Posts Tagged ‘Market reaction’

Weather-Induced Mood, Institutional Investors, and Stock Returns

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday November 19, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from William Goetzmann, Professor of Finance at Yale University; Dasol Kim of the Department of Banking and Finance at Case Western Reserve University; Alok Kumar, Professor of Finance at the University of Miami; and Qin Wang of the Department of Accounting and Finance at the University of Michigan at Dearborn.

Studies showing that weather patterns in major financial centers influence stock index returns provide suggestive evidence that investor mood influences asset prices (Saunders, 1993; Hirshleifer and Shumway, 2003). Individuals may misattribute mood induced by weather as information when making assessments about objects that should be otherwise unrelated (Schwarz and Clore, 1983), leading to mood-congruent judgments. For example, sunnier days may induce good moods amongst investors, generating overly optimistic beliefs regarding their investments and congruently influencing their trading decisions. Despite strong evidence of the weather effect on stock index returns, establishing plausibility in mood-based explanations relies in part on distinguishing which group of investors drives the weather effect, and directly confirming mood effects in their judgments.

…continue reading: Weather-Induced Mood, Institutional Investors, and Stock Returns

Measuring Price Impact with Investors’ Forward-Looking Information

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday September 16, 2014 at 9:09 am
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Editor’s Note: The following post comes to us from Aaron Dolgoff and Tiago Duarte-Silva, both of Charles River Associates. The views expressed here do not necessarily reflect those of Charles River Associates.

The recent Supreme Court decision in Halliburton brought renewed interest to price impact and event studies. Aside from identification and analysis of the news itself, the event study has three basis steps: (i) Estimate a statistical model (or “market model”) of how the stock price would be expected to change in absence of such news (“predicted price changes”), (ii) Calculate stock price changes in excess of the predicted price changes (“excess price change”), and (iii) Evaluate the statistical significance of the excess price change to distinguish material news from noise, or normal variations in stock prices.

…continue reading: Measuring Price Impact with Investors’ Forward-Looking Information

An IPO’s Impact on Rival Firms

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday September 15, 2014 at 9:04 am
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Editor’s Note: The following post comes to us from Matthew Spiegel, Professor of Finance at Yale University, and Heather Tookes, Professor of Finance at Yale University.

An initial public offering (IPO) is a major event in the life of any firm. But what does an IPO imply for the industry’s future? In our paper, An IPO’s Impact on Rival Firms, which was recently made publicly available on SSRN, we take a structural approach that allows different industries to progress in different ways post IPO. If one is forced to make a sweeping generalization, then this paper finds an IPO augurs in an era of reduced profits and greater consumer mobility within an industry. Unlike a static model, a structural model’s parameters produce implications about magnitudes rather than just signs. This permits one to assess whether the estimates are economically “reasonable in a straightforward manner.”

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Economic Crisis and Share Price Unpredictability: Reasons and Implications

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday July 10, 2014 at 9:14 am
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Editor’s Note: The following post comes to us from Edward G. Fox of University of Michigan at Ann Arbor, Department of Economics, Merritt B. Fox, the Michael E. Patterson Professor of Law at Columbia Law School, and Ronald J. Gilson, Charles J. Meyers Professor of Law and Business at Stanford Law School.

During the recent financial crisis, there was a dramatic spike in “idiosyncratic volatility”—the volatility of individual firm share prices after adjustment for movements in the market as a whole. The average firm’s increase was a remarkable five-fold as measured by variance. This dramatic spike is not peculiar to the most recent crisis. Rather, it has occurred with each major downturn in the economy since the 1920s, as our paper shows for the first time. These spikes present a puzzle in terms of existing economic theory. They also have important implications for several areas of corporate and securities law where the capacity of securities prices to reflect available information is particularly important. Examples include the presumption of reliance, loss causation and materiality in fraud-on-the-market suits, materiality in insider trading cases, and the corporate law regulation of defenses undertaken by targets of hostile takeover attempts. The continuing centrality of these issues is underscored by this week’s decision in Halliburton Co v. Erica P. John Fund, where the Supreme Court ruled that a defendant can defeat a fraud-on-the-market case class certification by showing that the alleged misstatement had no impact on price.

…continue reading: Economic Crisis and Share Price Unpredictability: Reasons and Implications

The Effects of Mandatory Transparency in Financial Market Design

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday June 25, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Paul Asquith, Professor of Finance at Massachusetts Institute of Technology (MIT); Thomas Covert of the Economics Area at the University of Chicago; and Parag Pathak of the Department of Economics at Massachusetts Institute of Technology (MIT).

Many financial markets have recently become subject to new regulations requiring transparency. In our recent NBER working paper, The Effects of Mandatory Transparency in Financial Market Design: Evidence from the Corporate Bond Market, we study how mandatory transparency affects trading in the corporate bond market. In July 2002, the Trade Reporting and Compliance Engine (TRACE) program began requiring the public dissemination of post-trade price and volume information for corporate bonds. Dissemination took place in four phases over a three-and-a-half year period, with actively traded, investment grade bonds becoming transparent before thinly traded, high-yield bonds.

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Corporate Scandals and Household Stock Market Participation

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday April 1, 2014 at 9:01 am
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Editor’s Note: The following post comes to us from Mariassunta Giannetti, Professor of Finance at the Stockholm School of Economics, and Tracy Yue Wang of the Department of Finance at the University of Minnesota.

Corporate scandals have large negative effects on the value of the firms that are discovered having committed fraud (Karpoff, Lee, and Martin, 2008; Dyck, Morse, and Zingales, 2013). Besides inflicting direct losses to shareholders, corporate fraud may also have indirect effects on households’ willingness to participate in the stock market, which may generate even larger losses by increasing the cost of capital for other firms. Evidence of the externalities generated by corporate fraud, however, is quite limited.

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Does Stock Liquidity Affect Incentives to Monitor?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday March 10, 2014 at 8:21 am
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Editor’s Note: The following post comes to us from Peter Roosenboom, Professor of Finance at the Rotterdam School of Management, Erasmus University; Frederik Schlingemann of the Finance Group at the University of Pittsburgh; and Manuel Vasconcelos of Cornerstone Research.

In our paper, Does Stock Liquidity Affect Incentives to Monitor? Evidence from Corporate Takeovers, forthcoming in the Review of Financial Studies, we examine the role of liquidity as a monitoring incentive and its effect on firm value by analyzing the market reaction to takeover announcements. The empirical evidence is consistent with the view that there is a tradeoff between monitoring via institutional intervention and liquidity for takeovers of private targets, but not for takeovers of public targets. This finding may be explained by the increased role of the disciplining effect of the threat of exit in connection to actions that on average destroy shareholder value, such as takeovers of public targets (Admati and Pfleiderer 2009).

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Merger Negotiations with Stock Market Feedback

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday February 18, 2014 at 9:02 am
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Editor’s Note: The following post comes to us from Sandra Betton of the Department of Finance at Concordia University; B. Espen Eckbo, Professor of Finance at Dartmouth College; Rex Thompson, Professor of Finance at Southern Methodist University; and Karin Thorburn, Professor of Finance at the Norwegian School of Economics.

In our paper, Merger Negotiations with Stock Market Feedback, forthcoming in the Journal of Finance, we investigate whether pre-bid target stock price runups increase bidder takeover costs—an issue of first-order importance for the efficiency of the takeover mechanism. We base our predictions on a simple model with rational market participants and synergistic takeovers. Takeover signals (rumors) received by the market cause market anticipation of deal synergies that drive stock price runups. The model delivers the equilibrium pricing relation between the runup and the subsequent offer price markup (the surprise effect of the bid announcement) that should exist in a sample of observed bids.

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The Impact of CEO Divorce on Shareholders

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday December 3, 2013 at 9:28 am
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Editor’s Note: The following post comes to us from David Larcker, Professor of Accounting at Stanford University; Allan McCall of the Department of Accounting at Stanford University; and Brian Tayan of the Corporate Governance Research Program at the Stanford Graduate School of Business.

Recent events suggest that shareholders pay attention to matters involving the personal lives of CEOs and take this information into account when making investment decisions. In our paper, Separation Anxiety: The Impact of CEO Divorce on Shareholders, which was recently made publicly available on SSRN, we examine the impact that CEO divorce can have on a corporation.

There are at least three potential ways in which a CEO divorce might impact a corporation and its shareholders. The first is loss of control or influence. A CEO with a significant ownership stake in a company might be forced to sell or transfer a portion of this stake to satisfy the terms of a divorce settlement. This can reduce the influence that he or she has over the organization and impact decisions regarding corporate strategy, asset ownership, and board composition. Shareholder reaction to loss of control will vary, depending on the view that investors have of CEO performance and governance quality. If they view performance and governance quality favorably, they will react negatively to the news; if they view management as entrenched or a poor steward of assets, they will react positively. Shareholder reaction will also depend in part on what happens to divested shares, including whether they are transferred to the spouse, sold in a block to a third-party, or dispersed in the general market. Each of these can shape the future governance of a firm.

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Blockholder Heterogeneity and Financial Reporting Quality

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday October 10, 2013 at 9:35 am
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Editor’s Note: The following post comes to us from Yiwei Dou of the Department of Accounting, Taxation & Business Law at New York University; Ole-Kristian Hope, Professor of Accounting at the University of Toronto; Wayne Thomas, Professor of Accounting at the University of Oklahoma; and Youli Zou of the Accounting Area at the University of Toronto.

An issue of considerable interest to accounting researchers is the association between shareholders and firms’ financial reporting quality (FRQ). In our paper, Blockholder Heterogeneity and Financial Reporting Quality, which was recently made publicly available on SSRN, we examine a specific type of shareholder, blockholders, because (1) they offer a sample of shareholders that are expected to have a significant impact on firms’ financial reporting decisions and (2) we are able to track individual blockholders and their association with FRQ. As discussed in more detail below, these two sample design features allow us to provide a test of the extent to which (large) shareholders influence FRQ. Blockholders also provide an interesting and economically important sample because of their large presence in U.S. capital markets in recent years.

…continue reading: Blockholder Heterogeneity and Financial Reporting Quality

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