significantly correlated with split factors after controlling for earnings forecast errors. This suggests that earnings forecast errors measure management's private information about future earnings with error, that split factors signal other valuation-relevant attributes, or that a signaling explanation is incomplete.     

Stock offerings in a different institutional setting: The Swiss case, 1973–1983

This paper analyzes the stock price effect of equity issues in Switzerland. There, insiders are not legally prevented from using their information for personal trades, and security offerings are with almost no exception rights issues. Unlike what we find for a comprehensive sample of U.S. rights issues and a sample of U.S. general cash offerings, a significant majority of firms experiences a positive monthly announcement effect. The average abnormal return itself, however, is not significant. Also, we find evidence inconsistent with infinitely price-elastic demand functions for common stock, as well as some evidence that offer prices convey new information.     

Do accurate earnings forecasts facilitate superior investment recommendations?

We find that analysts who issue more accurate earnings forecasts also issue more profitable stock recommendations. The average factor-adjusted return associated with the recommendations of analysts in the highest accuracy quintile exceeds the corresponding return for analysts in the lowest accuracy quintile by 1.27% per month. Our findings provide indirect empirical support for valuation models in the accounting and finance literatures (e.g., Ohlson, 1995) that emphasize the role of future earnings in predicting stock price movements. Our results also suggest that imperfectly efficient markets reward information gatherers, such as security analysts, for their costly activities in generating superior earnings forecasts.     

Equity Issues and Stock Price Dynamics

This paper presents an information-theoretic, infinite horizon model of the equity issue decision. The model predicts that (a) equity issues on average are preceded by an abnormal positive return on the stock, although for some firms the issue is preceded by a loss; (b) equity issues on average are preceded by an abnormal rise in the market; and (c) the stock price drops at the announcement of an issue. The model provides a measure of the welfare cost of asymmetric information; the welfare loss may be small even if the price drop at issue announcement is large.     

Economic policy uncertainty,investor attention and post-earnings announcement drift

How the market incorporates information into stock price is a core issue in finance. This study focuses on the impact of economic policy uncertainty (EPU) on the stock prices information efficiency of China's A-share market and underlying role of investors' attention allocation mechanism. This study analyzes the information efficiency of stock prices using the sensitivity of stock cumulative abnormal return to earnings information across different windows following earnings announcement. Based on the earnings announcement events of listed companies in China's A-share market, this study presents an empirical study of the aforementioned issues using event study and regression analysis methods. The following results are seen: (1) EPU aggravates the underreaction of stock price earnings information and the post-earnings announcement drift in the A-share market. (2) Under highly uncertain economic policies, investors show a limited attention allocation pattern of devoting increasing attention to macroeconomic policies and decreasing attention to earnings information, which leads to a decrease in the information efficiency of stock price. This study also analyzes the heterogeneity of the influence of EPU on stock price information efficiency using the institutional shareholding ratio. The results show that increasing institutional shareholding does not reduce the adverse effects of EPU on the information efficiency of stock prices. This study not only provides empirical evidence for Brunnermeier, Sockin, and Xiong (2022) and rational inattention theory, but also reveals that institutional investors show similar behavioral characteristics to retail investors in China's stock market. The results of this study have policy significance for improving the information efficiency of stock market.     

Unsophisticated Arbitrageurs and Market Efficiency: Overreacting to a History of Underreaction?

Prior research has documented that arbitrage activity significantly reduces or eliminates stock market anomalies. However, if anomalies arise due to unsophisticated investors’ behavioral biases, then these same biases can also apply to unsophisticated arbitrageurs and thereby disrupt the arbitrage process. Consistent with a disruption in the arbitrage process for the post‐earnings announcement drift anomaly, I document that the historically positive autocorrelation in firms’ earnings announcement news has become significantly negative for firms with active exchange‐traded options. For these easy‐to‐arbitrage firms, the firms in the highest decile of prior earnings announcement abnormal return (prior earnings surprise), on average, underperform the firms in the lowest decile by 1.59% (1.43%) at their next earnings announcement. Additional analyses are consistent with investors learning about the post‐earnings announcement drift anomaly and overcompensating. This study suggests that unsophisticated attempts to profit from a well‐known anomaly can significantly reverse a previously documented stock return pattern.     

Volatility spreads and earnings announcement returns

Prior research documents that volatility spreads predict stock returns. If the trading activity of informed investors is an important driver of volatility spreads, then the predictability of stock returns should be more pronounced during major information events. This paper investigates whether the predictability of equity returns by volatility spreads is stronger during earnings announcements. Volatility spreads are measured by the implied volatility differences between pairs of strike price and expiration date matched put and call options and capture price pressures in the option market. During a two-day earnings announcement window, the abnormal returns to the quintile that includes stocks with relatively expensive call options is more than 1.5% greater than the abnormal returns to the quintile that includes stocks with relatively expensive put options. This result is robust after measuring volatility spreads in alternative ways and controlling for firm characteristics and lagged equity returns. The degree of announcement return predictability is stronger when volatility spreads are measured using more liquid options, the information environment is more asymmetric, and stock liquidity is low.     

Security price reactions around corporate spin-off announcements

We examine security price reactions around the announcements of 123 voluntary spin-offs by 116 firms between 1963 and 1981 involving a pro-rata distribution of the common stock of a subsidiary to the stockholders of the parent firm. The median spin-off in the sample is 6.6% of the original equity value and is associated with an abnormal return of 7.0% from 50 days prior to the announcement through completion of the spin-off. No evidence is found to indicate the gains to stockholders represent wealth transfers from senior securityholders. Over the entire event period we find positive gains for firms engaging in spin-offs to facilitate mergers or to separate diverse operating units but negative returns to firms responding to legal and/or regulatory difficulties. In the two-day interval surrounding the first press announcement we find positive average excess returns for all groups.     

Stock splits in a neutral transaction cost environment: Evidence from the Athens Stock Exchange

This paper investigates the value consequences of stock splits in a market where institutional characteristics minimize the effects of price realignment and signaling. We find that despite these market conditions, stock splits by Greek firms produce positive price reaction around the announcement day. Further, split factors are directly related to pre-split price levels and deviations from average market prices. Splitting firms also realize earnings improvement which is not reversed after the stock split. Consistent with these findings, market reaction is inversely related to the post-split target price and the size of firm. We interpret this as evidence in support, respectively, of the self-selection and “attention-gathering” hypotheses. As reported in other international studies, there is no evidence of liquidity improvement.     

Equity and debt issuance by firms violating GAAP

We examine security issuance in restated periods by firms that misreport financial statements and find that only a small per cent of such firms issues securities in the restated period. Investors are misled by mistakes made by firms issuing equity more so than other restating firms at the initial announcement of misreported earnings, but are not misled by mistakes made by debt‐issuing firms. Equity‐issuing firms that manage earnings to beat analyst expectations experience abnormally high returns in the restated period prior to security issuance. Firms that restated more reports and have higher pre‐mistake returns are more likely to issue equity. High leverage, firm size and number of restated periods are positively associated with the likelihood of debt issuance by restating firms.     

不同收益水平上盈余信息与股利政策的交互关系研究

以沪深上市公司为样本,检验盈余信息和股利政策在不同收益上的解释作用,并深入研究盈余信息分别与现金股利、股票股利和多种分配方案等三个层面的股利政策的交互关系。结果表明:在大多数收益水平上,盈余信息和股利政策显著影响市场收益水平,而且二者之间存在显著的交互关系。具体而言,现金股利变化与盈余变化在不同收益水平上具有不同的交互影响;而股票股利与盈余信息的交互影响在各收益水平上均不十分突出;多种分配方案中的"综合政策"与盈余变动在各收益水平上表现出较大的正向交互影响。     

Shareholder Coordination,Information Diffusion and Stock Returns

We show that the quality of information‐sharing networks linking firms’ institutional investors has stock return predictability implications. We find that firms with high shareholder coordination experience less local comovement and less post‐earnings announcement drift, consistent with the notion that information‐sharing networks facilitate information diffusion and improve stock price efficiency. In support of the view that coordination acts as an information diffusion channel, we document that the stock return performance of firms with high shareholder coordination leads that of firms with low shareholder coordination.     

险资持股对上市公司股价波动的影响研究 ——基于机构投资者异质性视角

保险机构已经成为资本市场重要的机构投资者,其在整个资本市场中的作用日益受到关注.基于机构投资者异质性的视角,对保险机构和证券投资基金、社保基金以及Q FII等其他机构投资者的持股特征进行对比分析,总结梳理保险机构投资者持股的特征.并运用面板数据模型,从长期持股和持股比例变动两个方面对比分析保险机构持股与证券投资基金持股对股价波动的影响.结果表明:在样本期间内,相对于证券投资基金,保险机构长期持股起到了稳定股市的作用,但保险机构持股比例变动会加剧股市的波动.     

Common Stock Offerings and Earnings Expectations: A Test of the Release of Unfavorable Information

This paper examines the revisions of analysts' forecasts of future earnings around announcements of common stock offerings. The forecasts of the current year earnings are, on average, decreased when firms announce plans to issue additional common stock. The size of the decrease is significantly related to announcement period abnormal stock returns. In contrast, forecasts of the five-year growth rate of earnings are, on average, unchanged. We interpret these results as being consistent with the claim that equity offering announcements convey unfavorable information regarding the firm's short-term but not its long-term earnings prospects.     

Good News for Value Stocks: Further Evidence on Market Efficiency

This article examines the hypothesis that the superior return to so-called value stocks is the result of expectational errors made by investors. We study stock price reactions around earnings announcements for value and glamour stocks over a 5-year period after portfolio formation. The announcement returns suggest that a significant portion of the return difference between value and glamour stocks is attributable to earnings surprises that are systematically more positive for value stocks. The evidence is inconsistent with a risk-based explanation for the return differential.     

The Differences Between Stock Splits and Stock Dividends: Evidence on the Retained Earnings Hypothesis

Abstract:  This paper investigates stock dividends and stock splits on the Copenhagen Stock Exchange (CSE), which is of interest because several of the more recent explanations for a stock market reaction can be ruled out. The main findings are that the announcement effect of stock dividends as well as stock splits is closely related to changes in a firm's payout policy, but that the relationship differs for the two types of events. A stock dividend implies an increase in nominal share capital and hence a decrease in retained earnings. Firms announcing stock dividends finance growth entirely by debt (explaining the need for an increase in nominal share capital) and retained earnings. Basically all firms announcing a stock dividend with a split factor of less than two can also afford to increase their total cash dividends permanently, at least proportionally to the increase in share capital, leading to a significant announcement effect of 4.23%. Firms announcing a stock dividend with a split factor of two or more also increase total cash dividends permanently, but less than proportionally to the increase in share capital. This leads to an insignificant announcement effect of 0.08%. These findings support a retained earnings/signaling hypothesis. For stock splits, no separate announcement effect was found when a firm's payout policy was controlled for. This lends support to the idea that a stock split per se is a cosmetic event on the CSE and is also consistent with the fact that making a stock split on the CSE is virtually cost free.     

On-market share buybacks, exercisable share options and earnings management

Chan et al. (2006b ) suggest that managers might announce a share buyback to manipulate investors’ perceptions and capitalize on the positive price reaction usually associated with the announcement. The incentive to do so is greater when managers have exercisable options. Prior studies document that managers engage in upwards earnings management for opportunistic reasons related to option holdings (Bergstresser and Philippon, 2006). We examine the association between earnings management and exercisable option holdings for buyback firms to investigate if earnings management in the pre‐buyback period is greater for firms with equity incentives to increase share price. Our results, using 138 buybacks over the period 1996–2003, support our prediction. We find that buyback firms with both exercisable options that are in‐the‐money prior to the buyback announcement as well as options that are exercised in the buyback period have higher discretionary current accruals than buyback firms with no exercisable options, unexercised options or with out‐of‐the‐money options. Overall, our results are consistent with buyback firms with exercisable options using earnings management and buyback announcements to maximize option payoffs, and buyback firms without exercisable options signalling undervaluation.