The Impact of News of Expected Returns
buttons.Surprises and Returns
Surprise announcements can trigger
a chain of events that affect the stock price of a particular company,
competitors, and other companies that might be suppliers to or customers
of the primary company.
Mergers and acquisitions (M&A) are a frequent type of surprise announcement. They involve corporate structure. When the announcement is publicly made, analysts use that information to factor into the company's long-run market outlook.
A merger or an acquisition could signal to an analyst that one particular company is financially weak, and it could downgrade its long-run outlook for that company. Alternatively, an M&A announcement could also signal to analysts that a company can increase its market share and, henceforth, its profits. These announcements typically make the biggest splash in a top-heavy industry, such as automobiles, pharmaceuticals, or healthcare, with a few strong players dominating a market that is researching, developing, and innovating new products.
Other announcements that can have a variety of impacts on asset valuation include a major court decision, news of the development of new research and innovation, FDA approval of a new drug, or a new cheap source of raw materials.
Any of this news has the potential to impact a particular company and, in some cases, its competition, suppliers, and customers. In many cases, there will be signals that analysts pick up on ahead of time. Investors actively making investment decisions based on a particular company or within a particular industry need to be aware of how a surprise announcement might affect their investment.
Fixed-income market participants also make forecasts on the long-run health of a company to project the likelihood that an issuer of debt might default. A company's instruments are subject to move in the event of an aforementioned announcement or if a private rating agency (Standard and Poors or Moody's) changes its outlook on their debt. If a news announcement is seen as positive for a company, its fixed-income instruments might seem more creditworthy, its bonds will rise in price, and its yield will decline. The inverse is also true.
Look at the creditworthiness ratings of different countries by Standard and Poors.
World Countries Standard & Poor's Ratings An example of the credit ratings prescribed by Standard & Poor's as a result of their respective long-term liability analysis for debt issued at the national government level. Countries issue debt to build national infrastructure. Look at how expensive it is to raise capital for such projects based on the geographic region.
Key Points
- Surprise announcements that come from a company, its competition, or a supplier or customer can affect the long run value of a stocks and bonds related to that company.
- These announcements will often concern earnings, stages in a product development cycle (FDA approval of a drug) or corporate structure changes (the acquisition of a competitor) and can move a company's outlook positively or negatively.
- When the news is generally seen as positive, a company's equity and debt become more valuable on the secondary market, and its stock price will rise and the effective yield on its debt instruments will fall.
Term
- Mergers and Acquisitions (M&A) – is an aspect of corporate strategy, corporate finance, and management dealing with the buying, selling, dividing, and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or new location, without creating a subsidiary, other child entity, or using a joint venture.
Source: Boundless Finance, https://ftp.worldpossible.org/endless/eos-rachel/RACHEL/RACHEL/modules/en-boundless-static/www.boundless.com/finance/textbooks/boundless-finance-textbook/introduction-to-risk-and-return-8/the-impact-of-news-of-expected-returns-78/index.html
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