Evidence from Shock Corporate Events of Equity Market Efficiency

37 Pages Posted: 25 Mar 2008

See all articles by Les Coleman

Les Coleman

University of Melbourne - Department of Finance; Financial Research Network (FIRN)

Date Written: 17 March 2008

Abstract

The study uses a unique hand-collected database of totally unexpected corporate events (N=78), which comprise fatal industrial disasters, crashes of scheduled aircraft and sudden CEO deaths that affected US listed companies (N=84) in the decade to 2006. It identifies the times of the events and their media announcements, and separately analyzes each using daily closes and intraday data. The motivation is to understand the pathways along which new information is transmitted to markets, the role of the media in dissemination of price sensitive information, and the extent of insider trading around shock events.

Conventional event study methodology shows markets respond by the close of the trading day of the event, with most price adjustment completed within another day. Initial responses are state dependent, as price changes on the trading day following an event have a positive relationship to prior returns; price moves on the next trading day are largely explained by the prior day's change.

The more granular tick data show that markets take an hour or more to begin to respond to events that occur during the trading day. Because the first media announcements come about 13 hours after the event, markets anticipate them with substantial price falls and widening spreads at least four hours before the announcement. Somewhat counter-intuitively, media reports of the shock events stabilize markets within about two hours.

These results add to knowledge about market reaction to unexpected events and the dynamics of market efficiency that should inform design of future studies around corporate events.

Keywords: market efficiency, event studies, forensic finance, illegal insider trading

JEL Classification: G14

Suggested Citation

Coleman, Les, Evidence from Shock Corporate Events of Equity Market Efficiency (17 March 2008). Available at SSRN: https://ssrn.com/abstract=1107209 or http://dx.doi.org/10.2139/ssrn.1107209

Les Coleman (Contact Author)

University of Melbourne - Department of Finance ( email )

Faculty of Business & Economics
Parkville, Victoria 3010 3010
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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