Limits of arbitrage and mispricing: evidence from mergers and acquisitions

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Qingzhong Ma ◽  
David A. Whidbee ◽  
Wei Zhang
Keyword(s):  
Abnormal Returns ◽  
Idiosyncratic Volatility ◽  
Security Level ◽  
Supporting Evidence ◽  
Firm Characteristics ◽  
Calendar Time ◽  
Content Type ◽  
Limits To Arbitrage ◽  
Study Approach ◽  
Cumulative Abnormal Returns

PurposeThis paper examines the extent to which noise demand and limits of arbitrage affect the pricing of acquirer stocks both at the announcement period and over the longer horizon.Design/methodology/approachAn event study approach was adopted to measure announcement-period cumulative abnormal returns. Long-horizon returns are measured using buy-and-hold abnormal returns (BHARs), calendar time portfolios (CTPRs), and subsequent earnings announcement period abnormal returns. Main methodologies include ordinary least squared (OLS) regressions, Logit regressions, and portfolio analysis.Findings(1) Acquirer stocks with high idiosyncratic volatility (the proxy for the security level characteristic most directly associated with limits to arbitrage) earn higher announcement-period abnormal returns. (2) The return pattern reverses over the subsequent longer horizon, resembling news-driven transitory mispricing. (3) The mispricing is greater when deal and firm characteristics exacerbate the limits of arbitrage, and it weakens over time. (4) Transactions by higher idiosyncratic volatility acquirers are more likely to fail.Originality/valueLimits of arbitrage theory have been tested mostly in information-free circumstances. The findings in this paper extend the supporting evidence for limits of arbitrage explaining mispricing beyond the boundaries of information-free circumstances.

Cryptocurrency bubble risk and the FOMC announcements during COVID-19 black swan event

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Anis Jarboui ◽  
Emna Mnif
Keyword(s):  
Federal Reserve ◽  
Abnormal Returns ◽  
Relevant Information ◽  
Future Research ◽  
Open Market ◽  
Predictive Capacity ◽  
Federal Open Market Committee ◽  
Content Type ◽  
Cumulative Abnormal Returns ◽  
Practical Implications

Purpose After the COVID-19 outbreak, the Federal Reserve has undertaken several monetary policies to alleviate the pandemic consequences on the markets. This paper aims to evaluate the effects of the Federal Reserve monetary policy on the cryptocurrency dynamics during the COVID19 pandemic. Design/methodology/approach We examine the response and feedback effects via an event study methodology. For this purpose, abnormal returns (AR) and cumulative abnormal returns (CARs) around the first FOMC (Federal Open Market Committee) announcement related to the COVID-19 pandemic for the top five cryptocurrencies are explored. We, further investigate the effect of the eight FOMC statement announcements during the COVID19 pandemic on these cryptocurrencies (Bitcoin, Ethereum, Tether, Litecoin, and Ripple). In the above-mentioned crypto-currency markets, we investigate the presence of bubbles by using the PSY test. We then examine the concordance of the dates of these bubbles with the dates of the FOMC announcements. Findings The empirical results show that the first FOMC event has a negative significant effect after 4 days of the announcement date for all studied cryptocurrencies except Tether. The results also indicate that cumulative abnormal returns are significant during the event windows of (−3,8), (−3,9), and (−3,10). Besides, we find that Bitcoin, Ethereum and, Litecoin lived short bubbles lasting for a few days. However, Ripple and Tether markets present no bubbles and no explosive periods. Research limitations/implications This paper presents trained proof that FOMC announcements have a positive effect on volatility's predictive capacity. This work therefore promotes the study of the data quality of volatility in future research as well. Practical implications The justified effect of the FOMC announcements on cryptocurrency as a speculative asset has practical implications for investors in building their trading strategies in anticipation of the next FOMC announcement. Therefore, this study implies that the FOMC announcements contain very relevant information for investors in the cryptocurrency market. This research may not only encourage a better understanding of the evolution of the expectations of policymakers, but also facilitate a better understanding of how these expectations are developed. Originality/value The COVID-19 pandemic has disturbed the stability of financial markets, inciting the Fed to take some monetary regulations. To the best of our knowledge, this study is the first one that analyses the response of five major cryptocurrencies to FOMC announcements during COVID 19 pandemic and associates these dates with bubble occurrences.

The impact of qualified audit opinion on stock returns: an empirical study at Amman stock exchange

2022 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Rana Bayo Flees ◽  
Sulaiman Mouselli
Keyword(s):  
Stock Returns ◽  
Stock Exchange ◽  
Abnormal Returns ◽  
Market Model ◽  
Content Type ◽  
Going Concern ◽  
Study Approach ◽  
Audit Opinions ◽  
The Impact ◽  
First Time

Purpose This paper aims to investigate the impact of qualified audit opinions on the returns of stocks listed at Amman Stock Exchange (ASE) after the introduction of the recent amendments by the International Auditing and Assurance Standard Board (IAASB) on audits reporting and conclusions. It further investigates if results differ between first time qualified and sequenced qualifications, and between plain qualified opinion and qualifications with going concern. Design/methodology/approach Audit opinions’ announcements and stock returns data are collected from companies’ annual reports for the fiscal years 2016 to 2019 while stock returns are computed from stock closing prices published at ASE website. The authors apply the event study approach and use the market model to calculate normal returns. Cumulative abnormal returns (CARs) and average abnormal returns (AARs) are computed for all qualified audit opinions’ announcements. Findings The empirical evidence suggests that investors at ASE do not react to qualified audit opinions announcements. That is, the authors find an insignificant impact of qualified audit opinion announcements on stock returns using both CAR and AAR estimates. The results are robust to first time and sequenced qualifications, and for qualifications with going concern. Results are also robust to the use of risk adjusted market model. Research limitations/implications The insignificant impact of qualified audit opinions on stock returns have two potential conflicting research implications. First, the new amendments introduced to auditors’ report made them more informative and reduce the negative signals contained in the qualified opinions. That is, investors are now aware of the real causes of qualifications and not overreacting to the qualified opinion. Second, the documented insignificant impact confirms that ASE is not a semi-strong form efficient. Practical implications The apparent excessive use of qualifications should ring the bell on whether auditors misuse their power or companies are really in trouble. Hence, the Jordanian regulatory bodies need to warn auditors against the excessive use of qualifications on the one hand, and to raise the awareness of investors on the implications of auditors’ opinions on the other hand. Originality/value This study is innovative in twofold. First, it explores the impact of qualified audit opinions on stock returns after the introduction of new amendments by IAASB at ASE. In addition, it uses event study approach and distinguishes between first time qualified and sequenced qualifications, and between plain qualified opinion and qualifications with going concern. The results are consistent with efficient market theory and behavioral finance explanations.

Thanks, neighbor! Stock market experience around significant European tax cuts

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Huabing Wang ◽  
Anne Macy
Keyword(s):  
Stock Market ◽  
Spillover Effect ◽  
Abnormal Returns ◽  
The Other ◽  
Stock Index ◽  
Corporate Tax ◽  
Cross Sectional ◽  
Content Type ◽  
Study Approach ◽  
Tax Cuts

PurposeThis paper analyzes the effect of corporate tax cuts on the competitiveness of the tax-cutting countries and neighbor countries.Design/methodology/approachThis study utilizes four significant corporate tax reforms among the OECD countries in Europe that offer a one-time tax cut of 6% or more. The short-term event study approach examines the stock index reactions for both the tax-cutting countries and the other countries. Multivariate fixed-effect regressions are employed to study the cross-sectional variations in the non-tax-cut countries.FindingsThis paper finds positive excess returns for Slovakia and Germany around the tax-cut passage. Multivariate analysis of stock market reactions of the non-tax-cutting countries reveals some evidence supporting both the positive spillover effect and the negative competitive loss effect. More advanced countries are more likely to experience higher abnormal returns, while higher tax countries are more likely to suffer lower abnormal returns. Other factors identified that might have influenced the effect of a foreign tax cut include the existing trade flows with the tax-cutting countries, whether the country has a common currency and the export orientation of the economy.Research limitations/implicationsThe findings are subject to sample-size issues. The lack of results for the other two countries is due to complicating events, as suggested by the further investigation of concurrent news events around the event days.Practical implicationsThe simultaneous analysis of the reform countries and the other countries in the region suggests that policymakers need to consider the relative positioning of their country vs the other countries in terms of economic development and current tax burdens when determining the optimal policy for their country or to respond to the tax policy changes in the other countries.Originality/valueThis study offers empirical evidence regarding the effect of corporate tax changes on competitiveness through the lens of stock markets' reactions, which depend on the net results of the spillover gain vs the competitive loss.

New CEOs’ previous experience and acquisition performance

2019 ◽  
Vol 27 (3) ◽  
pp. 745-758 ◽  
Author(s):  
Heejin Woo
Keyword(s):  
Abnormal Returns ◽  
Competitive Advantages ◽  
Upper Echelon ◽  
Acquisition Performance ◽  
Content Type ◽  
Corporate Strategies ◽  
Cumulative Abnormal Returns ◽  
The Us ◽  
Event Study Method ◽  
Industry Experience

Purpose This study aims to investigate how new CEOs’ previous experiences in other organizations and other industries create value in acquisitions. Drawing on the upper echelon perspective, this study theorizes that the multiorganizational experience of new CEOs is positively associated with acquisition performance and, in particular, that the multi-industry experience of new CEOs leads to better performance in diversifying acquisitions than in related acquisitions. While new CEOs without multiorganizational experience undergo a cognitive entrenchment in firm-specific experience, new CEOs with multiorganizational experience can lead acquisitions with more flexibility and agility. Design/methodology/approach Acquisition and organizational data were drawn from the US manufacturing industries (SIC 20-39) between 2008 and 2010. The event study method was used to test hypotheses. In 346 acquisitions made by 139 firms, acquisition performance was measured according to cumulative abnormal returns. Findings Consistent with the hypotheses, the multiorganizational experience of new CEOs was positively associated with acquisition performance and, in particular, the multi-industry experience of new CEOs led to better performance in diversifying acquisitions than in related acquisitions. Originality/value This paper contributes to the CEO literature and acquisition literature by suggesting that the multiorganizational experience of new CEOs can be a valuable source of competitive advantages, particularly when implementing corporate strategies involving interorganizational integration processes.

Currency returns during democratic transition: evidence from Tunisia

2019 ◽  
Vol 45 (7) ◽  
pp. 966-979
Author(s):  
Ghadi Saad ◽  
Taoufik Bouraoui
Keyword(s):  
Design Methodology ◽  
Democratic Transition ◽  
Abnormal Returns ◽  
Market Model ◽  
Study Analysis ◽  
Content Type ◽  
Policy Effects ◽  
Cumulative Abnormal Returns ◽  
New Evidence ◽  
The International Monetary Fund

Purpose The purpose of this paper is to investigate the question whether democratic transition elections influence currency returns. Also, the paper examines the behavior of the currency market around these elections in Tunisia. Design/methodology/approach Empirical data are collected from the International Monetary Fund, the Central Bank of Tunisia and the Tunisian stock market websites. The paper employs event study analysis using a market model and investigates abnormal currency returns around the four election events that occurred during the period of democratic transition in Tunisia (2011–2015). A robustness test is also conducted to control for monetary policy effects. Findings The results indicate that democratic transition does impact currency returns. The authors did not find any significant effect on the events dates (t0). However, event windows around the elections days reacted significantly to the events. The authors notice a significant decrease in cumulative abnormal returns (CARs) at event periods leading up to the elections. Post-event windows perceived negative CARs in the first and second election, and positive CARs in the last two elections. The authors also find that the change in the victors of the elections does not cause major differences to CARs. Further, the authors do not find significant results when controlling for inflation and interest rate. Originality/value There is no evidence yet on how democratic transition elections can affect currency returns. Given that currency is a leading indicator of the performance of the financial sector, this paper should provide policymakers with new evidence on the response of currency returns to democratic transition.

scholarly journals Daily abnormal price changes and trading strategies in the FOREX

2020 ◽  
Vol 48 (1) ◽  
pp. 211-222
Author(s):  
Guglielmo Maria Caporale ◽  
Alex Plastun
Keyword(s):  
Design Methodology ◽  
Abnormal Returns ◽  
Trading Strategies ◽  
Price Changes ◽  
Content Type ◽  
Cumulative Abnormal Returns ◽  
Market Inefficiency ◽  
Intraday Data ◽  
Abnormal Profits ◽  
New Evidence

PurposeThis paper explores abnormal price changes in the FOREX by using both daily and intraday data on the EURUSD, USDJPY, USDCAD, AUDUSD and EURJPY exchange rates over the period 01.01.2008–31.12.2018.Design/methodology/approachIt applies a dynamic trigger approach to detect abnormal price changes and then various statistical methods, including cumulative abnormal returns analysis, to test the following hypotheses: the intraday behaviour of hourly returns on overreaction days is different from that on normal days (H1), there are detectable patterns in intraday price dynamics on days with abnormal price changes (H2) and on the following days (H3).FindingsThe results suggest that there are statistically significant differences between intraday dynamics on days with abnormal price changes and normal days respectively; also, prices tend to change in the direction of the abnormal change during that day, but move in the opposite direction on the following day. Finally, there exist trading strategies that generate abnormal profits by exploiting the detected anomalies, which can be seen as evidence of market inefficiency.Originality/valueNew evidence on abnormal price changes and related trading strategies in the FOREX.

scholarly journals A critical evaluation of event study approach using M&A events in the Indian banking industry

2016 ◽  
Vol 13 (3) ◽  
pp. 266-272
Author(s):  
Ullas Rao
Keyword(s):  
Event Study ◽  
Critical Evaluation ◽  
Abnormal Returns ◽  
Wealth Effects ◽  
Wealth Status ◽  
Inherent Limitation ◽  
Study Approach ◽  
Cumulative Abnormal Returns ◽  
Study Methodology ◽  
Event Study Methodology

The present study seeks to critically evaluate the most extensively employed technique – event study methodology, employed to capture the returns generated from M&A events on the wealth status of shareholders. Notwithstanding the popularity of the technique, authors in this paper argue that conceptual bases on which the methodology is founded is flawed. In the light of the extensive limitations attributable to event study methodology, there exists an urgent need to suggest improvement in the conceptual framework of the traditional method capable of lending application to capture the wealth effects of M&A events. The authors believe that application of such a modified approach will be much more salvageable as the results derived therefrom will command greater credibility as well as reliability. In order to highlight the inherent limitation of the event study approach, the authors have used the sample of Indian Banking M&A events retrieved from the M&A data available at etintelligence.com . Given the conceptual flaws of the event study approach, the authors argue that researchers must exercise great caution while commenting on the t-statistic observed for CAR (Cumulative Abnormal Returns) values as the statistical insignificance could be arising more out of the conceptual deficiency of the event study approach than pointing towards the neutral impact of an M&A event on the wealth status of the shareholders.

The long-run performance of SME IPOs in India: empirical evidence from Indian stock market

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Nischay Arora ◽  
Balwinder Singh
Keyword(s):  
Initial Public Offerings ◽  
Small And Medium Enterprises ◽  
Abnormal Returns ◽  
Least Square ◽  
Calendar Time ◽  
Content Type ◽  
Event Time ◽  
Long Run ◽  
Ordinary Least Square Regression ◽  
Medium Enterprises

Purpose The purpose of this paper is to study the pattern of long-run performance of small and medium enterprises (SMEs) initial public offerings (IPOs) and examine the firm- and issue-related determinants of long-run performance of SME IPOs in India. Design/methodology/approach The 3 6, 9 and 12 months share returns of Indian SME IPOs is studied using event time methodologies, i.e. buy and hold returns, cumulative abnormal returns and wealth relatives on a sample of 375 SME IPOs issued during February 2012 to May 2018. Additionally, ordinary least square regression has been used to investigate the determinants of long-run performance of SME IPOs on a reduced sample of 104 because of non-availability of price observations. Findings The findings reveal that Indian SME IPOs exhibit long-run overperformance contradicting the international evidences of underperformance, and this overperformance is significantly evident using buy and hold abnormal return (BHAR). Furthermore, based on the divergence of opinion hypothesis, fads theory and windows of opportunity hypothesis, the results reveal that on one hand, issue size and oversubscription negatively affect BHAR, while on the other hand, auditor reputation, underwriter reputation, hot market, underpricing, inverse of issue price, profits prior to listing positively affect long-run performance. However, firm age, firm size, debt equity ratio, volatility and long-run performance computed through BHAR lacks significant relationship. Research limitations/implications The study relied on event time methodology of measuring aftermarket performance of one year because of the limited availability of price offerings. Hence, the study could be extended to analyze aftermarket returns over a period of three to five years to enable reaching the vivid conclusions. Calendar time methodology may also be used to compute abnormal returns. Practical implications The results based on the study provides an implication to the investors by providing them an opportunity to bank higher long-run returns by engaging in active and timely trading strategies. Nevertheless, the results also show that investors should be cautioned while taking investment decisions. Originality/value The study contributes to rising body of international literature by analyzing the larger and recent sample of IPOs issued from 2012 to 2018 listed on SME exchange.

Asymmetric information and opportunism in insider share-pledging

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Michael R. Puleo ◽  
Steven E. Kozlowski
Keyword(s):  
Private Information ◽  
Abnormal Returns ◽  
Risk Assessments ◽  
Corporate Policies ◽  
Market Reactions ◽  
Content Type ◽  
Hurdle Models ◽  
Cumulative Abnormal Returns ◽  
Earnings Surprises ◽  
The Us

PurposeAmid growing attention from investors, regulators and advisory firms in recent years, this study assesses whether managers exploit private information to time share-pledge transactions and extract personal benefits while avoiding unintended market scrutiny.Design/methodology/approachWe use hand-collected pledging data for a random sample of S&P 1500 firms to examine whether private information influences insider share-pledging activity using Heckman selection and two-part hurdle models of the pledge decision. We also conduct an event study analysis of announcement returns to measure market reactions to pledging news and determine whether share-pledge disclosures affect investor risk assessments.FindingsConsistent with insiders timing pledges prior to anticipated performance declines, both the likelihood and level of pledging increase significantly with negative earnings surprises. New share-pledges precede significant decreases in abnormal returns, and public announcement of new pledging corresponds with significant negative cumulative abnormal returns. The evidence suggests that insiders exploit private information to time pledges, and that investors update risk assessments and value estimates based on information conveyed by these transactions.Practical implicationsOur findings hold important implications for governance and regulation of pledged shares, indicating that permissive reporting requirements in the US facilitate informed pledging and may undermine incentive alignment between managers and shareholders. The analysis promotes transaction-specific disclosures and transparent corporate policies for insider share-pledging.Originality/valueOurs is among the first empirical analyses of share-pledging in US firms and the first to examine the role of private information in pledging decisions. We offer novel evidence on the opportunistic use of pledged shares and provide insight to predictors of share-pledging behavior.

Price and volume effects around Islamic index revisions: the case of DJIM-GCC

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Chiraz Labidi ◽  
Dorra Laribi ◽  
Loredana Ureche-Rangau
Keyword(s):  
Trading Volume ◽  
Islamic Law ◽  
Market Reaction ◽  
Abnormal Returns ◽  
Content Type ◽  
Cumulative Abnormal Returns ◽  
Volume Response ◽  
Study Methodology ◽  
Compliance Certification ◽  
Volume Effects

PurposeThis study explores the price and trading volume effects around the quarterly Dow Jones Islamic Market-GCC index (DJIM-GCC) revisions and investigates whether these reactions are driven by firms' fundamentals or by investors' perception of ethical screening.Design/methodology/approachThe authors adopt an event study methodology to analyze the price and volume effects of Islamic indices redefinitions.FindingsThe results exhibit a positive (negative) price reaction for added (deleted) stocks. The authors also document an asymmetric volume response for index additions and deletions. The multivariate analysis of the cumulative abnormal returns reveals that the documented market reaction around Islamic index revisions is mainly related to the compliance attribution (withdrawal).Originality/valueThe approach allows to separate the market reaction arising from changes in firms' fundamentals from that induced by investors' perception of the attribution or withdrawal of a compliance certification. Moreover, the focus on the GCC region, where countries share the same cultural traits and perceive Islamic law identically excludes any social effect that would influence the market reaction due to cultural differences between countries.

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