6.6 Information efficiency and market capitalization
An interesting question to investigate using the Event Study Explorer is the relationship
between firm capitalization and the response to news. A reasonable prior is that smaller
capitalization firms with less intensive news coverage would show greater response to
extreme sentiment news events. Figure 6.13 overlays the event study charts, segmented
into four capitalization groups as shown by the label ‘‘Cumulative excess return’’.
The chart in Figure 6.13 conforms strongly to expectations, with the exception of
negative news for the smallest capitalization group.
For positive sentiment events (upper lines) the lowest cap group shows a large
response (2–3% excess returns relative to others in the sector/cap group). Note the
60-day scale in Figure 6.13. There is ample time to accumulate positions in these
(apparently) under-followed stocks.
For negative sentiment events (lower lines), a similar picture is seen, with the negative
excess return lines declining and the largest cap (i.e., most followed) showing the
smallest effects. The next two lower capitalization classes line up in beauty contestant
fashion, but the smallest cap group (under $2bn) shows anomalous behavior, essentially
flat for 40 days, then slightly positive.
162 News and abnormal returns
Figure 6.12.The Event Study Explorer built in Spotfire. Great flexibility in the scope and para-
meters of event studies is possible. Strong data-mining warnings apply.