Trading on New News: How Investors React to Company Disclosures

How do markets respond to major corporate events and strategic decisions? Do stock prices adjust to new information immediately or does it take time for market participants to assess the impact of news on firm valuations? Until recently these have not been studied in-depth because of the lack of data. But in the early 2000s the Securities and Exchange Commission required publicly traded companies to disclose “material” information openly and simultaneously to the market.

Assistant Professor Anna Scherbina and co-authors Andreas Neuhierl of Northwestern University’s Kellogg School of Management and Bernd Schlusche, an economist with the Federal Reserve Board, have analyzed stock market behavior following an array of corporate disclosures reported in press releases since 2006. In their recent research, “Market Reaction to Corporate News and the Influence of the Financial Crisis,” Scherbina and her co-authors made three significant discoveries. First, while regulations were created to level the playing field, “The more sophisticated investors are better equipped to interpret how news will affect a firm’s value,” Scherbina notes. Yet, turning a profit is not easy, as investors understand that during the learning period immediately following news releases it’s still an uneven playing field in which trading costs rise and liquidity drops. “It takes time for major news to be fully reflected in prices,” Scherbina says.

The researchers also showed that the market’s response to certain types of news changed during the financial crisis. Firms were no longer penalized for debt and equity issuances, and news that signaled good prospects elicited exaggerated positive reactions, while news that signaled bad prospects intensified the negative reactions. “During the financial crisis, reactions to firms’ cash flow news, legal environment and management changes became more dramatic,” explains Scherbina.


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