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Chapter -I

MEANING

A firms communication to outside interest groups, especially to the

capital markets, represents an essential part of financial accounting. Earnings

announcements provide market participants with one public information source

by which to evaluate performance of a firm. The response of actors in the

marketplace to interim and annual accounting earnings announcements has

interested both practitioners and academics for decades. The major issue has

been the information value of these disclosures. Announcements are said to

contain information if they alter investors beliefs about the value of an asset

(eaver !"#$%!!&'. n the course of the years since then, researchers have

become convinced that the releases are associated with both increased security

price variability and increased trading volume.

The announcement is of varying use for different investors. The

e)istence of diversely informed investors before an anticipated announcement

suggests that market participants monitor trading especially before an

announcement in order to make inferences from the assets trading history as to

the value of the asset. Theoretical support is available that information

asymmetry is greater prior to earnings announcements than after. *or e)ample,

+emski and *eltham (!""', -cichols and Trueman (!""', and /im and

0errecchia (!""!a, b' predict that anticipation of a public announcement

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stimulates the ac1uisition of private information. 2owever, it is doubtful

whether an earnings announcement totally removes information asymmetry

after the announcement. An earnings announcement communicates a firm

value, but with noise.

*or e)ample, /im and 0errecchia(!"", !""&' and 3ivne (!""&' state

that an announcement stimulates private information ac1uisition. amber,

arron, and 4tober (!""&' and amber, arron, and 4tober (!"""' empirical

findings support this proposition. Thus it is reasonable to believe that a greater

permanent price effect will remain for large transactions compared to small

transactions even after an announcement. 5eriodic earnings announcements

may not tell the whole story but they definitely provide the jest of it. These

numbers may lead to higher or lower e)pectations and affect the valuation of

the stock.

5eriodic earnings announcements do serve a purpose as they reveal

information that would give a fair idea of the progress of the company.

Additional disclosures, such as segment reporting, presentation of consolidated

results and the geographical break6up, give a lot of information that would

otherwise not be available in public domain at such fre1uency.

These are valuable sources of information and give insights into the

companies operations and prospects. They give you a feel of what is

happening in a company and where is it heading in terms of business

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performances. 5eriodic financial disclosures also show how the company

compared with its peers.

They indicate a companys market position and control with the industry

in that particular period and also point to whether a company has the potential

to make the best of the given business conditions.

t has become a 1uarter6to61uarter e)istence, as far as stock valuations

are concerned. The valuation of any stock hinges critically upon the

performance of the company in the latest 1uarter. This has been the trend in the

74 markets too, for a long time now. There, 1uarterly earning calls, earning

e)pectations, consensus estimates, earnings whispers and whispers, on

whispers and how actual earning safer, in relation to these myriad 8e)pected

numbers have become a critical factor in the stock valuation commanded by

stocks.

This trend is catching on in the ndian market too though it is still a

1uestion of a comparison between just e)pected and actual earnings. -ay be

over time, as selective disclosures become more rampant, aspects such as

whispers and whispers on whispers (which is supposed to be closer to what

companies have told the analysts in private than any other number' may also

take hold.

t is now two years since the 4ecurities and E)change oard of ndia

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now, irrespective of whether it is a negative or a positive surprise.

The market response may get further smoothened if companies are

allowed to provide advance warnings of any major factor that is likely to

impact the earnings stream in between two earning announcements. This is a

common practice in this 74. n recent times, companies such as ;oca6;ola and

?illette had come up with warnings on the negative side, much in advance of

the earnings announcements. And there have been occasions in the last two

years when the likes of -icrosoft, ntel and ;4;9 4ystems have publicly

revised earnings estimates upwards.

f such a facility is allowed, there could be scope for mischief. ut by

making it mandatory for any such advance warning to be made public to all

investors through the nternet, wire services and media, this aspect can be taken

care of, to some e)tent. E)pectations may get altered by such warnings and this

may lead to a less volatile process of price formation.

The absence of such periodic disclosure leaves a gap in financial

information. :orse, it could lead to selective disclosures, giving room for

insider trading. 4mall investor would be left in the lurch due to non6availability

of information. The market might witness wider swings due to speculation and

selective disclosure.

nformation provided in financial statements is useful if scrutini@ed

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properly. *or instance, the previous eight 1uarters earnings announcements

would indicate the trend in margins and earnings growth. 4harp deviations may

re1uire further scrutiny to judge the sustainability.

Pro forma earnings v/s GAAP earnings

The accounting profession has attempted to create a rich information

environment that provides relevant and reliable financial disclosures. The

auditing profession has attempted to provide some degree of assurance that

managements financial disclosures are presented in accordance with the rules

of the accounting profession. roadly speaking, the oversight practiced by the

audit profession helps to prevent investors from basing decisions upon data that

misrepresents an investment opportunity. The financial markets react more to

pro formaB earnings measures than to ?AA5 earnings measures. 5ro forma

means as ifB or for the sake of form.B There are several uses of the term. *or

instance, ?AA5 mandates pro forma earnings disclosures for certain

accounting changes. ?AA5 also re1uires pro forma earnings disclosures for

stock options that are not charged against ?AA5 earnings. The 4E; mandates

pro forma disclosures in certain circumstances involving business

combinations. Analysts routinely project companies financial statements

(called pro forma statements' in order to provide a basis for an estimate of

value. :hen companies remove certain items from ?AA5 earnings,

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purportedly to present a more accurate portrayal of their performance that they

believe ?AA5 distorts, they present the pro forma earnings. Any disclosure of

earnings that varies from ?AA5 mandated earnings (basic and diluted' should

be considered a pro forma earnings measure. These pro forma earnings

measures 1uestion the relevance and reliability of ?AA5 earnings, especially

because unfolding research appears to indicate that investors increasingly

follow pro forma measures. :ithout procedural guidance from the accounting

profession and oversight from the audit profession, companies may be inclined

to engineer allocations and estimations to achieve a desired pro forma result.

*urthermore, the processes used in one 1uarter might not be followed in a

subse1uent 1uarter. ndeed, pro forma earnings are both company6specific and

time6specific. Even companies within the same industry can have different

ways of measuring pro forma earnings, and the same firm across time may

change how it calculates pro forma earnings.

New Amendments

=egulation ? and on6?AA5 *inancial -easures and =ules *ebruary

!$, C>>D.

=ecently, the 4ecurities and E)change ;ommission (the Commission'

issued 4ecurities Act =elease DD6$! (4ecurities E)change Act =elease o.

D6&CC#' which adopts final rules relating to the use of pro forma financial

information by companies in earnings announcements and ;ommission filings.

The new rules re1uire companies to furnish their published annual and

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1uarterly earnings announcements to the ;ommission on *orm $6/ within five

business days of publication or release. 4pecifically, these rules implement%

!' =egulation ?F

C' Amendments to tem !> of

=egulation 46/ and tem !> of =egulation 46F D' amendments to

*orm C>6* to incorporate amendments to tem !> of =egulation 46/ into that

formF and ' amendments to *orm $6/ that re1uire companies to furnish on

*orm $6/ earnings releases and similar announcements.

Regulation G

=egulation ? implements new disclosure re1uirements that will apply

whenever a company publicly discloses or releases material information that

includes a non6generally accepted accounting principles ?AA5 financial

measure. ?enerally, =egulation ? applies to all public reporting companiese)cept registered investment companies. The regulation applies whenever a

company, or a person acting on its behalf, discloses publicly or releases

publicly any material information that includes a non6?AA5 financial

measure.

(a' on6?AA5 *inancial -easure

=egulation ? defines non6?AA5 financial measure as a numerical

measure of a companyGs historical or future financial performance, financial

position or cash flows that%

(i' E)cludes amounts, or is subject to adjustments that have the effect of

e)cluding amounts, that are included in the most directly comparable measure

calculated and presented in accordance with ?AA5 in the statement of income,

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balance sheet or statement of cash flows (or e1uivalent statements' of the

issuerF or

(ii' ncludes amounts, or is subject to adjustments that have the effect of

including amounts, that are e)cluded from the most directly comparable ?AA5

measure so calculated and presented.on6?AA5 financial measures do not

include operating and other financial measures and ratios or statistical measures

calculated in accordance with ?AA5 and measures that are not non6?AA5

financial measures.

E)amples of non6?AA5 financial measures include% !' operating

income that e)cludes e)pense or revenue items that are identified as

non6recurringF and C' ET+A that is not presented in accordance with

?AA5.

on6?AA5 financial measures do not include financial information that

does not have the effect of providing numerical measures that are different

from the comparable ?AA5 measures. E)amples of measures to which

=egulation ? does not apply include%

(iii' +isclosure of amounts of e)pected indebtedness, including contracted

and anticipated amountsF

(iv' +isclosure of amounts of repayments that have been planned or decided

upon but not yet madeF

(v' +isclosure of estimated revenues or e)penses of a new product line, so

long as such amounts were estimated in the same manner as would be

computed under ?AA5F and

(vi' -easures of profit or loss and total assets for each segment re1uired to

be disclosed in accordance with ?AA5.

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(b' =e1uirements of =egulation ?

=egulation ? includes the general disclosure re1uirement that a

registrant, or a person acting on its behalf, shall not make public a non6?AA5

financial measure that, taken together with the information accompanying that

measure, contains an untrue statement of a material fact or omits to state a

material fact necessary in order to make the presentation of the non6?AA5

financial measure, in light of the circumstances under which it is presented, not

misleading.

(c' =econciliation =e1uirement

:henever a public reporting company, or a person acting on its behalf,

publicly discloses or releases any material information that includes a

non6?AA5 financial measure, =egulation ? re1uires the company to provide

the following information as part of the disclosure or release of the non6?AA5

financial measure%

(i' A presentation of the most directly comparable financial measure

calculated and presented in accordance with ?AA5F and

(ii' A 1uantitative reconciliation by schedule or other clearly understandable

method (to the e)tent available without unreasonable efforts with respect to

prospective measures' of the differences between the non6?AA5 financial

measure and the most directly comparable ?AA5 financial measure.

=egulation ? applies to both historical and forward6looking non6?AA5

financial measures. n the case of reconciling forward6looking non6?AA5

financial measures, =egulation ? re1uires a schedule or other presentation

detailing the differences between the forward6looking non6?AA5 financial

measure and the appropriate forward6looking ?AA5 financial measure. The

;ommission noted that if the ?AA5 financial measure is not accessible on a

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forward6looking basis, the company must disclose that fact and provide such

reconciling information that is available without an unreasonable effort. The

company must also identify information that is not available and disclose its

probable significance.

The ;ommission intends that =egulation ? will work in association

with =egulation *+. Accordingly, a private communication of material,

non6public information will trigger a re1uirement for broad public disclosure

under =egulation *+. f that public disclosure contains material information

containing non6?AA5 financial measures, =egulation ? will apply to the

disclosure.

(d' E)ception for on6?AA5 *inancial -easures +isclosed in usiness

;ombination Transactions

=egulation ? also provides an e)ception for non6?AA5 financial

measures disclosed in business combination transactions. =egulation ? will not

apply to the disclosure of a non6?AA5 financial measure if that disclosure

relates to%

!' a proposed business combination transactionF

C' the entity resulting from the business combination transactionF or

D' an entity that is a party to the business combination transaction,provided the disclosure is contained in a communication that is subject

to the ;ommissionGs communication rules applicable to business

combination transactions.

(e' 3iability for 0iolation of =egulation ?

f a company, or any person acting on its behalf, fails to comply with

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=egulation ?, the company and(b' of the E)change Act or =ule !>b6H promulgated there under.

The ;ommission has warned companies that the use of non6?AA5 financial

measures could mislead investors if they obscure the companyGs ?AA5 results.

Amendments to Form -!" Furnishing Earnings Announ#ement on Form

-!

The ;ommission amended *orm $6/ to add new tem !C, +isclosure

of =esults of 9perations and *inancial ;ondition. The addition of tem !C to

*orm $6/ will bring earnings information within the ;ommissionGs current

reporting system by re1uiring registrants to furnish to the ;ommission all

releases or announcements disclosing material non6public financial information

about completed annual or 1uarterly fiscal periods. The re1uirement to furnish

a *orm $6/ under tem !C will not apply to companies that make these

announcements and disclosures only in their 1uarterly or annual reports filed

with the ;ommission. 4uch companies are permitted to specify which portion

of the 1uarterly or annual report contains information re1uired by tem !C.

tem !C does not re1uire that companies issue earnings releases or similar

announcements. 2owever, such releases and announcements will trigger the

re1uirements of tem !C.tem !C re1uires companies to furnish to the

;ommission a *orm $6/ within five business days of any public announcement

or release disclosing material non6public information regarding the companyGs

results of operation or financial condition for an annual or 1uarterly fiscal

period that has ended. tem !C will not apply to public disclosure of earnings

estimates for future or ongoing fiscal periods, unless those estimates are

included in the public announcement or release of material non6public

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information regarding an annual or 1uarterly fiscal period that has ended.

Earnings releases and announcements furnished pursuant to tem !C will not be

re1uired to comply with the prohibitions of tem !> of =egulation 46/

described above. The re1uirements of tem !C will apply regardless of whether

the release or announcement includes disclosure of a non6?AA5 financial

measure. 2owever, if the announcement or release includes a non6?AA5

financial measure, companies must indicate in the furnished *orm $6/ an

e)planation as to why management uses the non6?AA5 financial measure and

why it is useful to investors.

5ublic disclosure of financial information for a completed fiscal period

in a presentation that is made orally, telephonically, by web cast, by broadcast,

or by similar means will not be re1uired to be furnished on *orm $6/ if%

(i' The presentation is complementary to, and occurs within $ hours after,

a related written release or announcement that is furnished to the ;ommission

on *orm $6/ pursuant to tem !C prior to the presentationF

(ii' The presentation is broadly accessible to the public by dial6in

conference call, web cast or similar technology and the presentation was

announced by means of a widely disseminated press release that included

instructions as to when and how to access the presentation and the location of

the ;ompanyGs website where the information would be availableF and

(iii' The financial and statistical information contained in the presentation is

provided on the ;ompanyGs website, together with any information that would

be re1uired under =egulation ?.

Effe#tive $ate

=egulation ? will apply to all subject disclosures beginning on

-arch C$, C>>D. The re1uirement to furnish earnings releases and similar

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materials to the ;ommission on *orm $6/ will apply to earnings releases and

similar announcements made on or after -arch C$, C>>D. The amendments to

tem !> of =egulation 46/, tem !> of =egulation 46 and *orm C>6* will

apply to any annual or 1uarterly report filed with respect to a fiscal period

ending on or after -arch C$, C>>D.

4o from the above discussion, we can see that different arguments have

been advanced for positive as well as negative stock price reaction on the

earnings announcements. ut one thing is clear that earnings announcements

are the valuable source of information which tells the story of companys

market position. asically valuation of any stock depends upon the

performance of the company. n the ne)t section we provide the empirical

evidence on some the theories.

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Chapter - II

RE%IE& 'F (I)ERA)*RE

n this chapter various empirical studies on the earning

announcements effect on stock prices have been discussed. These studies are%

/i ;. 2an and +avid I. 4uk (!""#' studies stock price reactions to

investment firms research reports on their issuance date and on the subse1uent

Barronspublication date. The results show significant stock price effects at

both the report issuance date and the Barrons publication date, although

investors can obtain all necessary information on the report issuance date,

which is the first public announcement. Thus, the results suggest that the

Barronspublication causes a price reaction separate from the reaction to the

report issuance. The findings support the media coverage hypothesis recently

documented in the accounting and finance literature. The initial sample is

collected from the Barrons8=esearch =eports column from January !, !""!,

through +ecember D!, !""!.

The dissemination process of firm6specific annual earnings information

in the orwegian capital market is studied by Aasmund Eilifsen,/jell 2enry

/nivsfla and *rode 4aettem (!""&'. Theyfind a significant reduction in stock

price volatility in the post6announcement period relative to the pre6

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announcement period for companies traded on the 9slo 4tock E)change in the

period !"">6!""H. 2owever, they find a significant decline in the noise term

for the largest companies after the earnings release date, supporting the

hypothesis that earnings announcements reduce informational asymmetries

among investors. The data sample consists of D& companies listed on the 94E

with annual earnings announcements made between !""> and !""H.

Attila 9dabasi (1998) study investigates stock return reaction associated

with earnings announcements on the 4E to verify whether these

announcements possess informational value. The event study is conducted on

an e1ually weighted portfolio of "C securities, which made more than #>>

earnings announcements over the period from June !""C to June !""H. The

empirical results do indicate that the mean s1uared e)cess return (thus without

respect to sign of security returns' on the announcement day is significantly

larger than the average during the non6event period. The full sample is also

divided into goodB and badB news sub samples, which included D& and CH#

events respectively. The results reveal that the average abnormal returns on

announcements days are significantly different than @ero for each sub sample.

Jennifer 3. louin, Jana 4mith =aedy, +ouglas A. 4hackelford (C>>>'

produces evidence consistent with the difference between long6term and short6

term capital gains ta) rates affecting stock prices around public disclosures.

4pecifically, they find that price responses to 1uarterly earnings releases are

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increasing in the additional ta)es that investors would pay under short6term

capital gains ta) treatment. All "&,&$ firm61uarters from !"$D6!""& on ;=45,

E4, and ;ompustats industrial annual, full coverage, and research files are

e)amined.

Thomas J. 3ope@ and 3ynn =ees (C>>>' focuses on two distinct, but

related, issues with respect to the markets reaction to reported earnings that

meet or e)ceed analysts e)pectations !' is there a differential market response

to the level of une)pected earnings for firms that meet analysts forecasts

versus those that do notK And C' does the market provide a premium for firms

with a historical tendency to report positive forecast errorsK The results indicate

that meeting current e)pectations is a very important variable in the pricing of

une)pected earnings. n addition, they document evidence that the market

adjusts for historical tendencies in firms reporting behavior. 4ample of the

study consists of ",#DC firm61uarter observations (C,&!D firms' from !"$D

through !""$F data is available on the !""$ versions of ;ompustat, E4, and

;=45 databases.

Joseph +. 5iotroski and +arren T. =oulstone (C>>C' studies that the

relations between insider trading decisions and ne)t years earnings are not

strictly linear.t conclude that insiders do purchase on future earnings newsF

however, there e)ists a region beyond which insiders will not buy regardless of

the potential stock appreciation gains.This sample is derived from the complete

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set of firm6year observations available on ;=45 and ;9-574TAT between

!""C and C>>> with sufficient stock price and earnings data to compute current

and one6year ahead annual earnings and price changes.

5ing Eric Ieung ;harles 2. 3und1uist (C>>C' e)amines whether

security analysts, in revising their e)pectations of future earnings, e)tract

information about the underlying economic profits from the reported earnings.

Analysts forecast revisions after earnings announcements are modeled as a

ayesian learning process, in which the reported earnings and the capital

markets reactions to the reported earnings are two signals that reflect

underlying profits. :hile the reported earnings are noisy and biased signals,

the market reactions are noisy but unbiased signals. 4tudy uses a sample of

!$,CH& individual analysts 1uarterly forecasts from !""D to C>>!. This study

contributes to the literature that uses a rational e)pectation approach to

analy@ing investors reactions to earnings announcements.

:eimin 3iu, orman 4trong Lin@hong Lu (C>>C' study based on 5ost6

earnings6announcement drift in the 7/.The aim of this study is to test for the

e)istence of post6earnings announcement drift in a stock market outside the

74. 7sing measures of earnings surprise based on the time6series of earnings,

prices, and analyst forecasts. Their conclusion is that the 7/ stock market is

inefficient with respect to publicly available corporate earnings information.

The sample and data e)amined in this study comprise the intersection of all

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non6financial firms. The sample period is January !"$$ to -ay !""$.

+avid 2irshleifer James . -yers 3inda A. -yers and 4iew 2ong Teoh

(C>>C' e)amines whether individual investors are the source of post6earnings

announcement drift (5EA+'. They provide evidence on how individual

investors trade in response to e)treme 1uarterly earnings surprises and on the

relation between individual investors trades and subse1uent abnormal returns.

They find no evidence that either individuals or any sub6category of individuals

in their sample cause 5EA+. ndividuals are significant net buyers after both

negative and positive earnings surprises. There is no indication that trading by

any of their investor sub6categories e)plains the concentration of drift at

subse1uent earnings announcement dates. 5ost6announcement individual net

buying is a significant negative predictor of stock returns over the ne)t three

1uarters. 2owever, individual investor trading fails to subsume any of the

power of earnings surprises to predict future abnormal returns. The database

includes all trades made by a random sample of investors through a major

discount brokerage firm from !""! through !""# inclusive.

;hangling ;hen (C>>' e)amines the role of earnings persistence in

predicting post6earnings announcement abnormal returns. 2e e)tends the

5EA+ literature by identifying conditions under which stock prices

systematically under6 or overreacts to earnings news. t provides evidence that

the association between post announcement abnormal returns and earnings

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changes depends on the earnings persistence level i.e.stock prices under react

to high6persistence earnings and overreact to low6persistence earnings. The

sample includes all firm61uarter observations from !"&H to C>>! with available

data in the intersection of ;ompustat combined industrial and the ;=45 daily

stock return file and listed in the A-EL, I4E, or asda1.

2ai 3u (C>>'studied the correlation between stock returns in January

and the earnings information released in the month. The annual earnings

announced in January are predominantly positive, and the stock returns in late

January are abnormally higher than in the remainder of the year. oth time6

series and cross6 sectional analysis shows a strong relation between stock

returns and the earnings information released in January. Two data sources are

used in this study. The earnings information from January !"&C and +ecember

C>>C is drawn from 4tandard and 5oors ;9-574TAT datasets. The data

representing the whole stock market are from the ;=45.

2ai 3us (C>>' study brings together two related strands of literature

originated with all and rown (!"#$' and eaver (!"#$' i.e. stock price

continues to move upward (downward' after good (bad' news when earnings

announcements have high information uncertainty, as measured by high

abnormal trading volume and return volatility. This study uses four databases 6

;9-574TAT, ;=45, T* (;+A

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from the combined ndustrial Muarterly, *ull ;overage Muarterly, and =esearch

files in ;9-574TAT from !"&C to C>>C.The sample consists of both active

and inactive firms listed on the I4E, A-EL, and A4+AM.

John 5. -arney, /ong 4huhong and -ajid Taghavi (C>>' studied the

annual earnings announcement effect on the stock market in ;hina. The

investigations are carried out by modeling the daily changes of stock returns

using the -6E?A=;2 approach, in order to test the news effects of annual

earnings announcement on the conditional mean of abnormal return and the

variance of the returns. t is found that a higher than e)pected earnings

announcement leads to an increase of the conditional mean of stock returns on

days before the news announcement and a decrease afterwards. The results

indicate that there is overreaction in both 4hanghai and 4hen@hen -arkets from

to # days in advance of annual earnings announcements with rectification to #

days after the announcement. There were !CC listed companys altogether,

#"$ in 4hanghai and HC# in 4hen@hen. There were also D#&C data on the

earnings and losses announcements day and CD#$> data on daily stock price

returns in the time period around the announcement day.

;arina 4ponholt@ (C>>' uses the traditional event study method to

e)amine the in6information content of annual +anish earnings announcements.

This study uses data from !"""6C>>! and finds abnormal volatility in the days

surrounding the earnings announcements, indicating that the announcements do

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in fact contain information that is relevant for the stock market. The results do

not indicate that the +anish stock market is efficient. The abnormal volatility

persists for up to days after the announcement, while significant positive

abnormal returns accompany the announcements. This conclusion is shown to

be robust to the use of different trading fre1uency restrictions and e)istence of

concurrent disclosures. 4urprisingly, he find a positive relationship between

abnormal returns and firm si@e. This contradicts the findings of previous

studies, and indicates that small stock markets behave differently on this

aspect.

4tefano +ella0igna and Joshua 5ollet (C>>' compared the reaction to

earnings announcements on *riday to the reaction on other days of the week.

They find that the short6term response of stock prices to *riday earning

surprises is C> to D> percent lower than to non6*riday announcements. The

differential response is due to a #> percent lower ne)t6day response to *riday

earning announcements than to non6*riday earnings announcements. The

results are robust to the introduction of controls, including company fi)ed

effects. They observe parallel results for volume. Abnormal volume increase

around the day of announcement is C> percent smaller for *riday

announcements than for non6*riday announcements. They also find that, the

post6earnings announcement drift is stronger for *riday announcements than

non6*riday announcements. Their sample is comprised of appro)imately

!>!,>>> 1uarterly earning announcements occurring from January !""H until

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June C>>D. :e use the

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The main objective of the present study is to analy@e the effect of

earnings announcements on stock prices and to find out whether this studys

results are consistent with results of those studies that are conducted by others.

+AMP(ING $E+IGN

+ampling )e#hni0ues

The design of study can be said to be the 1uite essential part of the

research process, as it determine, what the managerial problem is and the type

of information that the research can generate to help the problem before

conducting the fieldwork. t is better to decide upon the method> companies, which have declared

their earnings during the year C>>D6C>>.

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Nature 2 +our#e of $ata

The objective of the project was such that only secondary data was

re1uired to achieve it. 4o secondary data was used for the study. The mode of

collecting the secondary data is various books, financial journal and websites

etc.

$ata )ools

n the present study, the effects of earnings on the stock prices of

companies announcing earning have been studied. The sample covered under

companies randomly selected which declared there earnings during the year

C>>D6>. *or the purpose of inclusion in the sample, the companies should be

listed on ombay 4tock E)change and these are regularly traded on stock

e)change. The stock price, earnings data and the date of the announcement of

earnings are taken from www.bseindia.comand www.rediff.money

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annual earning measured using a simple average of the past three years (similar

to ?onedes approach (!"&!''.

This e)pectation may be stated as

ARi4t5 678ARi4t-8 9 7:ARi4t-: 9 7;ARi4t-;

:here b!ObCObDO! 4ense) returns for a

period of !>> trading days ending !> trading days before the announcement

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date. The 8 Q 8and R so calculated has been used to calculate the e)pected

normal returns for the event window, starting !> trading days before the event

to !> trading days after the event .

The abnormal return for each of the day in the event window is the

difference between the actual stock return during that day and e)pected normal

return according the 4E D> 4ense) as per the 8 Q 8and R of the concerned

stock. +aily abnormal returns for security 8i 8from !> days before to !> days

after announcement (including announcement days' of earning increase has

been commuted

@R i4t 6 R i4t E'

S= i,tO e)cess return on security 8i for day 8t

= i,t O raw return on security 8i for day 8t which is calculated as

R i4t 6 MP i 4 t MP i4 as follow

Ei9 ?iRm 9 Bi

:here =mO =eturn on the 4E 4ense) and Qi , Ri are the parameters of market

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model and i is the error term.

After that e)cess return are stated as a function of change in earnings.

@Ri4t 6>i9 ?i@ARi

Assuming no difference between e)pected and actual earnings. The

parameter >i in the above e1uation should be close to @ero. The regression

parameter ?ishould be positive assuming that there is a relationship between

change in earnings e)pectations and change in stock prices.

The cumulative adjustment of stock prices to earnings announcement is

analy@ed by running the regression e1uation for C! days for all the !>>

companies. The rate of change in earnings e)pectations from tO 6!> to tO !> is

same for each of the C! regressions.

(IMI)A)I'N+ 'F ),E +)*$

!. 5aucity of time N resources led to the inability of conducting a large

survey.

C. Approaching all the companies earnings announcements was not

possible.

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Chapter - I%

EFFEC) 'F EARNING+ ANN'*NCEMEN)+

'N +)'C! PRICE+

This study is an attempt to analy@e the relationship between earning

announcements and stock prices. The companies selected for the study are

firms listed on ombay 4tock E)change and all these companies are included

in the sector6specific indices of the e)change. The firms selected are widely

held and the securities of these firms are fre1uently traded. An analysis is done

for a total of !>> companies, and was drawn from various sectors vi@.,

8.5harmaceutical and ;hemical (CH', :. *-;? 4ector (H', ;. nformation

Technology (!#', .Te)tile sector (!>', D. 547s (&', . anking 4ector (#',

Auto 4ector (H' and .9thers (CH'. :e can the nature of companies

*rom the below table it seems that ma)imum industries are in

5harmaceutical and ;hemical business line. n other category industry includes

the +iamonds and Jewellery industry, eer industry, 5aints industry, Tractor

and ;ombine industry, ron industry and other manufacturing industries.

NA)*RE 'F C'MPANIE+

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(ine of .usiness Num7er of Companies

MAN*FAC)*RING IN$*+)RIE+

5harmaceutical and ;hemical CH

Tea industry H

;otton ndustry !>

5etrol and =efinery H

;omputer and 4oftware industry $

Electronic ndustry $

Automobile and =elated ndustry H

5ower generation ndustry C

9ther ndustries CH

+ER%ICE IN$*+)RIE+

anking and 2otels #

C'N+)R*C)I'N IN$*+)R !

)')A( 8HH

ANA(+I+

The results of this study should be interpreted with the following

limitations in mind. +ata availability constraints have limited the time hori@on

and the sample si@e used in the study. Also, the study uses a relatively simple

model to generate earnings e)pectations. The advent of computeri@ed trading

systems in the 4E and the availability of earnings forecasts should enhance

future empirical work in this area.

The results are presented in Table ! for C>>D6C>>.The regression

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coefficients are significant at ""U level of significance for the time period tO6

!and > . The regression coefficient are significant for the time period tO6!, >

and V!. This implies that stock prices adjust to release of new earning

information the result shows that the adjustment essentially takes place around

the time of release of new earnings information.

n general, results obtain from this study suggests that the stock price

reaction in the 4E depends of the magnitude of the une)pected earnings.

These results are consistent with those of advanced financial markets around

the world.

)a7le : Regression Results :HH;-H

Time :indow ;onstant (Q' =eg coeff. Adj =6

41

t6stat

6!> 6>.>!H >.C!H >.!! >.#H

6" 6>.>!C >.!"H >.>$ >.D

6$ 6>.>" >.!$ >.!& >."C

6& 6>.>!D >.!# >.!D >.&>

6# 6>.>!H >.!CD >.>" >.H"

6H >.>!& >."" >.! >.&&

6 >.>C> >.C>! >.!" >."&

6D >.!C! >.C!C >.C! >.$"

6C >.C>C >.!$& >.C# !.>C

6! >.>!! >.D>! >.DD 6!."CW

> 6>.>HD >.CD" >.D! C.#CW

! >.>C >.C>> >.C! C.>$W

C >.>!D >.!H& >.!& !.#&

D >.>>" >.!#" >.!" !.&H

>.>D >.!"H >.CH !."H

H >.>&" >.!"& >.C! >.""

# >.>!" >.C>" >.!$ >."H

& >.>C$ >.!$! >.!C >.&H

$ >.>D! >.!&H >.>& >.H"

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" >.>CH >.!#> >.>" >.#H

!> >.>!# >.!#D >.!! >.&"

W +enotes significant at ""U level

Chapter -%

C'NC(*+I'N

n a market that is essentially characteri@ed by a large number of rational

and profit6seeking investors who compete with one another freely, the prices

should reflect all the available and e)pected information. An efficient market is

one that rapidly absorbs new information and adjusts the prices swiftly. The

results of this study show that the positive abnormal returns have persisted even

after the event6day. The results further indicated that 1uarterly results gave

positive signals to ndian markets and anyone who studied the market could

earn abnormal returns.

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This study documents the adjustments of stock prices to the release of

earnings data in a developing country conte)t. t suggests that earnings convey

information to the stock market and the stock price reaction depends on the

magnitude of the une)pected earnings. 4ophisticated research reports including

earnings projections are beginning to appear with the widespread liberali@ation

of financial markets. *uture work in this area may refine estimation of earnings

e)pectations and also look at the behavior of volume on the eve of earnings

announcements.

.I.('GRAP,

!. John 5. -arney , /ong 4huhong and -ajid Taghavi(C>>' , The effect

of annual earning announcement on ;hinese 4tock -arketB ,working

paper, 7niversity of orthumbria . +ownloaded from,

http%

efficiency comparisonB. +ownloaded from,

http%

8/13/2019 No. 40 (Earnings)

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paper, 7niversity of 4outhern ;alifornia. +ownloaded from,

http%', 4trategic release of

information on *riday% Evidence from earning announcementsB,

working paper, 7niversity of ;alifornia. +ownloaded from,

http%', Earnings 5ersistence and 4tock 5rice 7nder

and 9verreactionB, working paper, 7niversity of :isconsin6

-adison. +ownloaded from,

http%5rices.pdf.on

April, C>>H.

". ;.4ponholt@ (C>>', nformation ;ontent of Earnings Announcements

http://www.marshal.usc.edu/media/facultyResearch/janEffect.pdfhttp://www.cob.ohiostate.edu/fin/dice/%20papers/2002/2002-2.pdfhttp://www.efm.bris.ac.uk/economics/working_papers/pdffiles/dp00503.pdfhttp://www.efm.bris.ac.uk/economics/working_papers/pdffiles/dp00503.pdfhttp://emlab.berkeley.edu/users/sdellavi/wp/earnfr04-12-10.pdfhttp://www.arts.uwaterloo.ca/ACCT/seminars/Changling%20Chen_Earnings%20Persistence%20and%20Stock%20Prices.pdfhttp://www.arts.uwaterloo.ca/ACCT/seminars/Changling%20Chen_Earnings%20Persistence%20and%20Stock%20Prices.pdfhttp://www.marshal.usc.edu/media/facultyResearch/janEffect.pdfhttp://www.cob.ohiostate.edu/fin/dice/%20papers/2002/2002-2.pdfhttp://www.efm.bris.ac.uk/economics/working_papers/pdffiles/dp00503.pdfhttp://www.efm.bris.ac.uk/economics/working_papers/pdffiles/dp00503.pdfhttp://emlab.berkeley.edu/users/sdellavi/wp/earnfr04-12-10.pdfhttp://www.arts.uwaterloo.ca/ACCT/seminars/Changling%20Chen_Earnings%20Persistence%20and%20Stock%20Prices.pdfhttp://www.arts.uwaterloo.ca/ACCT/seminars/Changling%20Chen_Earnings%20Persistence%20and%20Stock%20Prices.pdf

8/13/2019 No. 40 (Earnings)

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in +enmarkB, working paper, 7niversity of Aarhus .+ownloaded from,

http%>', Analysts =esponsiveness and -arket 7nder

reaction to Earnings Announcements,B working paper, ;olumbia7niversity. +ownloaded from,

http%', -arket =eaction to Annual Earnings

Announcements% the case of Euronent 5aris,B working paper, 7niversity

of 5erpignan.+ownloaded from,

http%

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!&. www.bseindia.com

!$. www.moneycontrol.com

!". www.sebi.gov.in

A.+)RAC)

This study e)amines the effect of Earning Announcements on stock

prices, taking a sample of !>> companies listed on 4E and announcing their

earnings over the period C>>D6C>>.This study is based on the e)pectation

model approach put forth by enston Z!"#&[ and later refined by ?onedes

Z!"&![ and *orsgardh and 2ert@en Z!"&H[. The results show that the adjustment

essentially takes place around the time of release of new earnings information.

http://www.bseindia.com/http://www.moneycontrol.com/http://www.sebi.gov.in/http://www.bseindia.com/http://www.moneycontrol.com/http://www.sebi.gov.in/

8/13/2019 No. 40 (Earnings)

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ANNEJ*RE

NAME 'F C'MPANIE+!. A59339 TI=E4

C. A;;

D. A33A2AA+ A/

. A4A 5AT4 (+A' 3td.

H. A+2=A A/

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C!.;9=59=AT9 A/

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CH.;=9-T9 ?=EA0E4 3tdC#.;53A 3td

C&.+r. =E++I 3ab

C$.+A7= +A 3td

C".+EA A/

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D!.*93EL +A

DC.*93EL ;AE34

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8/13/2019 No. 40 (Earnings)

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&>.-A=7T 7+I9?

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8/13/2019 No. 40 (Earnings)

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C'N)EN)+

C,AP)ERN' )'PIC

I

II

III

I%

%

MEANING

RE%IE& 'F (I)ERA)*RE

RE+EARC, ME),'$'('G

EFFEC) 'F EARNING+ ANN'*NCEMEN)+'N +)'C! PRICE+

C'NC(*+I'N

.I.(I'GRAP,

ANNEJ*RE

PR'EC) REP'R)

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'N

EFFECT OF EARNINGS

ANNOUNCEMENTS ON STOCK PRICES

+*.MI))E$ IN PAR)IA( F*(FI((MEN) F'R ),E $EGREE'F MA+)ER 'F .*+INE++ A$MINI+)RA)I'N

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ACKNOWLEDGEMENT

It is a matter of pride and privilege to adequately express my

deep indebtedness, thanks and gratitude to the persons ho guided me

through this effort! It is very diffi"ult to individuali#e my gratefulness

here to all hose "ontributions have blossomed into this presentation! I

ould like to extend my deep sense of gratitude to $r! Balinder %ingh,

my &ro'e"t (uide for his valuable suggestions! $y sin"ere and hole

hearted thanks to $iss aram'it aur, for providing her "ooperation and

the ne"essary information

!

*ast but not the least +lmighty has made this endeavor

su""essful!

Amandeep Kaur

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CERTIFICATE

;ertified that Amandeep /aur, -A6Cnd Iear student has

completed her project report entitled, KEFFEC) 'F EARNING+

ANN'*NCEMEN)+ 'N +)'C! PRICE+L for the degree of -asters

of usiness Administration under my supervision.

$R .A(&IN$ER +ING,

3ecturer

+eptt. of ;ommerce N usiness

-anagement,?uru anak +ev 7niversity,

Amritsar.