The Impact of News on Companies Share Prices - Term Paper Example

THE IMPACT OF NEWS ON COMPANIES’ SHARE PRICES By Student’s Name Course+Code Class Institution Date Introduction The gravity of dissemination of information in the current decade is greater than ever before owing to technological forums that have made the spread of information easier and faster. News related to the financial performance of organizations makes specific content over the media thus making its availability to investors very simple. News additionally have the power to influence decisions made over different matters thus showing evidence of their ability to affect the choices made by investors. As researched by Fama in 1991, the effect on news on stock returns is a concept that is yet to be fully comprehended and determined definitively. Subsequent studies by Haugen et al (1991) and Dolde et al (2002) identifiy that the effect of news reports on the share prices of companies is dependent on the sophistication of the community upon financial markets and the level of news coverage. Gosnell et al (1996) and Green and Watts (1996) further determined that stock prices reacted to disseminated news within the hour that the news is released. This retro respect paper therefore seeks to determine the impact of news on companies’ share prices. The paper will discuss Tesco’s horse meat scandal and the consequent share prices reaction after the news broke to determine this concept. Furthermore, the discussion will employ the use of fourth generation elements to determine the conflicts following the news release. Share price reactions to news Studies reveal that the release of news regarding organizations which directly or indirectly affects their performance results in a rapid increase of instability (Bowers et al, 2014). The major effect is however short lived due to the speed of the stock market’s response. Investors and managers are prone to react based on the panic caused by the news item. The fact that the media mostly manipulates and exaggerates information for effect makes the situation seem dire than it really is thus prompting grave reactions. The importance of the share price reactions to news however cannot be underrated as they highly determine the performance of an organization and could result to its growth or closure. The reaction of the share price to news is thus basically determined by the rise in shares or drop witnessed in the financial information of an organization (Lou, Gu and Cheng, 2013). As aforementioned, the share price reaction to news can either be fall or rise in shares but mostly the overall effect is general instability witnessed over the market. An announcement by Lehman Brothers in 2008 about actively seeking a buyer saw their shares plummeting by 45%. Based on this share price reaction, it can be assumed that investors determined that the organization had difficulty in finding a suitor thus decided to withdraw their shares. Four days later the company filed for bankruptcy in what is still the largest bankruptcy in the history of the United States. The movement of share prices is thus grounded in the changes in supply and demand. When more individuals want to buy stock based on positive news, the market price increases while more sale of stock decreases the price (Lou, Gu and Cheng, 2013). These fluctuations are thus dependent on myriad factors including news items and the category of the business that is affected in the organization. Negative news usually results to selling of stock by individuals in the financial industry. This news includes economic and political uncertainty, poor corporate governance and reports of bad earnings as well as ethical concerns in organizations. Positive news on the other hand is bound to lead to buying of stocks and this news includes new products and acquisitions, positive political and economic indicators, positive earnings reports and exemplary corporate governance. It is however risky to assume that company share prices are solely affected by negative or positive news. The newness of the news information and the unexpectedness of the content are among the factors that influence the share price reaction. The news categories such as political, economical and on the basis of various divisions of the company also affect the company share prices (Albarran, 2016). The efficient market hypothesis on the other hand suggests that the prices of stock wholly represent all information that is publicly available and that no amount of information or evaluation can provide the investors and shareholders the chance to outperform the market (Jovanovic, et al, 2016). The hypothesis therefore purports that any information and news announcement regarding a company is rapidly subsumed within its stock prices. The hypothesis furthermore holds that the announcement will only affect the company share prices for a short amount of time. Efficient market hypothesis therefore determines that individual investors and shareholders are rational thinkers and assessors and that they will correctly interpret the available information before making any choices. The hypothesis moreover holds that drift in the pattern of company share prices are regular disruptions and that the efficient prices will return. One case that disapproved the hypothesis was that of the bankruptcy of the Lehman Brothers. Mini Case Study: Horse meat scandal, Tesco The horse meat scandal affecting grocery supermarkets in the UK has been the biggest ignominy upon food and drink in the grocery industry of Britain since the mad cow disease in 1980. Tesco, the largest British grocery retailer was the first casualty with one of its burgers containing 29% horse meat where it was supposed to be 100% beef. 37% percent of the beef products tested were confirmed to contain horse DNA. 60% of the salami products also had horse DNA. Based on the general theory of positive news getting high share prices and negative news getting low share prices, Tesco’s shares were bound to drop. As Dolde et al (2002) purports, the reaction of the share prices is dependent on the sophistication of the community and the level of coverage of the news. Given the magnitude of the scandal, the shares would be prone to dropping as the scandal affected political, legal, health, cultural and religious dimensions. Politically, the scandal threatened the European control systems and this would make investors doubtful of the integrity of the control systems. Additionally, the fact the meat was imported was equally risky for the investors as the foreign nature of the trade may be a part that they cannot control or have enough research done over it thus resulting to possible selling of their shares. Legally, the supermarkets faced potential litigation for selling contaminated food and failing to label the food products correctly if they contained contaminated substances. The legal ground could not however hold as the Tesco does not produce the meat but rather sources it from distributors who have been approved by the government. The threat of litigation therefore had little potential damage to the supermarket thus causing minimum concern to the investors. Based on health however, Tesco was bound to experience loss due to customers abandoning the supermarket. Despite horse meat being deemed as fit for human consumption, the consumer wants beef and not horse meat. On the other hand, the substance phenylbutazone used in horses is very fatal to human beings should it be consumed. The health perspective was bound to draw the highest share price reaction. The subsequent cultural and religious impacts of the news included disrespect to the Jewish community who do not eat horse meat and a disgrace to the British culture as well as horse meat is not consumed. Impact of the horse meat news scandal on Tesco’s company share prices The company shares of Tesco went down by 1% and a £300M wipeout in value following the horse meat scandal (Fletcher, 2013). Analysts however commented that the event was a five minute scandal and that the loss of shares was a great buying opportunity for investors. Four months after the scandal Tesco reported a decline in its UK sales, this resulted to a 5% drop in shares (Preston, 2013). Despite the report by that the investors had shrugged off the horsemeat scandal (Felsted et al, 2013) the company had subsequent drop in shares and share value until late 2016 where it picked up (Yeomans, 2016). The retailer has however witnessed further drop in its share prices due to further accounting scandals. In comparison with other retailers such as Sainsbury’s and Morrison’s, Tesco would have picked up well if not for subsequent negative news. Tesco is however getting back thus showing average improvement in its sales since three years past. Investors generally have a greater reaction to bad news as opposed to good news. This is because negative news has a longer lasting impact as opposed to positive news. Closer evaluation of the scandal reveals that most consumers were not concerned with the health risk of the meat but rather the incorrect labeling (Condon, 2013). Such concerns show that the media is the factor that led to the aggressive impact of the scandal on the share prices of Tesco. Tesco additionally suffered as a victim of the actions of its distributers in the chain who falsified the documents by labeling beef while having full knowledge that it had horse met in it. the retailer thus suffered a blow to its consumer loyalty at a time when it was trying to rebuild it. The impact does not fall under the fourth generation group as the scandal was not complex or long term. The fact the company share prices of Tesco subsequently fell after 2013 was the result of other scandal. The impact was equally short term as the horse DNA was quickly discovered and arrests made on the suspected culprits. Despite the fact that contamination targeted the culture of the British and the religions of the Jewish people in the region, the crime was not politically instigated but rather an illegal means of making money by duping unsuspecting retailers and consumers. Contamination of beef with other meats particularly horse meat is ongoing in various countries but it has not been established as an active network. Furthermore, there is no wide spread financial support for the illegal trade thus ruling it out as a fourth generation group. The most effective and available pressures were affected but not used. Politically, the horse meat scandal threatened the control system of the European government. Economically, Tesco shares suffered a loss as well as other retailers who sold the same products. Socially, the culture of the British was disgraced as well as the Jewish religion as they do not consume horse meat. The health of consumers was equally threatened to the potential presence of phenylbutazone in the meat which is fatal to human beings. The effect of the horsemeat scandal on the stock market might be a fourth generation strategy, however, most of the retailers got back to their feet thus proving the efficient market hypothesis right where news announcements are seen as a disruption of business rather than a long term effect. There were no existent forces behind the media that showed manipulation rather it was the media’s art of enhancing the story that made it more scandalous. Conclusion This paper therefore concludes that news certainly has a surmountable impact on company shares as seen from theory and the mini case study of Tesco’s horse meat scandal. It is also conclusive that news creates instability in the company share prices as the effect is still felt periods later in the changes of share value. Generally, negative news results to the selling of share prices and this reflects what happened in the Tesco horsemeat scandal. However, the retailer did not satisfy the arguments of the efficient market hypothesis as it still it went lower in share value after subsequent accounting scandals. The paper additionally disapproves of the fourth generation group given the lack of a terrorism impact, the absence of a political strategy in the scandal and lack of pressure. The scandal was moreover simple to investigate and mitigate despite its big hit in the retailers and did not have long term effects on the purchase of food products in the UK grocery market. References Albarran, A. B. (2016). The media economy. Routledge. Bowers, A. H., Greve, H. R., Mitsuhashi, H., & Baum, J. A. (2014). Competitive parity, status disparity, and mutual forbearance: securities analysts' competition for investor attention. Academy of Management Journal, 57(1), 38-62. Condon,. D. (2013, FEebruary,21). 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The Telegraph. Retrieved from: http://www.telegraph.co.uk/business/2016/11/15/tesco-enjoys-fastest-growth-in-three-years-as-aldi-and-lidl-slow/ Read More