According to a new report from Oxera, the economics consultancy, even routine corporate actions can have a significant impact on trading prices, trading volume and trade price volatility. The Depository Trust & Clearing Corporation (DTCC) sponsored the research by Oxera.
The report, called Share prices and trading activity over the corporate action processing cycle, studied five corporate action event types and how those events impacted share prices and trading activity. The five event types were: takeovers, stock splits, spin offs, rights issues and exchange offers. Most of the impacts studied by Oxera were corporate action events relating to U.S. securities, but the rights issue events studied involved a wide array of securities from the U.S., Europe and Asia.
The study claims to be one of the first to systematically analyze the impact that even routine corporate actions events can have on share prices and trading activity.
It is well known that the announcement of a takeover produces a price and trading impact in the securities market, says Dr. Luis Correia da Silva, Oxera managing director. But this study demonstrates that other corporate actions can also have an impact on share prices and trading activity. In addition, most of the effect occurs in a short period around the announcement of the action, or the event itself, as the market is absorbing the relevant information contained within that corporate action.
According to the Oxera report:
Corporate actions have potentially strong effects on share prices and trading activity in the relevant stocks, although these effects depend on the type of corporate action and the particular point in the corporate action processing cycle.
Within the corporate action types analysed in this study, takeovers, spin-offs, stock splits and rights issues appear to have the strongest effects, while exchange offers have only a limited impact.
In general, the strongest effect is observed on the date when the corporate action is announced, although record dates and ex dates are also often associated with significant increases in share price volatility and trading activity.
The report notes: Overall, this evidence demonstrates that corporate actions could have significant effects on share prices and trading activity of stocks, and potentially most important, that these effects often emerge in a predictable manner around critical corporate action processing dates.
I believe the study highlights the need for firms to make sure that their trading desks have access to accurate, timely data on corporate actions in order to execute proper trading strategies, says James Femia, managing director, DTCC Global Corporate Actions. What this study demonstrates is that trading can be significantly impacted by even routine announcements, and that organizations need corporate actions information quickly and accurately throughout their operations.
The findings of the study could put additional pressure on firms to improve the way they deal with corporate actions, says DTCC. It says the report supports the conclusion that ensuring that the front office has access to timely, accurate data on even routine corporate actions can help improve trading decisions and strategies made by a firms trading desk.
One of things we noticed in marketing our corporate actions announcement service was that the trading desks were increasingly pushing for better and more timely data on corporate actions, says Femia. As a result, one of the things we are in the process of changing in our offerings is a new service with an emphasis on speedy delivery of initial announcements information that is customized for trading desks, even if all the data hasnt been verified or completed. Traders and investors need early visibility of events. They cant necessarily wait until all the details of the event have been validated and verified.
DTCC provides firms with a corporate actions announcement service called the Global Corporate Actions Validation Service. The results of the research will feed into the development of this service, to ensure that DTCCs customers can make the most out of the information supplied.
This second report builds on a previous Oxera study published in May 2004 called Corporate Actions Processing what are the risks? which was also sponsored by DTCC. That study focused on quantifying the operational risks faced by firms in processing a growing volume of increasingly complex corporate action announcements on securities globally.