Rumors in the sky: Corporate rumors and stock price synchronicity

Using hand-collected rumor clarification announcements from Chinese listed firms to identify corporate rumors, we find that rumored firms have lower stock price synchronicity (R²) than do firms without rumors. Channel analyses reveal that rumors reduce stock price synchronicity through elevating investor sentiment rather than stimulating informed trading. Additionally, the negative association between corporate rumors and stock price synchronicity is more evident among firms with more individual investors and higher information opacity. Moreover, corporate rumors are associated with higher analyst forecast errors and forecast dispersion. Overall, our evidence suggests that corporate rumors reduce stock price synchronicity by increasing investor irrationality.     

The Impact of Bank Consolidation on Commercial Borrower Welfare

We estimate the impact of bank merger announcements on borrowers' stock prices for publicly traded Norwegian firms. Borrowers of target banks lose about 0.8% in equity value, while borrowers of acquiring banks earn positive abnormal returns, suggesting that borrower welfare is influenced by a strategic focus favoring acquiring borrowers. Bank mergers lead to higher relationship exit rates among borrowers of target banks. Larger merger‐induced increases in relationship termination rates are associated with less negative abnormal returns, suggesting that firms with low switching costs switch banks, while similar firms with high switching costs are locked into their current relationship.     

The information content of director trading: Evidence from acquisition announcements in Australia

In response to the long-standing debate about the information content of director trading, this study investigates the implications of director stock trading before an acquisition announcement by the company. Using a sample of 1249 acquisition announcements made by Australian acquiring firms between 2003 and 2012, we find that the stocks of acquiring firms with net director sales tend to underperform those of acquiring firms with net director purchases or with no director trades. This evidence supports the notion that director trading conveys useful information about the quality of subsequent acquisitions. Further, the informational effect of net director sales is most pronounced for acquisitions where the method of payment is stock, implying that the acquiring firm's stock may be overvalued.     

Stock Splits as a Manipulation Tool: Evidence from Mergers and Acquisitions

We document that acquiring firms are more likely than nonacquiring firms to split their stocks before making acquisition announcements, especially when acquisitions are financed by stock and when the deals are large. Our findings support the hypothesis that some acquiring firms use stock splits to manipulate their equity values prior to acquisition announcements. Using earnings quality as a proxy for firms' intention to manipulate, we find that acquirers with low earnings quality (i.e., acquirers that are more likely to use stock splits to manipulate their stock values) have lower long‐run stock returns compared with their benchmarks, especially when the deals are financed with stock. In contrast, acquirers with high earnings quality do not show that pattern. Our evidence complements and extends the findings in the literature that some acquirers manipulate their stock prices before stock‐swap acquisitions. This study suggests that target shareholders should use information such as earnings quality and stock splits to discriminate among acquirers and ensure that exchanges are conducted on fair terms.     

Market Misvaluation,Managerial Horizon,and Acquisitions

This paper analyzes the impact of managerial horizon on mergers and acquisitions activity. The main predication is that acquiring firms managed by short-horizon executives have higher abnormal returns at acquisition announcements, less likelihood of using equity to pay for the transactions, and inferior postmerger stock performance in the long run. I construct two proxies for managerial horizon based on the CEO's career concern and compensation scheme, and provide empirical evidence supporting the above prediction. Moreover, I also demonstrate that long-horizon managers are more likely to initiate acquisitions in response to high stock market valuation.     

The implied intra-day probability of informed trading

The paper develops a methodology for estimating the intra-day probability of informed trading for NYSE stocks, implied by the specialist’s quotes and depths. The time series pattern of our measure (PROBINF) in an intra-day analysis around earnings announcements is consistent with previous findings and with expectations regarding informed trading. Moreover, we find that PROBINF exhibits a strong and robust relationship with PIN, the level of insider trading and with measures of the price impact of trades. Our methodology complements the one developed in Easley et al. (J Financ 51(3):811–833, 1996a, J Financ 51(4):1405–1436, b), as it can be used to measure short term changes in informed trading and information asymmetry around events such as merger and acquisition announcements, share repurchases, stock splits, dividend announcements and index additions and deletions.     

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.     

Insider Trading around Dividend Announcements: Theory and Evidence

The informational role of strategic insider trading around corporate dividend announcements is studied based on the efficient equilibrium in a signalling model with endogenous insider trading. Insider trading immediately prior to the announcement of dividend initiations has significant explanatory power. For firms with insider selling prior to the dividend initiation announcement, the excess returns are negative and significantly lower than for the remaining firms (with no insider trading or just insider buying) as implied by our model. Another implication is that dividend increases may elicit a positive or negative stock price response depending on the firm's investment opportunities.     

Does Shareholder Composition Matter? Evidence from the Market Reaction to Corporate Earnings Announcements

We examine whether institutional ownership composition is related to parameters of the market reaction to negative earnings announcements. When firms report earnings below analysts' expectations, the stock price response is more negative for firms with higher levels of ownership by momentum or aggressive growth investors. There is no evidence, however, that these institutions cause an “overreaction” to earnings news. Ownership structure is also related to trading volume and to stock price volatility on days around earnings announcements. Our findings are consistent with the idea that the composition of institutional shareholders effects stock price behavior around the release of corporate information.     

The CEO pay slice

We investigate the relation between the CEO Pay Slice (CPS)—the fraction of the aggregate compensation of the top-five executive team captured by the Chief Executive Officer—and the value, performance, and behavior of public firms. The CPS could reflect the relative importance of the CEO as well as the extent to which the CEO is able to extracts rents. We find that, controlling for all standard controls, CPS is negatively associated with firm value as measured by industry-adjusted Tobin's q. CPS also has a rich set of relations with firms' behavior and performance. In particular, CPS is correlated with lower (industry-adjusted) accounting profitability, lower stock returns accompanying acquisitions announced by the firm and higher likelihood of a negative stock return accompanying such announcements, higher odds of the CEO receiving a lucky option grant at the lowest price of the month, lower performance sensitivity of CEO turnover, and lower stock market returns accompanying the filing of proxy statements for periods when CPS increases. Taken together, our results are consistent with the hypothesis that higher CPS is associated with agency problems and indicate that CPS can provide a useful tool for studying the performance and behavior of firms.     

The impact of Financial Times Deutschland news on stock prices: post-announcement drifts and inattention of investors

In this paper, we analyze the impact of Financial Times Deutschland (FTD) news on stock prices and trading volumes. Based on a sample of all news about German DAX, MDAX, and SDAX companies published in the news section of the FTD between 2006 and 2010, our results show that articles that contain positive (negative) information are associated with significantly positive (negative) abnormal returns and abnormal trading volumes around their publication. Furthermore, our results show an initial underreaction to these articles and subsequent post-publication drift. Based on the inattention hypothesis, we show that high-attention news (proxied by abnormal trading volume) almost instantaneously moves stock prices to their new valuation levels, whereas the price adjustment process takes much longer following low-attention news. Our results also hold within multivariate regressions where we additionally control for stock-specific characteristics (e.g., institutional ownership, size, and price-to-book ratio) as well as other attention-grabbing events (as measured by ad hoc announcements and cover-page news articles). Finally, we show that results primarily hold in the non-crisis period.     

Management friendship and insider opportunism

This study documents a significant increase in both trading activity and profitability of opportunistic top managers when a CEO develops a strong connection with subordinate executives through co-opting the executives who share social ties with him/her. This baseline evidence is robust to endogeneity concerns, alternative measures of management connection and insider opportunism, as well as controlling for other CEO and board attributes. Further analyses reveal that interpersonal connections between top managers are more likely to increase opportunistic insider trading in firms with lower-quality voluntary disclosures, more sociable executives, and relaxing legal barriers to insider trades. Increased insider opportunism in response to the CEO’s connection with other top executives engenders less informative stock prices and depresses stock market liquidity. Finally, insider trades in firms with stronger management connection are more predictive of future stock returns.     

FT coverage and UK target price run-ups

We focus on the market expectation hypothesis to explain the increase in share prices and trading volume of target firms before their merger announcements that have conventionally been attributed to either insider trading or market expectation. We use Financial Times (FT) coverage as a proxy of merger expectation and search for relevant articles for 783 UK target firms between 1998 and 2010. We identify a total of 1049 rumour articles and find that the FT market expectation proxy explains a small percentage of the target price run-ups. Results are strong during the sample period, even though the magnitude for both returns and trading volume tends to decrease within recent years. There is also a strong contemporaneous relation between abnormal returns and trading volume. Unexplained increases in target prices and trading volume may be attributed to insider trading.     

Option-implied information and quality of patents

This research explores how option-implied information predicts quality of patents. Using several measures of option-implied information, we find that only the option to stock volume (O/S) ratio positively and significantly predicts quality of patents around patent grant announcements. The findings are not entirely driven by information from the stock market and the probability of informed trading. Further investigations show that the predictability of O/S on patent quality is stronger when market sentiment is high, firms have a higher short-sale cost, and the quality of patents is relatively high.     

Conference calls around merger and acquisition announcements: Do they reduce information asymmetry? UK Evidence

This paper examines conference call meetings held around merger and acquisition (M&A) announcements in the UK market. Our main findings indicate that conference calls not only facilitate the smoother transmission of M&A-related information in the stock market and smooth the rate of the information flow to the market, but also they reduce informed trading through option markets before M&A events. We also find that there is an inverse relation of analysts’ forecast error and conference call probability, that firms initiate conference calls during M&As when their transactions are large and are facing liquidity constraints, and that the probability of a firm holding a conference call around an M&A is strongly and inversely related to the existence of traded equity options on its stock.     

Sell-side analyst heterogeneity and insider trading

This study explores insider trading patterns under different earnings surprises. After controlling for stock market liquidity and earnings announcements returns, we show that insiders sell more aggressively depending on the heterogeneity of analysts whose EPS forecasts are met or beaten to camouflage their trades. Specifically, insiders sell more shares of their company sooner after the publication of earnings when top analysts' forecasts are met or beaten. Consistent with the informed trading literature, insiders strategically select these moments because the stock price impact is low and the legal scrutiny of their trades is minimal. To support this result, we employ an exogenous drop in firms' analyst coverage due to the closure or merger of brokerage houses. Furthermore, in line with the camouflage incentives, by selling after top analysts' forecasts are met or beaten, stock prices adjust slowly to insider trades. Finally, we show that the incentives of insiders to hide their trades are concentrated in opportunistic insiders and members of the top management team, who are more likely to bear the costs of selling shares after positive news.     

The information content of stock splits

This study examines whether stock splits contain information content about future operating performance or whether splits are undertaken by firms to realign their share prices and to improve trading liquidity. In the four years following split announcements, splitting firms do not experience improved operating performance relative to non-splitting firms. Furthermore, stock split signals are not related to future profitability. The positive announcement effect can be explained by lower share prices and improved market liquidity following stock splits but not by split signals and post-split operating performance. Our results show very little evidence that stock splits signal improvement in long-run operating performance and are more consistent with the trading range/liquidity hypothesis.     

Insider Trading and Firm Performance Following Open Market Share Repurchase Announcements

The long‐run performance of equity securities subsequent to announcements of open market repurchases (OMR) remains a contentious topic. In this paper we propose the “dichotomous expectations hypothesis” which posits that insider trading following share repurchase announcements reveals private information concerning the future operating performance of announcing firms. In particular, insider abnormal purchases (abnormal sales) should predict an improvement (decline) in operating performance that leads to higher (lower) long‐run stock returns. Our hypothesis offers a credible economic link between insider trading and subsequent long‐run stock performance through the intervening variable of operating performance. The empirical results show consistency with this linkage.     

Mergers increase default risk

We examine the impact of mergers on default risk. Despite the potential for asset diversification, we find that, on average, a merger increases the default risk of the acquiring firm. This result cannot solely be explained by the tendency for generally safe acquirers to purchase riskier targets or by the tendency of acquiring firms to increase leverage post-merger. Our evidence suggests that managerial motivations may play an important role. In particular, we find larger merger-related increases in risk at firms where CEOs have large option-based compensation, where recent stock performance is poor, and where idiosyncratic equity volatility is high. These results suggest that the increased default risk may arise from aggressive managerial actions affecting risk enough to outweigh the strong risk-reducing asset diversification expected from a typical merger.     

Acquirer-target social ties and merger outcomes

This article investigates the effect of social ties between acquirers and targets on merger performance. We find that the extent of cross-firm social connection between directors and senior executives at the acquiring and the target firms has a significantly negative effect on the abnormal returns to the acquirer and to the combined entity upon merger announcement. Moreover, acquirer-target social ties significantly increase the likelihood that the target firm?s chief executive officer (CEO) and a larger fraction of the target firm?s pre-acquisition board of directors remain on the board of the combined firm after the merger. In addition, we find that acquirer CEOs are more likely to receive bonuses and are more richly compensated for completing mergers with targets that are highly connected to the acquiring firms, that acquisitions are more likely to take place between two firms that are well connected to each other through social ties, and that such acquisitions are more likely to subsequently be divested for performance-related reasons. Taken together, our results suggest that social ties between the acquirer and the target lead to poorer decision making and lower value creation for shareholders overall.