Reaction of investors to announcements in telecom sector in Bahrain

Event study is concerned about the changes in the equity value of firms (abnormal returns) as a result of the occurrence of some events. The changes in the equity value might be negative or positive depending on the reaction of the market to the event under investigation. The key assumption of the event study is that the market is efficient, which means that the effects of the event will be reflected immediately in the equity value of the company.

Literature indicates that the event study methodology is used widely in the corporate finance because it is crucial for firms to know the impact of policies (announcements) on the value of the firm over a relatively short time period. The importance of event studies is not confined to knowing how security is likely to react to a given event, but can also help to predict the reaction of other securities to different events.

Generally, there are three types of event studies. The first type is called “corporate events”, which examines the impact of firm-related events such as change of CEO, expansion, merger and acquisition, sponsorship of an important event, etc. The second type is “announcements of macroeconomic events” including events such as credit ratings of countries, unemployment figures, change in price of oil, etc. The third type is “regulatory events” including business-related rules and regulations such as bankruptcy Act, bribery Act, etc. The first type i.e. corporate events, is the one which is mostly used by scholars.

Using corporate events type, I conducted a study in Bahrain to examine the impact of a number of events on the stock prices of “a leading telecom provider”. In this study, six of the provider’s events were selected and have been classified under one of two categories: marketing or financial. Marketing events include announcements with a promotional nature, such as winning awards and reducing rates, while financial events include announcements such as change of top management and increase in investment. The purpose of the study was to identify the reactions of investors to the chosen six events announced by the provider. Furthermore, if investors react, do they react to all announcements equally and generate some abnormal returns or do we assume that there should not be any reaction, given that Bahrain market is efficient.

Overall, results show that regardless of the type of announcement or unexpected event, investors do react to this type of news, either negatively or positively. This is evident in the changes in the cumulative abnormal returns exhibited on the event day and throughout the period of the event. Results reveal that investors gain abnormal returns mainly from the announcement of increased investment in projects, as the provider’s announcement that it had taken steps to provide complete ICI infrastructure for al Baraka Banking Group (event 6) cause abnormal returns to rise by about 10%. Similarly, when the provider strengthened its commitment to the Jordanian telecom market in Umnia 3G (event 4), the abnormal return raised by about 5%. Yet investors felt neither happy nor confident when the company announced the appointment of a new supervisor committee and chief operating officer (event 5), and reacted negatively to this announcement. On the marketing end, when the provider slashed its rates for the business broadband (event 2), investor reactions were positive, and generated about 7% abnormal returns. Furthermore, it was found that award winning for investor relations gives a positive signal (event 1) while award winning for digital annual reports (event 3) was interpreted as a negative signal by investors. The six events used in this sample highlight the fact that the Bahrain Bourse is not efficient and therefore, investors can systematically make abnormal returns. This conclusion supports the signaling theory, which states that corporate management can send significant signals to the market by taking certain actions and publicly announcing events.