Announcements and revisions of Australian macroeconomic data and their news content for Australian financial markets

This paper investigates the responsiveness of nine Australian financial markets to announcements and revisions of balance on current account and GDP data. We find that current account announcements have a significant effect. Globally, the whole set of revisions are not significant but some individual revisions are statistically significant. When we partition announcements and revisions into good news and bad news we find that with respect to announcements only bad news about the current account has a significant impact. While the global set of revisions are not significant, an increased number of isolated revisions are significant. However, our general conclusion as to the overall lack of significance of the revisions data still holds true.     

The (un)informative value of credit rating announcements in small markets

This work examines the information value of local Israeli credit rating announcements. This matter is also important to other small markets, in which a debt issuer may take advantage of a “rating shopping” process or choose to avoid a rating procedure altogether, because the agencies do not carry out unsolicited rating. We analyze the bond and equity markets response to various rating announcements at different time periods. We find that except for downgrades in 2008–2009 the rating announcements have no information value. It seems that generally the market internalizes most of the information prior to the rating announcements.     

INDUSTRY PROSPECTS AND ACQUIRER RETURNS IN DIVERSIFYING TAKEOVERS

We use a sample of 816 diversifying takeovers from 1978 to 2003 to examine whether takeover announcements release negative information about the future prospects of the acquirer's main industry. We find that rivals that are most similar to the acquirer (homogeneous rivals) experience significant negative cumulative abnormal returns (CAR) around takeover announcements. Takeovers that result in negative wealth effects to acquirers are associated with negative abnormal revisions in analysts' forecasts of homogeneous rivals' earnings per share. We also find a decline in the posttakeover operating performance of rival firms. The decline is especially pronounced for homogeneous rivals and for takeovers with negative wealth effects to acquirers. Our findings imply that CAR-based estimates of acquirer wealth gains from takeovers that do not account for industrywide information releases are significantly biased downward.     

Improving corporate governance where the State is the controlling block holder: evidence from China

This paper examines changes in values and returns for Chinese firms around announcements of block-share transfers among government agencies, State-owned enterprises and private investors. We find that transfers to all three types of investors result in positive abnormal returns around transfer announcements, even when the transfers do not create a new controlling block holder and when transfers are between State entities. We also find that transfers from State entities to private entities result in larger increases in value and returns than transfers between State-controlled entities – consistent with the superior incentives and expertise of private investors. We conclude that corporate governance can be improved at State-controlled firms by improving incentives and expertise of controlling block holders.     

The long-term performance of acquiring firms: A re-examination of an anomaly

In this paper, we investigate the long-term stock return performance of Canadian acquiring firms in the post-event period by using 1300 M&A events in the 1993–2002 period. We use both event-time and calendar-time approaches and conduct robustness tests for benchmarks, methodological choices, statistical techniques and other related factors such as payment methods. We also assess the role of governance variables. Contrary to stylized facts reported in US studies, neither do we find negative abnormal long-term abnormal stock market returns once we account for methodological discrepancies nor do we find negative long-term operating performance in the post-acquisition periods for the acquirer following an acquisition event. We also find that the Canadian market reacts positively to acquisition announcements but corrects for this reaction within a short period of time. Overall we find that Canadian acquisitions do not show value destruction or overpayment.     

Short selling around dividend announcements and ex-dividend days

We examine short selling around dividend announcements and ex-dividend dates. Contrary to our initial expectation, we do not find abnormally high short-selling activity prior to announced dividend decreases, which runs counter to the argument that short sellers have the ability to acquire private information before its public dissemination. However, we find that the common negative relation between current short selling and future daily returns prior to unfavorable dividend announcements is similar to the negative relation during non-event times, suggesting that dividend announcements do not provide unusual trading opportunities for informed traders (Gonedes, 1978, and Benartzi et al., 1997). Around ex-dividend dates, we do find abnormal short selling, which may be explained by the return pattern around ex-dividend days documented by Lakonishok and Vermaelen (1986), who suggest that demand for a particular stock by dividend capture traders drives stock prices above their fundamental value thus providing a profitable trading opportunity for short sellers. Consistent with this conjecture, we find that both the level of short selling and the return predictability of short selling is markedly higher on and after the ex-dividend day than during non-event times.     

The Chinese experience: The impact of financial restatements on firm value and its implications on the investigatory practices of regulators

We examine the relationship between restatements of prior period financial results and firm value in China. This relationship is relevant to the millions of global investors who purchase Chinese equity securities because Chinese regulatory authorities must focus on the restatement events that, in their judgment, most warrant investigation. We recommend that they focus their attention on restatement announcements (and the firms that announce them) that possess the characteristics that most impact firm value.Prior studies of the American equity markets found evidence of a relationship between the nature of the restatement announcements and firm value, as well as evidence that core account adjustments and high-magnitude adjustments affect firm value more than noncore account adjustments and low-magnitude adjustments. However, based on a sample of Chinese listed firms that made corporate announcements that appeared in the Asian press between 2003 and 2011, we only find mixed evidence in the Chinese equity markets in support of the former relationship, and no evidence at all in support of the latter relationship.In other words, restatement announcements in China do not impact firm value to the same extent, and in the same manner, as restatement announcements in America. Chinese regulators must thus develop policies that are unique to the Chinese markets in order to effectively prioritize their oversight activities on firms that issue restatement announcements.What factors should be considered by Chinese regulators? We identify a collection of corporate governance variables, as well as a smaller collection of financial variables, that are significantly associated with decreases in firm value. We also develop a set of regression analyses that utilize these variables to explain a significant portion of the variability of firm value during the sample period. Interestingly, however, we find no evidence that the growth patterns of the firms are significantly associated with changes in firm value.Using this evidence, we recommend the development of a model of regulatory guidance that is customized for the unique characteristics of the Chinese equity markets. We believe that this model can help Chinese authorities focus their attention on specific restatement announcements that most impact firm value.     

Information aggregation around macroeconomic announcements: Revisions matter

I show that an empirical relation exists between stock returns on macroeconomic news announcement days and the future revisions of the released data but that this link differs across the business cycle. Using three major macroeconomic series that undergo significant revisions (nonfarm payroll, gross domestic product, and industrial production), I present evidence that daily returns on the Standard & Poor's 500 index and revisions are positively related in expansions and negatively related in recessions. The results suggest that revisions do matter, i.e., that investors care about the final revised value of a macroeconomic series, that they infer accurate information from the release of the preliminary inaccurate report, and that the more precise information is aggregated into prices on the day of the initial announcement. The results are consistent with the predictions of rational expectations trading models around public announcements combined with well-established empirical results on the asymmetric interpretation of information across the business cycle.     

The Impact of Public Information on the Stock Market

We study the relation between the number of news announcements reported daily by Dow Jones & Company and aggregate measures of securities market activity including trading volume and market returns. We find that the number of Dow Jones announcements and market activity are directly related and that the results are robust to the addition of factors previously found to influence financial markets such as day-of-the-week dummy variables, news importance as proxied by large New York Times headlines and major macroeconomic announcements, and noninformation sources of market activity as measured by dividend capture and triple witching trading. However, the observed relation between news and market activity is not particularly strong and the patterns in news announcements do not explain the day-of-the-week seasonalities in market activity. Our analysis of the Dow Jones database confirms the difficulty of linking volume and volatility to observed measures of information.     

Why do analysts issue forecast revisions inconsistent with prior stock returns? Determinants and consequences

We examine the informativeness of analyst forecast revisions that are directionally inconsistent with prior stock price movements (sign‐inconsistent revisions). Sign‐inconsistent revisions represent approximately one‐half of the forecast revisions from 1995 through 2010. Our tests indicate that sign‐inconsistent revisions are less informative than are sign‐consistent revisions. Sign‐inconsistent revisions are less likely to be closer to actual earnings realizations and they generate smaller stock price reactions. We also find evidence that sign‐inconsistent revisions are associated with analysts' economic incentives to generate trading volume and their behavioural limitations related to information uncertainty. These results suggest that sign‐inconsistent revisions do not necessarily benefit investors.     

Do Outside Directors with Government Experience Create Value?

We examine whether outside directors with government experience add value to their firms. We find that government directors are more likely to miss board meetings and that their appointment announcements are greeted more negatively. Firms with government directors also experience poorer operating performance and more negative merger announcement returns, although their mergers are less likely to be challenged by antitrust authorities. These adverse valuation effects are largely alleviated when firms have large government sales, when they operate in regulated industries, or when government directors are politically connected. Using close gubernatorial election outcomes as a natural experiment and an instrumental variables approach to control for endogeneity bias do not change the results.     

Variations in sovereign credit quality assessments across rating agencies

We investigate agency variation in credit quality assessment (Standard and Poor’s vs. Moody’s vs. Fitch) employing sovereign ratings data for 129 countries, spanning the period 1990–2006. While we find that the credit rating agencies often disagree about credit quality, it is usually confined to one or two notches on the finer scale. We find that several variables have varying importance in explaining ratings across agencies which leads us to conclude that material heterogeneity exists between them. Also, while watch and outlook procedures are generally strong predictors of rating changes relative to other public data, additional significant variables suggest that it might be possible to augment these agency data to provide better forecasts of future rating changes.     

How do financial analysts interpret industrial firms' corporate refocusing announcements?

This study investigates how analysts perceive the effect of corporate refocusing announcements on UK industrial firms' future earnings by examining current-year and one-year-ahead earnings forecast revisions, current-year target price revisions and earnings forecast errors in the five years surrounding a refocusing announcement year. The results reveal that analysts adjust their earnings forecasts downward in a refocusing announcement year and the following two years, predicting that operating performance in the post-refocusing period is likely to decline relative to their former earnings forecasts. Secondly, there is no evidence that analysts issue biased earnings forecasts after refocusing announcements or that their forecasts appear less accurate. Thirdly, they adjust their earnings forecasts downward in a refocusing announcement year with downward market movement. However, they do not similarly adjust their earnings forecast upward with upward market movement. The magnitude of downward adjustments exceeds that of upward adjustments. They also adjust current-year target price forecasts downward with downward market movement in the year prior to a refocusing announcement.     

Do sentiment trades explain investor overconfidence around analyst recommendation revisions?

This study examines irrational stock market reactions to analyst recommendation revisions depending on investor sentiment levels prior to analyst report announcements. We construct a firm-specific sentiment indicator by extending Huang et al. (2015, Review of Financial Studies, 28, pp.791–837). Analyst recommendation revisions have more pronounced effects for downgrades, which is attributable to sentiment effects. Domestic investors tend to react less to upgrades (downgrades) news when their prior beliefs are pessimistic (optimistic), implying that they are overconfident. The domestic investors drive sentiment trades, whereas foreign investors are not biased.     

Market uncertainty and the importance of media coverage at earnings announcements

We investigate whether increased investor demand for financial information arising from higher market uncertainty leads to greater media coverage of earnings announcements. We also investigate whether greater coverage during times of higher uncertainty further destabilizes financial markets because of greater attention-based trading or, alternatively, improves trading and pricing by lowering investor acquisition and interpretation costs. When uncertainty is higher, we find evidence of greater media coverage of earnings announcements and that the greater coverage leads to improvements in investor informedness, information asymmetry, and intraperiod price timeliness, and greater trade by both retail and institutional investors. In contrast to the media serving an expanded role in improving capital markets during more uncertain times, we fail to find that changes in firm-initiated disclosures lead to similar improvements and find that less frequent analyst forecast revisions exacerbate problems in capital markets during earnings announcements.     

Factors associated with price reactions and analysts’ forecast revisions around SEC filings

We investigate the extent to which rapid accessibility of financial reports filed electronically through the Securities and Exchange Commission’s EDGAR system has affected the ability of investors and security analysts to use accounting data in pricing decisions and forecasting. Consistent with prior research, we find evidence confirming that stock price reactions to SEC filings are significant in the EDGAR period but not the pre-EDGAR period. We also find significant revisions in analysts’ one-quarter-ahead earnings forecasts around SEC filings dates in both the pre-EDGAR and EDGAR periods. The price and forecast revision evidence indicates that financial analysts have used SEC filings all along. However, it is the advent of EDGAR that has allowed individual investors to also use 10-K and 10-Q filings. Cross-sectional analyses indicate that in the EDGAR period, trading volume around the preceding earnings announcements may influence individual investors to react to SEC filings. In contrast, variables such as the earnings surprise and the level of total accruals attract the attention of financial analysts. Interestingly, analysts appear to have been less likely in the pre-EDGAR period to bear the cost of searching out each SEC filing to identify those with large total accruals, which are known only after examining the SEC filing itself.     

The stock price effects of changes in dispersion of investor beliefs during earnings announcements

Existing research provides competing theories about how dispersion of investor beliefs might affect stock prices. We measure changes in dispersion of investor beliefs around earnings announcements using changes in the dispersion of individual analysts’ forecasts. We find that the 3-day market response to earnings announcements is negatively associated with changes in dispersion, consistent with the cost of capital hypothesis. The results hold after controlling for the current earnings surprise, forecast revisions of future earnings, and reported earnings relative to various earnings thresholds. Our study provides new insight about the information contained in earnings announcements that is incremental to the magnitude and timing of cash flows.     

Corporate Financial Policy,Information, and Market Expectations: An Empirical Investigation of Dividends

This paper documents a relationship between announcements of unexpected changes in financial policy and unexpected changes in performance of the firm. Using a new methodology that combines analysis of stock price movements and earnings forecast data, the authors provide evidence that analysts revise their earnings forecasts following the announcement of an unexpected dividend change by an amount positively related to the size of the unexpected dividend change. They also provide evidence that these revisions are positively related to the change in equity value surrounding the announcement. Further, they find that these revisions are consistent with rationality. Their results therefore provide direct evidence consistent with the hypothesis that unexpected dividend changes signal information about firm performance to market participants.     

The Relation Among Targets' R&D Activities, Acquirers' Returns, and In-Process R&D in the US

Abstract:  Using a sample of 129 mergers and acquisitions (M&As) in the US between publicly traded acquirers and targets in research and development (R&D) intensive industries over the period of 1994-2004 and a size- and industry-matched sample, we examine the relation among targets' R&D activities, the probability of acquirers' writing-off in-process R&D (IPRD), and acquirers' returns around the time of M&A announcements. We find that firms acquiring targets with higher R&D investments tend to write off some of the acquired R&D assets upon the completion of the M&As. We also find that the median cumulative abnormal return during the three days around M&A announcements for acquirers with subsequent IPRD write-offs is −2.73% while the return for acquirers without IPRD write-offs is −0.60%. This suggests that acquirers' stock returns around M&A announcements are much lower when investors expect acquirers to expense IPRD. The results are consistent with our conjecture that acquirers tend to write-off IPRD when they acquire overvalued targets. We also find that IPRD write-offs do not increase earnings or stock returns of acquirers after M&As, which is inconsistent with an earnings management hypothesis.     

The impact of rating changes in Australian financial markets

Credit ratings have only a limited role in Australian financial regulation, so the effects of rating changes on financial prices can be observed largely free from regulatory effects. We find that bond and stock prices move in the ‘expected’ direction following both positive and negative rating announcements, although the movements are small. Announcement effects are larger for small firms, for downgrades from investment to speculative grade, and where agencies have not previously indicated the rating is under review. Overall, the results suggest that agencies are not generally viewed as consistently having access to important information that is not already in the public domain.