The Stock Market Reaction to SEC Comment Letters

Mallory J. Rubin Research Assistant for Professor Tom Cook Reiman School of Finance, Daniels College of Business University of Denver August 31, 2007 Partners in Scholarship (PinS) Summer Research Associate Paper

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A.

Abstract Professor Cook and I utilize basic event study methodology in order to evaluate

the stock market reaction to allegations of accounting irregularities in Comment Letters issued by the U.S. Securities and Exchange Commission (SEC) since 2004. This is a single phase study in which we calculate daily abnormal stock returns and cumulative abnormal stock returns (CARs) for the sample as a whole as well as for five sub-samples categorized by Comment Letter issue. In the full sample test, we find that the average drop in stock price from the day before the Comment Letter release to the day following the release is a mere 0.06%. Over the window stretching from 30 days before the release to 60 days following the release, the average total decrease in stock price is only 1.39% for the whole sample. Only the abnormal returns in the (-30, 0) window are statistically significant, and only at a 10% level of significance. The five sub-samples we use are Revenue Recognition, Expensing, Acquisitions, etc., Contractual Obligations, and Overall Transparency and Other. The first four represent specific Comment Letter issues defined in our classification system, which are explained in the appendix to Table 1, and the third is the conglomeration of the remaining issue classifications. Three of the five sub-samples (Expensing, Acquisitions, etc., and Contractual Obligations) yield statistically significant CARs. Companies with Comment Letters for expensing concerns had their stock prices drop, on average, 1.28 percentage points for the (-30, 0) window, which is within a 5% level of statistical significance.

Rubin Companies addressed by the SEC for issues surrounding acquisitions and similar activities showed a significant loss of 0.20% in the window from 30 days after the event to 60 days after the event (10% level of significance). Interestingly, companies with issues concerning contractual obligations had a statistically significant gain of 0.36% in the window from two days before the issue date to the issue date itself. From our research, we can conclude that the SECs Comment Letters are more proactive than its AAERs are in identifying possible earnings management and other accounting fraud. However, the stock market is just slightly sensitive to the release of SEC letters. The drastic difference between this studys results and Professor Cooks findings in his 2006-2007 research of AAERs, including an average CAR of -14.07% in the (-1, +1) window at the 1% level of significance, clearly demonstrate the small

proportions of stock market reactions to Comment Letter issuances. Also, we observe that the market reaction to Comment Letters is much more gradual than that to AAERs, with a longer average period of declining stock returns.

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B.

Introduction The event study Professor Cook and I have conducted examines the stock market

reaction to earnings management allegations implied by the SECs issuance of Comment Letters to companies with questionable financial filing disclosures. Comment Letters, which are typically released within two weeks of an alleged accounting irregularity, represent an effort by the SEC to become more proactive in handling potential cases of accounting fraud. Formerly, the primary public announcements of irregularities were the SECs Accounting and Auditing Enforcement Releases (AAERs), which are publicly released announcements of much more serious accounting frauds than are implicated by the issuance of Comment Letters. They are often not generated until over two years after an allegation. Our research on the market reaction to the release of Comment Letters is a follow-up study to Professor Cooks sabbatical research on similar effects from the SECs AAERs (Cook & Grove, 2007). Though the SEC has been issuing Comment Letters for many years, the Letters have been publicly available since only December 2003, when Freedom of Information Act (FOIA) requests could begin being submitted for access to the files (Batterson et al., 2003). The SEC announced on June 24, 2004 that the Comment Letters issued after August 1, 2004 would soon be accessible without the FOIA process, explaining: We believe it is appropriate to expand the transparency of the comment process so that this information is available to a broader audience, free of charge (U.S. Securities and Exchange Commission Press Release, June 24, 2004). Hence, all Comment Letters issued

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after August 1, 2004 began being released to the public through the EDGAR database on May 9, 2005 (U.S. Securities and Exchange Commission, 2005). Comment Letters issued by the SEC cover a broad area of disclosure concerns. In large part because Comment Letters represent a proactive approach by the SEC, the issues they cover range from very minor accounting irregularities to severe accusations of fraudulent corporate behavior. The widely different language utilized across our sample of Letters demonstrates the extent of variation. For example, one common request in Comment Letters written since 2004 is the following, which responds to Avnet, Inc.s July 3, 2004 10-K filing: Please expand future filings to make more detailed and specific disclosure about how you identify and measure impairment of long-lived assets. Also make disclosures about how you measure fair value and describe the nature and extent of estimates and uncertainties that are inherent to that process. (Todd, 2004) The comment above, which addresses assumptions underlying asset impairment valuations, points to an area of increasing scrutiny in the accounting world: asset valuation. In fact, Nelson, Elliott, and Tarplay (2003) note similar comments about depreciation/amortization schedules from auditors statements in AAERs, and over 5% of the Letters we encounter highlight this specific issue. An example of a much more general, minor comment is this, written to CMGI, Inc. in 2004: The Overview section [of the Managements Discussion and Analysis] appears to merely repeat information contained in the Business section. As stated in Release No. 33-8350, the introduction or overview section should not be a duplicative layer of disclosure that merely repeats the more detailed discussion and analysis contained in the filing. Please amend so that your Overview section focuses on discussing the most important matters that management considers when evaluating the companys financial condition and operating performance. (Spirgel, 2004)

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A significant portion of the companies in our sample (approximately 11%) were cited by the SEC primarily for issues concerning basic disclosure requirements and/or (GAAP) guidelines such as the one described above. In response to the wide range of different issues addressed in the Comment Letters, we have classified the primary issue(s) addressed in each Letter into one of ten categories which we describe in an appendix to Table 1. They range from the highly specific and potentially severe, like Asset Valuation, to the very vague and likely insignificant, like Overall Transparency and Other. Several key concepts underlie our research topic of the stock market reaction to SEC Comment Letters. Though Comment Letters are considered to be much more minor than AAERs are, they still imply a companys insufficient disclosure. In recent years, such a lack of transparency has become strongly associated with accounting fraud in the form of earnings management. An overview of earnings management is provided below. Additionally, our study, and the entire category of event studies, tests the semi-strong form of the efficient market hypothesis (EMH), which suggests that stock prices reflect all publicly available information (Fama, 1970). Hence, if our findings show that the market quickly assimilates the SEC announcements through rapid stock price adjustments, then the semi-strong form of the EMH holds. In contrast, if there appears to be a lag in the markets reaction time, our study could be used as evidence against the semi-strong form of the EMH. Background information on the EMH, with a special emphasis on the semi-strong form, immediately follows the discussion of earnings management.

Earnings Management:

Rubin One of the most daunting challenges faced in the field of financial accounting is

combating the influence of earnings management. Earnings management occurs when top management resorts to operational alterations and reporting techniques that mislead external stakeholders on the financial realities of a firm (Healy & Wahlen, 1999). According to Nelson, Elliot, and Tarpley (2003), the definition above can include both GAAP compliant and non-GAAP compliant methodologies. Additionally, earnings can either be boosted or reduced to match managements desires (Nelson et al. 2003). Studies have shown that managers actively alter reported earnings in order to enhance compensatory benefits, to avoid regulation, and to match analysts forecasts (Healy & Wahlen, 1999). Earnings figures are typically viewed by investors as being more relevant to the financial outlook of a company than cash flow data is (Healy & Wahlen, 1999). Though it has been hypothesized that investors can see through earnings management, as reflected by the reaction in stock prices to earnings announcements, studies have clearly shown that stocks can drop drastically in value over the two years following an allegation of earning management (Healy & Wahlen, 1999). This clearly demonstrates that the market cannot identify all manipulations on its own. In fact, when financial statements are filed without full disclosure on the part of managers, even analysts struggle to recognize earnings management (Healy & Wahlen, 1999). Even since the passage of the Sarbanes-Oxley Act in 2002, in the wake of the major accounting scandals at Enron, WorldCom, Tyco and others, the presence of earnings management has been significant. While it is unclear whether the manipulation is more prevalent before than it was before the Act, there has been increased attention

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paid to the phenomenon. According to a survey reported by Don Durfee (2006), over half of chief financial officers (CFOs) at the end of 2006 claimed to have the authority to impact reported earnings by a magnitude of at least 3 percentage points. Interestingly, the CFOs also believed that external auditors were unlikely to observe such earnings management, and were almost equally unlikely to respond in the case that an allegation was made (Durfee, 2006). CFOs can use either operational planning or accounting methods, or a combination of both, to influence earnings figures. Operational methods include adjusting the timing of large projects or inventory order cycle. On the accounting side, new policies can be adopted at strategic times and critical estimates can be altered (Durfee, 2006). From analyzing the Comment Letters, it becomes apparent that the SEC accountants are concerned with both areas, addressing comments about operational reporting to the Managements Discussion and Analysis and Results of Operations sections and those on accounting management to the Accounting Policies and Estimates sections. The Comment Letters demonstrate that top managements manipulation of earnings, both by operational and accounting means, often serves to obscure transparency in financial reporting. In particular, some industries, including banking and insurance, have been cooking the books for over a decade. Banks have historically manipulated expensing by writing off smaller amounts of loans and overestimating loan loss provisions, while insurers have perennially understated claim loss reserves (Healy & Wahlen, 1999).

Efficient Market Hypothesis (EMH):

Rubin The efficient market hypothesis (EMH) is a prominent theoretical framework in finance. Fama (1970) gives a basic definition of an efficient market as one in which prices always fully reflect available information (p. 383). The EMH has three subsets, one of which is of particular importance to our study. There are weak, semi-strong, and strong forms of the EMH. Tests of the weak form seek to prove that capital market prices are determined by past prices and other historical data (Tung & Marsden, 1998). Tests of the semi-strong form of the EMH, in contrast, seek to prove that market prices account for publicly available data that is also current (Tung & Marsden, 1998). Finally, tests of the strong form seek to prove that both public and private information are reflected in market prices, making abnormal returns very unlikely (Tung & Marsden,

1998). The EMH has been dominant in the field for almost four decades, largely because the alternative theories are less adequate to describe stock price fluctuations in the market For example, anomalies, or events that contradict the EMH, including price overreaction and underreaction, tend to balance themselves out on average (Fama, 1998). The EMH is highly relevant to event study research because the notion of expected returns as creating efficient market equilibrium is foundational to all stock return generating models (Fama, 1970). As we explain below in the Event Study Methodology section, at least one stock return model must be applied in the course of conducting an event study. Thus, event studies rely upon the assumption that the EMH holds. Additionally, by showing how quickly a market reflects normal returns after experiencing abnormal returns, event studies can act as tests of the EMH. Because the speed of market adjustment back to normal expected returns implies underlying market efficiency, event studies can determine the extent of efficiency in the response to

Rubin 10 different types of announcements (Khotari & Warner, 2004). [S]ystematically nonzero abnormal returns following an event are inconsistent with efficiency and imply a profitable trading rule (Khotari & Warner, 2004, p. 12) Also, because event studies include both historical and current market data in calculating expected returns, they are specifically testing the semi-strong form of the EMH. In fact, evidence shows that short-horizon event studies such as ours, or ones with event windows under one year in length, strongly support market efficiency theories (Khotari & Warner, 2004).

Professor Cook and I extend prior event study research by looking at the stock market impact of the very recent phenomenon of publicly available Comment Letters. Our study, with a sample of 274 diverse U.S. companies, provides an initial examination of whether investors react to early reports of potential fraud and helps us to answer the following questions: Are the Comment Letters issued more closely to the date the financial press announces irregularities as compared to the SECs AAERs? Does the SEC appear to target companies that have performed poorly in recent years? Is the market sensitive to the allegations contained in the Comment Letters? In other words, are the abnormal returns and cumulative abnormal returns of stocks from these implicated companies different from zero? If so, is the magnitude of wealth loss proportional to that associated with the issuance of AAERs as studied in Professor Cooks sabbatical study?

C.

Literature Review

Rubin 11 A number of studies have analyzed the impact of earnings management on stock market returns in the context of SEC regulation. A strong example is Professor Cooks sabbatical research on the stock market reaction to AAERs issued by the SEC (Cook, 2007). The results of Professor Cooks research mimicked those of Beneishs 1999 study, showing that companies alleged of earnings fraud have their market values drop significantly within a few-day period surrounding the announcement Professor Cook (Cook & Grove, 2007) found an average drop of 14% in the three-day period around the event and 19% over an 11-day period. The study was developed, in part, to correct for the design inadequacies of previous event studies, including the failure to account for confounding events, nonsyncronous trading, and non-normal statistical distributions. Professor Cook references the Feroz, Park, and Pastena (1991) and Dechow, Sloan, and Sweeney (1996) studies to highlight the weaknesses in other event studies that measure the capital market impact of earnings manipulation allegations. In addition to Professor Cooks research, there are several studies that examine the area of earnings management. Healy and Wahlen (1999) summarize the extensive amount of qualitative research on the occurrence of earnings management, including the motivations behind the phenomenon and specific accruals most commonly manipulated to influence financial results. They analyze the results of different studies testing the prevalence of certain incentives to manipulate and the extent of earnings managements impact on resource allocation. Nelson, Elliott, and, Tarpley (2003) classify incidences of (attempted) earnings management, as identified by SEC auditors in financial statement filings, into four categories and report specific examples of each as they are described within actual

Rubin 12 AAERs. While this study thoroughly examines the role of the auditing process in uncovering and controlling earnings management, it ignores the impact on the larger capital market. McDowell (2005) utilizes a basic event study construction to measure the impact of SEC investigations on implicated companies stock returns, and finds that the disclosure of either a formal or informal SEC investigation results, on average, in an approximately 6% decrease in market value over a (-1, +1) window. The study accounts for some confounding activities and focuses on the volatility of stock returns, the size of firms in the sample, and calendar portfolios extending several months beyond the announcement of an SEC investigation. Unlike AAERs and Comment Letters, SEC investigations do not clearly state the specific areas of a companys financial and accounting procedures that are inadequate. Professor Cook and I extend the prior research on the connections between earnings management, the role of the SEC, and the resulting market reaction by looking at the stock market impact of the very recent phenomenon of publicly available Comment Letters. D. Event Study Methodology Data Collection: I followed a number of steps to complete the preliminary work necessary for this research project. At the beginning of the summer, I accessed daily stocks prices over a three year period for the all the companies in the sample and the Wilshire 5000 index from the Thompson DataStream database. The stock prices data covered approximately

Rubin 13 the time from two years prior to the relevant 10-K or Comment Letter issue date to one year after that date. I then converted the prices into holding period returns (HPRs) in data files to later be used with the SAS software to form SAS data sets. My next step was finding the appropriate SEC Comment Letter for each company (according to a 10-K date identified by the previous student researcher) on the EDGAR database within the SEC website, reading the Letters, and creating a classification system for the various issues addressed in the Letters. I organized every Comment Letter into a single category, with the exception of companies in which I observed both expensing and revenue recognition irregularities. Next, I again utilized the Thompson DataStream database, this time extracting descriptive data of the sample for the year before the issuance of the relevant Comment Letter using Excels vlookup function. I calculated the means, medians, standard deviations, and coefficients of variation of this company-specific financial data for all the companies in order to summarize the characteristics of the sample. The variables examined were total assets, sales, operating profit margin, earnings per share, and return on equity. I also obtained each companys SIC code so as to get an idea of the different industries representation in the sample. The final leg of the project was running the SAS data sets of stock returns through the Eventus software, version 8.0, from Cowan Research LC, in order to determine the occurrence and significance of abnormal returns, cumulative abnormal returns, and statistical variables both for the sample as a whole and for five sub-samples organized by major Comment Letter issue. The five sub-samples are Revenue Recognition, Expensing, Acquisitions, etc., Contractual Obligations, and Overall Transparency and Other.

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Event Studies: Our research structure is that of a basic short-horizon event study. Within the finance/accounting field, an event study is a research project that investigates whether the stock market reacts in a statistically significant way to a certain type of past event (Cook, 2007). Hence, measuring of the magnitude of an events impact on the market is a primary objective of event studies (Khotari & Warner, 2004). By the end of 2004, more than 500 event studies had been completed in financial research (Khotari & Warner, 2004). Many different kinds of events can be tested in this type of study, including earnings, stock split, or merger announcements released by the firm itself, as well as SEC investigations, analysts forecasts, and new legislative changes that occur externally. Event studies assume that the conditions necessary for the semi-strong form of market efficiency are present by testing a) whether information appears to be assimilated into market prices, and b) how quickly (efficiently) the process of assimilation occurs (Cook, 2007). Additionally, event studies presuppose that stock prices reflect the present value of a companys free cash flows (FCFs). When the effect of the events can be fully isolated, event studies are effective tools for predicting future FCFs, and hence, companies future financial performance. For example, increases in FCFs often precede stock price gains because FCFs are typically generated by increasing revenue levels, cost reductions, debt payoff, and dividend payments, all of which increase the value of a company to investors. Event studies utilize a time period around the announcement called an event window to represent the duration of earnings management. In our study, the longest event window runs from 30 days before the event date (the issue date of the Comment Letter) to 60 days following this date, and shorter windows, with the briefest being the three day

Rubin 15 interval around and including the announcement, are also examined. Because the longest event window is under a year in length, our study is considered to have a short horizon (Khotari & Warner, 2004). Comparing event windows of various lengths is crucial in testing market efficiency because the return to market equilibrium, or normal expected returns, can be estimated by determining the approximate period with the highest concentration of abnormal returns. In order to compare the hypothetically abnormal returns during the event window to normal (or expected) returns that are observed before earnings management occurs, an estimation window must be developed in order to apply a stock price model to the firm. Estimation windows utilize stock price data from sufficiently before an announcement in order to estimate what the stock prices in the event window ought to be. These predicted stock returns (in percentages), computed from a return generating model, are then compared to the actual returns observed in the event window, and abnormal returns are calculated and are then determined to be either statistically significant or insignificant. An estimation window must cover a long enough period to generate reliable predictions of future stock prices. Hence, we use an estimation window of 255 days, or the approximate number of days in a trading year. Our window ends 46 days prior to the event date for each company. With the Eventus software, we use a version of the Market Model to compute the estimated normal stock returns over the event window. The basic assumptions of the Market Model are that stock returns are a function of the entire stock market plus the risk of an individual stocks correlation with the stock market over time t, or mathematically: Rit = i +i (Rmt) + t

Rubin 16 where Rit is the expected stock return in time t, Rmt is the Wilshire 5000 value-weighted index of stocks at time t, and i and i are precise, unbiased parameters (Cook, 2007). The Market Model has become strongly established over the years in efficient market research since Famas (1970) pioneer work in the field. Once the expected normal returns have been calculated using the Market Model, abnormal returns can be determined by subtracting the expected normal return from the actual observed return as follows: ARit = Rit E(Rit | No announcement) Hence, ARit is the abnormal return to an individual firm i in time t due to the public release of an announcement, while Rit is the actual return in time t, and E(Rit | No announcement) is the expected return to firm i in period t using the Market Model and assuming the absence of an announcement. In other word, an AR is a stock prices deviation from the expected return over a certain period of time. Because of the undesirable nature of Comment Letters for firms, we anticipate negative abnormal returns on average for our sample. Event studies provide the opportunity to evaluate the average stock return reactions for a sample of companies both on a single day and over a period of time (typically one day). To calculate the average impact of an announcement on a particular day in the event window for all companies in the sample, the following equation is utilized: AARt = 1/n ARit This calculation gives insight into the average reaction for all sample firms on the same day in relation to each firms event date. As such, an AAR is defined as a samples average abnormal return over a period of time (typically one day). In order to see the total

Rubin 17 effect of the announcement on firms over time, however, a cumulative statistic must be generated by summing all of the AARs for all firms in the sample together (Cook, 2007). The resulting number is termed a cumulative abnormal return, or a CAR. CAR = AARt Because stock market return models, including the Market Model, cannot always estimate firms stock returns accurately, an abnormal return calculated through the steps above must be shown to be statistically different from what the return model predicts as the firms expected return. Statistical significance can be determined by establishing a considerable difference between a computed CAR and zero. An efficient markets test of significance effectively standardizes the CAR by dividing it by its own standard error: CAR / (CAR) The qualitative nature of the test design is important to the field of event studies. Power is one element of the overall test design. In essence, the term power refers to the ability of a specific test to accurately determine abnormal returns (Khotari & Warner, 2004). A goal, then, of event studies is to create high power tests. Precise specification of the test variable is also crucial. An event study, and hence the variable is tests, can only be as good as the assumptions upon which it relies. In our case, we rely heavily on the Market Model, and must account for any deficiencies in the model by adding additional statistical tests into the context of the research. We do this in order to eliminate the possibility of alternative hypotheses. These tests are examined in the Results section, Issues Affecting Data Accuracy, which is below. Because we have a short-horizon for our event window, our test is generally well-specified, but the power of our test is weak

Rubin 18 because the average abnormal performance of stock returns is not highly concentrated in the event window. This is also discussed in the Results section below.

E.

Sample Full Sample: Our sample consists of all companies that received a SEC Comment Letter after

the public release date of August 1, 2004 and also have -2 years to +1 year of daily stock returns immediately around the issue date which are accessible from the Thompson DataStream database. A small number of companies that participated in business combinations during our estimation window were eliminated from the sample. The final sample has 274 U.S. companies. The companies come from 8 different industries and represent 4 separate U.S. stock exchanges. As such, they range from large, multinational firms with several subsidiaries to small, regionally-based corporations. The primary comments each company received from the SEC also vary greatly across the sample, ranging from perennial issues such as revenue recognition and expensing to concerns with contractual obligations, hedging, and overall transparency. A small number of the firms in the study have merged or been acquired in the time that has passed since the post-event windows closed. Seven of the 274 total companies in the sample were cited twice, once for two separate Comment Letters addressing distinct 10-K filings over one month apart. Hence, our study examines a total of 281 events. Tables 1 through 4 in the appendix provide a detailed overview of the sample in terms of primary Comment Letter issue, exchange distribution, average financial data, and industry distribution.

Rubin 19 Our sample covers Comment Letters which contain many different issues identified by the SEC. We chose to classify each Comment Letter based on its primary issue of concern into ten categories: Revenue Recognition, Expensing, Acquisitions, etc., Asset Valuation, Contractual Obligations, Controls and Procedures, Hedging, Liquidity, Overall Transparency, and Other. Specific descriptions for the characteristics of companies in these categories are in an appendix to Table 1. Unsurprisingly, the two categories with the greatest number of Letters are Expensing and Revenue Recognition, with 62 and 67 Letters, respectively. This is in large part because these categories are the only two that we chose to allow for overlapping among classifications. Expensing and Revenue Recognition often occur simultaneously in earnings management, as described in the Introduction. Acquisitions, Contractual Obligations, and Overall Transparency concerns are also frequently cited, accounting for, respectively, 14%, 11%, and 12% of the Comment Letters designations in the sample. Controls and Procedures and Asset Valuation have significant representation with 26 and 19 Comment Letters, and all other categories contain small numbers of Letters. The majority of companies in our sample, or 170 of the total 274, trade actively on the New York Stock Exchange. However, there is also significant representation of NASDAQ-listed stocks, which account for 96 of the companies. There are also six overthe-counter (OTC) stocks and two AMEX-traded stocks. This information is summarized in Table 2. The summary statistics in Table 3 clearly demonstrate the great variety of companies included in our sample. The large standard deviations in all categories testify to the wide range of company sizes and profitability levels represented. The low

Rubin 20 coefficients of variation are also telling in this matter. Additionally, the low median figures for total assets and sales show that there are a significant number of small stocks in the sample. However, the proximity of the mean and median values for the profitability measures shows that the small companies are able to maintain fairly competitive with their larger counterparts. Table 4 in the Appendix summarizes the industry distribution of the sample. By far, the industry best represented in our sample is Manufacturing, with 131 companies. This is followed by Finance, Insurance, and Real Estate with 42 companies, Services (which is heavily computer-oriented) with 35 companies, Transportation and Utilities with 27 companies, and Retail Trade with 22 companies represented. There are a handful of companies in the Mining, Construction, and Wholesale Trade industries. The weighting towards the Manufacturing industry is not intended and simply reflects the abundance of Manufacturing companies fitting our two criteria of having data on Thompson Datastream and receiving a SEC Comment Letter that has been made available online.

Sub-Samples: The five sub-samples we investigate are segregated according to major Comment Letter issues. They are: Revenue Recognition, Expensing, Acquisitions, etc., Contractual Obligations, and Overall Transparency and Other. The first four groups comprise exactly of the companies with these Comment Letter classifications, while the last sub-sample includes companies with either an Overall Transparency or Other issue or any other issue

Rubin 21 not represented in the first four groups. Essentially, we evaluate whether any of the main issue categorizations have more significant abnormal returns than the sample as a whole. The Revenue Recognition sub-sample consists of 67 events. As described in the appendix to Table 1, companies with Letters in this category do not appear to be fully disclosing their revenue recognition policies in terms of accrual timing and/or basis for recognition. Indications of inappropriate revenue recognition are also cited frequently in this classification. The Expensing sub-sample consists of 62 events, many of which overlap with the Revenue Recognition sub-sample. Because many companies that received comments for one of these two issues were also addressed on issues concerning the other, we assign both categorizations to them. Comment Letters classified with Expensing issues identify problems like inappropriate aggregation of income statement expense line items, incomplete explanations of the expense line items and their underlying assumptions, as well as decreasing loss allowances that inaccurately portray expenditure trends in a company. The Acquisitions, etc. sub-sample consists of 47 events. The group simply contains all Comment Letters identified with this type of issue in the initial classification because they make up a significant portion of the total. Common citations are inadequate overall disclosure relating to segment reporting, acquisitions, affiliate companies, and subsidiary relationships, manipulation of impairment estimates for acquired assets or new contractual obligations, and inappropriate segment aggregation and/or consolidated financial statements in disclosures.

Rubin 22 With 36 events represented, the Contractual Obligations sub-sample is the smallest of our five sub-samples. Again, like the Acquisition, etc. group, the Contractual Obligations sub-sample consists of all Comment Letters originally classified into this category. Letters in this sub-sample inappropriately report debt covenant requirements, off-balance-sheet liabilities, or pending litigation that is likely to incur significant expenditures in the future. Companies with Letters falling under this category have a high likelihood of future cash flow problems. The final sub-sample, Overall Transparency and Other, is a catch-all for Letters whose issues do not fall within the first four categories. There are 118 events in this group. The range of issues in this sub-sample is the broadest of the five, going from speculative investments and hedging, to inadequate internal controls, to general reporting insufficiencies, and other issues like tax reserves and foreign currency conversion.

F.

Results and Analysis Full Sample Figure 1 clearly shows the trend in abnormal daily returns over the event window

for the companies in our sample. Though the average cumulative loss over the (-30, +60) period is small, only 1.39%, some of the daily abnormal returns are statistically significant, and the downward trend for our 274 companies occurs during the primarily bullish markets of 2004, 2005, and 2006. We find that the average drop in stock price in the (-1, +1) is a small 0.06%. This figure is a tiny proportion of the total average decrease of 1.39%. Even the average cumulative losses of 0.28% in the (-5, +5) window and 0.23% in the (-10, +10) window are relatively small percentages of the total event

Rubin 23 window CAR, meaning that much of the overall loss is occurring closer to the edges of the event window. Only the abnormal returns in the (-30, 0) window are statistically significant, and at a weak 10% level of significance. Because this portion of the drop represents nearly 50% of the total decrease, it may indicate that investors learn of the accounting irregularities before the Comment Letters are released, or at least anticipate some negative reports (Khotari & Warner, 2004). However, Beneishs 1999 study demonstrates that the SEC typically hones in on companies with recent histories of poor returns, so the -0.66% average change in stock price from day -30 to the event date may corroborate these findings. Moreover, even though the bigger stock price declines occur further away from the announcement date, they do not necessarily undermine the semistrong form of the efficient market hypothesis because the daily abnormal returns themselves are so weak, with very little statistical significance.

Sub-Samples Only three of the five sub-samples (Expensing, Acquisitions, etc., and Contractual Obligations) yield statistically significant CARs. Companies with Comment Letters for expensing concerns have their stock prices drop, on average, 1.28% during the (-30, 0) window, which is within a 5% level of statistical significance. Companies addressed by the SEC for issues involving acquisitions and similar activities lose an average of 0.20% in the (-30, +60) window at the 10% level of significance. Interestingly, companies with contractual obligations issues have a statistically significant gain of 0.36% in the (-2, 0) window. Neither the Revenue Recognition sub-sample nor the Overall Transparency and Other sub-sample yield any statistically significant results, but the trends in their data

Rubin 24 mimic those of the other sub-samples and the full sample, with the CARs sloping downward to an average sum between -0.50% and -1.50%. Significant drops occur not only on a single day between 40 and 50 days after the announcement date for the full sample Eventus study, but also in each of the five subsamples. This could be a possible indication that our event dates (day 0 in the event window) do not accurately represent the point in time when the market learns the contents of the Comment Letters. Accessed from the EDGAR database, our event dates are the filing dates recorded on the SEC website, and as such, probably differ somewhat from the dates that the information was publicly released about each company. It is feasible that the market receives the Comment Letters a little more than a month after the filing date provided by the SEC.

Issues Affecting Data Accuracy There are a number of statistical issues that have the potential to bias the results of our research. Certain characteristics of the sample create these issues, but we utilize features within the Eventus software to check for impacted data and counteract any detrimental effects. The main issues we encounter are issues with daily returns and issues with small stocks in the sample (Cook & Grove, 2007).

Issues with Daily Returns One problem associated with evaluating daily returns using the Market Model is serial correlation, or the lack of independence between daily abnormal returns because of the time-insensitive parameters built into the Market Model (Cook & Grove, 2007). Our

Rubin 25 test has a built-in function from Eventus that corrects for serial correlation. Another problem with using daily returns is that of heteroskedasticity, which occurs when daily returns have differing variances due to their non-normal distribution. In event studies, the calculation of abnormal returns during the event window depend upon estimates determined using the estimation window. However, there are often different levels of variability, and hence different daily variances, in the event window as compared to the estimation window. We utilize a test developed by Bohmer, Musumici and Paulsen (1991) to eliminate the potential bias of heteroskedasticity (Cook & Grove, 2007). A final problem with daily returns is their non-normal distribution. Daily returns are often skewed, or have asymmetrical distributions, and exhibit kurtosis, or variances that are responses to infrequent, extreme variations. We correct for these issues by incorporating Cowans 1992 generalized sign test into our results. Tables 5 and 6 include this statistic in our results. Issues with Small Stocks in the Sample There are also a number of problems due to the high number of small stocks present in our sample. Non-synchronous trading, or irregular trading patterns common in small stocks, weakens the specification of our test by bringing the beta parameter estimates of the Market Model closer to zero (Cook & Grove, 2007).We do not correct for this problem because Professor Cooks previous research indicated that nonsynchronous trading has a very minor impact on the calculation of abnormal stock returns. Another problem arises because Nasdaq and OTC stocks are not as widely traded as those on the New York Stock Exchange, which means they have a greater number of

Rubin 26 days with zero returns. To correct for this, we again utilize the generalized sign test, the results of which are reported in Tables 5 and 6.

G.

Conclusions Our study of the stock market reaction to SEC Comment Letters extends prior

research by evaluating the interaction between a new type of SEC correspondence and the capital market system. We utilize a sample of significant size, with 281 Comment Letters written to 274 U.S. companies, and augment the classical statistical tests with non-parametric tests to account for problematic elements of the data. The results of our study enable us to address the questions considered above in the Introduction. First, Comment Letters do represent a more proactive approach by the SEC in identifying and combating earnings management and other accounting fraud. The vast majority of Comment Letters in our sample were publicly released within one year of the original 10-K filings to which they refer, and within that set, most were released closer to 9 months after the filing date. AAERs, on the other hand, are historically publicized over two years after an allegation has been made (Cook, 2007). Also, the samples weak returns in the (-30, 0) window may support the Beneish (1999) finding that the SEC focuses its regulatory energies on companies that are already performing poorly on the stock market. The stock market is weakly sensitive to the release of SEC letters. Our data indicates a slight but consistent negative stock market reaction to allegations of earnings management that are publicized in SEC Comment Letters now available in the EDGAR database on the SEC website. Though the results of our study show only an -1.39%

Rubin 27 cumulative abnormal return for the entire 90-day event window, the (-30, 0) window is statistically significant at a 10% level of significance. The drastic difference between this studys results and Professor Cooks findings in his 2006-2007 research of AAERs, including an average CAR of -14.07% in the (-1, +1) window at the 1% level of significance, illustrate the small proportions of stock market reactions to Comment Letter issuances. Though both forms of SEC documents are publicly available, only AAER releases generate drastic stock market reactions. This phenomenon probably exists because the content and implications of AAERs are better understood by the investing world than the meaning of Comment Letter issuances. Also, the reaction to Comment Letters is not only smaller than that to AAERs, but is also much more gradual. About 20 percentage points of the total average 32% decline in stock value in Professor Cooks research occurred over a ten day period roughly surrounding the event date. However, in our study of Comment Letters, the cumulative 1.39% drop in value was fairly steady throughout the 90-day event window.

Rubin 28 H. Bibliography

Batterson, D., B. Boch, J. Burgdoerfer, J. Gromacki, T. Malik, R. Osborne, and W. Tolbert, Jr. 2003. SEC News Alerts, December 2003. Retrieved July 26, 2007, from http://corp.jenner.com/alert_details_1079490383265.html Beneish, M. The Detection of Earnings Manipulation. The Financial Analysts Journal 55 (5): 24-36. Retrieved August 8, 2007, from http://0-web.ebscohost.com.bianca.penlib.du.edu/ehost/pdf? vid=11&hid=105&sid=24e4c4ba-42ea-492f-908a-c9118a16ac8c %40sessionmgr104 Cook, T. 2007, February 20. Report on My Sabbatical during Fall Quarter 2006 2007: The Stock Market Reaction to Allegations of Earnings Fraud. Reiman School of Finance, Daniels College of Business, University of Denver. Cook, T. and H. Grove. 2007, June 18. The Stock Market Reaction to Allegations of Earnings Manipulation. Daniels College of Business, University of Denver. Durfee, D. 2006. Management or Manipulation? CFO 22 (13): 28. Retrieved July 24, 2007, from http://www.cfo.com/article.cfm/8189832/c_8341296? f=magazine_alsoinside Fama, E. F. 1970. Efficient Capital Markets: A Review of Theory and Empirical Work. Journal of Finance 25 (2): 383-417. Retrieved July 26, 2007, from http://web.ebscohost.com/ehost/detail?vid=22&hid=107&sid=5335e6a5-51bc40f7-9168-70a4430717aa%40sessionmgr108 Fama, E. F.1998. Market Efficiency, Long-Term Returns, and Behavioral Finance. Journal of Financial Economics 49 (3): 283-306. Retrieved July 26, 2007, from http://0-www.sciencedirect.com.bianca.penlib.du.edu/science? _ob=MImg&_imagekey=B6VBX-408CBS1-12&_cdi=5938&_user=1497530&_orig=browse&_coverDate=09%2F01%2F1998 &_sk=999509996&view=c&wchp=dGLzVzzzSkWW&md5=65efb079eeda13b9ada52e7f89ffea83&ie=/sdarticle.pdf Healy, P. M., and J. M. Wahlen. 1999. A Review of the Earnings Management Literature and Its Implications for Standard Setting. Accounting Horizons 13(4): 365-383. Retrieved July 24, 2007, from http://web.ebscohost.com/ehost/detail? vid=3&hid=101&sid=d198eada-b474-4478-95a2-167f758c31fe %40sessionmgr109 Khotari, S. P., and J. B. Warner. 2004, November 11. Econometrics of Event Studies. University of Dartmouth Working Paper.

Rubin 29

McDowell, J. 2005. A Look at the Markets Reaction to the Announcements of SEC Investigations. Glucksman Institute for Research in Securities Markets, New York University. Nelson, M. W., J. A. Elliott, and R. L. Tarpley. 2003. How Are Earnings Managed? Examples from Auditors. Accounting Horizons 17 (Supplement): 17-35. Spirgel, L. 2004, December 14. Comment Letter to CMGI, Inc. Regarding Form 10-K for the Fiscal Year Ended July 31, 2004. U.S. Securities and Exchange Commission. Retrieved August 13, 2007, from http://sec.gov/Archives/edgar/data/914712/000000000004039987/filename1.txt Todd, G. 2004, December 14. Comment Letter to Avnet, Inc. Regarding Form 10-K for the Fiscal Year Ended July 3, 2004. U.S. Securities and Exchange Commission. Retrieved August 13, 2007, from http://sec.gov/Archives/edgar/data/8858/000000000004039996/filename1.txt Tung, A. T., and J. R. Marsden. 1998. Test of Market Efficiencies Using Experimental Electronic Markets. Journal of Business Research 41 (2): 145-151. Retrieved July 26, 2007, from http://0-www.sciencedirect.com.bianca.penlib.du.edu/science? _ob=MImg&_imagekey=B6V7S-3SX6NG9-61&_cdi=5850&_user=1497530&_orig=browse&_coverDate=02%2F28%2F1998 &_sk=999589997&view=c&wchp=dGLbVzWzSkWW&md5=52ee89fe167350f4c405bfb49bb9c7a1&ie=/sdarticle.pdf U.S. Securities and Exchange Commission. 2004, June 24. SEC Staff to Publicly Release Comment Letters and Responses. Retrieved July 9, 2007, from http://www.sec.gov/news/press/2004-89.htm U.S. Securities and Exchange Commission. 2005, May 9. SEC Staff to Begin Publicly Releasing Comment Letters and Responses. Retrieved July 9, 2007, from http://www.sec.gov/news/press/2005-72.htm

I.

Appendix: Tables and Graphs

Table 1:

Rubin 30

Comment Letter Issue Distribution

Acquisitions, etc. Asset Valuation Contractual Obligations Controls and Procedures Expensing Hedging Liquidity Overall Transparency Revenue Recognition Other

2004 4 1 1 0 5 0 2 4 3 0

2005 26 8 24 15 31 5 8 18 38 7

2006 17 10 11 11 26 5 2 17 26 5

Total 47 19 36 26 62 10 12 39 67 12

%
14.24% 5.76% 10.91% 7.88% 18.79% 3.03% 3.64% 11.82% 20.30% 3.64%

100.00%
*All companies have been designated one Comment Letter classification except for those exhibiting earnings manipulation in terms of both expensing and revenue recognition.

Appendix to Table 1:
Comment Letter Issue Categorizations:

Rubin 31

Overall Transparency SEC Comment Letters addressing a companys overall transparency emphasize a lack of appropriate detail in qualitative and non-financial information within financial statement filings. Comments in these letters often advise improvements to the MD&A section and to tabular disclosures. Companies receiving a large number of brief comments on very distinct aspects of their filings have also been included in this category. Expensing Comment Letters in this category highlight questionable accounting methods for and disclosure of companies expenses. Common citations include aggregation of income statement expense line items, incomplete explanations of the expense line items and their underlying assumptions, and decreasing loss allowances that inaccurately portray expenditure trends in a company. Revenue Recognition This category incorporates Comment Letters with a primary concern on revenue recognition policies. Issues frequently addressed in these Letters are return policies, special agreements with supply chain participants, and exact terms for the time-sensitive recognition of normal operating revenues. Full disclosure of revenue recognition procedures for distinct operating segments and/or product lines is also a recurring comment. Revenue recognition and expensing have been categorized separately because [r]evenues and expenses differ fundamentally in the accounting principles being applied (Nelson et al., 2003, p. 21). Contractual Obligations Companies with SEC Comment Letters focusing on contractual obligations have inappropriate disclosure in areas such as debt covenant requirements, off-balance-sheet liabilities, and pending litigation likely to incur significant expenditures. Transparent schedules of future interest payments on debt are a frequent request of the SEC. Inclusion in this category can imply future cash flow problems. Controls and Procedures A significant amount of companies failed to comply with the new Internal Controls and Procedures protocol established by Sarbanes-Oxley in 2002, and were therefore classified into this Comment Letter category. These companies either determined that their controls and procedures were not effective in the previous year or failed to appropriately state their effectiveness under the specific guidelines issued under Sarbanes-Oxley. In several cases, ineffective controls caused the need for restatements. Asset Valuation

Rubin 32
This category of Comment Letters addresses the valuation methods of many asset classifications, including accounts receivable, inventories, long-lived assets, and intangible assets. The issue of impairment is prominent in the latter two asset groups, with many citations for impaired properties and major goodwill impairment following acquisition activity. Acquisitions, etc. Companies with inadequate overall disclosure relating to segment reporting and the similar areas of acquisitions, affiliate companies, and subsidiary relationships, have been classified underneath this umbrella category. Impairment of acquired assets and the addition of new contractual obligations frequently appear within this category of SEC Comment Letters. Inappropriate segment aggregation and consolidated financial statements in disclosures are also commonly recognized. Liquidity Comment Letters that stress limitations in cash flow disclosure, burdensome cash obligations, decreases in revenues, increases in accounts receivables, or any combination of the above, concern the issue of a companys liquidity. Companies receiving such letters often rely heavily upon non-operating cash flows and/or misclassify their cash flows. Incomplete disclosure of significant contractual obligations is also referred to frequently by the SEC accountants. Hedging Companies derivative investments and other hedging activities receive the greatest amount of attention in this group of Comment Letters. The most frequent citation highlights inadequate explanation of the risks and assumptions underlying fair valuation of such investment instruments. The SEC cannot conclude that these companies accounting methodologies for derivatives and other hedging strategies comply with GAAP regulations. Other When a Comment Letter did not clearly fall into one of the nine categories explained above, it was classified as Other. A small number of companies were cited primarily for tax accounting issues, while a few others lacked transparency in their international business activities and accounting procedures. Though stock-based compensation disclosure was commented upon in many letters, it was only rarely the main concern expressed by the SEC.

Table 2: Exchange Distribution

#
%

Rubin 33
Nasdaq NYSE OTC AMEX Total 96 17 0 6 2 27 4 35.04% 62.04% 2.19% 0.73% 100.00%

Table 3: Summary Financial Data

Mean Stand. Dev. Median Co. of Variation Total Assets* Sales* Oper. PM EPS $19,850,125 $6,256,405 11.34% 1.38% $96,189,346 $14,255,519 22.30% 2.08% $2,152,186 $1,382,202 10.79% 1.22% 0.21 0.44 0.51 0.66 *Assets and sales figures are presented in terms of thousands of dollars ROE 14.14% 63.89% 13.16% 0.22

Table 4: SIC Code Distribution

Mining Construction Manufacturing Transportation & Public Utilities Wholesale Trade Retail Trade Finance, Insurance, Real Estate Services Total # 5 3 130 27 9 22 42 36 274 % 1.82% 1.09% 47.45% 9.85% 3.28% 8.03% 15.33% 13.14% 100.00%

Table 5: Full Sample Abnormal Returns using the Market Model

Day -30 N 281 Generalized Sign Z -0.227 Running Cumulative Abnormal Return -0.07% Mean Abnormal Return -0.07% Positive: Negative 134:147 Patell Z -0.28

Rubin 34
-29 -28 -27 -26 -25 -24 -23 -22 -21 -20 -19 -18 -17 -16 -15 -14 -13 -12 -11 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 +1 +2 +3 +4 +5 +6 +7 +8 +9 +10 +11 +12 +13 +14 +15 +16 +17 +18 +19 +20 +21 +22 +23 +24 +25 +26 +27 +28 +29 +30 281 281 281 281 281 281 281 281 281 281 281 281 281 281 281 281 281 281 281 281 281 281 281 281 281 281 281 281 281 281 281 281 281 281 281 281 281 281 281 281 281 281 281 281 280 280 279 279 278 278 278 278 278 274 274 272 271 271 270 269 0.967 0.729 -0.943 0.012 -0.823 1.325$ 1.803* -0.227 0.848 -0.465 -0.465 -1.062 -1.301$ -0.585 -2.017* -0.465 0.967 1.445$ -0.823 -1.540$ 0.609 0.49 0.132 -0.943 -0.704 -0.346 -0.346 1.325$ -2.017* -1.062 -0.823 -0.465 -0.227 -0.585 -0.107 -0.704 0.49 -2.137* 1.325$ 2.758** -0.346 0.132 -0.704 -0.943 -1.485$ -1.724* 2.285* 0.847 0.426 0.066 0.306 -1.014 1.387$ -0.183 0.301 0.298 0.236 0.357 -0.801 -0.622 0.05% 0.07% 0.06% -0.04% -0.20% -0.26% -0.10% -0.04% -0.06% 0.06% 0.09% 0.10% -0.03% -0.04% -0.16% -0.37% -0.45% -0.27% -0.28% -0.35% -0.28% -0.38% -0.28% -0.28% -0.31% -0.48% -0.60% -0.56% -0.65% -0.66% -0.61% -0.67% -0.64% -0.64% -0.56% -0.64% -0.59% -0.67% -0.61% -0.51% -0.60% -0.62% -0.62% -0.50% -0.56% -0.65% -0.51% -0.49% -0.47% -0.34% -0.28% -0.41% -0.51% -0.49% -0.48% -0.55% -0.53% -0.68% -0.79% -0.76% 0.12% 0.01% -0.01% -0.10% -0.16% -0.06% 0.16% 0.06% -0.02% 0.13% 0.02% 0.01% -0.13% -0.01% -0.12% -0.21% -0.08% 0.17% -0.01% -0.07% 0.07% -0.09% 0.10% 0.00% -0.03% -0.17% -0.11% 0.04% -0.09% -0.01% 0.04% -0.06% 0.02% 0.00% 0.08% -0.08% 0.06% -0.08% 0.06% 0.09% -0.09% -0.01% 0.00% 0.12% -0.06% -0.09% 0.14% 0.02% 0.02% 0.13% 0.07% -0.13% -0.10% 0.02% 0.01% -0.07% 0.01% -0.14% -0.11% 0.03% 144:137 142:139 128:153 136:145 129:152 147:134) 151:130> 134:147 143:138 132:149 132:149 127:154 125:156( 131:150 119:162< 132:149 144:137 148:133) 129:152 123:158( 141:140 140:141 137:144 128:153 130:151 133:148 133:148 147:134) 119:162< 127:154 129:152 132:149 134:147 131:150 135:146 130:151 140:141 118:163< 147:134) 159:122>> 133:148 137:144 130:151 128:153 123:157( 121:159< 154:125> 142:137 138:140 135:143 137:141 126:152 146:132) 131:143 135:139 134:138 133:138 134:137 124:146 125:144 0.487 -0.441 -0.665 -1.227 -0.89 -1.217 1.291$ 0.505 0.272 0.74 0.429 0.37 -0.875 0.031 -1.205 -1.802* -0.237 2.621** -0.334 -1.218 -0.106 -1.099 0.772 0.333 -0.704 -1.508$ -0.212 0.959 -1.625$ 0.061 0.469 -0.867 -0.982 -0.818 0.359 -0.745 0.756 -1.371$ 0.68 1.334$ -0.863 -0.604 -0.181 0.655 -0.549 -0.197 1.601$ 1.111 0.532 1.136 0.192 -1.004 -0.788 -0.02 -0.206 -1.126 0.297 -0.849 -0.34 0.24

The symbols $,*,**, and *** denote statistical significance at the 0.10, 0.05, 0.01 and 0.001 levels, respectively, using a 1-tail test.The symbols (,< or ),> etc. correspond to $,* and show the significance and direction of the generalized sign test.

Table 6:

Rubin 35

Full Sample Cumulative Abnormal Returns using the Market Model

Days (-1,+1) (-5,+5) (-10,+10) N 281 281 281 Mean Cumulative Abnormal Return -0.06% -0.28% -0.23% Patell Z -0.623 -1.449$ -1.168 Generalized Sign Z -0.465 -1.062 0.49

The symbols $,*,**, and *** denote statistical significance at the 0.10, 0.05, 0.01 and 0.001 levels, respectively, using a 1-tail test. The symbols (,< or ),> etc. correspond to $,* and show the significance and direction of the generalized sign test.

Rubin 36

Table 7: Sub-Sample Cumulative Abnormal Returns

Overall Transparency, etc.
Window
(-2,0) (-1,+1) (-5,+5) (-10,0) (+1,+10) (-10,+10) (-30,0) (+2,+30) (-30,+30) (+31,+60)

Contractual Obligations

Acquisitions, etc.

Expensing

Revenue Recognition

Mean Cumulative Abnormal Return (CAR)

0.18% 0.19% 0.10% -0.47% -0.34% -0.81% -0.23% -0.04% -0.04% -0.75%

Generalized Sign Z
0.941 0.02 -0.164 0.020 0.204 -0.164 -0.164 -0.533 -0.164 0.852

CAR
0.36% 0.11% -0.97% -0.72% -1.18% -1.90% -1.01% -0.82% -1.88% -1.77%

Gen. Sign Z
1.502$ -0.499 -0.499 -0.833 -0.833 -0.833 -0.166 -0.499 -0.499 -0.680

CAR
-0.49% -0.68% -0.51% -0.64% 0.48% -0.16% -1.04% 1.14% 0.08% -0.20%

Gen. Sign Z
-0.675 -0.967 -0.675 -0.383 0.494 0.494 -0.675 0.786 -0.383 1.385$

CAR
-0.39% -0.13% -0.31% 0.17% 1.17% 1.34% -1.28% -1.17% -2.63% -0.52%

Gen. Sign Z
-0.367 -0.113 -0.875 0.141 0.395 1.411$ -1.892* 0.395 -0.367 -0.636

CAR
-0.37% -0.35% -0.19% 0.27% 1.02% 1.29% -0.38% -1.13% -1.60% 0.21%

Gen. Sign Z
-0.284 -0.772 -1.017 0.449 -0.039 0.694 -0.772 -0.284 -0.039 -0.539

The symbols $,*,**, and *** denote statistical significance at the 0.10, 0.05, 0.01 and 0.001 levels, respectively, using a 1-tail test. The symbols (,< or ),> etc. correspond to $,* and show the significance and direction of the generalized sign test.

Rubin 37

Figure 1: Full Sample Cumulative Average Abnormal Returns Figure 1: Cumulative Average Ma Abnormal Returns r k e t i n d e x d i s t i n c t i o n =V a l u e
0. 20% 0. 10% 0. 00% - 0. 10% - 0. 20% - 0. 30% - 0. 40% - 0. 50% - 0. 60% - 0. 70% - 0. 80% - 0. 90% - 1. 00% - 1. 10% - 1. 20% - 1. 30% - 1. 40% - 1. 50% - 30 - 20 - 10 0 +1 0 Da y +2 0 +3 0 +4 0 +5 0 +6 0