Troublesome Tidings? Investors’ Response to a Wells Notice
36 Pages Posted: 17 Apr 2011
Date Written: April 13, 2011
Scant evidence has amassed about how a Wells notice might affect stock prices. We find that prices fall significantly in the three days around a first-time Wells disclosure and, for disclosures that involve subsequent timely litigation, stock prices drop more sharply, by more than three percent. For companies that report the receipt date of a Wells notice, we observe no market reaction on that date but, rather, a negative reaction 2-4 days after receipt date, especially for disclosures made in a later 10-Q or 10-K. These results suggest that prior studies of market reaction to SEC or shareholder litigation events may have understated investors’ response. Consistent with investors’ negative response to a Wells notice, we further find a significant shift from insider buying to selling up to four weeks before disclosure, although this tracks best with stock return in the same period. From the standpoint of disclosure policy, our results imply that investors consider a Wells disclosure as a material event.
Keywords: Wells Notice, Securities and Exchange Commission, Investor Response, Disclosure Regulation, Event Study
JEL Classification: G14, K22, M41
Suggested Citation: Suggested Citation