How the Equity Market Responds to Unanticipated Events*

Abstract

One of the major premises of efficient market theory is that the market quickly impounds any publicly available information, including macroeconomic information, that might be used to predict stock prices. It is only new-and especially new and unpredictable-information that moves prices, and yet many studies examine only announcements that have a predictable component. Researchers typically select a proxy for the anticipated portion of the news announcement and then test the market's reaction to the unanticipated portion of the announcement. However, the process of separating the anticipated and unanticipated portions of news announcements is critical to conclusions that can be drawn about price changes, the speed of adjustment, and trading activities. We avoid this separation problem by looking at fully unanticipated events. * We would like to thank Laura Starks and an anonymous referee for helpful suggestions, Ron Howren for computer support, Eric Schuster and Bob Hebert for gathering the sample, and Sandra Sizer Moore for editorial assistance. Ajay Patel thanks the Research Fellowship Program at Wake Forest University's Babcock Graduate School of Management for partial support of this project. Tie Su acknowledges financial support from the Research Council, University of Miami. The usual disclaimer applies.

Bidders’ strategic timing of acquisition announcements and the effects of payment method on target returns and competing bids

“…Therefore, announcement timing is important since announcements made during nontrading hours should provide more information content than those made during trading hours. Specifically, Jennings (1994), Greene and Watts (1996), Masulis and Shivakumar (2002), and Brooks et al (2003) document greater stock price reactions to announcements during nontrading hours compared with those during trading hours, implying more information content contained in the overnight announcements. However, none of the existing studies examine the timing issue of the acquisition announcements, except for Jennings (1994).…”

“…First, if news is released during the overnight period of no trading, there is additional time for news to be broadly disseminated and for investors to submit new orders or change existing orders. Second, opening procedures differ from trading procedures employed during the rest of the trading day 1990-1994 2489 quarterly earnings announcements d Nontrading-hours earnings announcements have larger price responses than trading-hours earnings announcements d The majority of the price response to nontrading-hours earnings announcements is realized during the opening trade Gennotte and Trueman (1996) Managers release their mandatory public announcements after the market close since this timing strategy gives traders more time to evaluate the impact of the disclosure N/A N/A d Management who needs more dissemination time for their announcements tends to announce after market close Cao et al (2000) Using market maker preopening quotes as price signals in the absence of firm commitments and trading on NASDAQ facilitates price discovery October 1995-September 1996 52 most active NASDAQ stocks d Nonbinding quotations of market makers do convey information for price discovery d Market makers signal their estimate of the effect of overnight news through preopening quotes so that less-informed market participants have more information to update their own expectations prior to trading Masulis and Shivakumar (2002) Because investors typically have a lot of time to assess the economic impact of news released overnight, and because of the efficiency of the opening pricing mechanism, the opening prices can more fully reflect the information content in overnight news releases 1990-1992 573 SEO announcements d There are greater stock price reactions to overnight than to daytime announcements Brooks et al (2003) The market handles overnight and daytime unanticipated information differently. First, the characteristics of the market between the opening trade and continuous trading throughout the day are different.…”

“…By investigating other corporate events (e.g., earnings, dividends, seasoned equity offerings, or other unanticipated events), some studies have documented the importance of announcement timing because of the different information dissemination processes between trading and nontrading sessions (Patell and Wolfson, 1982;Francis et al, 1992;Greene and Watts, 1996;Gennotte and Trueman, 1996;Cao et al, 2000;Masulis and Shivakumar, 2002;Brooks et al, 2003). Managers have a strategic choice to make with regard to the time of day when their announcements are released.…”

Optimal VWAP trading under noisy conditions

“…This implies that past volume information may help predict future volume spikes/lulls. Brooks et al (2003) study 21 unanticipated CEO deaths, and find that the unanticipated news/information can influence stock volume for up to an hour after the news release. Nofsinger and Prucyk (2003) find a two hour delay between an unanticipated news announcement, and a subsequent volume increase.…”

The Impact of Terrorist Bombings on the Market Values of Hospitality and Tourism Enterprises: Global Evidence From Turkey, Spain, and Indonesia

“…The first dimension is negative-positive dimension in which the event can be solely negative, solely positive, or an event that can be either positive or negative. The examples for the positive-negative dimension are: events that can be either positive or negative (dividend announcements, earnings announcements), solely positive events (introduction of a new product, capital investment announcement) and solely negative events (plane crash, plant explosion, hotel fires, and earthquakes) (Brooks, Patel, & Su, 2003).…”