AN ANALYSIS OF THE WALL STREET JOURNAL'S COVERAGE OF CORPORATE NEWS AND THE RESEARCH DESIGN OF EVENT STUDIES

The typical event study of corporate news restricts its sample of announcements to events reported in the Wall Street Journal (WSJ) and listed in the WSJ Index. In this paper we examine whether such samples are representative of the events omitted from the WSJ. Focusing on convertible calls in the 1980s, we analyze possible differences between a sample based only on the WSJ Index and a larger but similarly constructed sample of calls reported in the Dow Jones News Service but not in the WSJ Index. Numerous parametric and nonparametric tests reveal no significant cross-sample divergences in key attributes of the calling firms and called bonds, or in the distributions of risk-adjusted returns around announcements. This evidence suggests that WSJ-based samples for other corporate news items can be representative of cases not covered by the WSJ. Further, the evidence indicates that the results of event studies using WSJ-based samples may support inferences about events not reported in the newspaper.     

Reactions of the International Stock Exchange to Company Employment Announcements: Redundancies and New Jobs

This paper is the first to look directly at the reaction of the London market to company announcements of changes to employee count. Using event study methodology, we examine market reactions to 54 redundancy announcements during the period 1990–1999 and 52 announcements of new jobs during the period 1993–1999. In line with previous US studies we find that market reaction, measured by cumulative abnormal returns, is negative before the day of redundancy announcement. The actual redundancy announcement is greeted positively by the market when measured in terms of the mean, but negatively when measured in terms of the median. Thus, in a minority of cases the announcements are seen as value enhancing. The market reacts positively before new job announcements and this positive reaction is highly significant when the announcement is made. The results suggest that new job announcements contain value–relevant information for the market. Potential causal factors other than announcement size are not significant.     

Information Content of Insider Trading Around Corporate Announcements: The Case of Capital Expenditures

There is gathering evidence of insider trading around corporate announcements of dividends, capital expenditures, equity issues and repurchases, and other capital structure changes. Although signaling models have been used to explain the price reaction of these announcements, a usual assumption made in these models is that insiders cannot trade to gain from such announcements. An innovative feature of this paper is to model trading by corporate insiders (subject to disclosure regulation) as one of the signals. Detailed testable predictions are described for the interaction of corporate announcements and concurrent insider trading. In particular, such interaction is shown to depend crucially on whether the firm is a growth firm, a mature firm, or a declining firm. Empirical proxies for firm technology are developed based on measures of growth and Tobin's q ratio. In the underlying “efficient” signaling equilibrium, investment announcements and net insider trading convey private information of insiders to the market at least cost. The paper also addresses issues of deriving intertemporal announcement effects from the equilibrium (cross-sectional) pricing functional. Other announcement effects relate the intensity of the market response to insider trading, variance of firm cash flows, risk aversion of the insiders, and characteristics of firm technology (growth, mature, or declining).     

How Do Investors Interpret Announcements of Earnings Delays?

Unlike in the case of delays of 10‐K or 10‐Q filings, the SEC does not require managers to disclose delays of earnings announcements to the public. Thus, for companies that are unable to report earnings by their expected date, managers face a decision: remain silent or announce the delay. Prior research has investigated all earnings delays, whether or not they are accompanied by announcements of the delay announcement, and found that the market reaction is slightly negative, on average, for companies that allow their expected earnings dates to pass without disclosing results. It's not clear, however, whether this negative reaction was due to the absence of news or to the information contained in the announcements of the earnings delays. The authors' recent study documents that earnings delay announcements are associated with an average one‐day abnormal stock return of a negative 6%. This statistically as well as economically significant reduction in value is consistent with anecdotal evidence in the popular business press as well as predictions of disclosure theories, in particular the explanation that concerns about legal liability and managerial reputation motivate managers to disclose bad news. The study also shows that almost all managers who announce earnings delays attempt to influence the market reaction by disclosing the underlying cause. Finally, the study shows that the market reaction to earnings delay announcements is positively related to future earnings changes, consistent with the role of these disclosures in providing a signal of deteriorating financial performance.     

PROFITABILITY, EARNINGS ANNOUNCEMENT TIME LAGS, AND STOCK PRICES

This research addresses (1) whether firms with lower (hgher) than expected earnings fgures released those figures to the public later (earlier) than expected and (2) whether there is a reaction by the capital market to the timing of the earnings announcement. The results indicate that later than expected earnings announcements are likely to contain worse news than early announcements. Also the stock returns of late reporting firms appear to be lower than that of early reporting firms in the days surrounding the earnings announcement date.     

Information asymmetry and accounting restatement: NYSE-AMEX and NASDAQ evidence

We examine the impact of accounting restatement announcement on firms’ value and information asymmetry for both auction market (NYSE-AMEX) and dealer market (NASDAQ) using a public sample of restatement announcements from 1997 to 2005. In both markets, we document economically and significantly negative mean cumulative abnormal returns around the announcement dates. The restatements attributed to auditors are associated with more negative returns than those attributed to management and the SEC. However, there is no significant difference between market reactions arising from the core and non-core restatements. We also find a significant increase in volume, number of transactions, average order size, volatility, and various measures of spreads after the restatement announcement indicating that restatement announcements diminish company prospects and contribute to increased uncertainty and information asymmetry. Finally, we find that the information asymmetry in the NASDAQ market around the event date is less pronounced than in the NYSE-AMEX market.     

Qualified audit opinions and stock prices: Information content,announcement dates,and concurrent disclosures

We investigate whether announcements of ‘subject to’ audit opinions and disclaimers of opinions affect stock prices. The results indicate that many firms experience negative abnormal performance prior to the release of qualified opinions, and that the magnitude of prior abnormal performance differs across types of qualifications. However, there is little evidence of a stock price effect when qualifications are disclosed publicly. It is difficult to construct powerful tests of the announcement effect of a qualified opinion for three reasons. First, the announcement date of the qualification is not easily identified. Second, measuring the unanticipated component of the announcement requires a model of market expectations. Third, controls must be employed for concurrent disclosures. The problems concerning event date identification have ramifications for other accounting event studies, particularly studies of disclosures typically contained in the annual report or 10-K.     

Market rationality and dividend announcements

We investigate stock market rationality by examining the timeliness and unbiasedness of the market's response to dividend announcements. Our initial findings for market timeliness show a sluggish market reaction to dividend announcements; however, when the ex-dividend effect is controlled for, we find no evidence of a sluggish market reaction. We examine the unbiasedness of the market's response by testing whether the net announcement effect across a sample that is devoid of ex-post selection bias sums to zero. We observe a significant positive net announcement effect and examine several plausible conjectures for this puzzling phenomenon, but none provides a satisfactory explanation.     

OPEN MARKET STOCK REPURCHASE PROGRAMS AND LIQUIDITY

In this paper I examine the behavior of bid and ask spreads and depths around announcements of open market stock repurchase programs. For a sample of 195 announcements from 1988 to 1990, I find statistically significant evidence of a small decline in spreads and no evidence of a shift in depths following the announcement date. Results are similar for a subsample of firms experiencing post-announcement declines in the number of shares outstanding. I conclude that open market repurchase programs as used recently do not adversely affect market liquidity.     

Reactions of the London Stock Exchange to Company Trading Statement Announcements

Using event study methodology, we examine market reactions to nearly 2,000 trading statements during the period 1995‐2001. We find that profit warnings outnumber upgrades by 50%, and, in line with previous US studies, we find that market reaction to the actual announcements is considerably greater for profit warnings than for upgrades.Sub-samples demonstrate significant market reaction to profit warnings for all sizecontrolled portfolios, but that reaction to the announcements is greatest for small companies.Examination of pre- and post-announcement CARs shows no pre-announcement market anticipation of the announcements.Post-announcement there is a significant positive abnormal return on the day after the announcement of bad news for the small company subsample.Other post-announcement results are small and insignificant.Trading volume results are consistent with this picture. Finally, when the trading statements are examined for news on turnover and margin changes, we find that the market reaction to margin changes is greater than market reaction to turnover changes.     

Announcement and Publication Decisions and the Use of Prediction Errors in Cross-Sectional Analysis: Evidence on Seasoned Equity Issues

An important concern for empirical analysis of market responses to public releases of information is whether the voluntary nature of announcement and publication decisions imparts a selectivity bias and, if so, how this bias affects empirical results. Using a database of SEC filings of equity issues, all related Wall Street Journal published announcements are identified. The published announcements are used to classify proposed issues into subsamples with homogeneous information structures. Announcement and WSJ publication decisions are found to be non-random but, for industrial firms, not significantly related to firm size or exchange listing. Coefficients estimated without controlling for selectivity are found not to be significantly biased for either industrial or utility issues. However, for industrial issues, significance levels are considerably lower when selectivity bias is controlled. The hypothesis common to other studies of new issue announcement effects that observations from different information structures can be pooled, with coefficient estimates restricted to be equal across information structures, is rejected. The results have implications for the methods used to study cross-sectional market responses     

The market valuation of share repurchases in Europe

We analyze a uniquely constructed data set of open market share repurchases across a sample of European firms. We find that the announcement date market reaction is lower than that in the US, mainly because of (i) the relatively large number of recurring announcements which generate significantly lower returns than the initial announcements of intention to repurchase shares; (ii) the rather low market reaction in France, due probably to specific governance and corporate cultural issues; and (iii) the regulatory reform that allowed UK firms to keep the repurchased shares as treasury stock, which decreased their market impact. Across our countries, taxation, shareholder protection, and the European Union’s Market Abuse Directive do not affect significantly the market valuation of repurchases. Our results imply that ultimately, domestic institutional specificities and reforms play significant roles in the market valuation and popularity of share repurchases.     

How Much New Information Is There in Earnings?

We quantify the relative importance of earnings announcements in providing new information to the share market, using the R² in a regression of securities' calendar‐year returns on their four quarterly earnings‐announcement “window” returns. The R², which averages approximately 5% to 9%, measures the proportion of total information incorporated in share prices annually that is associated with earnings announcements. We conclude that the average quarterly announcement is associated with approximately 1% to 2% of total annual information, thus providing a modest but not overwhelming amount of incremental information to the market. The results are consistent with the view that the primary economic role of reported earnings is not to provide timely new information to the share market. By inference, that role lies elsewhere, for example, in settling debt and compensation contracts and in disciplining prior information, including more timely managerial disclosures of information originating in the firm's accounting system. The relative informativeness of earnings announcements is a concave function of size. Increased information during earnings‐announcement windows in recent years is due only in part to increased concurrent releases of management forecasts. There is no evidence of abnormal information arrival in the weeks surrounding earnings announcements. Substantial information is released in management forecasts and in analyst forecast revisions prior (but not subsequent) to earnings announcements.     

MARKET REACTION TO DIVIDEND-DECREASE ANNOUNCEMENTS: PUBLIC UTILITIES VS. UNREGULATED INDUSTRIAL FIRMS

In this study I compare the common share price reaction to dividend-decrease announcements by public utilities with the share price reaction to dividend-decrease announcements by unregulated firms. Regressing cumulative prediction errors from an event study methodology on firm characteristics, the empirical evidence shows that dividend decreases by public utilities prompt stronger negative market reactions than similar announcements by unregulated firms, even when yield, yield change, firm size, and Tobin's Q differences are considered.     

Employee Downsizing Strategies: Market Reaction and Post Announcement Financial Performance

Empirical studies have generally reported insignificant market reactions to employee downsizing. In an effort to reconcile ongoing layoffs with inconclusive empirical results, we segregated our sample by downsizing strategy and examined employee layoff announcements made by Fortune 500 firms during the 1993–1995 period. Unlike previous studies, we find a positive market reaction for layoff announcements related to revenue refocusing. Market reaction with respect to layoff announcements involving cost cutting was insignificant while weak evidence was found for a negative market reaction to layoffs related to plant closings. Consistent with the market reaction, post announcement analysis revealed that downsizing in conjunction with revenue refocusing (plant closing) improved (reduced) firm financial performance and that revenue refocusing firms significantly outperformed cost cutting and plant closing firms over the three–year post announcement period.     

The market valuation of M&A announcements in the United Kingdom

This paper investigates the short-term market reaction to UK acquirers announcing domestic and foreign mergers and acquisitions (M&As) from 2000 to 2010. We define acquirers as value, moderate and glamour acquirers based on equally weighted market-to-book terciles. We find that value acquirers outperform glamour acquirers during and after the M&A announcement. We also focus on the impact of institutional ownership and find that higher domestic, foreign and total institutional ownership leads to lower market reaction to M&A announcements. We also find that long-term institutional investors lead to a higher post-announcement market performance. Finally, we find that greater domestic institutional ownership mitigates the typical poor short-term performance following M&A announcements of glamour acquirers.     

Market reaction to anticipated announcements

In this paper we analyze how anticipating a forthcoming public announcement affects the market reaction to the announcement by altering investors' incentives to acquire private information. Specifically, we study price change, volume, and information asymmetry at the time of the announcement. We also investigate how information acquisition, information asymmetry, price, and volume are influenced by the quality of prior knowledge, the marginal cost of gathering information, the degree of risk tolerance, and noise. Finally, we compare market reactions to anticipated announcements of known precision with the response to announcements that are either unanticipated or of uncertain quality.     

Stock price behavior surrounding stock repurchase announcements: Evidence from Japan

This paper examines stock price behavior surrounding announcements of stock repurchases made by Japanese firms from 1995 to 1998. Our analysis shows that, much as in the case of the U.S. markets, stock prices in Japan go up in response to stock repurchase announcements. We also find that there is no significant difference between the market reaction to the announcement for intention of repurchase execution and the market reaction to the announcement of an article alteration to allow stock repurchases. On the other hand, there is a significant difference in the pre-announcement period returns motivating these two announcements. While a large decline in stock price will motivate a firm to execute a stock repurchase, a smaller price decline will motivate a firm to merely alter its articles of association to allow future repurchases.     

Stock Price Distributions and News: Evidence from Index Options

We estimate the shape of the distribution of stock prices using data from options on the underlying asset, and test whether this distribution is distorted in a systematic manner each time a particular news event occurs. In particular we look at the response of the FTSE100 index to market wide announcements of key macroeconomic indicators and policy variables. We show that the whole distribution of stock prices can be distorted on an event day. The shift in distributional shape happens whether the event is characterized as an announcement occurrence or as a measured surprise. We find that larger surprises have proportionately greater impact, and that higher moments are more sensitive to events however characterised.     

The effects of social ratings on firm value

This paper examines, in a short-term perspective, the effects of Vigeo social ratings announcements on the firm's shareholder value. From an event study on a large sample of European firms, we show that the announcement of ratings generates a strong positive stock market reaction regardless of whether the rating is good or bad. This finding underlines the relevance of ratings and reveals the value effects of corporate social responsibility (CSR). We also find that the overall rating has no impact on shareholders’ wealth. We highlight that specific CSR dimensions drive the value effects. Some are value enhancing and others value destroying. Our study complements the literature on the complex links between socially responsible practices and firm value. It gives arguments to measure properly the benefits and risks associated with non-financial factors, and to integrate them into asset pricing models and allocation processes.