Daily Stock Market Swings and Investor Reaction to Firm-Specific News
36 Pages Posted: 28 Sep 2011 Last revised: 26 Jun 2012
Date Written: June 26, 2012
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: Suggested Citation