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Chapter -I

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 (!"",', -c.ichols and Trueman (!"",', and /im and 0errecchia (!""!a, b' predict that anticipation of a public announcement

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

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

moved to a system of 1uarterly earning announcements, rather the once6in6si) months routine that was in vogue till then. 9f course, there can be little doubt than 1uarterly earning announcements are better as otherwise insiders and informed investors (who have access to selective disclosures' have a field day for a longer period, based on unpublished price6sensitive information. :hile on balance, 1uarterly earnings announcements are good for the market and investors, market response to such announcements has changed and hence this is a variable that has to be factored in while timing investment decisions. +ue to higher fre1uency, the degree of earnings surprise (positive or negative' is smaller than in the past. 2owever, the market response to even this smaller degree of earnings surprise is e)aggerated. *or instance, take the case of ;adbury (ndia. :hen it announced higher6than6e)pected earnings growth accompanied by top line growth for the fourth 1uarter of !""", there was a sharp re6rating of the stock in a flat<declining market. (t moved up from around =s. &>> to =s."$> in a short time frame. To some e)tent, the e)pectations put out by various institutional investors (most of it are based on informed opinion obtained from companies' and the manner in which companies tend to just e)ceed, meet or fall short of these numbers has a tempering influence on the stock price trends. 9therwise, it is a 1uiet possible that the price movements may be sharper than is the case

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

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 Apro formaB earnings measures than to ?AA5 earnings measures. 5ro forma means Aas ifB or Afor 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,

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 !$, C>>D. =ecently, the 4ecurities and E)change ;ommission (the E CommissionE' issued 4ecurities Act =elease DD6$!&# (4ecurities E)change Act =elease .o. D,6,&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 EfurnishE their published annual and

1uarterly earnings announcements to the ;ommission on *orm $6/ within five business days of publication or release. 4pecifically, these rules implement% !' C' =egulation ?F Amendments to (tem !> of =egulation 46/ and (tem !> of =egulation 46 F 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 companies e)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 Enon6?AA5 financial measure.E (a' .on6?AA5 *inancial -easure =egulation ? defines Enon6?AA5 financial measureE 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,

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 Enon6recurringEF and C' E (T+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.


=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

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 EprivateE 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 ;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% !' C' D' a proposed business combination transactionF the entity resulting from the business combination transactionF or 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 usiness

=egulation ?, the company and<or the person acting on its behalf may be subject to an enforcement action alleging violations of =egulation ?. *urthermore, disclosure pursuant to =egulation ? that is materially deficient may, in addition to violating =egulation ?, give rise to a violation of 4ection !>(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, E+isclosure of =esults of 9perations and *inancial ;ondition.E 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

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

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 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 and *orm C>6* will apply to any annual or 1uarterly report filed with respect to a fiscal period

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.

Chapter - II


(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 Barrons publication 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 Barrons publication 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 Barrons 8=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 (!""&'. They find a significant reduction in stock price volatility in the post6announcement period relative to the pre6

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 AgoodB and AbadB 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

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

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

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

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<4pectrum', and ( E4. Earnings

announcement dates and other financial accounting information are obtained

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

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

June C>>D. :e use the (< <E<4 data on analyst forecasts to form a measure of earning surprise. *rom the above discussion we can see that empirical studies have yielded pu@@ling results, some studies favoring the positive stock price reaction while the other found it negative. Also we can see that most of the studies have taken place in developed stock markets, very few studies have been done in (ndian 4tock -arket. 2ence the need is felt to study this issue in (ndian 4tock -arket.

Chapter -III

RE+EARC, ME),'$'('G=esearch is a careful investigation or in1uiry especially through search for new facts in branch of knowledge. =esearch problem is the one, which re1uires a researcher to find out the best solution for the given problem. './EC)I%E

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<techni1ue of data collection. ?enerally, there are C Techni1ues of data collection% !. C. ;enses Techni1ues 4ample Techni1ue The availability of resources, time factor, and degree of accuracy, desire N scope of the problem enable us to apply sample techni1ue. The sampling units were chosen on the basis of accessibility N convenience. +ampling +i1e The sample si@e of the project is !>> companies, which have declared their earnings during the year C>>D6C>>,.

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 and<risc. Methodolog3 4everal studied in this areaF including the seminal studies by rown (!"#$' and all and

eaver (!"#$', use the residual approach to access the

information content of earning announcements. 2owever, due to the lack of data consensus earnings forecasts by stock analysts, this study uses the e)pectation model approach put forth by enston (!"#&' and later refined by

?onedes (!"&!' and *orsgardh and 2ert@en (!"&H'. The market e)pectation of

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!<D A=i,tOAnnual earning of firm i made known in time period tF and A=j,t5 OE)pected annual earnings for firm i in time t. The stock prices has been estimated throw the following e1uation E <Ri= 6 > 9 ?Rm 9 ei :here =i 6 return of security i =m P return on market portfolio Q , R6 regression parameters e6 error<disturbance term The model assumes a linear relationship between the return of the securities to the return of the market portfolio. The taken as benchmark inde). The stock return has been regressed to 4E D> 4ense) returns for a 4ED> 4ense) has been

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

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 A E<R i4t= :here tO day measured relative to the earnings increase announcement day (tO>' 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 A MP i4<t-8= MP i4<t-8= :here -5 i , tO market price (closing' of security 8i on date 8t -5 i,(t6!' O -arket price of security 8i on day (t6!' E(= i,t' O e)pected return on security 8i during day 8t which has been estimated through -arket model using 4E6 4ense) D> as follow E<R i4t= 6 >i9 ?iRm 9 Bi :here =mO =eturn on the 4E 4ense) and Qi , Ri are the parameters of market

model and Ti 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 ?i should 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.


Approaching all the companies earnings announcements was not possible.

Chapter - I%


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

FGAuto 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.


(ine of .usiness MAN*FAC)*RING IN$*+)RIE+ 5harmaceutical and ;hemical Tea industry ;otton (ndustry 5etrol and =efinery ;omputer and 4oftware industry Electronic (ndustry Automobile and =elated (ndustry 5ower generation (ndustry 9ther (ndustries +ER%ICE IN$*+)RIE+ anking and 2otels C'N+)R*C)I'N IN$*+)R)')A( ANA(-+I+

Num7er of Companies

CH H !> H $ $ H C CH

# ! 8HH

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

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 :I Regression ResultsI :HH;-HC Time :indow ;onstant (Q' =eg coeff. 6!> 6" 6$ 6& 6# 6H 6, 6D 6C 6! > ! C D , H # & $ 6>.>!H 6>.>!C 6>.>" 6>.>!D 6>.>!H >.>!& >.>C> >.!C! >.C>C >.>!! 6>.>HD >.>C, >.>!D >.>>" >.>,D >.>&" >.>!" >.>C$ >.>D! >.C!H >.!"H >.!,$ >.!#, >.!CD >."" >.C>! >.C!C >.!$& >.D>! >.CD" >.C>> >.!H& >.!#" >.!"H >.!"& >.C>" >.!$! >.!&H Adj =6 41 >.!! >.>$ >.!& >.!D >.>" >.!, >.!" >.C! >.C# >.DD >.D! >.C! >.!& >.!" >.CH >.C! >.!$ >.!C >.>& t6stat >.#H >.,D >."C >.&> >.H" >.&& >."& >.$" !.>C 6!."CW C.#CW C.>$W !.#& !.&H !."H >."" >."H >.&H >.H"

" !>

>.>CH >.>!#

>.!#> >.!#D

>.>" >.!!

>.#H >.&"

W +enotes significant at ""U level

Chapter -%

(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.

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>>,' , A The effect of annual earning announcement on ;hinese 4tock -arketB ,working paper, 7niversity of .orthumbria . +ownloaded from, on http%<<<upload<upXjm)y -arch!D , C>>H. C. Aasumd ?ilifsen , /jell 2enry /nivsfal and *rode 4aettem (!""&', AEarning announcement and the variability of stock returns.B. +ownloaded July,C>>>. D. Jing 3iu (C>>D', A-arket and analyst reaction to earning news% an efficiency comparisonB. +ownloaded from, http%<<www.anderson.u)<documents<areas<fac<accounting<driftH>D. pdf.on June, C>>,. ,. 2ai 3u (C>>,', A+o earning e)plains the January effectKB, working from, http%<<<for<dp<!"""< !>"".pdf. on <)scg<ywg@lw<kshC.pdf.


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

http%<<<media<faculty=esearch<janEffect.pdf.on -arch, C>>H. H. +avid 2irshleifer, James ..-yers, 3inda A.-yers and 4iew 2ong Teoh (C>>C', A+o individual investors drive post6earnings announcement driftKB, working paper, 9hio 4tate 7niversity. +ownloaded from,http%<<<fin<dice< papers<C>>C<C>>C6C.pdf.on -arch, C>>D. #. +aniella Acker,-athew 4talker and (an Tonks(C>>>', A id6ask spreads around earnings announcementsB ,working paper, 7niversity of ristol. +ownloaded from, http%<<<economics<workingXpapers<pdffiles<dp>>H>D. pdf.on !H -arch, C>>!. &. 4tefano +ella 0igna and Joshrra 5ollet (C>>,', A4trategic release of information on *riday% Evidence from earning announcementsB, working paper, 7niversity of ;alifornia. +ownloaded from, http%<<<users<sdellavi<wp<earnfr>,6!C6!>.pdf.on Jan, C>>H. $. ;hangling ;hen (C>>,', AEarnings 5ersistence and 4tock 5rice 7nder and 9verreactionB, working paper, 7niversity of :isconsin6 -adison. +ownloaded from, http%<<<A;;T<seminars<;hangling UC>;henXEarningsUC>5ersistenceUC>andUC>4tockUC>5rices.pdf.on April, C>>H. ". ;.4ponholt@ (C>>,', A(nformation ;ontent of Earnings Announcements

in +enmarkB, working paper, 7niversity of Aarhus .+ownloaded from, http%<<<caf<wp<wp6!&&.pdf.on -ay, C>>H. !>. /i ;. 2an and +avid I. 4uk (!""#', A4tock 5rices and the decisions ", number D, pp.C&6DC. !!. Jennifer 3. louin, Jana 4mith =aedy and +ouglas A. 4hackelford working paper &#,,, 7niversity of arrons

8=esearch =eports ;olumn.B Journal of *inancial and 4trategic

(C>>>', A;apital ?ains Ta)es and 4tock =eactions to Muarterly Earnings AnnouncementsB, 5ennsylvania .+ownloaded from, http%<<<papers<w&#,,.on 9ct, C>>C. !D. Joseph +. 5iotroski and +arren T. =oulstone (C>>C', AEvidence on the .on63inear =elation between (nsider Trading +ecisions and future Earnings (nformation.B Journal of Accounting =esearch ,!, number D, pp. HCH6HH>. !,. :eimin 3iu, .orman 4trong and Lin@hong Lu (C>>D', A;an 5ost Earnings Announcements +rift E)plain 5rice -omentumK AJournal of usiness ", number 3, pp. $"6!!#. !H. Iuan Yhang (C>>,', AAnalysts =esponsiveness and -arket 7nder reaction to Earnings Announcements,B working paper, ;olumbia 7niversity. +ownloaded from, http%<<www.><accounting<seminars<Y2A.?.pdf.on 4ep, C>>,. !#. 3ouhichi :ael (C>>,', A-arket =eaction to Annual Earnings Announcements% the case of Euronent 5aris,B working paper, 7niversity of 5erpignan.+ownloaded from, http%<<<cofi<efma<papers<C#!.pdf.on -arch,C>>,.

!&. !$. !".

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.

NAME 'F C'MPANIE+ !. A59339 TI=E4 C. A;; D. A33A2A A+ A./ ,. A4(A. 5A(.T4 ((.+(A' 3td. H. A.+2=A A./ #. E-3 &. 9- AI +IE(.? $. 2A=AT *9=?E ". A./ 9* A=9+A !>. 5;3 !!. AJAJ A7T9 !C. 2A=AT( TE3E 0E.T7=E4 !D. 2A=AT E3E;T=9.(;4 !,. 2E3 !H. (=3A ;9=59=AT(9. !#. A3AJ( TE3E *(3!&. A./ 9* (.+(A !$. ;E.T7=I TELT(3E4 !". ;A.A=A A./ C>. ;2A- A3 *E=T(3(YE=4 A.+ ;2E-(;A34 C!. ;9=59=AT(9. A./ CC. ;A+(3A 2EA3T2;A=E CD. ;9.TA(.E= ;9=5 C,. ;-; 3td CH. ;=9-T9. ?=EA0E4 3td C#. ;(53A 3td C&. +r. =E++I 3ab C$. +A 7= (.+(A 3td C". +E.A A./ D>. EL(+E (.+74T=(E4 D!. *(.93EL (.+(A DC. *(.93EL ;A E34 DD. *E+E=A3 A./

D,. ?7JA=AT A- 7JA ;E-E.T4 3td DH. ?A(3 (.+(A D#. ?E 42(55(.? D&. ?7JA=AT (.+74T=(E4 D$. ?=A4(- (.+74T=(E4 D". ?9+=EJ ;9.47-E=4 5=9+7;T4 ,>. ?T3 3td ,!. ?-+; ,C. 27?2E4 49*T:A=E 4I4TE-4 ,D. 2E=9 29.+A ,,. 2+*; A./ 3td ,H. 2(.+7JA T-T ,#. 2(.+A3;9 (.+74T=(E4 ,&. 25;3 ,$. (.+(A. =AI9. A.+ (.+(A. 3td ,". (.*94I4 TE;2 3td H>. (.+9 =A-A 4I.T2ET(;4 H!. (+ ( A./ HC. (;(;( A./ 3td HD. (.+(A.90E=4EA4 A./ H,. (.? 0I4IA A./ HH. ( 5 ;omp H#. (5;3 H&. (+ ( H$. (.+(A. 29TE34 ;omp 3td H". (;( (.+(A #>. (6*3EL #!. (T; 3td #C. JN/ A./ #D. J ;2E-(;A34 #,. J(.+A3 4TEE3 N 59:E= #H. /9TA/ -A2(.+=A A./ ##. /9;2( =E*(.E=(E4 #&. 375(. 3td #$. -A2(.+=A N -A2(.+=A 3td #". -A4TE/

&>. -A=7T( 7+I9? &!. -T.3 &C. -(;=9 (./4 &D. .AT A37- ;o. &,. .(;293A4 5(=A-A3 (.+(A &H. .90A=T(4 (.+A( &#. .AT(9.A3 *E=T(3(YE=4 &&. 9=(E.TA3 A./ &$. 9=;2(+ ;2E-(;A34 N 52A=-A;E7T(;A34 &". 5N? $>. 5. $!. 593A=(4 3ab. $C. 5(+(3(TE (.+(A $D. 57.JA T=A;T9=4 $,. =;* $H. =AI-9.+ $#. =E3(A.;E ;A5(TA3 $&. 4I.+(;ATE A./ $$. 4A(3 A7T29= $". 4 ( ">. 4ATIA- ;omp "!. TATA -9T9=4 "C. T2E=-AL 3td "D. TATA (.*9TE;2 ",. T(4;9 3td "H. 7.(9. A./ 9* (.+(A "#. 7.(TE+ 5294529=74 "&. 7T( A./ "$. 0(JAIA A./ "". :(5=9 3td !>>. YEE TE3E *(3-4





+*.MI))E$ IN PAR)IA( F*(FI((MEN) F'R ),E $EGREE 'F MA+)ER 'F .*+INE++ A$MINI+)RA)I'N <FINANCE= : -EAR+ <+E++I'N :HH:-HC=





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! Bal inder %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


;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.

$RG .A(&IN$ER +ING, 3ecturer +eptt. of ;ommerce N usiness -anagement, ?uru .anak +ev 7niversity, Amritsar.