Conclusion

Overall, the paper succeeded in identifying companies which have Situation X-type events more commonly than Situation Y. It also partially managed to explain the competitors’ stock price reactions, with limitations. Arbitrage profits can be earned for some companies if:

1. news articles are released during the trading hours

2. the duration of price adjustment to direct news is different to the duration of adjustment to competitors’ news (beneficial, but not necessary)

3. technology industry shows low returns on the day (discussed below)

4. transaction costs are low (Apple’s significant news effect on Google and Hewlett Packard is high enough to disregard transaction costs)

5. relevant software is created, which analyses competitors’ news and intraday stock returns

Hypothesis Check

Ratios of response to significant news analysis

Significant opposite reaction test

H₀: news that significantly affects company A does not have a significant opposite effect on its competitors. RN < OR

H_a: news that significantly affects company A has a significant opposite effect on its competitors. RN > OR

We fail to reject the null hypothesis for all cases. The results from the tests suggest that news articles that are significant for both companies are usually of Situation Y type, where both competitors benefit or suffer.

Opposite reaction test

H₀: news that significantly affects company A does not have an opposite effect on its competitors. Neg>OR

H_a: news that significantly affects company A has an opposite effect on its competitors. Neg>OR

We reject the null hypothesis for Apple, Microsoft and Lexmark. Apple and Lexmark show weakly significant results, while Microsoft shows moderately significant results. On average these companies’ significant news articles have opposite effect on the competitors. Significant news articles about Microsoft are of Situation X type in almost 60% of cases, which opens opportunities for arbitrage profits.

Proportion of competitors’ influence on the stock return

Market return as control variable

H₀: there is no negative relationship between the return of company A and its competitors.

H_a: there is negative relationship between the return of company A and at least one of its competitors.

We fail to reject the null hypothesis for all companies. The results show positive correlation between competitors’ stock returns, except for Microsoft case. Microsoft is affected in an opposite way from competitors’ stock returns, but the results are insignificant.

Industry return as control variable

H₀: there is no negative relationship between the return of company A and its competitors.

H_a: there is negative relationship between the return of company A and at least one of its competitors.

Null hypothesis is rejected for Apple and Microsoft at 99.9% confidence level. Apple’s returns are affected in an opposite way by Google’s and Hewlett-Packard’s share price returns. Microsoft is affected in an opposite way by Apple’s stock returns. Arbitrage opportunities are available, especially for Microsoft-Apple case.