Does the stock market reward innovation? European stock index reaction to negative news during the global financial crisis

Adcock, Christopher, Hua, Xiuping, Mazouz, Khelifa ORCID: https://orcid.org/0000-0001-6711-1715 and Yin, Shuxing 2014. Does the stock market reward innovation? European stock index reaction to negative news during the global financial crisis. Journal of International Money and Finance 49 (B) , pp. 470-491. 10.1016/j.jimonfin.2014.06.004

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Abstract

This study uses data on 27 European stock indices over the period from January 2007 to December 2012 to investigate the relationship between innovations and the market reaction to negative news during the financial crisis. We use the bivariate BEKK-GARCH approach to estimate time-varying betas and abnormal returns. We show that index prices of countries in the high (low) innovation groups experience significantly positive (negative) abnormal returns on and following the negative news announcement dates. We also find that index beta changes following the arrival of bad news is negatively associated with a country's innovativeness. This finding suggests that innovations promote economic stability and enhance investors' confidence in a country's ability to cope during difficult times. Thus, policy makers who are concerned with sustainable growth should encourage R&D investments by adopting effective policies and avoid unnecessary cuts in R&D expenditures even during times of crisis. A study of the pre-crisis period from January 2001 to December 2006, using the same methods, indicates that investors value innovation more during difficult times.

Item Type:	Article
Date Type:	Publication
Status:	Published
Schools:	Business (Including Economics)
Subjects:	H Social Sciences > HF Commerce H Social Sciences > HG Finance
Additional Information:	PDF uploaded in accordance with publisher policy at http://www.sherpa.ac.uk/romeo/issn/0261-5606/ [accessed 10/10/14]
Publisher:	Elsevier
ISSN:	0261-5606
Date of First Compliant Deposit:	30 March 2016
Last Modified:	24 Nov 2024 23:45
URI:	https://orca.cardiff.ac.uk/id/eprint/63875

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