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Market reactions to layoff announcements during crises: Examining impacts and conditioners
... Still, the Vietnamese Dong (2.82 %) and Papua New Guinean (0.47 %) were identified as almost resilient or least impacted currencies in APEC during COVID-19. Numerous studies (Ashraf & Goodell, 2022;Yarovaya et al., 2022;Goodell et al., 2023;Kumar et al., 2023;Pandey and Kumari, 2021) indicated that COVID-19 impacted several economies, leading to market reactions based on the different announcements. ...
By combining TVP-VAR Model (time domain connectedness) and TVP-VAR based Baruník and
Kˇrehlík model (frequency domain connectedness), this study analyzes the impact of the COVID-19
pandemic, the Russia-Ukraine war, and the Silicon Valley Bank (SVB) collapse on the Asia Pacific
Economic Cooperation (APEC) forum currency exchange rates. The results reveal that APEC
currencies have time-varying effects (tend to cluster in appreciation and depreciation patterns in
both the short and long term) and have generated higher total return spillover during COVID-19
(in the time domain) than the Russia-Ukraine war and SVB collapse. During COVID-19 (87.18 %)
(total return spillover), impacts were more severe than the Russia-Ukraine crisis (79.49 %) and
the Silicon Valley Bank collapse (75.55 %). Moreover, the South Korean won, Thai Bhat and
Australian Dollar are identified as consistent shock transmitters, and Malaysian Ringgit, Philippine peso, Indonesian Rupiah, and Chinese Yuan as consistent shock receivers in the time domain.
The findings have substantial repercussions for financial regulators and investors.
... We adopt the Brown and Warner (1985) ESM with the market model (MM) estimation. The MM generates results like complex models (Dyckman et al., 1984;Kumar et al., 2023). The event date is September 26, 2022. ...
Purpose
This study aims to comprehensively understand market reactions to Bursa Malaysia's announcement on mandatory climate-change-related disclosures, exploring sector-specific dynamics and cross-sectional influences.
Design/methodology/approach
The study uses event study methodology on 412 listed firms to analyze market reactions around the announcement date. The sector-wise analysis further delves into variations across industries. Cross-sectional analysis explores the significance of environmental, social and governance (ESG) scores and firm controls in explaining the differences across sample firms.
Findings
The event study reveals initial negative market reactions on the event day, with a subsequent shift from positive to negative cumulative impact, indicating the evolving nature of investor sentiment. The sector-wise analysis highlights heterogeneous effects, emphasizing the need for tailored strategies based on industry-specific characteristics. The cross-sectional findings underscore the growing importance of ESG factors, with firm size and performance influencing market reactions. Financial leverage and liquidity prove insufficient to explain cumulative abnormal return (CAR) differences, while past returns and volatility are influential technical factors.
Practical implications
The economic significance of the results indicates a growing trend where investors prioritize companies with more substantial ESG scores, potentially driving shifts in corporate strategies toward sustainability. Better ESG performance signifies improved risk management and long-term resilience in the face of market dynamics. Regulatory bodies may respond by enhancing ESG reporting requirements, while financial institutions integrate ESG factors into their models, emphasizing the benefits of sustainability and financial performance.
Originality/value
This research contributes to the existing literature by providing a nuanced analysis of market responses to climate-related disclosures, incorporating sector-specific dynamics and cross-sectional influences. The findings offer valuable insights for businesses and policymakers, emphasizing the need for tailored approaches to climate-related disclosure management.
... During this time, they were hit by a series of different events, causing large fluctuations in their corresponding stock prices over time, including the US-China trade war, the Covid-19 pandemic, the petroleum oversupply due to the shale revolution [120,121], the Russia-Saudi Arabia price war [122,123] and the Ukraine-Russia war [65]. • Technology Sector: Technology stocks are grouped into several communities and reveal herding behavior in three sub-periods, including Pre-Covid-19 (coinciding with the US-China trade war [124][125][126]126]), Covid-19 pandemic (coinciding with the downturn time caused by the pandemic followed by a global economic recession) and the Ukraine-Russia conflict (coinciding with the time when Technology companies were laying off workers [127][128][129] followed by the AI boom that gave an impetus to the Technology sector [130,131]). • Healthcare Sector: Herding behavior was found in most healthcare stocks and ETFs during three sub-periods: ...
Herding behavior has become a familiar phenomenon to investors, carrying the potential danger of both undervaluing and overvaluing assets, while also threatening market stability. This study contributes to the literature on herding behavior by using a more recent dataset to cover the most impactful events of recent years. To our knowledge, this is the first study examining herding behavior across three different types of investment vehicle. Furthermore, this is also the first study observing herding at a community (subset) level. Specifically, we first explore this phenomenon in each separate type of investment vehicle, namely stocks, US ETFs and cryptocurrencies, using the widely recognized Cross Sectional Absolute Deviation (CSAD) model. We find similar herding patterns between stocks and US ETFs, while these traditional assets reveal a distinction from cryptocurrencies. Subsequently, the same experiment is implemented on a combination of all three investment vehicle types. For a deeper investigation, we adopt graph-based techniques such as Minimum Spanning Tree (MST) and Louvain community detection to partition the given combination into smaller subsets whose assets are most similar to each other, then seek to detect the herding behavior on each subset. We find that herding behavior exists at all times across all types of investment vehicle at a subset level, although the herding might not manifest at the superset level. Additionally, this herding behavior tends to stem from specific events that solely impact that subset of assets. Given these findings, investors can construct an appropriate investment strategy composed of their choice of investment vehicles they are interested in.
... However, Fama's et al. (1969) efficient market hypothesis argues that efficient stock markets incorporate all relevant information, negating the possibility of abnormal gains. Concomitantly, recent studies suggest that stock markets do over (under)-react to significant news events (Arcuri, Gandolfi, & Russo, 2023;Boussaidi & Dridi, 2020;Kumar, Pandey, & Goodell, 2023;McMenamin, Breen, & Muñoz-Portillo, 2016). Additionally, studies on the impact of the Russia-Ukraine war provide evidence on heterogenous responses to different asset classes in different markets Costola & Lorusso, 2022;Lyócsa & Plíhal, 2022). ...
... Additionally, stocks with zero trading volume indicating frequent zero returns have also been excluded.5 Exhaustive literature support using the event study method to examine the short-term reaction of stock returns to various events(Abbassi, Boubaker, Manita, & Pandey, 2023;Goodell & Huynh, 2020;Jin, Lu, & Zhang, 2022;Kumar, Pandey, & Goodell, 2023;Li, Chen, & Dong, 2021;Mansley, Wang, Weng, & Zhang, 2023;Nerlinger & Utz, 2022;Pandey, Hassan, Kumari, & Hasan, 2023, Prabu A et al., 2016, 2024Z. Wang, Dong, & Liu, 2022;Yousaf, Riaz, & Goodell, 2023;. ...
... From the reviews, there were several indications emphasizing the changes of the human capital or human values of firms during economic crisis compared to non-crisis situations in the tourism sector and other industries [39,40]. The negative changes of human capital in the crisis period mainly came from an employee layoff [41,42], as well as a significant decline in the wages of workers [43,44]. Therefore, the findings presented above support the development of the third hypothesis (H3) of our study. ...
The tourism industry has grappled with the challenges posed by the onset of the coronavirus disease (COVID-19) since the start of 2020, experiencing a complete lockdown that profoundly affected travel activities. This viral outbreak had a critical impact on both the financial and non-financial aspects of life, including the intellectual capital (IC) of the tourism and hospitality sectors. However, there is a scarcity of studies addressing this issue within the context of tourism-related businesses. Thus, this paper aims to investigate the changes in the overall IC and its components before and during the COVID-19 pandemic, with a specific focus on understanding the transformation of IC in the tourism industry of Thailand, a country that is highly dependent on tourism. The study involved 37 tourism-related companies listed on the Stock Exchange of Thailand (SET). Organizational data from financial and annual reports published between 2019 and 2020 were collected for analysis. The assessment of value added intellectual capital (VAICTM) was employed to evaluate the performance of the overall IC and its components during the pandemic. The results, based on the testing of four hypotheses, indicated that most hypotheses were accepted, signifying a substantial transformation in the overall IC performance of tourism-related companies during the pandemic crisis. This transformation was observed in the IC components of physical and human capitals. However, the structural capital was the only IC component that did not experience a significant impact from COVID-19. To comprehend the reasons and effects of the IC transformations during the pandemic, this study delved into the relevant literature. Additionally, the paper includes implications to support firms in preparing for future challenges.
The paper investigates the effect of the first and second waves of COVID-19 on metal, mining, and its associated sectors stocks in India. Furthermore, the paper explores how the share price of the Indian metal, mining, and allied sectors is impacted and how it differs from the rest of the market. We also compare the effect of the pandemic waves on share prices related to metal, mining, and associated sectors in India during the study period, which ranges from January 2020 to December 2021. The share prices are collected from CMIE prowess for the sample firms. We use event study methodology to explore the impact of the different waves on the above-mentioned sectors. The finding exhibits that the first wave of the pandemic was more extreme in terms of the adverse price reaction than the second wave of the pandemic in the short term in the first five days. In the first wave, a more negative impact was on the Nifty50 index than the metal index. The firms in the metal and allied sectors experienced more negative price reactions than the metal index on the announcement of the lockdown event in the first wave. In the second wave, the impact was less than experienced by the firms in the first wave. We present the comparative empirical findings in daily and period-wise frequency to understand the effect of the 1st and 2nd waves of the pandemic on metal, mining, and its associated sectors in India. Our paper will contribute to the literature on extreme events and assist different stakeholders.
The transition to sustainable energy sources has become a significant global concern in recent years, driven by growing environmental awareness and the need to mitigate climate change. In the European Union (EU), this commitment to a greener future is exemplified by introducing the REPowerEU initiative. This study aims to investigate the impact of the REPowerEU program on European stock markets through an event study analysis. By analyzing the market reactions surrounding key events and announcements related to the REPowerEU initiative, we aim to provide valuable insights into the financial implications of this sustainable energy policy on stock market returns and volatility. The REPowerEU initiative has had varying impacts on European stock markets. While developed European stock markets experienced a significantly positive overall impact, emerging, EU and non-EU stock markets encountered a negative impact. The cross-sectional analysis indicates the significance of the Climate Change Performance Index in explaining cumulative returns during the post-event window. The REPowerEU initiative led to positive investor sentiment in EU nations during extended event windows. Countries with better climate change performance experienced positive abnormal returns from sustainable energy policy initiatives. Notably, greater dependence on fossil fuel imports from Russia was associated with more negative abnormal returns. These findings underscore the complexity and diversity of market reactions to sustainable energy transition initiatives and highlight the need for further research to understand the underlying factors driving these market responses.
How do stocks respond to environmental, social, and governance (ESG) regulatory interventions, and in what way do ESG reputations influence the magnitude of such responses? Through an event study approach, we investigate how establishing a mandate for "reasonable assurance" on ESG metrics affected market and firm-level returns in India. Findings reveal persistent negative post-event cumulative abnormal market returns declining to -1.20% during the [+1,+5] window. The imposition of the reasonable assurance mandate depressed the market. However, consistent with a reservoir of goodwill hypothesis, ESG scores positively shielded firm-level investor reactions, with the governance component of ESG being the most influential.
This study examines the market reaction to the 2022 Russian invasion of Ukraine on the leading European Union stock market indices employing the event study method, cross-sectional and network analysis. We find adverse event day impact on the stock market indices. Further, Poland, Denmark, and Portugal exhibit positive cumulative abnormal returns in the post-event period. A few developed nations are insignificant to the war event. The findings are attributable to the geographic proximity to the war zone and the market efficiency. While the developed markets and NATO nations exhibit positive returns, the economic sanctions and the fear of reduced exports negatively drives the abnormal returns during the post-event windows. Contrary to previous studies, stronger past returns negatively drive the returns during the post-event windows. Additional analysis on mapping of financial networks provides relevant insights into systemic integration between EU stock markets, especially during the war.
Keywords: European markets, Variables, Stock markets, Developed markets, Event study, Crises
We investigate whether the Russia-Ukraine conflict has affected energy firms’ stock prices. Based on a global sample of 1,630 energy firms, we conduct an event study around Russia's invasion on February 24, 2022. We find that cumulative average abnormal returns (CAARs) of these firms are positive around the event, i.e., energy firms outperformed the stock market. This outperformance is higher for North American firms than European and Asian ones. Our results provide evidence of energy firm outperformance in those export markets that compete with Russian suppliers of renewables, fossil fuels and uranium, following the Russian-Ukraine invasion.
In this paper we examine the impact of the breakout of the conflict between Russia and Ukraine on the G20 and other selected stock markets using the event study approach. The analysis of the abnormal returns (AR) before and after the launch of the ‘special military operation’ by Russian military forces on the 24th of February 2022 revealed a strong negative impact of this military action on a majority of the stock markets, especially on the Russian market. The aggregate stock market analysis indicates a significant and negative impact of the Russia-Ukraine conflict on the event day and post event days. The country-wise analysis demonstrated that the stock markets of Hungary, Russia, Poland, and Slovakia were first to react in anticipation of the military actions in Ukraine, showing negative returns in pre- event days already, whereas the stock markets of Australia, France, Germany, India, Italy, Japan, Romania, South Africa, Spain, and Turkey were adversely affected in the post-invasion days. Finally, the regional analysis indicates that the European and Asian regions are significantly and adversely affected by this event.
We test for the existence of volatility spillovers and co-movements among energy-focused corporations during the outbreak of the COVID-19 pandemic, inclusive of the April 2020 events where West Texas Intermediate (WTI) oil future prices became negative. Employing the spillover index approach of Diebold and Yilmaz (2012); as well as developing a DCC-FIGARCH conditional correlation framework and using estimated spillover indices built on a generalised vector autoregressive framework in which forecast-error variance decompositions are invariant to the variable ordering, we examine the sectoral transmission mechanisms of volatility shocks and contagion throughout the energy sector. Among several results, we find positive and economically meaningful spillovers from falling oil prices to both renewable energy and coal markets. However, this result is only found for the narrow portion of our sample surrounding the negative WTI event. We interpret our results being directly attributed to a sharp drop in global oil, gas and coal demand, rather than because of a sudden increase in oil supply. While investors observed the US fracking industry losing market share to coal, they also viewed renewables as more reliable mechanism to generate long-term, stable and low-cost supply.
Purpose
The study aims to fill a gap in the literature on the economic impact of industrial and international diversification on firm performance in the energy sector. Li et al. (2016) investigate firms listed in China, and this study analyzes firms listed in (Western) Europe.
Design/methodology/approach
A sample of 129 energy firms is extracted from Datastream and covers the period from January 2009 to December 2015. Univariate and multivariate regression analyses are used to determine a plausible relation of diversification on corporate performance. Also, the difference between renewable energy firms and conventional energy firms is explored.
Findings
A univariate analysis using both return on assets and Tobin's Q as a variable shows that renewable energy firms have a higher profitability than conventional energy firms. However, a multivariate analysis does not confirm this result. The authors also document a negative relation between diversification strategies and firm performance.
Research limitations/implications
The study uses main industry codes. Yet, one might make a distinction between renewable energy and conventional energy amounts with corporations. Also, the authors cover financial crisis years. Researchers might take into account more recent years.
Practical implications
The findings of the study highlight the importance of short-term and long-term considerations for practitioners related to demand, the energy mix, oil prices and firm strategies.
Originality/value
The authors contribute to the debate and the literature when identifying similarities and differences between conventional energy firms and renewable energy firms in their application of diversification strategies and their (relation to) firm performance.
We analyze the stock price effects of bulk trade in India over the period 2004–2012. Using an event study model we note significant impact of bulk trades on the share prices with cumulative returns being very high around the trades for both BSE and NSE. Buy trade has significant positive cumulative abnormal returns, indicating that buy trades on average increases firm value. Next, we regress cumulative average abnormal returns of different windows on different independent variables. The effect of all the variables considered is found to be higher in case of buy trades than the sell trades.
This paper investigates the short-term overreaction to specific events and whether stock prices are predictable in the Egyptian stock exchange (EGX). We find evidence of the short-term overreaction in the EGX. Losers (“bad news” portfolios) significantly outperform winners (“good news” portfolios) and investors can earn abnormal return by selling the winners and buying losers. Terrorist attacks have negative and significant abnormal returns for three days post event followed by price reversals on day four post event. Whereas, the tensions in the Middle East region have a negative and significant abnormal returns on event day followed by price reversals on day one post event. Moreover, the formation of a new government has no effect on the average abnormal returns post event in the EGX. The results also show that small firms tend to have greater price reversals compared to large firms. Overall, our results provide evidence of the leakage of information in the EGX.
A firm’s reputation is perhaps one of its most important strategic resources. Using data from Fortune’s America’s Most Admired Companies survey, this article examines how layoffs affect the reputations of firms. The authors found that layoffs have a negative impact on a firm’s reputation and that this relationship is significantly stronger for newer firms than older firms. Limited support is found for the hypothesis that larger firms’ reputations will be buffered from the adverse effects of a layoff on their reputations. Implications of this research and future research questions are discussed.
This paper shows that over time, expected market illiquidity positively affects ex ante stock excess return, suggesting that expected stock excess return partly represents an illiquidity premium. This complements the cross-sectional positive return–illiquidity relationship. Also, stock returns are negatively related over time to contemporaneous unexpected illiquidity. The illiquidity measure here is the average across stocks of the daily ratio of absolute stock return to dollar volume, which is easily obtained from daily stock data for long time series in most stock markets. Illiquidity affects more strongly small firm stocks, thus explaining time series variations in their premiums over time.
When a firm issues security to finance its growth, how does the market react and do investors differentiate between good and bad growth? By manually reading the intended use of proceeds of each security offering of U.S. REITs during 2000–2020, we classify whether the proceeds are used for expansionary or other purposes and analyze whether security offerings that are used to finance sub-optimal growth matter for shareholders' wealth. Adopting an event study method, we find that the expansionary use of proceeds does not affect shareholders' wealth following a debt offering announcement. However, when we distinguish good growth from bad growth, we find that debt financing used for good growth is associated with an increase in shareholders' wealth (+1.734% abnormal return in the 5-day event window) and debt financing used for bad growth is associated with a decrease in shareholders' wealth (−0.563% abnormal return in the 5-day event window). For equity offering announcements, on average, neither the expansionary use of proceeds nor the nature of growth significantly affects shareholder wealth.
We show heterogeneous impacts of two sorts of events using a sample of six events arising from the Indo-China border disputes in 2020. The NIFTY's sectoral indices reacted heterogeneously to both events. While a few sectors evidenced positive and negative abnormal returns, others were unaffected by the events. The cross-section of the abnormal returns reveals that higher risk and volatility lead to higher returns during the post-event window.
We examine the impact of the Russia-Ukraine war on the value of global currencies against the US dollar (USD) using event study methodology and market model estimates. We show that the Russia-Ukraine conflict had a negative impact on the value of the global currencies; however, a region-by-region analysis shows that while European currencies (particularly the Russian rouble, Czech koruna, and Polish zloty) depreciated against the USD, Pacific currencies appreciated significantly, and the currencies of the Middle East and Africa (ME&A) are insignificant. We also show that due to the financial and economic sanctions imposed on Russia, as well as Poland and the Czech Republic's proximity to the war zone, their currencies have weakened significantly against the USD. Furthermore, the Russian Central Bank's announcement to peg the rouble with gold, has had a significant positive impact on the pan-American, European (particularly the Russian rouble and the Polish zloty), and ME&A currencies. The analysis reveals a group of currencies that are unaffected by exogenous shocks. Incorporating these stable currencies into a portfolio would reduce the risk of volatile currencies. Future research can help gain additional insights by combining them with other major currencies such as the Chinese yuan, Japanese yen, British pound, and euro.
As a once-in-a-century global pandemic, COVID-19 severely hit the global economy and disrupted the worldwide supply chain. Based on 505 Chinese firms, we use the event study method to explore the effect of COVID-19 on the financial performance of firms. The findings show that COVID-19 has an immediate impact on Chinese firms. Hubei firms experience stronger effects than non-Hubei firms. Supply chain disruptions effects from COVID-19 are observed. Transportation industry are hit more severely than retail industry. Insurance companies experience a strong adverse effect. On the other hand, both medical and competitor firms experience significantly positive spillover effects.
The Coronavirus (COVID-19) pandemic is disrupting the world. Employing an event study, we find cross-country evidence that stock markets all significantly react to COVID-19, but with different speeds, strengths and directions. Moreover, reactions to COVID-19 also vary across quantile levels of return distributions in any given country, by using a augmented quantile auto-regression approach. US (Indian) markets generally show overreaction (underreaction), while Stock markets in Australia, Germany, Japan and UK overreact to the pandemic when quantile returns are below the median.
Purpose
The authors examine the short-term stock market reaction surrounding US layoffs during the coronavirus disease 2019 (COVID-19) period. The authors’ specific interest is on any changes that may be observed in US stock markets during the COVID-19 outbreak. This information will help us assess the extent to which policymakers adopted at time revenue and expenditures measures to minimize its negative impact.
Design/methodology/approach
The authors study the linkage between layoffs announced by firms and stock markets in US for the COVID-19 period between March 2020 and October 2020. This period shows important economic figures; a huge number of job cuts announced by blue-chip companies listed in the New York Stock Exchange (NYSE) due to widespread economic shutdowns. The authors examine whether and to what extent stock markets in US have reacted to layoff announcements during the COVID-19 pandemic using an event-study methodology.
Findings
The study’s results show that US layoffs during the pandemic did not cause any abnormalities on the stock returns, either positive or negative. Based on the mean-adjusted volume, the authors find that layoffs increase the stocks' trading volume, especially on the event date and the day following the event. US stocks become more volatile on the days following the event. Interestingly, on the event date, the authors find that stocks get the highest abnormal volatility; however, the result is statistically insignificant.
Practical implications
The authors suggest that layoffs announcements follow the business cycle quite closely in most industries. The study’s results have implications for investors, regulators and policymakers as they permit to examine the effectiveness of the measures adopted.
Social implications
The study’s results show that policymakers reduced uncertainty implementing intensive measures quickly and should follow similar policy in the future pandemic and/or unexpected events.
Originality/value
This paper contributes to the literature in two directions: First, to the best of the authors’ knowledge this is the first study that provides empirical evidence and assesses the extent to which a major global shock such as the COVID-19 pandemic may have altered the reaction of US stock markets to layoff announcements. Second, this is the first study on this topic that examines volume and volatility abnormalities, while the authors check the robustness of the findings with different methods to calculate abnormal returns.
We investigate the impact of mass layoff announcements on industry rivals and find that investors perceive layoff announcements as news about industry prospects. When a layoff announcement conveys good (bad) news for the announcer, rivals on average witness a 0.51% increase (0.65% decrease) in cumulative abnormal stock returns. To explain this industry effect, we test a “growth opportunities” channel, where rivals with greater growth opportunities are affected most by changing industry prospects, and find that these firms experience the strongest contagion effect. Alternative industry classifications and a placebo test confirm that our results are not driven by confounding factors.
With a sample of 49 stock market indices of the developed and emerging markets in the world using the standard event methodology, this paper aims to examine the impacts of the 2019-nCoV outbreak on the global stock markets. Previous studies have supported that macroeconomic news and firm-specific news do impact the stock market returns. This study provides evidence for global stock market reactions to epidemics. The study concludes that the 2019-nCoV outbreak has significantly impacted the global stock markets with the Asian stock markets being hit the hardest. Further, the study also analyzed the impacts of lockdowns/restrictions imposed by the economies to contain the 2019-nCoV outbreak. This study evidences that early lockdowns/restrictions imposed by the nations have yielded positive results in containing the spread of the novel coronavirus, thus, rebuilding the investor’s confidence and sharp reversal in the stock market returns. The statistical results establish a high and moderate negative correlation between the cumulative abnormal returns (CARs) and the cumulative cases and deaths both country-wise and that of the world indicating that the cross-country variation in the evolution of cases and fatality rates led to such stock market reactions impacting the market sentiments and anticipation for the future.
Keywords: Covid-19, emerging market, developed market, event study
COVID-19 has had significant impact on US stock market volatility. This study focuses on understanding the regime change from lower to higher volatility identified with a Markov Switching AR model. Utilizing machine learning feature selection methods, economic indicators are chosen to best explain changes in volatility. Results show that volatility is affected by specific economic indicators and is sensitive to COVID-19 news. Both negative and positive COVID-19 information is significant, though negative news is more impactful, suggesting a negativity bias. Significant increases in total and idiosyncratic risk are observed across all industries, while changes in systematic risk vary across industry.
During the ongoing COVID-19 pandemic in the US, there has been considerable media attention regarding several US legislators who traded stocks in late January through February 2020. The concern is that these legislators traded in anticipation of COVID-19 having a major impact on the financial markets, while publicly suggesting otherwise. We consider whether these legislator trades were in a time window, and of a nature, that would be consistent with trading ahead of the market. Towards this end, we assess the reactions of US industries to sudden COVID-related news announcements, concomitantly with an analysis of levels of investor attention to COVID. Results suggest that, at an industry-level, for legislator trading to be “ahead of the market” it needed to have been done prior to February 26, and involving the 15 industries we identify as having abnormal returns, especially medical and pharmaceutical products (positive); restaurants, hotels, and motels (negative); as well as services and utilities. These criteria are met by many of the legislator trades. Our results help to both parameterize concerns about this case of legislator trading; as well as provide insight into the reactions and expectations of investors toward COVID-19.
This study examines how financial contagion occurs through financial and nonfinancial firms between China and G7 countries during the COVID–19 period. The empirical results show that listed firms across these countries, financial and non-financial firms alike, experience significant increase in conditional correlations between their stock returns. However, the magnitude of increase in these correlations is considerably higher for financial firms during the COVID-19 outbreak, indicating the importance of their role in financial contagion transmission. They also show that optimal hedge ratios increase significantly in most cases, implying higher hedging costs during the COVID-19 period.
This paper highlights the enormous economic and social impact of COVID-19 with respect to articles that have either prognosticated such a large-scale event, and its economic consequences, or have assessed the impacts of other epidemics and pandemics. A consideration of possible impacts of COVID-19 on financial markets and institutions, either directly or indirectly, is briefly outlined by drawing on a variety of literatures. A consideration of the characteristics of COVID-19, along with what research suggests have been the impacts of other past events that in some ways roughly parallel COVID-19, points toward avenues of future investigation.
We study whether the behavior of stock prices, in relation to size and book-to-market-equity (BE/ME), reflects the behavior of earnings. Consistent with rational pricing, high BE/ME signals persistent poor earnings and low BE/ME signals strong earnings. Moreover, stock prices forecast the reversion of earnings growth observed after firms are ranked on size and BE/ME. Finally, there are market, size, and BE/ME factors in earnings like those in returns. The market and size factors in earnings help explain those in returns, but we find no link between BE/ME factors in earnings and returns.
A number of studies have investigated the causes and effects of stock market crashes. These studies mainly focus on the factors leading to a crash and on the volatility and co-movements of stock market indexes during and after the crash. However, how a stock market crash affects individual stocks and if stocks with different financial characteristics are affected differently in a stock market crash is an issue that has not received sufficient attention. In this paper, we study this issue by using data for eight major stock market crashes that have taken place during the December 31, 1962–December 31, 2007 period with a large sample of US firms. We use the event-study methodology and multivariate regression analysis to study the determinants of stock returns in stock market crashes.
This paper lays out a decomposition of book-to-price (B/P) that derives from the accounting for book value and that articulates precisely how B/P “absorbs” leverage. The B/P ratio can be decomposed into an enterprise book-to-price (that pertains to operations and potentially reflects operating risk) and a leverage component (that reflects financing risk). The empirical analysis shows that the enterprise book-to-price ratio is positively related to subsequent stock returns but, conditional upon the enterprise book-to-price, the leverage component of B/P is negatively associated with future stock returns. Further, both enterprise book-to-price and leverage explain returns over those associated with Fama and French nominated factors—including the book-to-price factor—albeit negatively so for leverage. The seemingly perverse finding with respect to the leverage component of B/P survives under controls for size, estimated beta, return volatility, momentum, and default risk.
This article examines the relation between stock returns and a set of operating decisions: layoffs, operation closings, and
pay cuts. We find evidence that cost-cutting measures occur after significant stock price declines. Announcements of layoffs
and temporary operation closings are associated with negative returns, while permanent operation closings do not have significant
announcement effects.
We examine the relation between layoffs and stockholders' wealth, and corporate performance subsequent to layoffs. We find that layoffs are preceded by a period of poor stock market and earnings performance, and are followed by significant improvements in both. On average, layoff announcements are associated with a significantly negative stock market response, with the lowest returns associated with layoffs attributed to declining demand. We do not find any evidence that layoff announcements are followed by reduced total employment in the subsequent 3 years; however, we find evidence of improving profit margins and improved labor productivity following layoffs. We find no evidence that the eventual turnaround in firm performance following layoff decisions is due to mean reversion in accounting earnings. Finally, we find that layoff firms tend to increase corporate focus. Our findings support the view that a layoff decision is a rational response to ensure corporate survival.
This paper examines properties of daily stock returns and how the particular characteristics of these data affect event study methodologies. Daily data generally present few difficulties for event studies. Standard procedures are typically well-specified even when special daily data characteristics are ignored. However, recognition of autocorrelation in daily excess returns and changes in their variance conditional on an event can sometimes be advantageous. In addition, tests ignoring cross-sectional dependence can be well-specified and have higher power than tests which account for potential dependence.
We examine the response of stock returns to corporate layoff announcements for the 12-year period from 1981 to 1992. The results indicate a dramatic shift in the investors' perception of initiatives to reduce the number of employees. While there were negative abnormal returns associated with the announcements during the recessionary and boom periods of the 1980s, there are positive abnormal returns associated with the announcements in the early 1990s. This evidence suggests that important structural changes in the U.S. labor market may be underway.
This paper examines properties of daily stock returns and how the particular characteristics of these data can affect event study methodologies. We find no evidence that either nonnormality in the time-series of daily excess returns or bias in OLS estimates of Market Model parameters affect the specification or power of tests for abnormal performance. However, under plausible conditions, both autocorrelation in excess returns and changes in the variance of daily returns conditional on an event can affect the tests; simple procedures to deal with these issues are sometimes quite useful. We also show that taking into account dependence in the cross-section of the daily excess returns can be harmful, resulting in tests with relatively low power and which are no better specified than those which assume independence.
Announcing a layoff decision could trigger either an increase or decrease in firm value, depending upon whether adverse market conditions or efficiency improvement are motivating it. Layoff announcements often contain information that indicates the motivation. This article finds that the layoff announcement is a useful signal for investors. There are significantly positive (negative) abnormal stock returns around the announcement date for firms that cite efficiency improvements (demand declines) as the reason for the layoffs.
Two hypotheses are considered to explain employee layoffs by corporations: (1) the declining investment opportunities hypothesis; and (2) the efficiency hypothesis. The stock market response to employee layoff announcements is estimated to be negative, which is consistent with the declining investment opportunities hypothesis as opposed to the efficiency hypothesis. Large, permanent, and unanticipated layoffs are associated with higher market reaction relative to small, temporary, and anticipated layoffs. A significant difference exists between industry type and for the stated reason of the layoff. Corporate layoffs per se increased the efficiency of the firm, as evidenced by a significant increase in return on equity and net income to employee in the post-announcement relative to the pre-announcement period. Copyright Blackwell Publishers Ltd 1998.
Lawrence R. Klein pioneered the work on aggregation, in particular in production functions, in the 1940s. He paved the way for researchers to establish the conditions under which a series of micro production functions can be aggregated so as to yield an aggregate production function. This work is fundamental in order to establish the legitimacy of theoretical (neoclassical) growth models and empirical work in this area (e.g., growth accounting exercises, econometric estimation of aggregate production functions). This is because these models depend on the assumption that the technology of an economy can be represented by an aggregate production function, i.e., that the aggregate production function exists. However, without proper aggregation one cannot interpret the properties an aggregate production function. The aggregation literature showed that the conditions under which micro production functions can be aggregated so as to yield an aggregate production function are so stringent that it is difficult to believe that actual economies can satisfy them. These results question the legitimacy of growth models and their policy implications. Scientifi c work cannot proceed as if production functions existed. For this reason, the profession should pause before continuing to do theoretical and applied work with no sound foundations and dedicate some time to studying other approaches to estimating the impact of economic policies in order to understand what questions can legitimately be posed to the empirical aggregate data. Lawrence R. Klein fue uno de los pioneros del campo de la agregaci�n, en particular en el �rea de las funciones de producci�n, durante la d�cada de los 40. Sus contribuciones ayudaron a defi nir el problema de la agregaci�n para que investigadores posteriores establecieran formalmente las condiciones formales bajo las que funciones de producci�n microecon�micas con propiedades neocl�sicas pudieran ser agregadas con el fi n de generar una funci�n
We examine a sample of 8,313 cases, between 1951 and 2001, where firms unexpectedly increase their research and development (R&D) expenditures by a significant amount. We find consistent evidence of a misreaction, as manifested in the significantly positive abnormal stock returns that our sample firms' shareholders experience following these increases. We also find consistent evidence that our sample firms experience significantly positive long-term abnormal operating performance following their R&D increases. Our findings suggest that R&D increases are beneficial investments, and that the market is slow to recognize the extent of this benefit (consistent with investor underreaction). Copyright 2004 by The American Finance Association.
The authors study whether the behavior of stock prices, in relation to size and book-to-market equity (BE/ME), reflects the behavior of earnings. Consistent with rational pricing, high BE/ME signals persistent poor earnings and low BE/ME signals strong earnings. Moreover, stock prices forecast the reversion of earnings growth observed after firms are ranked on size and BE/ME. Finally, there are market, size, and BE/ME factors in earnings like those in returns. The market and size factors in earnings help explain those in returns but the authors find no link between BE/ME factors in earnings and returns. Copyright 1995 by American Finance Association.
Financial constraints, debt capacity, and the cross-section of stock returns
- Hahn