Stock price reaction to public and private information

I use Easley and O’Hara's [1992, Journal of Finance 47, 577–604] private information-based trading variable, PIN, together with a comprehensive public news database to empirically measure the effect of private and public information on the post-announcement drift. I show that stocks associated with high PIN, consensus public news surprises, and low media coverage experience low or insignificant drift. Thus not all information acquisition variables have the same effect on the market's efficiency. Whether information is public or private is irrelevant; what matters is whether information is associated with the arrival rate of informed or uninformed traders.     

Stock price reactivity to earnings announcements: the role of the Cammer/Krogman factors

Review of Quantitative Finance and Accounting - The stock characteristics often used in securities litigation to assess market efficiency are dispositive indicators of reactivity to earnings...     

Where do betas come from? Asset price dynamics and the sources of systematic risk

In this article we break asset's betas with common factors intocomponents attributable to news about future cash flows, realinterest rates, and excess returns. To achieve this decomposition,we use a vector autoregressive time-series model and an approximatelog-linear present value relation. The betas of industry andsize portfolios with the market are largely attributed to changingexpected returns. Betas with inflation and industrial productionreflect opposing cash flow and expected return effects. We alsoshow how asset pricing theory restricts the expected excessreturn components of betas.     

Stock price response to new‐CEO earnings news

New‐CEO earnings news exhibits asymmetric effects on stock prices. Stock prices rise more on good earnings news announced by firms with new CEOs compared with those with established CEOs. By contrast, stock prices tend to fall by a smaller amount on bad earnings news for new CEOs. Both the new‐CEO quality effect and the new‐CEO honeymoon effect are more pronounced for CEOs appointed during challenging situations. The new‐CEO quality effect is stronger for firms followed by fewer analysts, while the honeymoon effect is stronger for firms followed by more analysts – illustrating the importance of a transparent information environment.     

Stock returns after major price shocks: The impact of information

This paper focuses on stocks that experience major price changes. Using analyst reports as a proxy, I find that price events accompanied by information are followed by drift, while no-information ones result in reversals. One interpretation of these results is that investors underreact to news about fundamentals and overreact to other shocks that move stock prices. Consistent with this hypothesis, information-based price changes are more strongly correlated with future earnings surprises than no-information ones. Furthermore, drift exists only when the direction of the price move and of the change in analyst recommendations have the same sign. Finally, the ratio of no-information to information-based price shocks is strongly correlated with aggregate implied volatility and also forecasts momentum returns.     

Stock price effects and costs of secondary distributions

This study does not support the view that a large number of shares can be sold at the prevailing market price and at a small cost. A significant stock price decrease is observed at the initial announcement of secondary distributions. The price declines are greater for offerings by officers and directors and for larger offerings, but are significant for all types of sellers and for large and small offerings. There is no significant price decline at the offering when secondaries are announced in advance. Underwriting and other selling costs are substantial and are positively related to relative offering size.     

Systematic liquidity risk and stock price reaction to shocks

This study examines the relationship between systematic liquidity risk and stock price reaction to large 1‐day price changes (or shocks). We base our analysis on a yearly updated constituents list of the FTSE All share index. Our overall results are consistent with the price continuation hypothesis, which suggests that positive (negative) shocks will be followed by positive (negative) abnormal returns. However, further analysis indicates that stocks with low systematic liquidity risk react efficiently to both positive and negative shocks, whereas stocks with high systematic liquidity risk underreact to both positive and negative shocks. Our results are valid irrespective of various robustness tests such as size of the shock, size of the firm, month‐of‐the‐year and day‐of‐the‐week effects. We conclude that trading on price patterns following shocks may not be profitable, as it involves taking substantial liquidity exposure.     

Speculative dynamics and price behavior in the Shanghai Stock Exchange

This article examines the extent to which the trading behavior of heterogeneous investors manifests in stock price changes of asset portfolios which constitute the Shanghai Stock Exchange. There are three major findings that materialize. Firstly, reliable statistical evidence of a negative relation between the conditional first and second moments of the return distributions of stock prices lends support to the volatility feedback effect. Secondly, ‘feedback’, or momentum-type investors, are not present in this market as is often detected from the daily price changes of other industrialized markets. Finally, trade volume as a proxy for ‘information-driven’ trading suggests that such investors play a statistically significant role in stock price movements. Parameter estimates from this latter group of investors imply that a rise in stock prices from a high volume trading day is more likely than a rise resulting from a low volume trading day.     

Stock market reaction to fed funds rate surprises: State dependence and the financial crisis

This paper examines the response of US stock returns to Federal Funds rate (FFR) surprises between 1989 and 2012, focusing on the impact of the recent financial crisis. We find that outside the crisis period, stock prices increased as a response to unexpected FFR cuts. State dependence is identified with stocks exhibiting larger increases when interest rate easing coincided with recessions, bear markets, and tightening credit conditions. However, an important structural shift occurred during the crisis, changing the stocks’ response to FFR shocks and the nature of state dependence. Throughout the crisis period, stocks did not react positively to unexpected FFR cuts, which were interpreted as signals of worsening future economic conditions. This triggered a rebalancing of investment portfolios away from falling equities and towards safe-haven assets. Our results highlight the severity of the crisis and the ineffectiveness of conventional monetary policy close to the zero lower bound.     

Stock price informativeness on the sensitivity of strategic M&A investment to Q

Using a strategic merger sample that covers the period from 1985 to 2011, we find that the acquirer’s stock price firm-specific information, the new information created by investors about the value of firm fundamentals, increases the positive sensitivity of strategic merger investment to the acquirer’s Q; the target’s stock price firm-specific information increases the negative sensitivity of merger investment to the target’s Q. These results suggest that managers learn from financial markets in identifying strategic merger investment opportunities by transferring assets from poorly managed firms to well managed firms. In addition, the target’s stock price firm-specific information itself increases the acquisition size, indicating that informed acquirer managers are more likely to take out large merger investment. Last but not the least, stock price informativeness increases merger synergies and post-merger performance, suggesting that informed managers make better merger investment that increases shareholder value. Our study contributes to the recent increasing stream of studies on managerial learning from the market.     

Entrenchment,governance, and the stock price reaction to sudden executive deaths

To study managerial entrenchment, I use the stock price reaction to unexpected senior executive deaths. If a highly effective manager dies unexpectedly, the stock price reaction should be negative. If, however, death removes an entrenched manager when the board would or could not, the stock price reaction should be positive. While, individually, age and tenure only weakly correlate with the stock price reaction to a sudden death, the reaction is strongly positive (6.8%) if: (1) the executive’s tenure exceeds 10 years, and (2) abnormal stock returns over the last three years are negative.     

The impact of trading halts on liquidity and price volatility: Evidence from the Australian Stock Exchange

This study examines market behaviour around trading halts associated with information releases on the Australian Stock Exchange, which operates an open electronic limit order book. Using the Lee, Ready and Seguin (1994) pseudo-halt methodology, we find trading halts increase both volume and price volatility. Trading halts also increase bid-ask spreads and reduce market depth at the best-quotes in the immediate post-halt period. The results of this study imply that trading halts impair rather than improve market quality in markets that operate open electronic limit order books.     

UK interim and final dividend reductions: a note on price reaction

Price reactions to interim and final dividend reductions are found to be significantly negative and stronger for interim dividend reductions. Although the market reacted negatively around final dividend reduction announcements it bounced back to its prior level within one month of the announcements. The magnitude of price reactions to dividend reductions is found to be statistically related to the size of the dividend reduction, the post-announcement effect from day 2 to day 20, the pre-announcement effect from day ?20 to day ?2, the gearing ratio and the dummy variable interim versus final dividend reduction.     

Trading frequency and asset pricing on the London Stock Exchange: Evidence from a new price impact ratio

This study proposes a new price impact ratio as an alternative to the widely used Amihud’s (2002) Return-to-Volume ratio. We demonstrate that the new price impact ratio, which is deemed Return-to-Turnover ratio, has a number of appealing features. Using daily data from all stocks listed on the London Stock Exchange over the period 1991–2008, we provide overwhelming evidence that this ratio, while being unequivocal to construct and interpret, is also free of a size bias. More importantly, it encapsulates the stocks’ cross-sectional variability in trading frequency, a relatively neglected but possibly important determinant of stock returns given the recently observed trends in financial markets. Overall, our findings argue against the conventional wisdom that there is a simple direct link between trading costs and stock returns by strongly suggesting that it is the compound effect of trading frequency and transaction costs that matters for asset pricing, not each aspect in isolation.     

The effect of self-selection bias on the testing of a stock price reaction to management's earnings forecasts

This study examines the inferential bias due to the failure to control for self-selection when studying the market's reaction to management earnings forecasts. The analysis is conducted by controlling for self-selection and comparing the results to those obtained when self-selection is not controlled. This comparison suggests that the overall inference of a market reaction to the management forecast issuance does not change. However, the statistical significance declines when self-selection is considered. Since the issuance of a management forecast is an obvious self-selection, the results of this study suggest that self-selection should be considered and evaluated in quasi-experimental studies in accounting and finance.     

Robust estimation with flexible parametric distributions: estimation of utility stock betas

The distributions of stock returns and capital asset pricing model (CAPM) regression residuals are typically characterized by skewness and kurtosis. We apply four flexible probability density functions (pdfs) to model possible skewness and kurtosis in estimating the parameters of the CAPM and compare the corresponding estimates with ordinary least squares (OLS) and other symmetric distribution estimates. Estimation using the flexible pdfs provides more efficient results than OLS when the errors are non-normal and similar results when the errors are normal. Large estimation differences correspond to clear departures from normality. Our results show that OLS is not the best estimator of betas using this type of data. Our results suggest that the use of OLS CAPM betas may lead to erroneous estimates of the cost of capital for public utility stocks.     

International financial integration and national price levels: The role of the exchange rate regime

This paper proposes a new perspective on systematic deviations from purchasing power parity. Panel evidence for OECD countries shows that international financial integration increases the national price level under managed exchange rate regimes and lowers the price level under floating exchange rates. An open economy sticky-price model reproduces these findings by relating them to the possibility of insurance against consumption losses in internationally integrated financial markets. The utilization of insurance is reflected by relative price adjustments which manifest themselves in changes of the national price level. The direction of relative price adjustments, however, depends on the extent to which insurance is used under different exchange rate regimes: under a peg, financial integration raises the national price level; under a float, however, financial integration lowers the national price level.     

Price limit changes,order decisions,and stock price movements: an empirical analysis of the Taiwan Stock Exchange

Review of Quantitative Finance and Accounting - This study examines the relationships among price limit changes, order submission decisions, and stock returns in the Taiwan Stock Exchange....