Daily Stock Market Swings and Investor Reaction to Firm-Specific News

36 Pages Posted: 28 Sep 2011 Last revised: 26 Jun 2012

See all articles by Huseyin Gulen

Huseyin Gulen

Purdue University - Krannert School of Management

Byoung-Hyoun Hwang

Cornell University - Dyson School of Applied Economics and Management; Korea University - Department of Finance

Date Written: June 26, 2012

Abstract

The simple happenstance of the overall stock market being up or down for the day can explain a substantial portion of the abnormal return attached to corporate news announcements. In particular, we demonstrate that firm-specific news announcements that are typically met with a positive stock price response (e.g., announcement of a stock split, positive earnings surprise, takeover offer) are accompanied with abnormal announcement day returns that are substantially more positive when the market return on the announcement day is high than when the market return is low. The analogue applies to firm-specific news announcements that are typically met with a negative price response (e.g., announcement of a seasoned equity offering, negative earnings surprise). The difference in the initial market reaction is economically substantial, and it fully reverses within weeks of the announcement. Together, our results suggest that investors sometimes under- or overreact and that investor misreaction is tied importantly to the overall market performance on the announcement day.

Keywords: Stock Market Swings, Investor Reaction, Firm-Specific News Announcements

JEL Classification: G12, G14, G30

Suggested Citation

Gulen, Huseyin and Hwang, Byoung-Hyoun, Daily Stock Market Swings and Investor Reaction to Firm-Specific News (June 26, 2012). Available at SSRN: https://ssrn.com/abstract=1934873 or http://dx.doi.org/10.2139/ssrn.1934873

Huseyin Gulen

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

Byoung-Hyoun Hwang (Contact Author)

Cornell University - Dyson School of Applied Economics and Management ( email )

Ithaca, NY
United States

HOME PAGE: http://www.bhwang.com

Korea University - Department of Finance

Seoul, 136-701
United States

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