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Stock Price Behavior Around Announcements of Write-Offs

Author

Listed:
  • Eli Bartov

    (New York University)

  • Frederick W. Lindahl

    (George Washington University)

  • William E. Ricks

    (Rosenberg Institutional Equity Management)

Abstract

Is it plausible that important corporate events such as write-offs, averaging around 20% of firms' market values, are associated with stock-price responses of less than 1%? We investigate this question by observing a lengthy period before and after the announcement date. We find, as suggested by previous studies, that price declines precede write-off announcements. We find what has not been found before: abnormal returns continue to decline after the announcement by as much as 21% annually for a two-year period. This significant stock-price underperformance is also observed around subsequent earnings announcements, and is robust to various risk-adjustment techniques. Our findings are important on two counts: they (1) suggest that disclosure standards may not be sufficient to allow market agents to understand the economic consequences of the write-offs, and (2) reveal a substantial mispricing, which is inconsistent with market efficiency.

Suggested Citation

  • Eli Bartov & Frederick W. Lindahl & William E. Ricks, 1998. "Stock Price Behavior Around Announcements of Write-Offs," Review of Accounting Studies, Springer, vol. 3(4), pages 327-346, December.
    • Handle: RePEc:spr:reaccs:v:3:y:1998:i:4:d:10.1023_a:1009644800963
    DOI: 10.1023/A:1009644800963
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    References listed on IDEAS

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    1. Scholes, Myron & Williams, Joseph, 1977. "Estimating betas from nonsynchronous data," Journal of Financial Economics, Elsevier, vol. 5(3), pages 309-327, December.
    2. Brickley, James A. & Van Drunen, Leonard D., 1990. "Internal corporate restructuring : An empirical analysis," Journal of Accounting and Economics, Elsevier, vol. 12(1-3), pages 251-280, January.
    3. Elliott, JA & Hanna, JD, 1996. "Repeated accounting write-offs and the information content of earnings," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 34, pages 135-155.
    4. Thakor, Anjan V, 1987. "Asset Writedowns: Managerial Incentives and Security Returns: Discussion," Journal of Finance, American Finance Association, vol. 42(3), pages 661-663, July.
    5. Strong, John S & Meyer, John R, 1987. "Asset Writedowns: Managerial Incentives and Security Returns," Journal of Finance, American Finance Association, vol. 42(3), pages 643-661, July.
    6. Klein, April, 1986. "The Timing and Substance of Divestiture Announcements: Individual, Simultaneous and Cumulative Effects," Journal of Finance, American Finance Association, vol. 41(3), pages 685-696, July.
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    Cited by:

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