A sign of the growing influence of mobile communications – if from a rather leftfield source – has arrived from a team of US researchers.
‘Distracted driving’ laws, intended to reduce car accidents by limiting the use of mobile communications devices, also drive down stock prices and trading volume of firms headquartered in the affected areas, the team reports. Sampling 30 state-wide distracted-driving laws implemented from 2001 to 2011, the investigators find local stocks see volume drops of almost 10 percent in the two-day window around the effective dates. Moreover, this liquidity reduction corresponds to a fall in company value, with the mean stock experiencing a 19 basis-point negative abnormal return.
‘There appears to be significant friction when these laws go into effect that has an impact on stock prices,’ says study co-author Nerissa Brown, associate professor of accounting at the University of Delaware. ‘The effect on turnover falls off over time, but persists.’
The smartphone’s lightning-fast occupation of the human hand and mind has been so sudden that hardly any academic research exists on mobile communications’ role in capital markets. Indeed, Brown and her colleagues are the first to empirically measure mobility’s influence on information flow and price discovery. ‘We hadn’t expected to see much effect,’ she says. ‘But our results show that mobile technology matters.’
Of scapegoats and signals
Managing investor reaction in the aftermath of corporate financial wrongdoing is among the most challenging IR tests a board and management team can face. But the capital market consequences, even for the same misconduct, are inconsistent across firms. Now a team of US researchers knows why.
‘Firms can successfully manage investor reaction to misconduct by either scapegoating or signaling change,’ says study co-author Ashley Gangloff of the University of Missouri. ‘Middle-ground approaches that don’t commit one way or the other are less successful.’
Analyzing market reactions to more than 100 CEO departures following a material financial restatement, Gangloff and colleagues Brian Connelly and Christopher Shook at Auburn University find a marked link between a firm’s executive succession announcement and its ability to restore investor confidence. ‘Investors respond very positively to announcements that include the appointment of an outsider to replace the executive; that signals intent to change,’ says Gangloff.
Announcements of insider replacements also work. ‘Our findings show the investment community has no significant response [to this],’ says Gangloff. While not a complete changing of the guard, she says that ‘isolating blame to a single person communicates that the misconduct did not go beyond that one bad influence. Replacing him/her with an insider suggests the business will remain relatively unchanged.’
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