Review of Accounting Studies, 3, 327–346 (1998)
1998 Kluwer Academic Publishers, Boston. Manufactured in The Netherlands.
Stock Price Behavior Around Announcements
Leonard N. Stern School of Business, New York University
FREDERICK W. LINDAHL
School of Business and Public Management, George Washington University
WILLIAM E. RICKS
Rosenberg Institutional Equity Management
Abstract. Is it plausible that important corporate events such as write-offs, averaging around 20% of ﬁrms’ market
values, are associated with stock-price responses of less than 1%? We investigate this question by observing a
lengthy period before and after the announcement date. We ﬁnd, as suggested by previous studies, that price
declines precede write-off announcements. We ﬁnd what has not been found before: abnormal returns continue
to decline after the announcement by as much as 21% annually for a two-year period. This signiﬁcant stock-price
underperformance is also observed around subsequent earnings announcements, and is robust to various risk-
adjustment techniques. Our ﬁndings are important on two counts: they (1) suggest that disclosure standards may
not be sufﬁcient to allow market agents to understand the economic consequences of the write-offs, and (2) reveal
a substantial mispricing, which is inconsistent with market efﬁciency.
Write-offs (deﬁned as material, infrequent charges against earnings for asset revaluations or
provisions for future costs) are important corporate events due to the large dollar amounts
typically involved and their signiﬁcant ramiﬁcations for ﬁrm performance and value.
Clearly, write-offs are challenges for investors trying to assess a ﬁrm’s performance and
value. This is because they are infrequent and are often ambiguous in the information they
convey. A write-off may indicate a management intent to rid itself of a relatively unprof-
itable operation and thus be considered good news. Alternatively, a write-off may simply
convey information about reductions in asset values or presage even deeper troubles yet to
come. In addition, write-offs typically distort a ﬁrm’s earnings picture by packing large
losses into one quarter, thereby masking the trend underlying the ﬁrm’s earnings, which in
turn makes it difﬁcult for investors to evaluate future ﬁrm performance and value.
The confusing nature of write-offs is reﬂected in reports in the ﬁnancial press and by re-
cent empirical ﬁndings. For example, The Wall Street Journal (1996a) reports that analysts
claim that write-off announcements “make it difﬁcult to get a ﬁx on the level and direction
of future earnings,” and The Wall Street Journal (1996b) quotes a security analyst as saying,
“Every company I follow has a write-off. No one has any idea of what anyone is earning.”
In addition, Elliott and Hanna (1996), who study the information content of earnings com-
ponents in the presence of a succession of large accounting write-offs, conclude that special
items add noise to the information environment.