Analyst responsiveness and the post-earnings-announcement drift
By Yuan Zhang
This study examines the responsiveness of analyst forecasts to current earnings
announcements. The results show considerable cross-sectional variation in analyst
responsiveness and suggest that this variation is related to the costs and benefits
associated with prompt forecast revisions. More importantly, this study finds that with
responsive forecast revisions, more of the market reaction takes place in the event
window and less in the drift window, suggesting that analyst responsiveness mitigates
the post-earnings-announcement drift and facilitates market efficiency.
Share Repurchase Offers and Liquidity: An Examination of Temporary and Permanent Effects
By Nayar, Nandkumar; Singh, Ajai K; Zebedee, Allan A
Open-market repurchase programs do not allow for precise estimates of share buy-back intensity to measure liquidity effects. To circumvent the uncertainty surrounding the quantity and timing of shares truly acquired in repurchase programs and to measure their long-term impact, the study examines Dutch auctions and fixed-price tender offers. They investigate both the temporary and permanent liquidity effects of share repurchase programs and find that the improvement in liquidity is transitory and limited to the tender period when the firm's offer to repurchase shares is outstanding. Improvements in liquidity over longer intervals appear to be the result of an overall price improvement and a reduction in volatility rather than the result of structural change in market dynamics.
Star Power: The Effect of Morningstar Ratings on Mutual Fund Flow
By Diane Del Guercio
This paper employs an event-study methodology on over 10,000 Morningstar star rating changes and find that Morningstar has substantial independent influence on the investment allocation decisions of retail mutual fund investors. It is the discrete change in the star rating itself, and not the change in the underlying performance measures that drives flow. The study document economically and statistically significant positive abnormal flow following rating upgrades, and negative abnormal flow following rating downgrades. In contrast to the cross-sectional flow-performance literature, the study find evidence of investor punishment of performance declines, some of which is evident immediately in the month of the rating change.
Market reactions to E-business outsourcing announcements: An event study
By Manish Agrawala, , Rajiv Kishoreb and H. Raghav Raob
This study finds that Stock markets have reacted favorably to firms who announced their implementation of E-business projects for commercial exploitation. Those that outsourced E-business projects in order to achieve swift execution also achieved abnormal positive returns. Contrary to expectations, outsourcing E-business projects with high task complexity also led to positive results. The study finds that the above hree factors explained more than 20% of the variance in abnormal returns. The results were obtained from an event study of 96 E-business-related announcements, including those made by firms in the S&P500 index during 1999–2002. This paper contains information that should therefore help firms identify E-business projects for outsourcing.
The information content of stock split announcements:Do options matter?
By Keh-Yiing Chern a, Kishore Tandon b, Susana Yu c, Gwendolyn Webb
This study tests the informational efficiency of trading in stock options in the context of stock split announcements. These announcements tend to be associated with positive abnormal returns.Traditional event study results show abnormal returns that are significantly lower for optioned than non-optioned stocks, whether traded on the NYSE, Amex, or Nasdaq. After controlling for market returns, capitalization, book-to-market ratio, and trading volume, The study finds that the abnormal returns are significantly lower for NYSE/ Amex optioned than non-optioned stocks. The overall effects tend to be lower after optioning. These findings are consistent with the hypothesis that the prices of optioned stocks embody more information, diminishing the impact of the stock split announcement. This Study provides new evidence of the beneficial effects of options on their underlying stocks.
The Impact of Blog Recommendations on Security Prices and Trading Volumes
By Veljko Fotak
Previous research and recent statements by the Securities and Exchange Commission indicate that e-mail spam and message board posts are often used to manipulate markets in a variation of the classical pump-and-dump scheme, leading to temporary market reactions followed by price reversals. In contrast, this paper hypothesize that financial blogs spread genuine information leading to permanent market adjustments. The author investigates stock recommendations on blogs and find that bloggers tend to write about liquid securities issued by large firms; The paper also finds that bloggers offer short advice consistent with momentum strategies but long advice consistent with contrarian strategies. To test the hypothesis that stock recommendations on blogs impact both prices and trading volumes of the touted securities, the collected recommendations from blogs and analyzed returns and trading volumes on the days surrounding publication; the paper offers evidence to support the hypothesis and finds some evidence of market reaction being stronger for short recommendations. The paper hypothesizes and tests that the magnitude of the market reaction depends on the market capitalization of the touted firm, on the size of the blog's audience, on the depth of the analysis of the blog post and on the perceived skill of the blog's author. The paper finds that the market appears to react more strongly to recommendations given by holders of a graduate degree in Finance or Economics; the other hypothesized factors do not have an impact on the magnitude of the reaction. Finally, the paper documents the absence of price reversals in the twenty days following blog publication, giving support to the hypothesis that blogs offer genuine information.
The Wealth Effect of Japanese-US Strategic Alliances
By Chang, Shao-Chi; Chen, Sheng-Syan; Lai, Jung-Ho
This study investigates the wealth impact for Japanese and US firms that announce nonequity strategic alliances. The Study finds that on average, both Japanese and US shareholders benefit from the formation of international alliances. The study shows that shareholders earn larger abnormal returns in these alliances when the partnering firms are relatively small in size, have higher growth opportunities, or are less profitable. The study also shows that both Japanese and US partnering firms display significant improvements in operating performance over the three-year period subsequent to the formation of international alliances.
The Economic Impact of Olympic Games: Evidence from Stock Markets
By Christian D. Dickxand Qingwei Wangz
By means of an event study of stock market reactions to the announcement of the Olympic Games host cities, The study find a significant and positive announcement effect of hosting the Summer Games, with a cumulative abnormal return of about 2% within a few days. The study do not find any significant results for the Winter Games. Neither do they detect a significant impact when bidders lose the competition. The findings are in line with economic intuition, since the Summer Games represent a larger event and are thus more likely to have a significant impact. They also find that among the winners, small economies tend to have greater cumulative abnormal returns than their large peers.
Earnings quality at initial public offerings
By Ray Ball, Lakshmanan Shivakumar
This study shows that, contrary to popular belief, initial public offering (IPO) firms report more conservatively. The Study attribute this to the higher quality reporting demanded of public firms by financial statement users and consequentially higher monitoring by auditors, boards, analysts, rating agencies, press, and litigants, and to greater regulatory scrutiny . This study question alternative hypothesis that managers opportunistically inflate earnings to influence IPO pricing. They conjecture that upward-biased estimates of ‘‘discretionary’’ accruals occur in a broad genre of studies on earnings management around similar large transactions and events.
Event Study: Pennsylvania AG destroyed "roughly $2.7
billion in shareholder wealth"
Research Report: Agency Costs, Charitable
Trusts, and Corporate Control: Evidence from Hershey's Kiss-Off
By Jonathan Klick, Robert H. Sitkoff
August, 2007
Abstract: In July 2002, the trustees of the Milton Hershey School Trust
announced a plan to diversify the Trust's investment portfolio by selling the
Trust's controlling interest in the Hershey Company. The Company's stock jumped
from $62.50 to $78.30 on news of the proposed sale. But the Pennsylvania
attorney general, who was then running for governor, brought suit to stop the
sale on the grounds that it would harm the central Pennsylvania community. In
September 2002, after the attorney general obtained a preliminary injunction,
the trustees abandoned the sale and the Company's stock dropped to $65.00. Using
standard event study econometric analysis, we find that the sale announcement
was associated with a positive abnormal return of over 25 percent and that
canceling the sale was followed by a negative abnormal return of nearly 12
percent. Our findings imply that instead of improving the welfare of the needy
children who are the Trust's main beneficiaries, the attorney general's
intervention preserved charitable trust agency costs on the order of roughly
$850 million and prevented the Trust from achieving salutary portfolio
diversification. Overall, blocking the sale destroyed roughly $2.7 billion in
shareholder wealth, reducing aggregate social welfare by preserving a suboptimal
ownership structure of the Company.