Stock price reactivity to earnings announcements: the role of the Cammer/Krogman factors
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Stock price reactivity to earnings announcements: the role of the Cammer/Krogman factors O. Miguel Villanueva1,2 · Steven Feinstein2,3 Accepted: 1 October 2020 © Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract The stock characteristics often used in securities litigation to assess market efficiency are dispositive indicators of reactivity to earnings announcements. Stocks with large capitalization, high trading volume, broad analyst coverage, a large number of market makers, and narrow bid-ask spread are far more likely to react significantly to earnings announcements than stocks without these characteristics. Univariate and multivariate tests compel this conclusion, but provide weaker evidence for analyst coverage. Keywords Earnings announcements · Cammer/Krogman factors · Securities litigation · Logit regression · Stock price reactivity · Market efficiency JEL Classification G14 · G18 · K22
1 Introduction and scope The principle of market efficiency is of interest far beyond the arenas of finance academics who ask if only company fundamentals impact stock prices, and investment professionals and their clients who ask if the benefits of active management are worth the costs. Courts and lawyers are interested too. Market efficiency plays a pivotal role in class action securities litigation. A typical class action securities case is one in which a company has allegedly made misrepresentations or omissions that artificially inflated the company’s stock price. When the truth emerges, the stock price falls and investors suffer losses. To prevail in litigation and recoup damages under U.S. securities laws, plaintiffs must establish that the subject security consistently reacts to new information, because that form of market
* O. Miguel Villanueva [email protected]; [email protected]
Steven Feinstein [email protected]; [email protected]
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Boston University – MET, 1010 Commonwealth Ave., Boston, MA 02215, USA
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Crowninshield Financial Research, Inc., 56 Harvard St., Brookline, MA 02445, USA
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Babson College, 231 Forest St., Babson Park, MA 02457, USA
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O. M. Villanueva, S. Feinstein
efficiency links the alleged misrepresentations to the trading prices upon which investors relied. In the United States, a company that inflates its stock price with misrepresentations or omissions may be liable for damages to injured investors pursuant to the Exchange Act of 1934. However, pursuing a securities fraud claim against a public corporation is extremely expensive,1 while the potential recovery to an average investor is generally modest. To seek relief, investors band together and pursue their claims in a class action. In order for such a case to move forward, the court must certify a class of plaintiffs. The court will do so if trying the case on a class basis is deemed superior to each investor pursuing the case individually. Among the conditions required for class certification is proof that all proposed class members relied on the alleged misrepre
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