Market Reaction to Corporate News and the Influence of

the Financial Crisis

Andreas Neuhierl∗

University of Augsburg

Anna Scherbina†

UC Davis

Bernd Schlusche‡

UC Berkeley

January 15, 2010

ABSTRACT

Having obtained a complete dataset of corporate press releases issued between April2006 and August 2009, we analyze the stock price reactions to various types of corporateevents. Besides confirming the previously-documented empirical regularities about thereaction to financial news, we also document a strong market response to news aboutcorporate strategy, customers & partners, products & services, management changes,and legal issues. In addition, we find that return volatility generally increases andliquidity decreases in the month after the announcement. Investigating separately thetime periods before and during the financial crisis, we observe that the response tocertain types of news has changed. For example, during the crisis period, news thatsignal higher and more stable future cash flows, such as announcements about corporaterestructuring, new corporate partners, successful research completion, FDA approvals,and legal settlements lead to more positive price reactions. On the other hand, eventsthat are perceived to decrease future cash flows and increase their uncertainty, suchas announcements about legal troubles, FDA rejections, and failed research effortshave a more negative effect on stock prices. Moreover, announced plans to raise fundsthrough equity or debt offerings are perceived less negatively, and announcements ofshare buybacks lead to even higher abnormal returns than in the pre-crisis period. Wealso show that during the more uncertain crisis period, news announcements tend tolead to larger volatility increases.

JEL classification: G01, G10, G14, G30.

Keywords: Corporate News, Event Study, Market Efficiency, Financial Crisis

∗Address: Department of Statistics and Mathematical Economic Theory, University of Augsburg, Universitätsstrasse 16,86159 Augsburg, Germany. E-mail: andreas.neuhierl@wiwi.uni-augsburg.de†Address: Graduate School of Management, University of California, Davis, One Shields Avenue, Davis, CA 95616. E-mail:

ascherbina@ucdavis.edu. Phone: (530) 754-8076. Fax: (530) 725-2924.‡Address: Haas School of Business, University of California, Berkeley, 2220 Piedmont Avenue, Berkeley, CA 94720. E-mail:

schlusche@haas.berkeley.edu.

Market Reaction to Corporate News and the Influence of

the Financial Crisis

ABSTRACT

Having obtained a complete dataset of corporate press releases issued between April2006 and August 2009, we analyze the stock price reactions to various types of corporateevents. Besides confirming the previously-documented empirical regularities about thereaction to financial news, we also document a strong market response to news aboutcorporate strategy, customers & partners, products & services, management changes,and legal issues. In addition, we find that return volatility generally increases andliquidity decreases in the month after the announcement. Investigating separately thetime periods before and during the financial crisis, we observe that the response tocertain types of news has changed. For example, during the crisis period, news thatsignal higher and more stable future cash flows, such as announcements about corporaterestructuring, new corporate partners, successful research completion, FDA approvals,and legal settlements lead to more positive price reactions. On the other hand, eventsthat are perceived to decrease future cash flows and increase their uncertainty, suchas announcements about legal troubles, FDA rejections, and failed research effortshave a more negative effect on stock prices. Moreover, announced plans to raise fundsthrough equity or debt offerings are perceived less negatively, and announcements ofshare buybacks lead to even higher abnormal returns than in the pre-crisis period. Wealso show that during the more uncertain crisis period, news announcements tend tolead to larger volatility increases.

I. Introduction

On January 9, 2007, Apple Inc. issued a press release, headlined “Apple Reinvents the Phone

with iPhone.” The first few sentences of the press release read:

“... today introduced iPhone, combining three products—a revolutionary mobile

phone, a widescreen iPod with touch controls, and a breakthrough Internet commu-

nications device with desktop-class email, web browsing, searching and maps—

into one small and lightweight handheld device.”

The press release also contained a quote from Apple’s CEO, Steve Jobs, stating that

“...iPhone is a revolutionary and magical product that is literally five years ahead of any

other mobile phone,” and then went on to describe in more detail the various features of the

new product. On the day of the announcement, the stock trading volume increased more

than four-fold and remained almost as high on the following day before dropping by half the

day after. The stock price also significantly increased from the day before the announcement

to five days after; precisely, Apple’s stock realized a cumulative return of 9.31% in excess of

the market. In the month after the announcement the return volatility increased by nearly

5%, while the stock’s illiquidity, as measured by the Amihud (2002) specification, decreased

by 46%.

The strong market reaction to the press release and its careful and precise phrasing illus-

trate just how important corporate news announcements are for stock prices. Corporate

press releases became highly prevalent after the SEC’s Regulation Fair Disclosure (Reg FD),

implemented in October 2000, mandated that publicly traded companies have to disclose all

information that may have an impact on the firm’s market value. The regulation stated:

“With advances in information technology, most notably the internet, information can be

communicated to shareholders directly and in real time, without the intervention of an inter-

mediary. This online revolution has created a greater demand, expectation, and need for

direct delivery of market information. As many individual commenters noted, under this

paradigm, analysts still provide value for investors by using their education, judgment, and

expertise to analyze information.”1

1The entire document can be found at http://www.sec.gov/rules/final/33-7881.htm.

1

Corporations’ press releases reach investors almost instantaneously via services such as

PR Newswire, BusinessWire, Globenewswire, Marketwire, and the like. We form our dataset

of corporate press releases between April 2006 and August 2009, which is to the best of

our knowledge the most complete among such datasets, by combining observations from all

major news wire services. For that reason, we believe that our dataset contains all press

releases that were issued in this time period. Additionally, we manually classify the press

releases into several news categories. For example, the Apple announcement above is classified

under the category Products & Services → New Product. We analyze how various types of

news coming from a firm affect its stock’s return, liquidity, and volatility. This allows us to

estimate the news-worthiness of the information released by the firm and the extent to which

this information changes the investors’ priors about the proper valuation model and how it

affects the informational advantage of better-informed investors. Moreover, we study how

the reaction to different types of news has changed during the more uncertain crisis period.

The impact of financial news has been extensively studied in the literature. We confirm

that several documented regularities exist in the most recent data. For example, announce-

ments of better-than-expected financial results are accompanied by high returns, and financial

results that fall below market expectations are accompanied by negative returns. Announce-

ments of financial decisions, such as dividend payments, share repurchases, and forward stock

splits lead to positive price reactions and announcements about secondary debt and equity

offerings by negative price reactions. News related to mergers and acquisitions also elicit a

strong and positive response.

However, we find that just as important are announcements of other corporate events.

Such announcements were not mandatory in the past and only came about as a result of

Reg FD. Hence, our study attempts to study stock price reactions to a comprehensive set

of corporate news in a systematic manner. For example, we find that stock prices react

strongly to customer losses and acquisitions. Such seemingly non-news-worthy events such as

company awards, announcements of new meetings and events, as well as news about reaching

new sales milestones are also accompanied by significantly positive returns. The underlying

reason might be a temporary or a permanent increase in investor attention (Merton (1987)).

2

The market reacts negatively to unfavorable legal news, management terminations, as well

as announcements about FDA rejections and product defects. On the other hand, news

releases about new partnerships formed, legal settlements, management additions, FDA

approvals, and achievements in research are accompanied by significantly positive excess

returns. Besides negative financial results, the news categories that have the largest effect

on post-news return volatility jumps are announcements about SEC investigations, FDA

rejections, M&A activities, and management terminations.

We further split our time series into two subsamples—before and during the financial

crisis. We assume that the financial crisis, which originated in the sub-prime mortgage crisis,

ceased to be viewed as an issue for only the sub-prime mortgage originators and turned global

on March 17, 2008. This day is the Monday following the weekend during which troubled Bear

Stearns, having lost considerable amounts of money on its hedge funds that had exposure

to the subprime mortgage market, signed a merger agreement with JP Morgan Chase. This

date splits our sample at about 23.5 months of data assigned to the before-crisis period, and

16.5 months to the period since the start of the crisis. Investigating the price reactions to

various news categories in the before-crisis period and during the crisis period, we find that,

on average, the post-event stock volatility has increased considerably more following news

announcements during the more uncertain crisis time. The post-announcement decrease in

stock liquidity has also become more pronounced.

However, the most intriguing result is that price reactions to certain types of news

announcements have changed. Since the crisis is characterized by a widespread difficulty

in obtaining credit, the announcements of secondary equity offerings are accompanied by

significantly less negative stock returns, and the returns around share buyback announce-

ments are significantly more positive. Any news potentially signaling larger and more stable

future cash flows (such as announcements of FDA approvals, research achievements, new

products, customer wins, new partnerships, and generally good financial results) lead to

higher contemporaneous returns than in the period before the crisis. On the other hand,

news that are detrimental to future cash flow expectations (such as announcements about

legal troubles, FDA investigations, and negative news about corporate credit) are accom-

3

panied by more negative price reactions. Finally, any news about corporate reorganization

or restructuring are viewed in a significantly more positive light.

This paper studies price reactions to news coming from primary news sources, i.e. corpo-

rations themselves. Another strand of literature that has recently gained momentum has

focused on the importance of news media and internet chat board postings in disseminating

new information to the market. These papers typically try to assess whether new information

has a positive or a negative content based on the presence of positive or negative words in

news stories or chat board messages and investigate whether thus quantified qualitative news

stories can predict future returns (e.g., Chan (2003), Antweiler and Frank (2004), Das and

Chen (2007) for internet message boards; Tetlock (2007), Tetlock, Saar-Tsechansky, and

Macskassy (2008) for news stories, and Engelberg (2008) for news stories that accompany

earnings announcements). Moreover, Tetlock (2009) investigates the effect of being in the

news on the stock’s order flow and the information environment, as well as return patterns.

Here, we work exclusively with information coming directly from firms themselves. Further,

besides classifying whether an announcement contains positive or negative information about

the firm, our paper is, to the best of our knowledge, the first study that hand-classifies

corporate news based on the content of the announcement and investigates what types of

corporate announcements are deemed most important by the market and are found to have

an unanticipated component to actually affect stock prices, as well as how various news

categories change stocks’ informational environment.2 We have a total of ten major news

categories and 55 subcategories, with a total of 288,716 unique press releases.

The rest of the paper proceeds as follows. Section II describes the data. Section III

explains the test methodology and shows the test results of the basic hypotheses. It also

presents additional empirical hypotheses and results for the crisis period. Section IV concludes.

2According to the rational expectations theory, mere announcements should not affect stock prices; whatmatters for stock prices is unanticipated news revealed through corporate announcements.

4

II. Data

A. Regulation Fair Disclosure and Corporate Press Releases

Regulation Fair Disclosure (Reg FD), implemented in October of 2000, requires that publicly

traded companies disclose all information that might impact their market valuation simulta-

neously to everyone. The goal of this regulation was to address the recent analyst scandal,

where firms could disclose material information to select analyst and thus force analysts to

issue favorable reports in return for valuable information. Reg FD forced firms for the first

time to disclose all information, favorable or unfavorable, all at once , via a preferred method,

and without any delay. This created the possibility to form a dataset of news that firms deem

to be important for their valuation and to study the market reaction to different types of

corporate action and news otherwise unrelated to firms’ strategies (passive news).

Prior to the adoption of Reg FD, companies issued press releases, but these press releases

did not have to contain negative news. The new SEC regulation stated explicitly that firms

had to disclose all information in order not to give anyone an advantage of insider knowledge

and to disclose the new information soon after it has become known. Though the SEC

did not specifically list the types of news that had to be reported, it stated that news

that are “material” and “nonpublic” and when “there is a substantial likelihood that a

reasonable shareholder would consider it important” are deemed important (page 9). The

SEC’s document further provides examples of these types of news that might be considered

to be of investment value. On page 10 it states:

“While it is not possible to create an exhaustive list, the following items are some

types of information or events that should be reviewed carefully to determine

whether they are material: (1) earnings information; (2) mergers, acquisitions,

tender offers, joint ventures, or changes in assets; (3) new products or discoveries,

or developments regarding customers or suppliers (e.g., the acquisition or loss of

a contract); (4) changes in control or in management; (5) change in auditors or

auditor notification that the issuer may no longer rely on an auditor’s audit report;

(6) events regarding the issuer’s securities—e.g., defaults on senior securities, calls

5

of securities for redemption, repurchase plans, stock splits or changes in dividends,

changes to the rights of security holders, public or private sales of additional

securities; and (7) bankruptcies or receiverships.”

The innovation that enabled companies to release new information to the public simul-

taneously rather than through analysts as intermediaries was the internet. The document

states: “With advances in information technology, most notable the internet, information

can be communicated to shareholders directly and in real time, without the intervention of

an intermediary” (page 3). The SEC even suggested the steps in which the information could

be released. On page 15 of the document, it suggests the following steps for releasing new

information to the public:

• First, issue a press release, distributed through regular channels, containing the

information...

• Second, provide adequate notice, by a press release and/or website posting, of

a scheduled conference call to discuss the announced results...

• Third, hold the conference call in an open manner...

B. Our Dataset

Our press release dataset comprises all corporate press releases issued by over 6,500 US

companies which are publicly traded on NASDAQ, NYSE, and AMEX over the period from

April 2006 to August 2009. The number of press announcements grows at a rate of roughly

750 releases per day.3

Corporate press releases are issued via news wire services which further distribute the

information to corporate and individual subscribers. Some of these services, such as Reuters

and Dow Jones, charge very higher fees since they include additional news items about firms

and the economy. The fees of others, such as PR Newswire, are lower. Obviously, the various

news wire datasets have considerable overlap. Our dataset is consolidated from the various

news wire services, such as PR Newswire, BusinessWire, GlobeNewswire, MarketWire, and

3Throughout the paper, we used the terms (corporate) press release, news event, and news announcementinterchangeably.

6

many others. PR Newswire contains 50%-60% of all publicly traded firms, BusinessWire

about 30%, and GlobeNewswire and MarketWire are the next in terms of coverage, and the

rest contains significantly fewer firms. We hope that the resulting dataset contains the entire

sample of corporate press releases.

Among all postings, corporate press releases can be identified by the “source” printed at

the bottom of the report. We only include those items issued by corporations rather than

news agencies.4 The items are then manually classified into various news categories based on

the content of the announcement texts. In the future, this classification can be automated

based on search words. We have obtained our dataset with the help of iMiners, Inc., and we

have worked with the company to refine the news classifications to balance the generalness

and the specificity within each category.

For the sake of brevity, we remove press releases for which we do not have any priors in

terms of what influence they would have on stock returns (for example, news releases about

a company’s participation in a charity event, establishing industry-wide awards and competi-

tions, announcing various types of meetings, webcasts, conference calls, and the participation

in environmental initiatives, making various statements regarding labor strikes, announcing

various employee and industry initiatives, changes in internal policies, announcing the partic-

ipation in various corporate surveys (such as the diversity of the labor force, security assess-

ments, etc.), announcing forthcoming speaking engagements of their executives, the partici-

pation in news campaigns, and so on). Furthermore, we discard categories with fewer than

30 observations. This leaves us with 288,716 corporate press releases divided into ten major

categories each of which, in turn, is split up into several subcategories as described in Table

I. Besides the number of news announcements in each major category, Table I gives a brief

description for each of the 55 subcategories. The categories span a wide array of categories

of significantly different size. The size of the categories ranges from large categories with

more than 50,000 announcements to very small categories with just over 500 press releases.

The largest category, Customer & Partnerships, contains 54,552 observations and includes

announcements on a company’s customers and partners, such as customer losses or customer

4An exception is the category Analyst Action that, in addition to press releases by firms, contains newsissued about the firm by firms that employ securities analysts.

7

wins. The second largest category comprises a total of 54,111 announcements and conveys

financial news, e.g., on secondary offerings or on dividend payments. The category that

provides news on a company’s products and services, such as new products, product defects,

approvals by the FDA etc., follows with 50,194 press releases. With a mere 548 observa-

tions, Analyst Action is the smallest category, and contains announcements of a company’s

upgrading or downgrading by analysts, as well as information about the initiation of analysts’

coverage of a company.

Table II presents summary statistics on the monthly press release activity across firms.

Panel A of the table reports the statistics for the entire sample and Panel B shows the

statistics by size categories; Panel A shows that the average number of corporate press

releases per firm is 1.244 per month. Panel B of the table shows that the number of press

releases increases with firm size. The left-hand side of Panel B reports the statistics for the

sample divided every month into NYSE-based size quintiles, and the right-hand side shows

the statistics of sample-based size quintiles, which are constructed every month such that each

quintile contains roughly the same number of stocks. Not surprisingly, the results indicate

that large firms, on average, issue more corporate press releases in a given month than small

firms. In particular, the average number of monthly news announcements increases with firm

size from 0.434 for the smallest NYSE-based size quintile (1.072 for the smallest sample-based

size quintile) to 3.177 for the largest NYSE-based quintile (1.528 for the largest sample-based

quintile).

All other data, i.e., time series of daily stock prices/returns, trading volumes (number

of shares traded), and the return of the CRSP value-weighted index are obtained from the

CRSP daily files. The dollar trading volume needed for the construction of the Amihud

(2002) illiquidity measure in Section B.2 is computed as the product of the daily trading

volume (number of shares traded) and the end-of-day stock price.

III. Test Results

In this section, we investigate the impact of various types of news on stock returns, volatility

and liquidity. News that the market deems most material for the stock prices but that are also

8

relatively easy to interpret will be accompanied by larger immediate price reactions. Those

news that are somewhat unusual and unique to a company will likely not lead to an immediate

price reaction, but will create a larger informational asymmetry between investors who are

better- and worse-informed about the impact of the news on the fair firm value. Finally, some

of such press releases will create the need for the additional news or the interpretation of the

impact of the original news announcements and will lead to higher future stock volatility and

more informational asymmetries until a sufficient amount of new information is released and

market participants agree on the new equilibrium valuation.

A. News’ Impact on Stock Returns

A.1. Event Study Methodology

To assess the immediate impact of news releases on stock prices, we follow the common event

study methodology. For each firm i, the abnormal return on day t, ARit, is specified as:

ARit = Rit − E(Rit|Xt), (1)

where Rit and E(Rit|Xt) are the actual and normal returns respectively for day t, and Xt is

the conditioning information for the model. Assuming that returns can be described by the

market model, the abnormal return is defined as:

ARit = Rit − α̂i − β̂iRmt, (2)

where Rit and Rmt are the day-t returns on security i and the market portfolio, which we

proxy with the CRSP value-weighted index. The coefficients α̂i and β̂i are OLS estimates

from regressions of firm i’s daily returns on the return on the market portfolio over the 200

days prior to the event window.

The event window extends from one day before to five days after the day of the press

release. As is common in event studies, we start the window one day before the actual

announcement day in case the news has leaked to the market before the actual press release.

We keep the event window relatively short because a) we are interested in the short-term

9

impact of news on stock prices and b) we want to minimize the incidence of overlapping

event windows across firms. Thus, we first compute the average daily abnormal return for

each firm i issuing a press release on day t:5

CARit =1

7

t+5∑τ=t−1

ARiτ , (3)

Next, we calculate the average CAR across all firm-announcement observations. In order

not to understate the standard errors for statistical inference, we correct for the correlation

between individual CARs estimated over overlapping event windows by clustering errors by

the week in which the press release was issued.

A.2. Event Study Results

Before turning to the actual test results, consider first the plot of individual CAR observations

for each news categroy in Figure 1. The plot shows that different types of news categories

lead to different standard deviations of CARs. Moreover, some categories result in more

negatively-shifted and some in more positively-shifted CARs. The plot of the CARs of all

categories in Figure 2 shows clearly that most press releases convey information affecting

firm valuations. Positive news lead to positive CARs, while negative news to negative

CARs. Individual plots of CARs for select news categories are presented in Figure 3. The

left-hand side of the figure shows plots for categories that include positive announcements

(introductions of a new product, FDA approvals, legal settlements, new partnerships, and

a research achievements); the right-hand side shows plots for categories containing news

with a negative impact on firms’ stock prices (product defects, FDA rejections, announce-

ments about legal troubles, such as a stockholder lawsuit, management terminations, and

secondary debt offerings). All plots show that news leak in the market prior to the official

news announcements. However, following news announcements, prices adjust and generally

stabilize at the new level without reverting back to the pre-announcement level. Table III

presents the results of the formal test for the sign of the price reaction following different

types of news announcements. The table reports the average CAR and the p-value of the

5Henceforth, for convenience we refer to the average daily abnormal return as CAR.

10

two-sided t-test. The results confirm the previously reported regularities, especially when it

comes to financial news that have been extensively studied in prior literature.

The first category, Analyst Action, is somewhat unusual in that besides the press releases

issued by the firm itself it also includes announcements that have been issued by firms that

employ securities analysts, such as Zacks. Consistent with prior literature (e.g., Barber,

Lehavy, McNichols, and Trueman (2001), McNichols and O’Brien (1997)) we find that news

of recommendation upgrades and initiation of coverage lead to positive price reactions and

downgrades cause prices to fall. Indeed, the average CAR is significantly positive and equal

to 0.174% for analyst recommendation upgrades, 0.534% for the initiation of coverage, and

significantly negative (-1.035%) for analyst downgrades.

Similarly, when firms succeed or fail in obtaining financing capital and/or rating agencies

make public positive or negative announcements about the corporate debt (in Positive Credit

News and Negative Credit News), stock prices react positively and negatively, respectively,

though insignificantly. Prior literature that studied debt ratio changes is somewhat split

in the empirical findings; some studies claim that stock prices do not react to changes in

bond ratings (e.g., Kliger and Sarig (2000)) while others find that equity prices react only to

rating downgrades (Hand, Holthausen, and Leftwich (1992) and Goh and Ederington (1993)).

Consistently with the latter findings, Dichev and Piotroski (2001) show that long-run stock

returns are negative following bond downgrades, and that this underperformance is most

pronounced for small firms with low-rated debt.

Turning to financial decisions, extensively-studied in prior literature, our results are

consistent with prior findings. In particular, corporate announcements of dividend payments

result in positive CARs (see Fama (1998) and Brealey, Myers, and Allen (2006) for a liter-

ature review). According to the asymmetric information models of Myers and Majluf (1984)

and Myers (1984), also summarized in detail in Brealey, Myers, and Allen (2006), secondary

equity offerings signal that stocks might be overpriced, and equity prices should fall upon the

announcement. This theory is confirmed by Smith (1986), among others. Similarly issuance

of additional debt may be also interpreted as a negative signal in some circumstances, and

prices would react negatively as well. For example, Akhigbe, Easterwood, and Pettit (1997)

11

show that prices react negatively to announcements of new debt issuances when the need

to raise debt is motivated by an unexpected cash shortfall. Poor negative performance for

firms that issue stocks through secondary equity offerings is documented in Loughran and

Ritter (1995). On the other hand, a share buyback signals that equity might be undervalued,

and prices should react positively (first reported by Lakonishok and Vermaelen (1990) and

Ikenberry, Lakonishok, and Vermaelen (1995)). In a more recent study, Peyer and Vermaelen

(2009) confirm the existence of the repurchase anomaly in more recent data. The price

reactions that we document are consistent with these hypotheses. Additionally, press releases

announcing forward stock splits are accompanied by positive price reactions, also consistent

with the signaling models and previously documented, for instance, by Ikenberry, Rankine,

and Stice (1996). Large positive (negative) abnormal returns around announcements about

forward (reverse) stock splits suggest that markets underreact to both forward and reverse

stock splits (e.g., Desai and Jain (1997)).6

Negative news about corporate performance (such as lower-than-expected earnings and

sales) result in negative price reactions. Lower-than-expected financial results, summarized

within the category Negative Financial Results, lead to significantly negative CARs, while

higher-than-expected earnings, reported within Positive Financial Results, lead to signif-

icantly positive CARs (see, for example, Ball and Kothari (1991), Stice (1991), Kothari

(2001), and Vega (2006) who study stock price reactions to earnings surprises).

Among the less-frequently analyzed news categories, we show that news that potentially

signal higher and more stable future cash flows, such as announcements about product

approvals, FDA drug approvals (in the U.S. and in Europe), new patents, the successful

completion of research projects, the acquisition of new customers and joint partnerships, are

accompanied by positive price reactions (see, e.g., Pakes (1985), Jaffe (1986), and Austin

(1993)). The positive market reaction to the announcement of joint partnerships has been

previously documented by McConnell and Nantell (1985) using a sample of 210 firms involved

in 136 joint ventures and Woolridge and Snow (1990) using 197 joint venture announcements.

The positive reaction to new product announcements that we document here is also consistent

6See Yildizhan (2009) for a survey on this topic.

12

with the earlier result in Woolridge and Snow (1990) who show this effect using a sample of

241 such announcements.

Not surprisingly, negative news about current or future cash flows (customer/partner

loss, FDA rejection, product defect, etc.) are accompanied by significantly negative price

reactions (see, e.g., Jarrell and Peltzman (1985), Barber and Darrough (1996), Alexander

(1999), and Fornell, Mithas, Morgeson III, and Krishnan (2006)). Interestingly, Jarrell and

Peltzman (1985) find that the penalty in terms of stock returns even exceeds the direct costs

associated with product recalls.

Spin-off announcements can be expected to be positive as they signal that corporations

refocus the attention on their core business (see Cusatis, Miles, and Woolridge (1993), Desai

and Jain (1999), and Chemmanur and Yan (2004), among others). However, examining

78 voluntary corporate spin-offs that were completed between 1972 and 1987, Seward and

Walsh (1996) do not find that spinoff announcements are accompanied by positive abnormal

returns. Yet, in our more comprehensive and more recent dataset, we document that the

market indeed reacts positively to spinoff announcements.

As for corporate infrastructure investments, a study by Woolridge and Snow (1990) shows

that the market tends to react positively to corporate investment announcements. We,

however, document no significant reaction to the announcements of neither additional capital

investment nor the scaling back or the abandonment of ongoing corporate operations (Positive

and Negative Infrastructure News categories).

Announcements of negative legal issues, such as stockholder lawsuits, are responded to

negatively and announcements of settlements positively, confirming the findings of, e.g.,

Bhagat, Brickley, and Coles (1994) and Bizjak and Coles (1995).

As for announcements of changes in the management team, management additions are

interpreted as good news, and management terminations (voluntary and involuntary combined)

are reacted to negatively. These findings contribute to previous literature on stock price

reactions following managerial turnover, such as Furtado and Rozeff (1987), Weisbach (1988),

Bonnier and Bruner (1989), and Huson, Parrino, and Starks (2001).

13

Finally, consistent with the Merton (1987) hypothesis that attention increases the investor

base and decreases the cost of capital, the types of news that put firms in the limelight, such

as announcements in the category Company Awards, as well as news on sponsorships of

industry events, and investor meetings, are accompanied by positive returns.

B. News’ Impact on the Informational Environment

Besides the impact of corporate press releases on stock returns, news could affect the stocks’

informational environment. We investigate changes in volatility and liquidity following news

announcements. (Idiosyncratic) volatility measures how prices move in response to new

information and how frequently new information is released. If valuation priors are weakened

as a result of a news announcement, there is an increased demand for new information or

for additional information clarifying the impact of the news announcement. Moreover, prices

would move more in response to new information as a greater degree of updating on the

news is taking place. Hence, news releases that decreases valuation uncertainty would lead to

volatility decreases. Announcements that increase valuation uncertainty and whose impact on

a firm’s valuation is difficult to assess would result in higher future (idiosyncratic) volatility.

Liquidity measures how much a unit of trade moves prices. When the degree of informa-

tional asymmetry is low, prices would not respond as strongly to trades, as traders are not

perceived to trade because of an informational advantage but rather for liquidity reasons.

When concerns about informational asymmetries are high, prices would move more in the

direction of the trade and their liquidity will be lower.

We employ the Amihud (2002) measure of liquidity, which produces a good approxi-

mation of liquidity that can be calculated from trade-by-trade high-frequency transaction

data. If a news announcement is hard to interpret, concerns might arise that some investors,

perhaps insiders, are better adept at processing this information, and, as a consequence, the

stock’s liquidity will decrease. If, on the other hand, new information removes the informa-

tional advantage of better-informed traders and levels the playing field, then liquidity should

increase.

14

We measure volatility and liquidity in the periods before and after news announcements

and check whether they increase or decrease as a result of the news releases.

B.1. Change in Volatility

In order to test variance changes across firms, we estimate for each news announcement

the pre-event variance and the post-event variance over 21 days.7 We then calculate for

each corporate press release the ratio of the two variances and test the null hypothesis that

the average ratio (across firms) is equal to one using a standard parametric Student t-test.

Formally, the null hypothesis is stated as

H0 : var [Rpost]− var [Rpre] = 0, or equivalently,

var [Rpost] /var [Rpre] = 1,

where [Rpre] denotes returns from periods before a news announcement and [Rpost] denotes

returns from periods after a news announcement. Following Ohlson and Penman (1985), we

use the approximation var [Rδ] = E [R2δ ] , δ = {pre, post}, and rewrite the null hypothesis as

H0 : E[R2post

]− E

[R2pre

]= 0, or equivalently,

E[R2post

]/E[R2pre

]= 1.

Not many papers have specifically studied changes in volatility following certain firm

events, which is somewhat surprising since the consequences of event-induced volatility could

be substantial for firms in several ways. Specifically, “increased volatility could alter the

firm’s investment policy going forward via an increased cost of capital or by a reduction in the

attractiveness of the firm’s equity as a medium for acquisitions or compensation. Increased

volatility also could affect the various agency relationships in the firm, exacerbating conflicts

7Throughout the paper, the tests on changes in variance are performed by using the variance of returns.As a robustness check, we have also estimated idiosyncratic volatilities and re-run the tests based on theseestimates. The results are similar and the conclusions remain the same.

15

between stockholders and bondholders and hindering resolution of stockholder-management

problems...” (Clayton, Hartzell, and Rosenberg (2005), pages 1779-1780). Among the few,

that have studied that question, Kliger and Sarig (2000) find that when Moody’s announces

better- (worse-) than-expected ratings, the volatilities implied by prices of options on the fine-

rated issuers’ shares decline (rise). Clayton, Hartzell, and Rosenberg (2005) find that CEO

departures, especially the forced ones that in the authors’ view create “higher uncertainty

over the firm’s strategic direction and management’s ability to run the firm” (page 2), lead

to significant increases in stock volatility. Besides, event-induced changes in volatility are

found for announcements of stock splits by Ohlson and Penman (1985), Dubofsky (1991),

and Koski (1998).

Table IV presents the mean of the ratio of pre- to post-event variance for each subcat-

egory. In addition, the table lists the p-values for the null hypothesis that the mean ratio

is different from one.8 Except for the category Class Action (with an insignificant decrease

in post-event volatility), volatility ratios are exceeding one for all categories, meaning that

stock return volatility increases following press releases. As indicated by p-values close to

zero, these increases in volatility are significant (at least) at the 5% level for all categories.

We observe the highest event-induced volatilities for news announcements in the categories

Negative Pre-Announcements and FDA Rejection, with increases in volatility of 80% and

62%, respectively. These types of news apparently lead to an immense uncertainty with

regard to the firms’ correct valuation and, consequently, to strong price movements following

news releases. Announcements about analyst upgrades of firms’ ratings and news about

secondary offerings are accompanied with low levels—of just about 10%—of event-induced

volatility, indicating their marginally destabilizing effect on stock prices.

B.2. Change in Liquidity

Following Amihud (2002), we employ the ratio of the absolute daily stock return to its dollar

trading volume as a measure for illiquidity.9 The ratio reflects the daily price response per

8The standard deviations of volatility changes are clustered for events within the same month.9We chose the Amihud (2002) measure as an indicator for illiquidity due to its simple data requirements

compared to those of other illiquidity measures.

16

one dollar of trading volume. Formally, we calculate the illiquidity measure, Illiq, for stock i

on day t as follows:

Illiqi,t =|Ri,t|

Volumei,t, (4)

where Ri,t is the return on stock i on day t and Volumei,t is corresponding trading volume in

dollars.

In order to test for changes in (il-)liquidity across firms, we employ a similar procedure

to that described for the increase in variance. In particular, we first calculate for each news

announcement the Amihud (2002) measure over the 21 days before and after the event.

Second, we compute for each news event the ratio of the pre- and post-event measure and

test the null hypothesis that the average ratio of pre- and post-event illiquidity (across firms)

is equal to one using a standard t-test. The null hypothesis is formalized as:

H0 : Illiqpost − Illiqpre = 0, or equivalently,

Illiqpost/Illiqpre = 1,

where Illiqpre and Illiqpost denote Amihud (2002) illiquidity measures before and after a news

announcement, respectively.

Most previous studies on liquidity changes around corporate events focus on the impact

of announcements of share buybacks (e.g., Singh, Zaman, and Krishnamurti (1994) and

Ginglinger and Hamon (2007)), secondary equity offerings on stocks’ liquidity (e.g., Kothare

(1997)), and index changes (e.g., Hegde and McDermott (2006)). Our results for changes

in the Amihud illiquidity measure after various types of corporate news announcements

are presented in Table V.10 Values of the illiquidity measure greater than one for almost

all categories indicates that news announcements generally lead to higher informational

asymmetry and, consequently, to lower liquidity, implying the informational environment

becomes more uncertain. That is, owing to the fear of better informed or more sophisticated

10The standard deviations of liquidity changes are clustered for events within the same month.

17

market participants, fewer people are willing to trade stocks after corporate press releases.

Moreover, most of the decreases in liquidity, as indicated by p-values close to zero, are signif-

icant. With drops of roughly 40%, the largest significant decreases in liquidity are found for

the categories Negative Pre-Announcements, FDA Rejection, and Reverse Split. Among the

few exceptions that do not (significantly) reduce liquidity are press releases about delisting

rumors, class action lawsuits against the firms, and approvals of drugs in Europe.

C. The Impact of the Financial Crisis

The current financial crisis has been called the worst financial crisis since the Great Depression.

The crisis has originated in the collapse of the housing bubble. The after-effects of the

bubble’s collapse and scope of its effect on the rest of the economy emerged only gradually.

In 2006-2007, the effect of the collapsing bubble was felt by home construction and real estate

lending companies, many of which reported significant losses and filed for bankruptcy. Over

time, hedge funds and investment banks with exposure to mortgage-backed securities began

reporting investment losses as well. We argue that the crisis turned global—affecting all

sectors of the U.S. economy and the international markets—after the first investment bank,

Bear Stearns, fell and had to be sold in a fire-sale to JP Morgan Chase on March 16, 2008

in order to avoid filing for bankruptcy. This major bank failure at once raised the level of

the crisis among concerns about contagion to an economy-wide phenomenon; worries about

credit supplied by hedge funds and investment banks spread to all sectors of the economy.

Some argue that the crisis really started with the collapse of Lehman Brothers, which did not

happen until September 17, 2008. It is also possible to argue that the crisis started earlier,

when major mortgage lending companied had failed. While it is impossible to pinpoint

precisely the start date of the crisis, choosing any date between the third quarter of 2007

when the effects of the collapsing real estate market started to be widely felt and the collapse

of Lehman Brothers will likely not significantly change the outcome of our analysis. Here,

we assume that the market was under the impression that the U.S. economy has entered

the crisis period on Monday, March 17, 2008, the first trading day after the fire-sale of Bear

Stearns to JP Morgan was finalized.

18

The financial crisis was characterized by a shortage of credit, falling consumer demand,

and widespread legal scandals. In this environment, it is natural to expect that certain types

of corporate news would be perceived differently by the market. For example, the news about

plans to raise additional capital would be perceived less negatively because it was believed

that additional capital was truly needed due to the freezing of credit markets. Any good news

about future cash flows would be perceived much more positively. Likewise, any negative

news about future cash flows would be perceived much more negatively due to potential

bankruptcy concerns. Figure 4 plots individual CAR observations separately for the periods

before and after the start of the economic crisis, and confirms the conjecture that the market

reaction to different types of news has changed after the start of the crisis. Besides changes in

the mean CARs, the figure shows that the crisis period is characterized by a higher dispersion

of how the market reacts to news. Figure 5 provides a graphical illustration of the differences

in the impact of news announcements on stock returns. For each subcategory, the figure

plots the mean CAR for the periods before the crisis (indicated by the dark bars) and after

the start of the crisis (indicated by the light bars). The general picture of the figure is that

the market reaction to both negative and positive press releases are stronger since the start

of the crisis; positive news are followed by more positive price reactions, while negative news

are associated with more negative price reactions.

Additionally, news releases are likely to have a larger impact on stocks’ return volatility

and liquidity, since the crisis period is characterized by a more uncertain informational

environment. Priors on the correct valuation have likely become more diffuse during the

crisis period, and, hence, new information would likely produce a significant shift in the

priors in the highly uncertain crisis period. In particular, we expect news announcements to

increase the level of informational asymmetry more since the start of the crisis—and conse-

quently reduce post-event liquidity more significantly—as well as to induce larger increases in

volatility. A quick first indicator for this conjecture is the comparison of the CAR variances

for each subcategory in both the pre-crisis and the crisis period. The plots of the CAR

variances in Figure 6 show that, with very few exceptions, the variance of the CAR in a

given subcategory is larger in the crisis period than before the start of the crisis, indicating

19

an increase in informational uncertainty and asymmetry during the crisis. Figures 7 and 8

provide a comparison of the ratios of return variances and liquidities, respectively, for both

sample periods, and confirm that post-event increases in volatility and decreases in liquidity

became larger since the start of the crisis. In the following, we formally check whether the

conjectures hold true by investigating the differences in the market response to corporate

press releases in the periods before and during the crisis.

Before turning to the actual test results for the periods before and during the crisis, it

is interesting to see to what extent the content of press releases issued by firms has changed

during the economic crisis compared to the pre-crisis period. For each period, Table VI

presents the number of news announcements in each subcategory as well as the respective

percentage fraction in the total number of press releases for a given category. (Since the time

period before the crisis is longer than that after the start of the crisis, it contains more obser-

vations of press releases.) We observe some interesting changes in the nature of corporate

announcements. While there are fewer positive news about corporate performance (e.g.,

Positive Credit News and Positive Infrastructure News), there are relatively more announce-

ments about negative performance results. For instance, the percentage share of Delisting

Rumors increases from below 1% to more than 2%, and the frequency of announcements

about firms’ difficulties in obtaining credit (Negative Credit News) almost triples. A similar

pattern is found in the category Financial ; positive financial news become less frequent,

whereas negative financial announcements become more frequent. The frequency of news

covering the launch of a new product or the introduction of a new service provided by the

company decreases by three percentage points, which is the news category that has experi-

enced the largest decline.

C.1. Test Results for the Cumulative Abnormal Returns

Turning to the actual test results on the reaction to corporate press releases for the periods

before and during the crisis, we first consider differences in the stock price response to

corporate announcements. For each subcategory, the mean of the CARs and the p-value

of the corresponding t-test for the average CAR being equal to zero for the respective sample

20

periods are provided in Table VII. Furthermore, the last column of the table presents, for

each subcategory, the result of the t-test for the null hypothesis that the mean event-CARs

for the periods before and during the crisis are equal. For the sake of brevity, we focus the

description of the results on the most conspicuous and significant findings with respect to a

change in the market reaction to news from the pre-crisis period to the period after the start of

the crisis. As mentioned earlier, we observe that for the majority of subcategories the average

CAR is larger in magnitude while having the same sign during the crisis. On the one hand,

cash-flow stabilizing or, potentially, cash-flow increasing news, such as the launch of a new

product or a new partnership, and various news within the category M&A are accompanied

with more positive price reactions during the crisis than before the crisis. Furthermore, the

market values the positive signal of share buybacks more during the crisis period, resulting in

an increase in the mean CAR from 0.350% before the crisis to 0.593% during the crisis. On

the other hand, news on downgrades of a firm’s rating as well as announcements that lead

to higher cash-flow uncertainty or, otherwise, negatively affect a company’s outlook (e.g.,

customer loss, failed research, product defect, negative legal issues) are followed by more

negative price responses. However, there are exceptions to this general tendency towards

more extreme price reactions. For instance, news on secondary equity offerings (SEOs) are

followed by less negative price reactions during the crisis period (CAR is equal to −0.045%

with an insignificant p-value) than during the pre-crisis period (CAR is equal to −0.163%

and the p-value is significant at the 1% level). It seems that the market is less concerned

about the possibility that stocks are overpriced and more sympathetic to the possibility

that firms do need capital in light of the prevailing credit crunch. Therefore, firms are no

longer penalized for issuing equity. Interestingly, for other subcategories, such as Reorga-

nization and Retirement, the direction of the market’s reaction to press releases reverses

relative to the pre-crisis period. While before the crisis restructuring efforts by the firms’

management as well as any type of managerial change or re-organization were perceived as

negative news, as indicated by negative CARs (e.g., CARs for Reorganization and Retirement

equal to −0.132% and −0.091%, respectively), the same type of news is followed by positive

price reactions during the crisis period (CARs for Reorganization and Retirement equal to

21

0.430% and 0.031%, respectively). It seems that since the beginning of the crisis the market

is more concerned about corporate governance mechanisms, in particular negative effects on

firms’ performance due to the agency problem which arises from the separation of ownership

and control (management).11 As a result, announcements regarding the improvement of

managerial structures or changes in management are perceived as good news and therefore

accompanied by positive stock price reactions.

As indicated by significant p-values in the last column of Table VII, the difference in mean

CARs for the periods before and after the start of the crisis are statistically significant in

many cases. For example, while the price reactions to FDA approvals are significant in both

periods, the reaction in the post-crisis period is significantly stronger. Similarly, while being

significantly positive for both periods before and during the crisis, announcements about

legal settlements are perceived as significantly more positive during the crisis.

C.2. Test Results for Changes in Volatility and Liquidity

This section outlines the results for differences in event-induced changes in stocks’ volatility

and liquidity. For the periods before and during the crisis, Table VIII presents, for each

subcategory, the average ratio of post-to pre-event volatility. In addition, the table includes

the p-values of the t-tests for event-induced changes in volatility for both periods before

and during the crisis, and the test results for the null hypothesis that these changes are the

same for both periods. Similarly, Table IX presents the results for event-induced changes

in liquidity. Variance ratios in Table VIII larger than one in connection with significant p-

values, for almost all categories, confirm that the post-event volatility tends to be higher for

both sub-periods. Comparing the magnitudes of these increases, we find that some events

result in larger and some in smaller increases in volatility for the two sub-periods. During the

crisis period, post-event volatility tends to be larger following news about delisting rumors,

mergers and acquisitions, and rating downgrades, among others. This implies that these

types of news lead to larger post-announcement valuation uncertainty during the crisis than

in the pre-crisis period, and, as a consequence, to larger volatility increases. On the contrary,

some types of press releases are found to create smaller increases in valuation uncertainty for

11Shleifer and Vishny (1997) provide a survey on the topic of agency problems in corporations.

22

the crisis period. Examples for such press releases are the announcements of both positive

and negative financial results and pre-announcements, as well as news on SEC investigations

and other legal troubles. These news became more common, and not surprisingly, the market

learned how to interpret such news.

The findings for event-induced changes in liquidity (Table IX) are similar to those for

changes in volatility. For both the pre-crisis period and the period after the start of the

crisis, corporate press releases, generally, lead to decreases in liquidity, indicating the higher

post-event informational asymmetry in the second sub-period. As for the magnitude of

post-event decreases in liquidity, there is no clear tendency, as is the case for event-induced

volatility.

IV. Conclusion

For this paper we have collected a comprehensive dataset of corporate press releases, which

since the SEC’s Regulation Fair Disclosure include all the corporate news that are deemed

to be material for firm valuation. Using this unique dataset on corporate events, we further

classified the news into various categories and investigated the impact of the different types of

news on stock prices and the informational environment. We also subdivided our time series

into the sub-periods before and during the financial crisis. Not surprisingly, we found that

announcements about secondary equity offerings were viewed less negatively and positive

cash flow news were perceived significantly more positively by the market. On the other

hand, among the widespread bankruptcy concerns, the market reacted significantly more

negatively to negative cash flow news and the announcements of legal troubles. In future

work, we plan to further the scope of our research by assessing the process of price discovery

using high-frequency return data and by investigating what factors influence the speed of

post-event price discovery across firms and industries.

23

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Appendix

Appendix A. Typical Press Release Headlines

Here we provide some examples of typical press release headlines within each news category.

1. Analyst Action

(i) Downgrade

Aetna Inc. (AET) 27-04-2006 15:16:14 S&P Equity Research Downgrades Shares of

Aetna to ’Hold’ (3-STARS) from ’Buy’ (4-STARS)

Biovail Corporation (BVF) 20-06-2008 12:31:00 CIBC World Markets Equity Research

Downgrades Target Price of BVF from $12.00 to a Staggering Low of $7.50 Based on

Potential Incumbent Win in Proxy Battle

(ii) Initiation

American Capital Ltd. (ACAS) 17-05-2006 11:11:26 William Blair & Company Initiates

Coverage of American Capital Strategies, Ltd. With Outperform Rating

(iii) Upgrade

Alcoa Inc. (AA) 19-10-2006 10:24:30 Alcoa’s Hungary Operations Named Most Efficient

Based on Financial Measure

Affiliated Computer Services, Inc. (ACS) 05-02-2007 08:15:00 ACS Rates ’Positive’ in

Leading Analyst Firm’s Latest MarketScope Report for HRO Services

2. Awards

(i) Company Award

Dell Inc. (DELL) 26-04-2006 12:00:05 Dell Receives Top U.S. Government Award for

Workplace Diversity Efforts

Constellation Engy (CEG) 31-03-2006 9:44:40 Baltimore Gas and Electric Company

Ranks Highest in the East Region With Business Customers According to the 2006 J.D.

Power and Associates Electric Utility Business Customer Satisfaction Study

(ii) Product Award

Oracle Corp. (ORCL) 07-06-2006 8:02:20 Oracle’s Siebel Universal Customer Master

Wins ’Gold Award’ for Master Data Management in Bloor Research Study

30

Xerox Corp. (XRX) 13-06-2006 6:00:01 Xerox Imaging and Repository Operations Earn

ISO/IEC 27001 Accreditation for Security

3. Corporate

(i) Delisting Rumors / Possibility

Circuit City Stores, Inc. (CCTYQ) 30-10-2008 16:05:00 Circuit City Stores, Inc. Receives

Notification from NYSE about Non-Compliance with a Continued Listing Standard

(ii) Difficulties

Williams-Sonoma, Inc. (WSM) 08-01-2009 06:00:03 Williams-Sonoma, Inc. Announces

a 22.6% Decrease in 2008 Holiday Revenues

(iii) Improvements

Hayes Lemmerz International, Inc. (HAYZ) 07-04-2006 8:00:30 Hayes Lemmerz Initiates

Major Restructuring to Enhance Competitive Position

(iv) IPO Filing with SEC

Stoneridge, Inc. (SRI) 23-10-2007 16:47:00 Stoneridge, Inc. Announces Brazilian Joint

Venture IPO Filing

(v) Negative Credit News

Affiliated Computer Services, Inc. (ACS) 20-03-2007 15:49:27 Fitch Places Affiliated

Computer Services on Rating Watch Negative On LBO Offer

(vi) Negative Infrastructure News

Furniture Brands International, Inc. (FBN) 05-02-2006 16:46:01 Thomasville Furniture

Industries Announces Closing of Case Goods Manufacturing Facility

Arapaho Capital Corp. (AHO) 07-06-2006 17:13:53 Ahold intends to divest 46 Tops

stores in Northeast Ohio

(vii) Positive Credit News

Gasco Energy Inc. (GSX) 30-03-2006 16:15:27 Gasco Energy Secures Revolving Line of

Credit

Autonation Inc. (AN) 03-04-2006 8:47:50 AutoNation, Inc. Receives Lender Commit-

ments for $600 Million Term Loan

31

(viii) Positive Infrastructure News

Verizon Communications Inc. (VZ) 25-04-2006 8:57:07 Verizon Wireless Expands Its

Network in Rensselaer County

Centerra Gold Inc. (CG) 29-03-2006 8:30:02 Centerra Gold Continues to Expand

Kumtor SB Zone and Adds 1 Million Ounces of Reserves at the Gatsuurt Project

4. Customers and Partnerships

(i) Customer / Partnership Loss

Anika Therapeutics, Inc. (ANIK) 03-12-2007 18:01:01 Anika Therapeutics and Galderma

Complete Termination of License, Development and Supply Agreements

America Service Group Inc. (ASGR) 21-08-2006 18:30:25 America Service Group to

Terminate Contract with Florida Department of Corrections

(ii) Customer Win

Electro Scientific Industries, Inc. (ESIO) 25-04-2006 21:22:01 ESI Receives Follow-on

Multi-System Order from Hynix Semiconductor Inc. for Its Model 9830 Semiconductor

Link Processing System; 9830 Order Furthers ESI’s Momentum in the Asia Market

The Boeing Company (BA) 25-04-2006 5:00:33 Singapore Aircraft Leasing Enterprise

Orders 10 More Boeing 737s

(iii) Milestones

Travelzoo Inc. (TZOO) 04-06-2006 8:11:01 Travelzoo(R) Publications Surpass 10 Million

Subscribers; Travel Enthusiasts Trust Internet Media Company on Where to Find the

Best Travel Offers

Cyberonics, Inc. (CYBX) 05-01-2006 16:01:44 Cyberonics Announces 1,100th Patient

Treated With VNS Therapy(tm) for Treatment-Resistant Depression (TRD) Since FDA

Approval

(iv) New Partnership

Independence Holding Company (IHC) 25-07-2006 16:21:44 Independence Holding Company

Announces New Relationship with Carolina Benefit Administrators to Market and Admin-

ister Group and Individual Major Medical

32

Dolby Laboratories, Inc. (DLB) 31-07-2006 8:00:51 Dolby Announces Deal With Infitec

GmbH to Provide 3-D Technology for Dolby Digital Cinema; New technology to Provide

High-Quality and Flexible Digital 3-D Solution

5. Financial

(i) Dividend Payments

NSC Groupe SA (NSC) 25-04-2006 9:41:49 Norfolk Southern Declares Quarterly Dividend

Holly Energy Partners, L.P. (HEP) 25-04-2006 6:45:29 Holly Energy Partners Declares

Distribution; Increases Quarterly Distribution From 0.625to0.64 Per Unit

(ii) Forward Split

Cascade Financial Corporation (CASB) 25-04-2006 20:00:10 Cascade Financial Corpo-

ration Declares 5-for-4 Stock Split

Sonic Corporation (SONC) 04-06-2006 17:00:30 Sonic Declares Three-for-Two Stock

Split

(iii) Negative Financial Results

Silicon Motion Technology Corp. (SIMO) 27-04-2006 17:00:43 Silicon Motion Technology

Corporation Announces First Quarter Results for the Period Ended March 31, 2006:

Market Conditions Contribute to Sequential Weakness but Growth Expected to Pick

Up in Q2

RPM International Inc. (RPM) 08-01-2009 07:30:00 RPM Reports Decline in Sales, Net

Income for Fiscal 2009 Second Quarter

(iv) Negative Pre-Announcement

Keynote Systems, Inc. (KEYN) 04-03-2006 7:30:02 Keynote’s Preliminary Second Quarter

2006 Revenue Below Expectations

(v) Positive Financial Results

Kennametal Inc. (KMT) 26-04-2006 7:30:39 Kennametal Reports Strong Third Quarter

(vi) Positive Pre-Announcement

OM Group, Inc. (OMG) 25-04-2006 7:01:50 OM Group Increases Outlook for 2006 First

Quarter Earnings Per Share

33

(vii) Restatement

Richardson Electronics, Ltd. (RELL) 04-04-2006 19:00:27 Richardson Electronics, Ltd.

to Restate its Financial Statements

(viii) Reverse Split

Sequenom, Inc. (SQNM) 06-02-2006 12:52:08 Sequenom Implements Reverse Stock Split

Idera Pharmaceuticals, Inc. (IDRA) 22-06-2006 9:00:12 Idera Pharmaceuticals to Effect

a Reverse Stock Split

(ix) Secondary Offering: Debt

Dean Foods Company (DF) 05-10-2006 6:30:27 Dean Foods Announces Launch of $300

Million Senior Notes Public Offering

(x) Secondary Offering: Equity

Kimco Realty Corporation (KIM) 30-03-2006 8:01:40 Kimco Announces Offering of 10

Million Shares of Common Stock

(xi) Share Buyback

Papa John’s Int’l, Inc. (PZZA) 19-04-2006 18:08:01 Papa John’s Increases Stock Repur-

chase Authorization to $575 Million

6. Legal

(i) Class Action

Pixelplus Co., Ltd. (PXPL) Shareholder Class Action Filed Against Pixelplus Co., Ltd.

by the Law Firm of Schiffrin & Barroway, LLP

(ii) Negative Legal Issues

LifePoint Hospitals, Inc. (LPNT) 17-04-2006 14:07:01 Dissident Stockholder Files Suit

against LifePoint Hospitals, Inc.

(iii) SEC Investigation

One Liberty Properties, Inc. (OLP) 21-06-2006 16:30:01 One Liberty Properties Receives

Notification of Formal Investigation from the SEC

(iv) Settlement

Freddie Mac (FRE) 18-04-2006 15:53:42 Freddie Mac Settles With Federal Election

Commission

34

7. M&A

(i) Acquisition

Plains Exploration & Production Company (PXP) 24-04-2006 7:58:41 PXP Announces

Agreement to Acquire Stone Energy and Elimination of 2007 and 2008 Crude Oil Collars

(ii) Merger

Gerdau Ameristeel Corporation (GNA) 28-04-2006 16:14:05 Sheffield Steel Announces

53% Shareholder Agreement of Merger With Gerdau

(iii) Spinoff

Level 3 Communications, Inc. (LVLT) 20-07-2006 16:19:01 Level 3 Signs Agreement to

Sell Software Spectrum Subsidiary for $287 Million

8. Management

(i) Additions

Guest-Tek Interactive Entertainment Ltd. (GTK) 25-04-2006 9:03:26 Lottery Industry

Veteran Connie Laverty Joins GTECH as Senior Vice President and Chief Marketing

Officer

(ii) Compensation

Duke Energy Corporation (DUK) 04-06-2006 16:05:31 Duke Energy Releases Details of

CEO Compensation Package

(iii) Promotions

EMCOR Group, Inc. (EME) 04-03-2006 10:32:01 Mark A. Pompa to Succeed Leicle

E. Chesser as Chief Financial Officer of EMCOR Group; Mr. Chesser to become Vice

Chairman of EMCOR Group, to retire at the end of 2006

(iv) Reorganization

PepsiAmericas, Inc. (PAS) 15-05-2006 17:01:05 airforce(R) Nutrisoda(R) Announces

New Management Team

(v) Retirement

Safeguard Scientifics, Inc. (SFE) 24-05-2006 11:37:01 Safeguard Scientifics Announces

Retirement of Directors Anthony L. Craig and Robert Ripp

35

(vi) Termination

Energy Partners, Ltd. (EPL) 19-04-2006 18:07:01 EPL Announces Departure of David

Looney as Chief Financial Officer

9. Meetings and Events

(i) Company Sponsored

Arrow Electronics, Inc. (ARW) 26-04-2006 17:16:01 Arrow Electronics Works with

Technology Suppliers to Facilitate 2006 Open Architecture Seminars

(ii) Industry Events

Aspect Medical Systems, Inc. (ASPM) 25-04-2006 9:45:01 Aspect Medical to Webcast

Presentation at Deutsche Bank 31st Annual Health Care Conference on May 2, 2006

(iii) Investor Meetings

N S Group Inc. (NSS) 16-06-2006 9:26:01 NS Group to Present at the NIRI Regional

Investor Conference in Cincinnati, Ohio; Presentation June 20th

Socket Mobile Inc. (SCKT) 27-06-2006 16:05:31 Socket Communications to Present to

Investors at the C.E. Unterberg, Towbin Emerging Growth Conference

10. Products and Services

(i) Failed Research

Bristol Myers Squibb Co. (BMY) 18-05-2006 14:00:30 Bristol-Myers Squibb Announces

Discontinuation of Development of Muraglitazar, an Investigational Oral Treatment for

Type 2 Diabetes

(ii) FDA / general Approval

General Electric Company (GE) 20-04-2006 9:00:07 U.S. FDA Approves GE Healthcare’s

Next-Generation Digital Mammography System for Improved Breast Care

(iii) FDA Investigation

Pharmacyclics, Inc. (PCYC) 05-09-2006 7:30:56 Pharmacyclics to Submit New Drug

Application for Xcytrin(R) for Treatment of Lung Cancer Patients With Brain Metas-

tases

(iv) FDA Rejection

36

Cephalon, Inc. (CEPH) 08-09-2006 17:02:18 Cephalon Receives Non-Approvable Letter

on SPARLON(TM)

(v) New Product

Nokia Corporation (NOK) 25-04-2006 5:44:57 Digitally Divine Nokia N73 - the Ultimate

Challenge to the Digital Camera

(vi) Patent Award

Assurant, Inc. (AIZ) 28-06-2006 12:50:04 Assurant Awarded Patents for Call Processing

System

(vii) Pharmaceutical Approval EU

Biogen Idec Inc. (BIIB) 29-06-2006 2:30:21 TYSABRI(R) Receives Approval in European

Union for the Treatment of Relapsing Remitting Forms of Multiple Sclerosis

(viii) Product Defect

Johnson & Johnson (JNJ) 31-03-2006 17:08:26 Ortho-Clinical Diagnostics Issues a Voluntary

Product Recall for VITROS(R) Immunodiagnostic Products Signal Reagent

(ix) Research Achievements

Somaxon Pharmaceuticals, Inc. (SOMX) 04-10-2006 6:01:04 Somaxon Pharmaceuticals

Announces Positive Phase 3 Results with SILENOR(TM) for the Treatment of Adults

with Chronic Insomnia

(x) Updates & Upgrades

Sony Corporation (SNE) 06-01-2006 13:00:28 Sony Strengthens BRAVIA Flat-Panel

LCD Line With Full HD Models and 1080p Inputs

37

−0.2 0 0.2 0.4 0.6 0.8 1 1.2

Updates & UpgradesResearch AchievementsProduct DefectPharmaceutical Approval EUPatent AwardNew ProductFDA RejectionFDA InvestigationFDA ApprovalFailed ResearchApprovalsInvestor MeetingsIndustry EventsCompany SponsoredTerminationRetirementReorganizationPromotionsCompensationAdditionsSpinoffMergerAcquisitionSettlementSEC InvestigationNegative Legal IssuesClass ActionShare BuybackSecondary Offering: EquitySecondary Offering: DebtReverse SplitRestatementPos. Pre−AnnouncementPos. Financial ResultsNeg. Pre−AnnouncementNeg. Financial ResultsForward SplitDividend PaymentsNew PartnershipMilestonesCustomer WinCustomer LossPositive Infrastructure NewsPositive Credit NewsNegative Infrastructure NewsNegative Credit NewsIPO Filing with SECImprovementsDifficultiesDelisting RumorsProduct AwardCompany AwardUpgradeInitiationDowngrade

mean abnornal return

mean abnormal return

Figure 1. Boxplot of the Cumulative Abnormal Returns. For each news category, the cumulativeabnormal returns of each news event are plotted.

38

Fig

ure

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39

New Product

FDA Approval

Settlement

New Partnership

Research Achievements

Product Defect

FDA Rejection

Negative Legal Issues

Termination

Secondary Offering: Debt

Figure 3. Plots of the Cumulative Abnormal Return for Select Categories. For select categories,which have not been covered in previous literature, the figure plots the cumulative abnormal return over theperiod from 21 days before the event to 21 after the event. Abnormal returns are computed using the marketmodel as a measure for the normal return.

40

Fig

ure

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41

Figure 5. Means of the Cumulative Abnormal Returns Before and After the Crisis. For eachnews category, the means of the cumulative abnormal returns are plotted for the period before (dark bars)and during the crisis (light bars).

42

Figure 6. Variances of the Cumulative Abnormal Returns. For each news category, the variancesof the cumulative abnormal returns are plotted for the period before (dark bars) and during the crisis (lightbars).

43

Figure 7. Variance Ratios Before and After the Crisis. For each news category, the variance ratiosare plotted for the period before (dark bars) and during the crisis (light bars).

44

Figure 8. Amihud Ratios Before and After the Crisis. For each news category, the ratios of theAmihud illiquidity measure are plotted for the period before (dark bars) and during the crisis (light bars).

45

Table I

Press Release Categories

Category Subcategory Obs. Description

1. Analyst Downgrade 77 Rating of company is downgradedAction Initiation 114 Coverage of company is initiated(548) Upgrade 357 Rating of company is upgraded

2. Awards Company Award 10,903 Company is rewarded for achievements(13,574) Product Award 2,671 Company receives award for one of its products

3. Corporate Delisting Rumors 3,916 Receipt of notice of non-compliance/potential delisting(13,773) Difficulties 283 Negative performance, e.g. decrease in sales

Improvements 1,455 Positive performance, e.g. increase in sales or revenue growthIPO Filing with SEC 218 Filing for Initial Public Offering, e.g. of subsidiary, with SECNegative Credit News 230 Financing pressure or difficultiesNegative Infrastructure News 55 Company has to close facilities or needs to exit certain marketsPositive Credit News 976