Stock price reaction to profit warnings: the role of time-varying betas

Shuxing Yin, Khelifa Mazouz, Abdelhafid Benamraoui () and Brahim Saadouni
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Shuxing Yin: Sheffield University
Khelifa Mazouz: Cardiff University
Abdelhafid Benamraoui: Westminster University
Brahim Saadouni: Manchester University

Review of Quantitative Finance and Accounting, 2018, vol. 50, issue 1, No 3, 67-93

Abstract: Abstract This study investigates the role of time-varying betas, event-induced variance and conditional heteroskedasticity in the estimation of abnormal returns around important news announcements. Our analysis is based on the stock price reaction to profit warnings issued by a sample of firms listed on the Hong Kong Stock Exchange. The standard event study methodology indicates the presence of price reversal patterns following both positive and negative warnings. However, incorporating time-varying betas, event-induced variance and conditional heteroskedasticity in the modelling process results in post-negative-warning price patterns that are consistent with the predictions of the efficient market hypothesis. These adjustments also cause the statistical significance of some post-positive-warning cumulative abnormal returns to disappear and their magnitude to drop to an extent that minor transaction costs would eliminate the profitability of the contrarian strategy.

Keywords: Profit warnings; Market efficiency; Overreaction; Time-varying betas; Event-induced variance (search for similar items in EconPapers)
JEL-codes: G14 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s11156-017-0623-3

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