Current Issue

CONTENTS of Volume 24, Number 2, December 2018

  • Regulation FD Disclosure of 8-K filing and Stock Crash Risk

  • Hyunkwon (kwon) CHo

  • ABSTRACT

    This paper tests whether item 7.01 of the Form 8-K filing, which is subject to the regulation FD, mitigates stock crash risk. The regulation FD forces the firm to communicate private information using information channel with broad coverage. Such communications may mitigate the firm’s stock crash risk by revealing the negative news in a more timely manner. Consistently, I find a negative association between the frequency of item 7.01 disclosures with the negative news (measured by market reaction surrounding the Form 8-K filing date) and subsequent stock crash risk. On the contrary, the results show that there is no association between the frequency of item 7.01 disclosures with the positive news and subsequent stock crash risk. Such association is more pronounced when the firm’s is not followed by equity analysts or do not have high percentage of institutional ownership. I also find that item 7.01 disclosures provide incremental information over other voluntary items or mandatory items of the Form 8-K filing. Finally, I use tone of the item 7.01 disclosures to identify whether the news is positive or negative, and find consistent results to the main findings. Overall, these findings suggest that communications subject to the regulation FD, especially the negative ones, are an important mechanism that mitigate stock crash risk.

  • KEYWORDS

    Stock crash risk; Regulation FD; 8-K filings

  • JONG-RYONG LEE

  • Credit Risk and Underlying Asset Risk

  • ABSTRACT

    This paper develops the credit risk of simple risky bond (Merton 1974) as expected option return to the maturity and analytically presents that the credit risk is influenced by the underlying asset risks. The paper moreover shows that the direction and magnitude of the influence depends on what the underlying asset risks are. Simulation results indicate that the relations between the credit risk and the asset risks are different among asset risks.

  • KEYWORDS

    Credit Risk, Expected Option Return, Pricing of an Option, Pricing of Risky Bond, Relation between Credit Risk as Expected Option Return and Asset Risk

  • SOJUNG CAROL PARK

  • Investor’s Overreaction to an Extreme Event: Evidence from the World Trade Center Terrorist Attack

  • ABSTRACT

    This paper investigates whether investors overreacted to the World Trade Center terrorist attack, using insurers’ stock returns. Short-term abnormal return reversals are observed after the 9/11 attack. The reversals may reflect the substantially increased uncertainty surrounding insurer stocks after the event, meaning that the price reactions are efficient risk adjustments. However, after controlling for the change in risk, I still find evidence of price reversals, which I attribute to investor overreaction. To bolster this claim, I provide cross-sectional evidence that reversals are stronger for insurers with higher information asymmetry, which have wider ex-ante bid-ask spreads and smaller numbers of analysts following. This result indicates that the reversals are likely due to behavioral biases.

  • KEYWORDS

    September 11, Overreaction Hypothesis, Uncertain Information Hypothesis, Information Asymmetry