Do stock markets temporarily overreact to fraud?

Abstract

The aim of this report is to assess the impact of corporate scandals in stock markets within the United States, from January 1996 to December 2014. We analyze the impacts on abnormal returns both in the year of the event and one year after. We find that most of the fraudulent cases in our sample occur in 2001 - the end of the first boom in US history. We document an average abnormal return of about -13 percent in the short-term event, over a 21-day event window. In the long-term event, we find an average abnormal return of 1 percent, over the same window. It appears that the occurrence of a fraudulent act has a negative impact on security returns but, over time, these effects fade. In our regression model, we find that legislation is the only variable that has a significant impact on returns across all models applied. In the short-term, there appears to be an additional penalty in returns for fraud cases that occurred before the implementation of the Sarbanes-Oxley Act of 2002. Revenue growth rate appears to be the most significant variable in the short-term event, with a negative impact on returns. Nevertheless, we do not find significance in the long-term, most likely because market participants only overreact to the announcement temporarily.

Date of Award	18 Jul 2017
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Christopher Hossfeld (Supervisor)