Abstract
This paper focuses on how ad hoc disclosures affect German stock market efficiency. An event study based on absolute abnormal returns and regression analyses is conducted to investigate markets not only on event day, but also prior to and after the issuance of ad hoc information. Event-day reactions are found to depend on index affiliation, market uncertainty, disclosure periodicity, and the informativeness of the disclosure. Although reacting very efficiently in the post-event period, market prices are subject to adjustment several days after disclosure. The most important finding is that information related to periodic reports diffuses into the market prior to report issuance.
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Notes
The Prime Standard segment contains German market participants that follow international standards. Prime Standard membership is a key requirement for admittance to any of the four prominent indices, DAX, MDAX, SDAX and TecDAX. As the Prime Standard did not exist before January 1, 2003, the Official Market (Amtlicher Markt) is used as its closest equivalent during the period from 2000 to 2002.
In 1999, the Form 8-K Report had to be issued within 15 calendar days. In 2004, the SEC tightened the regulation to require disclosures to be issued within 4 days.
10-K and 10-Q reports deviate from 8-K filings by their periodic character. 10-K filings subsume annual reports, whereas the 10-Q form provides information on a quarterly basis. EDGAR is the electronic data-gathering, analysis, and retrieval system of the SEC, introduced in 1996.
In addition to the requirement to issue ad hoc disclosures, companies traded on the German stock market are also mandated to issue periodic financial reports. These periodic reports (e.g., annual and quarterly financial reports, preliminary earnings figures, etc.) are usually published during a fixed and foreseeable period within the respective company’s financial year. For instance, for companies whose fiscal year ends in December, the most common time for presenting the annual report is at the end of February/beginning of March in the following year. The completion of such a periodic report usually triggers the issuance of an ad hoc disclosure of the report’s most important parts and information. The report itself is then issued in much greater detail during the annual press conference a few hours or days later. In this paper, a disclosure whose issuance has been triggered by an upcoming periodic report is referred to as a “periodic” ad hoc disclosure.
The German market is open from 09:00 to 20:00; however, we exclude the last trading hour from the analysis for methodological reasons.
All ad hoc disclosures (without exception) related to periodic reports were issued prior to the corresponding report.
The entire study will follow the convention that the letter t denotes days. Days prior to the issuance of ad hoc disclosures on day \(t_{0}\) are denoted by a negative subscript number, e.g., for the day prior to publication this translates to \(t_{-1}\). Days after \(t_{0}\) are denoted by unsigned subscripts, e.g., for the day after issuance this leads to \(t_{1}\).
The entire sample of standardized mean-corrected absolute abnormal returns is used to create the Corrado (1989) test statistic. \(\mathrm{AAR}_{j,t}^{*}\) are calculated for each single day of the entire research period, i.e., from \(t_{-302}\) to \(t_{10}\). Each of the \(\mathrm{AAR}_{j,t}^{*}\) has a return rank assigned, leading to \(K_{j,t}=\mathrm{rank}[\mathrm{AAR}_{j,t}^{*}]\), where \(K_{j,t}\) is the return rank of \(\mathrm{AAR}_{j,t}^{*}\) and \(K_{j,t} \in [1,\ldots ,313]\). The rank statistic of the daily \(\mathrm{AAR}_{j,t}^{*}\), under the 313-day analysis window, follows \(T_{\mathrm{AAR}^{*}}=\frac{\frac{1}{N}\sum _{1}^{N}(K_{j,t}-156.5)}{\sigma _{K_{\mathrm{AAR}^{*}}}}\), whereas \(\sigma _{K_{\mathrm{AAR}^{*}}}=\sqrt{\frac{1}{313}\sum _{t_{-302}}^{t_{+10}}(\frac{1}{N}\sum _{1}^{N} K_{j,t}-156.5)^{2}}\). Under the \(H_{0}\), \(T_{\mathrm{AAR}^{*}}\) follows \(\sim \) \(N(0,1)\).
An earlier version of the paper applied the Wilcoxon–Mann–Whitney U statistic to test the abnormal returns for statistic significance. While the Corrado (1989) test is preferable due to allowing for a less restrictive sample selection technique, the former test design was capable of producing robust and significant results not different from those reported here.
The same periods as for the daily returns are used to derive the parameters, reducing data points by a factor of five. Assuming a stable variance–covariance matrix for the market regression, we use the same market model parameters as for the daily returns to calculate the expected returns model. For the week prior to the event Eq. (2) changes to \(\mathrm{AR}_{j,w_{-1}}=r_{j,w_{-1}}-E[r_{j,w_{-1}}|r_{M,w_{-1}}]\), where \(\mathrm{AR}_{j,w_{-1}}\) is the abnormal return in the week prior to the event in \(t_{0}\), \(r_{j,w_{-1}}\) is the realized return of security j and \(E[r_{j,w_{-1}}|r_{M,w_{-1}}]\) is the expected return in week \(w_{-1}\) according to the market model. The weekly \(\mathrm{MAAR}_{j}\)-estimation is carried out for 30 weekly returns, still corresponding to the period from \(t_{11}\) to \(t_{160}\). The weekly equivalent of Equation [4] is \(\mathrm{MAAR}_{j}=\frac{1}{30}\sum _{w_{3}}^{w_{32}}\mathrm{AAR}_{w}\), ranging from week 3 to week 32.
The \(\overline{\mathrm{AAR}_{J,t}^{*}}\) as well as \(\overline{\mathrm{AR}_{J,t}}\) and \(\overline{R_{J,t}}\) of the entire 21 days observation window from \(t_{-10}\) to \(t_{10}\) are shown in the “Appendix”.
The results are not reported.
The tests are not reported.
Tests using the Wilcoxon–Mann–Whitney U test on a smaller sample (2813 disclosures) of standardized median-corrected absolute abnormal returns statistically confirm market adjustments for \(t_{7}\)/\(t_{8}\). The results are not reported.
A possible way was to analyze subgroups of ad hoc disclosures that contain information from which it would be possible to make an ex ante assumption about the expected sign of the price effects and see whether the results are consistent with those of this paper. A robustness check applied a standard event study methodology to a much smaller sample of ad hoc disclosures announcing future dividends. The results are consistent as they show the same anticipative market reaction in \(t_{-1}\).
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Acknowledgments
We thank the anonymous referee for his/her thorough review, which significantly contributed to improving the paper. We are further indebted to a seminar at the University of Fribourg, a seminar at the University of Innsbruck, the Austrian Working Group on Banking and Finance, the Multinational Finance Conference 2013, and the 17\({\mathrm{th}}\) Conference of the Swiss Society for Financial Market Research. In addition, we thank Janette Walde, Jochen Lawrenz and Markus Schmidt for helpful suggestions. Financial support through a grant provided by the University of Innsbruck is also very gratefully acknowledged. The study received additional technical support from Focal Point Scientific Computing at the University of Innsbruck.
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Bank, M., Baumann, R.H. Market efficiency under ad hoc information: evidence from Germany. Financ Mark Portf Manag 29, 173–206 (2015). https://doi.org/10.1007/s11408-015-0250-8
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DOI: https://doi.org/10.1007/s11408-015-0250-8