Do Stock Price Reactions to Public Information Reflect its Long-run Effect on the Firms’ Fundamental Value? The Case of an Emerging Market^†

† This paper is developed from the first chapter of the first author’s PhD dissertation, “Essays on capital market and leverage.”

Abstract

This paper examines the relationship between the cumulative abnormal returns (CARs) induced by various events and long-term operating performances in the post-event period. We gather six events from KRX Disclosure System over 2000–2011 and then ascertain the different CAR patterns. While most of other studies have focused on a single type of events, we deal with various types of events. Based on the general valuation model, stock return or price should reflect the firm’s fundamental value and we expect CARs to show a close relationship with the firm’s fundamental value over a long horizon. However, no distinct relationship between CARs and operating performances is found. The stock price reactions which are temporary and unrelated to the firm’s fundamental values may be explained by market inefficiency in Korea.

KEY WORDS:

• Stock price reactions
• event study
• post-event performances
• market efficiency

JEL CLASSIFICATION:

• G14

Notes

† This paper is developed from the first chapter of the first author’s PhD dissertation, “Essays on capital market and leverage.”

1 Stock price often reacts to some events or factors that are not related to the firm’s fundamentals. Chen (2017) showed that there were stock return anomalies from ending digit effects, by analyzing data from 68 countries.