The Effects of Firm Characteristics on Investor Reaction to IT Investment Announcements

This paper examines the effects of firm characteristics measured by price-to-book (PB) ratio, free cash flow (FCF), and variability of daily stock return (VDR) on investor reaction in the stock market to IT investment announcements. In contrast to previous studies, which focused exclusively on whether or not IT investment announcements led to an abnormal return in the market, this study investigates the extent to which firm characteristics influence the direction and magnitude of cumulative abnormal returns (CARs). Although these firm characteristics critically affect investor reaction to IT investment announcements, existing event studies in the IT literature pay scant attention to them. In spite of the same IT investment (say, developing an ERP system) announcement, the market reaction would vary due to the heterogeneity in financial situations under which the firm operates before the announcement. Contrary to previous studies, the results suggest that IT investment announcements result in significant abnormal returns around the event announcement date when only the announcements made by investing firms were considered. We provide some empirical evidence that investments in IT can have a great impact on firm value. With regard to the firm characteristics in relation to CARs, PB ratio, and variability of daily stock returns significantly affect the investorsí reaction to IT investment announcements. Finally, this study shows IT investment decision makers the implications of drawing greater attention from investors when making IT investment announcements

Determinants of capital market reactions to seasoned equity offers by German corporations

Our study provides evidence on the share price reactions to the announcement of equity issues in Germany, where capital market is characterized by institutional features distinct from the U.S. market. German seasoned equity issues yield a positive market reaction which contrasts to the significant negative abnormal returns reported for the U.S. We provide evidence that these results are due to differences in both issuing characteristics and floatation methods, and in the corporate governance and ownership structures of the two countries. Our study explains much of the empirical puzzle of different market reactions to seemingly similar events across financial markets

Large capital infusions, investor reactions, and the return and risk performance of financial institutions over the business cycle and recent finanical crisis

The authors examine investors' reactions to announcements of large seasoned equity offerings (SEOs) by U.S. financial institutions (FIs) from 2000 to 2009. These offerings include market infusions as well as injections of government capital under the Troubled Asset Relief Program (TARP). The sample period covers both business cycle expansions and contractions, and the recent financial crisis. They present evidence on the factors affecting FI decisions to issue capital, the determinants of investor reactions, and post-SEO performance of issuers as well as a sample of matching FIs. The authors find that investors reacted negatively to the news of private market SEOs by FIs, both in the immediate term (e.g., the two days surrounding the announcement) and over the subsequent year, but positively to TARP injections. Reactions differed depending on the characteristics of the FIs, stage of the business cycle, and conditions of financial crisis. Larger institutions were less likely to have raised capital through market offerings during the period prior to TARP, and firms receiving a TARP injection tended to be larger than other issuers. The authors find that while TARP may have allowed FIs to increase their lending (as a share of assets) in the year after the issuance, they took on more credit risk to do so. They find no evidence that banks' capital adequacy increased after the capital injections.Securities ; Financial services industry ; Banks and banking

Uncertainty triggers overreaction: evidence from corporate takeovers

Behavioural finance models suggest that under uncertainty, investors overweight their private information and overreact to it. We test this theoretical prediction in an M&A framework. We find that under high information uncertainty, when investors are more likely to possess firm-specific information, acquiring firms generate highly positive and significant gains following the announcement of private stock and private cash acquisitions (positive news) while the market heavily punishes public stock (negative news) deals. On the other hand, under conditions of low information uncertainty, when investors do not possess private information, the market reaction is complete (i.e. zero abnormal returns) irrespective of the type of acquisition. Overall, we provide empirical evidence that shows that information uncertainty plays a significant role in explaining short-run acquirer abnormal returns

What happens around earning announcements? An investigation of information asymmetry and trading activity in the Saudi market

This paper examines stock returns and trading activities around earnings announcements for listed companies in the Saudi stock market (SSM). Specifically, we examine the levels of stock liquidity, trading activity, volatility, bid-ask spread, asymmetric information and investor trading behaviour around earnings announcements for all firms in the market for the period 2002-2009. Abnormal price and volume reactions around earnings announcements suggest that these announcements produce highly informative contents. The magnitude of the cumulative abnormal returns around earnings announcement is induced by trading activity in the two weeks before the release date. We also show evidence of an increased adverse selection cost around earnings announcement, which is then gradually reduced in the post-announcement period, indicating that earnings announcements reduce uncertainty in the market. We also examine trading behaviour among small and large investors in the market through constructing order imbalance measures. In general, large investors are more sophisticated and show higher informed trading before earnings announcements whereas smaller investors show stronger reaction to news. Moreover, small investors show a buying pattern which is consistent with times-series based earnings surprise. They are net-buyers for good news and net-sellers for bad news portfolios

How markets react to earnings announcements in the absence of analysts and institutions evidence from the Saudi market

How stock markets react to news is an established area of research. We examine the behaviour of the Saudi Stock market in response to earnings announcements where there are no analysts’ forecasts, with the aim of examining the efficiency of the market. The SSM seems to underreact to positive news for the first five days and then reactions tend to strengthen in the following weeks, indicating the presence of a post–earnings announcement drift, or PEAD. At the same time, the SSM overreacts to negative news in the first five days and then reverses its direction and reports an upward post-earnings announcement drift. The individually dominated market combined with the absence of analysts’ forecasts is the main explanation for this underreaction to positive news and overreaction to negative news

Determinants of the stockholder reactions to convertible debt offering announcements: an analysis of the Western European market.

This paper examines the determinants of the stockholder reactions to convertible debt announcements made by Western European companies. We simultaneously test the impact of issuer characteristics, security design features, the stated uses of proceeds and the aggregate convertible debt issue volume. Our evidence suggests that the announcement returns are positively influenced by the maturity and conversion premium, and negatively influenced by the Eurobond feature, the level of post-conversion equity dilution and the aggregate convertible debt volume. We also document significant interaction effects between the issuer characteristics, the convertible debt design and the convertible debt market condition. First, we find that hot market convertibles are structured to be more 'debt-like' than non-hot market convertibles. Second, we show that the influence of the issuer characteristics depends on the convertible debt design: equity-like convertibles are perceived as instruments able to reduce adverse selection and financial distress costs, whereas debt-like convertibles are perceived as predominantly straight debt. Lastly, we demonstrate that issuer and security characteristics have much more power for explaining the investor reactions during non-hot markets than during hot markets.Determinants; Market; Companies; Characteristics; Security design; Design; Premium; Effects; Selection; Costs; Markets;

Institutional Investors and the Information Content of Earnings Announcements: The Case of Poland

This paper investigates the relationship between market reaction to earnings surprises and institutional concentration in the firm?s shareholders base. We use data from the Polish stock market where pension funds form a homogenous and highly competitive investor class with an increasing share in the market capitalisation and trading volume. We find evidence that higher pension funds holdings in a company tend to reduce the magnitude of market reaction around public disclosures. We interpret these findings as an information advantage that funds have over individual investors, which may result from scale economies in gathering and processing public information, as well as from access to privileged information in the interim period. We also find that company mangers are selective as to the type of information they provide to the market prior to their scheduled disclosures. --public disclosure,information advantage,institutional investors

Do markets love misery? : Stock prices and corporate philanthropic disaster response

While companies have emerged as very proactive donors in the wake of recent major disasters like Hurricane Katrina, it remains unclear whether that corporate generosity generates benefits to firms themselves. The literature on strategic philanthropy suggests that such philanthropic behavior may be valuable because it can generate direct and indirect benefits to the firm, yet it is not known whether investors interpret donations in this way. We develop hypotheses linking the strategic character of donations to positive abnormal returns. Using event study methodology, we investigate stock market reactions to corporate donation announcements by 108 US firms made in response to Hurricane Katrina. We then use regression analysis to examine if our hypothesized predictors are associated with positive abnormal returns. Our results show that overall, corporate donations were linked to neither positive nor negative abnormal returns. We do, however, see that a number of factors moderate the relationship between donation announcements and abnormal stock returns. Implications for theory and practice are discussed

Signaling strategic commitment for organizational transition: how to manage potential M&As through voluntary disclosures

To ‘transit or not’ often depends upon winning over investor opinion to large strategic initiatives. M&A is one such major realignment of an organization and yet once a bid for a company has been announced there is a period of uncertainty when the bid may not be completed. This depends on share price movements determined more by investor perceptions than fundamental values. This paper investigates whether these perceptions may be influenced by ‘voluntary’ corporate communications and so link managerial practices to strategic outcomes. Drawing upon two very large M&A data sets (USA and UK) (57,000 deals; 30,000 communications) we argue managerial practice (signaling strategic commitment) shapes market response and demonstrate communication characteristics, and the use of high-reputation intermediaries, play an important role in determining share price reaction