Evidence from Shock Corporate Events of Equity Market Efficiency
37 Pages Posted: 25 Mar 2008
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: Suggested Citation