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How Stock Prices React to Managerial Decisions and other Profit Signalling Events in the Hellenic Mobile Telecom Market

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How Stock Prices React to Managerial Decisions and other Profit Signalling Events in the Hellenic Mobile Telecom Market
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  Journal of Money, Investment and Banking ISSN 1450-288X Issue 2 (2008) © EuroJournals Publishing, Inc. 2008 http://www.eurojournals.com/finance.htm How Stock Prices React to Managerial Decisions and other Profit Signalling Events in the Hellenic Mobile Telecom Market Apostolos G. Christopoulos University of Athens, Department of Economics, Department of Economics 5 Stadiou str., 10562, Athens, Greece Konstantinos P. Vergos Certified Analyst, 32-34 Vergovitsis str., 11477, Athens, Greece John Mylonakis 10 Nikiforou str., Glyfada, 16675, Athens, Greece Abstract The aim of this paper is to examine the effect of actions by the management of COSMOTE, the leading Greek mobile operator, actions by HTO, its parent company, economic, investment and analysts’ report announcements on the share price of Cosmote S.A. and competition issues. For this purpose, the sample includes announcements that relate to managerial decisions (actions to increase market share in the mobile telephony market), investments in subsidiaries abroad and co-operations with retail networks, competition moves, capital structure decisions, profit announcements analysts reports and investors’ plans and decisions. Different event periods are examined. The abnormal returns are examined for different event periods (from five days before the event/announcement until 90 trading days after the event/announcement). From the analysis it is shown that stock prices do not react instantaneously to publicly announced information. Indeed, stock  prices continue to appreciate or depreciate till at least till ten days after the event. Keywords:  Telecommunications, announcements, Cosmote share, market efficiency, valuation, profit signaling, management, capital markets. JEL Classifications Codes:  G14, L96, D81, F14 1. Introduction In Greece, mobile telephony was initially introduced in 1993 when the conservative government auctioned two licences, which were acquired by Panafon and TIM Hellas. In reality, the licenses were granted in the late 1992, when Panafon and Telestet were founded. Initially, the market operated as a duopoly, under the control of the Ministry of Communications and the Greek Regulatory Authority (E.E.T.T). However in 1998, a third mobile licence was granted to COSMOTE, a subsidiary of the fixed voice incumbent, HTO. Four years later, in 2002 another mobile operator, namely Q-Telecom, entered the Greek market and became the fourth mobile operator. However, in 2004 Q-Telecom was acquired by TIM Hellas and since then, the market consists of three operators. Since June 2004, when   Journal of Money, Investment and Banking - Issue 2(2008)  40 Panafon-Vodafone de-listed from the Athens Stock Exchange and since TIM Hellas in not-listed yet in the ASE, the investigation in our study refers only to COSMOTE. The purpose of this paper is to investigate whether publications and the announcements can be considered as drivers of share prices. If this is so, then one may argue that electronic media and the written press can “manipulate” the share prices and therefore the question we need to answer is to what extent? It is also interesting to examine whether such publications and announcements analysis of the  past can be used to foresee the future movement of the share prices in the sense that negative news are expected to be followed by a fall of prices or they just give information that results in losses for the investors, i.e. in cases where publications and announcements that call the investors to buy/sell a  particular share have as a result the fall/increase of the particular share price. In the case of this analysis, it has to be taken into consideration that Cosmote is a subsidiary of HTO, one of the biggest listed companies in the Athens Stock Exchange (ASE) and therefore the conclusions may not be applicable to every company, listed in the ASE. It can be argued that for smaller companies it is expected that investors will need more time to react and share prices will change with delay. It can, also, be argued that for smaller companies it is expected that investors will need more time to react and share prices will change with delay. Of course another distinction that can be made is according to the significance of the published information or the announcement. It is expected that an important publication/announcement will be followed by faster reactions whereas for minor news, the reaction is expected to be slower. In this paper, daily closing share prices for the period 28-9-2000 until 2-3-2006 are examined. The share prices are adjusted for capital increases and dividends. The data which is used comes from the electronic EFFECT database. The srcinal sample of events was compiled by information revealed to the press. The articles were collected from daily and weekly newspapers. The electronic database of Reuters Business Briefing is used in order to crosscheck the time of information releases. 2. Historical development of Mobile Telephony in Greece Mobile telephony in Greece is considered as one of the most successful markets. The mobile operators cover geographically the entire Greek territory and they offer a wide range of products and services tailored to different types of consumer. This can be seen in terms of penetration which in Greece is estimated at almost 100%. At the same time, the intensive competition has driven the mobile operators to decrease their prices for both calling and SMS rates which led the number of the subscribers and the volume of the telephony minutes to increase continuously. Today, the Greek market is among the most successful in the European Union (EU) whereas it seems to operate also as a close substitute to the fixed voice telephony which at the same time follows a declining course in volumes of units (minutes) for fixed-to-fixed telephone calls. Cosmote a member of the HTO group launched its commercial operations in April 1998, five years after its two major competitors. HTO owns 70% of Cosmote whereas the remaining 30% was licensed to Telenor of Norway, while Panafon and STET Hellas launched their commercial operations in July 1993. In June 2001, after only three years of operation, it was ranked first in terms of subscribers in the relevant market of mobile telephony. In June 2002 a fourth operator Q-Telecom launched commercial operations. Cosmote today has over 4.2 million customers in Greece and also has subsidiaries in Albania, Bulgaria, Romania and the Former Yugoslavian Republic of Macedonia - FYROM. This development was part of the strategic planning of HTO Group and Cosmote for expansion in the South Eastern European region, and particularly in markets with significant growth  potential. Cosmote entered the Athens Stock Exchange (ASE) in early October 2000 and since then its share performance is among the best between the listed telecom companies in Europe. The same appears to be with Cosmote’s financial results which are among the best of all listed European companies in the sector (in terms of EBITDA margin, Net Income margin, ROIC, ROE, etc). Another  41  Journal of Money, Investment and Banking - Issue 2 (2008)   point that affects the performance of Cosmote’s share is its decisions for investments, mainly in the Balkans and the Southeast Europe. Investments like in Albania, Bulgaria, FYROM and Romania, are considered to be very successful in terms of both subscribers and revenues. The regulatory intervention is another factor that may affect the results of Cosmote share price. However, such actions have taken  place mainly during the last 2 years, when EETT decided to investigate two cases. The first was the very high international roaming rates where no actions were taken and the second was the common  practices in terms of SMS tariffs. 3. Research Methodology This paper attempts to investigate how all the above-described factors (namely announcements about Management status, investments to Subsidiaries, Competition moves, Capital structure decisions, Profit announcements, Analysts reports and Investors plans) can affect the trading of Cosmote shares in the ASE. In other words, in this article we are interested in investigating which of the above mentioned factors affect more the price of Cosmote and at which significance level. 3a Data The source of our work is references to Cosmote in the daily newspapers, from the day of Cosmote’s introduction into the stock exchange till March 2006. Since we use a window period that starts 10 days  before the announcement and finishes 100 after the event, we excluded some events that took place during the first 100 days after the company was listed in the ASE. Alternatively, we can say that in this paper we attempt to present an event study  where we categories the events into six groups, three groups of positive announcements and three groups of negative announcements. In particular the events that are examined are the following: a.   Positive Management events (The state will proceed to further privatisation of the company, The company is planning to acquire, or increase stake on, profitable companies/or gain licences (mainly for the mobile telephony) in the telecom sectors of other countries, The company is planning to sell non-profitable subsidiaries in the telecom sector in other countries, replacement of the company’s Director General).  b.    Negative Management events, actions to the opposite direction to these of Positive Management events (e.g. the state will not proceed to further privatisation of the Cosmote, Conflicts between the Minister and the Director General, etc). c.   Positive Competition & Capital Structure events (Foreign investors will increase stake on Cosmote, New marketing strategy will strengthen Cosmote’s competitive position, The issue of debt will favour current investors). d.    Negative Competition & Capital Structure events (i.e. to say actions to the opposite direction to these of Positive Competition & Capital Structure events including the entry of new competitors to the market or decisions of Regulatory Authority that undermine Cosmote’s competitive position). e.   Positive Profit signalling events (decreased Investments to non-profitable sectors/subsidiaries, Increased Investments to profitable sectors/subsidiaries). f.    Negative Profit signalling events (i.e. to say actions to the opposite direction to these of Positive Profit signalling events). The classification of events had been as illustrated on the following Table 1.   Journal of Money, Investment and Banking - Issue 2(2008)  42 Table 1:  Classification of events that affect share price Factor Positive decision Negative decision Classification Management The state will proceed to further privatisation of the company, and/or new director general for the company The state will not proceed to further privatisation of the company, and/or conflicts between minister and director general Management events Subsidiaries The company is planning to acquire, or increase stake on, profitable companies or gaining licences for mobile telephony in other countries The company will not acquire, or will decrease stake on, profitable companies/or licences for mobile telephony in other countries The company is planning to sell non- profitable subsidiaries in other countries The company is planning to acquire non- profitable subsidiaries in other countries Investors Foreign investors will increase stake on the company Foreign investors will decrease stake on the company Competition & Capital Structure events Competition  New marketing strategy will strengthen the company’s competitive position  New competitors will enter the market, and/or decisions of the Regulatory Authority that undermine the company’s competitive position Capital structure The issue of debt will favour current investors The issue of warrants will not favour current investors Profitability Increased Investments to non-profitable sectors/subsidiaries Decreased Investments to non-profitable sectors/subsidiaries Profit signalling events Decreased Investments to profitable sectors/subsidiaries Increased Investments to profitable sectors/subsidiaries Profit announcements The company is expected to increase profits The company is expected to decrease profits Analysts reports Analysts raise target-price and/or expect higher profitability Analysts decrease target-price and/or expect lower profitability Contracts Contracts that affect profitability positively Contracts that affect profitability negatively In this research a two level process for the analysis is followed. The first level was to use the publications information from an electronic data base which we divided in six columns according to the content of the publication (event). We made an effort to examine most important events in the examined period. In total we examined 122 events that took  place from September 1998 up to March 2006. Then all the variables are regressed. Different event periods are examined. The start of event period is five days before announcement, or at the day of announcement. We examine abnormal returns from the start of event  period (five days before the event, or at the day of announcement) till 90 trading days after the announcement. The number of examined cases by type of event is illustrated in the Table 2. Table 2:  Number of examined cases by type of event Type of cases Positive cases Negative cases Total number of cases Type of events Positive cases Negative cases Total number of cases management 2 5 7 Management events 8 8 16 subsidiaries 6 3 9 investors 4 3 7 Competition & Capital Structure events 15 7 22 competition 7 1 8 capital structure 4 3 7 cost/investments 1 7 8 Profit signalling events 51 21 72  profit announcement 11 4 15 analysts 33 8 41 contracts that affect profits 6 2 8 Total 74 38 122 Total 74 38 122 There are two main research questions to investigate. First, it is investigated whether positive announcements are recognised by the marketplace. Second, it is examined whether negative announcements are recognised by the marketplace.  43  Journal of Money, Investment and Banking - Issue 2 (2008)   3b Hypothesis Testing The event-study methodology is used in this study to examine the reaction of investors to announcements. The ordinary least squares market model procedure (srcinally suggested by Masulis, 1980, and Brown and Warner, 1980) described by Brown and Warner (1985) is used to test the hypothesis that a sample’s event period abnormal return (  AR ), or cumulative abnormal return ( CAR ), is equal to zero. The methodology is based on the assumption that capital markets are sufficiently efficient to evaluate the impact of new information on expected future cash flows of the firm. It involves the  prediction of a "normal" return during the event window in the absence of the event, estimation of the abnormal return within the event window, where the abnormal return is defined as the difference  between the actual and predicted returns; and testing whether the abnormal return is statistically different from zero. We denote the abnormal returns estimated from the market model as  ARs  (“abnormal returns”), while calling the cumulative abnormal returns estimated as CARs  (“Cumulative abnormal returns”). The market model assumes a linear relationship between the return of any security to the return of the market portfolio:  t ,i t , mii t ,i  e R R  ++=  β α   given that 0 )e(  E  t ,i  =  and  2e t ,i  t  )e( Var  σ  =  where  t  is the time index, i = 1,2,…,  n  stands for security,  R i,t  and  R  m,t  are the returns on security i  and the market portfolio respectively during period  t , and e i,t  is the error term for security i . An estimation period of days –100 to –10 before the event day is used. The prediction error (the difference between the actual return and the predicted normal return), in this study referred to as excess return, denoted as  AR ’ , is then calculated as:  t , m^ii^ t ,i t ,i  R R R A  β α   −−=′  Under the null hypothesis, the excess returns will be jointly normally determined with a zero conditional mean and conditional variance ( )  ]  ) R R(   [  R A  m m t , m e t ,i  t 2222 1901   +++=′  which, given the sample is large, reduces to  2e t ,i  2  t  R A   where: m  R  is the mean of the market portfolio. For a subset of N events, the cumulative excess returns at each instant  t  within the event window are computed as ∑ = ′=′  N 1i t ,i N 1 t  R A R A  The test statistic for any day in the event period is given by  p t stat Sˆ  R A t  ′=  where S ’  p  is the standard deviation of the mean excess returns over the pre-event period
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