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Professor
Institution
Event analysis of BP and shell
Date
Event analysis
Introduction
According to Dreman & Berry, (1995, pp21-36), There are multiple argument concerning the effects of announcement on the stock prices, such events usually attract a lot of attention. There are also arguments that such events attract the attention of speculators thereby increasing stock volatility. Events may mean a lot to the shareholder and the potential investors. Such events usually lead to increased activity in the stock of the companies in question and may either mean convenience or detrimental depending on the nature of the company (Harris, 1986; Ho, 1998; Jaffe, 1974).
Company information
BP and shell are both global; company dealing in oil and gas, with its presence in 80 countries around the world. The companies’ main products include gasoline, energy and other petrochemical products. The companies are operating two main segments in the petrochemical sector: Exploration & Production. And Refining & Marketing. Under exploration and production, the company explores for oil and natural gas, develops oil nd gas fields, midstream transportation, storage and processing., The company trades natural gas, liquefied natural gas, power and natural gas liquids. However, on the refining and marketing segments, the company supply and trades, refining, manufactures, markets and transports crude oil, petroleum and petrochemicals products. Recent activities include the acquisition of 83% of Companhia Nacional de Acucar e Alcool in April 2011, as well as the acquisition of Verenium’s lignocellulosic biofuels business in 2010
The company financials report as at 3rd march include:
Prev Close:
47.84
Open:
47.42
Bid:
46.26 x 100
Ask:
55.00 x 1000
1y Target Est:
52.93
Beta:
1.8
Next Earnings Date:
N/A
Day’s Range:
47.28 – 47.69
52wk Range:
33.62 – 49.09
Volume:
6,740,414
Avg Vol (3m):
7,587,520
Market Cap:
150.24B
P/E (ttm):
5.89
EPS (ttm):
8.06
Div & Yield:
1.92 (4.00%
Shell
DETAILS
73.62
72.90
73.00
72.51
1.87 Mil
2.71 Mil
72.01
1,000
73.78
1,000
77.97
57.97
3.36
4.62
Normality plot of the bp shares
Descriptive statistics for the bp data
Anderson-Darling
A-Squared
2.802
p
0.000
95% Critical Value
0.787
99% Critical Value
1.092
Mean
604.298
Mode
581.1, 579, 587, 573.7, 641.1
Standard Deviation
25.909
Variance
671.280
Skewedness
0.194
Kurtosis
-1.314
N
116.000
Minimum
560.000
1st Quartile
581.100
Median
600.800
3rd Quartile
628.503
Maximum
655.400
Confidence Interval
4.765
for Mean (Mu)
599.533
0.95
609.063
For Stdev (sigma)
22.950
29.752
for Median
588.700
612.000
Objectives of the study:
The main objectives of this study are:
- To examine the effects of announcement on underlying stock prices
- To determine whether the companies’ announcement are legitimate news or terrible news
Data and Technique
The data for the two companies are used are based on a number of common assumptions about the
T test for Shell
t-Test 1-sample
Test Mean
1889.75
Confidence Level
0.95
N
112
Average
1889.75
Test Stdev
p 1-sample Stdev
Stdev
151.0336
151.0336
0.964
SE Mean
14.27133
T
0.000
TINV
1.658697
p – One sided
0.5
Accept Null Hypothesis because p > 0.05 (Means are the same)
p – two sided
1
Accept Null Hypothesis because p > 0.05 (Means are the same)
T test bp
t-Test 1-sample
Test Mean
604.2978
Confidence Level
0.95
N
116
Average
604.2978
Test Stdev
p 1-sample Stdev
Stdev
25.90908
25.90908
0.965
SE Mean
2.405598
T
0.000
TINV
1.658212
p – One sided
0.5
Accept Null Hypothesis because p > 0.05 (Means are the same)
p – two sided
1
Accept Null Hypothesis because p > 0.05 (Means are the same)
It is imperative to know that the standards levels of t statistics are as shown below:
level
One tailed
Two tailed
1%
2.33
2.55
5%
1.66
1.95
10%
0.97
1.25
We set the day that the company released the information’s defined as day zero, then the daily returns for the first 30 days is calculated to determine the linearity of the data. This is as shown below:
Rit the 30 days around the first day “zero”: t = -30, -29,…-1, 0, 1,…, 29, 303
Then it is also advisable to calculate the total daily returns Rmt, for these days on the market of another firms, either Shall or BP. However, this may be done to compare group of companies having the same risk or operating in the same industry. The returns can however, be easily adjusted for market performance as well as risks. This will help in getting the excess returns for both Shell and BP during the period. For example, when the CAP model (capital assets pricing model) was used for controlling risk (Aitken, 2000, p 5)
Then the abnormal returns are defined as differences ARit= Rit–Rmt5
Then finally the average of the abnormal returns is calculated overall the N events in the whole sample:
The Cumulate the returns that are given for the first T days to CAAR are calculated:
From mother studies, there is enough proof that during the pre announcement the reaction from then investors varies in form from the reaction of the investors during post announcements. The preannouncement drifts that occur prior to the earning are usually because of insider trading. This is always against the strong for efficiency. However during the post announcement drift the reaction of the investors are against the semi strong form (MacKinlay, 1997).
Kabir, & Vermaelen (1996, pp 1591–160) states that, the t statistics is useful for determining if the excess returns during the announcements are very different from zero. This was arrived at by getting the t statistics for all the values of n and dividing the average excess returns by some predetermined standard error
T statistic (excess return/day t) = Average Excess Return / Standard Error
If the t statistics are statistically significant, the event affects returns; the sign of the excess return determines whether the effect is positive or negative.
Abnormal returns
When announcement are made most investors try to determine whether announcement are good for the company or bad for the same company: in the case we should determine whether the company had registered returns on the day of the announcements (Manne, 1966).
We assume that then return of the company on the day of announcements was 0.5. Further investigation finds that the returns for the same companies over the past 3 months were 0.3 on the business day. And the S&P INDEX had risen by 0.4%. Additionally, the CAPM estimated coefficient was found to be a=-0.1% and b=1.1.what was the response of the investors on the announcements (Barber, Griffin, and Baruch, 1994, p 23: Lorie, &. Neiderhoffer, 1968, pp 35-51: Kwong, &, Wong, (1984, pp, 905–917).
Market-adjusted abnormal returns
First we compute the original abnormal return for the announcement using the market-model, this is based on a number of factors amongst them the date of announcement, the nature of the company and performance of the company in prior events
Then we use the market market-adjusted model:
Then the mean adjusted model:
Conclusion
Is the market efficient?
Accordion to Grigori et al, (2008, p3), an efficient market is the market in which the market price is actually the unbiased estimate of the true value of the real investment. In this regard, it is healthy to say that the market is efficient. It also important to note that the market prices of the two companies are biased. Kyle, (1985, pp 1315–1335) enthuses that, this is because the prices are either low or high than the true value. However, it is important to note that the deviation are random and are not easy to determine the degree of randomness, based on the fact that when the stock of BP had more ratios they were overvalued than the stocks of Shell. Finally i would like to say that market efficiency is difficult to state because it depends on the risk adjustment procedure, magnitude of the issues and selection bias, (Dreman, 1998; Ball, 1978, pp 103-126).
Herring, et al, (2010, p 347), argues that, market efficiency is relative as there is likelihood that the market may be efficient o a group of investors and not efficient to other, this explains why the shareholder of BP may view the market as efficient while the investors of shell do not hold the same view. This may only be attributed to the differential tax and transaction cost. These factors confer advantages to some shareholders relative to other.
The efficient of the market makes it difficult for any group of shareholder to beat the market through the same strategy despite the availability of the precise information tom the investors. They cannot consistent find the undervalued stocks. The efficiency of the market makes it difficult for investors to use the price information both current and past to beat the market putting them at disadvantages land leaving them speculating.
From the three analyses, the abnormal return was positive, meaning that the announcement was a good for the investors. In most cases, the abnormal returns and the final cumulative returns for the past 12 months are usually measures of just averages. They are also the cumulative effects of the announcements on the made by the company; this is also same to the dividend and earnings announcements
Bibliography
Grigori Erenburg, Janet Kiholm Smith, and Richard L. Smith, (2008). “The Paradox of‘Fraud-on-the-Market Theory’: Who Relies on the Efficiency of Market Prices?”, Working Paper, 12.
Brad M. Barber, Paul A. Griffin, and Baruch Lev1994., “The Fraud-on-the-Market Theory and Indicators of Common Stocks’Efficiency,” The Journal of Corporation Law,
Aitken C.G.G. (2000), “Interpretation of Evidence, and Sample Size Determination,” in Joseph L. Gastwirth, ed., Statistical Science in the Courtroom,
Lorie, J., and V. Neiderhoffer (1968): “Predictive and Statistical Properties of Insider Trading,” Journal of Law and Economics, 11, 33–51.
MacKinlay, A. C. (1997): “Event Studies in Economics and Finance,” Journal of Economic Literature, 35, 13–39.
Manne, H. G. (1966): Insider Trading and the Stock Market. The Free Press, New York.
Harris, L. (1986): “Cross-Security Tests of the Mixture of Distributions Hypothesis,” Journal of Financial and Quantitative Analysis, p. 39.
Ho, B. M. (1998): Public Companies and their Equity Securities: Principles of Regulation under Hong Kong Law. Klumer Law International, London.
Jaffe, J. F. (1974): “Special Information and Insider Trading,” Journal of Business, 47, 410–428.
Kabir, R., and T. Vermaelen (1996): “Insider Trading Restrictions and the Stock Market: Evidence from the Amsterdam Stock Exchange,” European Economic Review, 40, 1591–1603.
Kwong, K. S., and K. A. Wong (1984): “The Behavior of Hong Kong Stock Prices,” Applied Economics, 16, 905–917.
Kyle, A. (1985): “Continuous Auctions and Insider Trading,” Econometrica, 53, 1315–1335.
Herring, Richard; Diebold, Francis X.; Doherty, Neil A. (2010). The Known, the Unknown, and the Unknowable in Financial Risk Management: Measurement and Theory Advancing Practice. Princeton, N.J: Princeton University Press. p. 347.
Dreman David N. & Berry Michael A. (1995). “Overreaction, Underreaction, and the Low-P/E Effect”. Financial Analysts Journal 51 (4): 21–30.
Ball R. (1978). Anomalies in Relationships between Securities’ Yields and Yield-Surrogates. Journal of Financial Economics 6:103-126
Dreman D. (1998). Contrarian Investment Strategy: The Next Generation. Simon and Schuster.
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