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Troublesome Tidings? Investors’ Response to a Wells Notice

36 Pages Posted: 17 Apr 2011  

Paul A. Griffin

University of California, Davis - Graduate School of Management; University of California, Davis

Estelle Sun

Boston University - Questrom School of Business

Date Written: April 13, 2011

Abstract

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

Griffin, Paul A. and Sun, Estelle, Troublesome Tidings? Investors’ Response to a Wells Notice (April 13, 2011). Available at SSRN: https://ssrn.com/abstract=1809172 or http://dx.doi.org/10.2139/ssrn.1809172

Paul Griffin (Contact Author)

University of California, Davis - Graduate School of Management ( email )

3102 Gallahger Hall
Davis, CA 95616
United States
(530) 752-7372 (Phone)
(425) 799-4143 (Fax)

HOME PAGE: http://www.gsm.ucdavis.edu/griffin/

University of California, Davis ( email )

3102 Gallahger Hall
Davis, CA 95616
United States
(530) 752-7372 (Phone)
(425) 799-4143 (Fax)

HOME PAGE: http://www.gsm.ucdavis.edu/griffin/

Estelle Sun

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States
1-617-353-2353 (Phone)

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