The efficient markets theory suggests that, all else being equal, the stock market effect of two concurrently issued corporate press releases should equal the sum of the announcements issued separately. But a new study of more than 80,000 US announcements shows that, in certain circumstances, one plus one is greater than two when it comes to company value.
‘Issuing a new product release on the same day as another positive announcement has more punch than two stand-alone announcements,’ says study co-author Alina Sorescu, professor of marketing at Texas A&M University. ‘We find abnormal returns are about 0.4 percent higher than the sum of what returns would have been had they been made separately.’
The reason, according to Sorescu, can be found in Robert Merton’s model of capital market equilibrium with incomplete information. ‘Basically, concurrent releases increase the likelihood their content will stand out and be noticed by investors,’ says Sorescu, adding that US firms issue dual good news announcements about 7 percent of the time. ‘The reason it doesn’t happen more often is because firms don’t have an infinite supply of good news.’
This synergy is most potent for firms with high values, low investor recognition and high idiosyncratic volatility. Indeed, the researchers find these sorts of companies are those most likely to leverage concurrent ‘Perhaps they made the link to the Merton model,’ says Sorescu. ‘But we have no evidence they know what they are doing. It could be pure chance.’
For Merton, the more familiar a company stock is to investors, the better. But new research suggests a potential checkpoint to seeking the limelight. ‘Using social media like Twitter to attract attention can help boost market valuation and lower a firm’s cost of capital,’ says study co-author Pegaret Pichler, assistant professor of finance at Northeastern University. ‘But any benefits depend on a company’s reputation for social responsibility.’
Analyzing corporate Twitter activity, the researchers find firms with positive ESG ratings experience an average 6 percentage point increase in market-to-book values – a growth unrelated to changes in firms’ growth options or market or industry changes. ‘We don’t find [Twitter use] hurts those with a negative reputation,’ says Pichler. ‘But it doesn’t help them, either.’
The investigators uncover evidence that institutional ownership decreases following the onset of tweeting – about -1.2 percent for those with positive ratings and -2.4 percent for those with negative ratings. ‘For negatively perceived firms, the decrease is concentrated in socially sensitive institutions such as pension funds and universities,’ says Pichler. ‘But that institutional divestment is balanced by increased retail demand. Still, if too many negatively perceived firms begin tweeting, that sort of attention-seeking could actually become detrimental.’
World o’ research
– US researchers report that the size of a CFO’s signature predicts financial reporting quality. Study results show the bigger the signature, the more likely are restatements, weaker internal control quality and less timely loss recognition.
– IPO communications should emphasize company strategy while company product information should be considered with caution. Dutch researchers studying German IPOs say the risk of media negativity on the IPO date increases when business journalists are fed product data.
– Finnish investigators find information posted on a company’s Facebook wall affects retail investor trading behavior but is ignored by investors such as financial institutions.
– The more often institutional investors attend corporate site visits, the more likely the host firm’s stock price is to crash. The authors of a study published in the International Review of Economics & Finance say their findings are consistent with the notion that site visits magnify managers’ incentives to withhold bad news, which leads to bad news accumulation and future stock price crash risk.
– Firms attending investor conferences gain a 1.4 percent-2.8 percent boost in stock liquidity compared with non-attendee firms, say US researchers. Those with low pre-conference visibility see the biggest bump. On the other hand, for companies with a large investor base and high visibility, conference participation can actually lead to a drop in stock liquidity resulting from heightened information asymmetry among investors.
This article originally appeared in the winter 2017 issue of IR Magazine
