How quarterly profit announcements influence the share prices of top 10 listed companies in London Stock Exchange

Research proposal

Name Student ID Subject

: Aruna C. M. Munasinghage : L1055KDKD1010 : Research Methodology

Contents
Title......................................................................................................................................................... 3 Research Brief ......................................................................................................................................... 3 Financial Market Efficiency ..................................................................................................................... 5 Research aims and objectives ................................................................................................................... 6 Research questions .................................................................................................................................. 7 Literature review ..................................................................................................................................... 8 Factors that determine the stock prices ................................................................................................. 8 Factors that determine the stock trading volume ................................................................................... 9 Effect of current dividends and earnings announcements on stock prices ............................................ 10 Research methodology ........................................................................................................................... 12 Research Method ................................................................................................................................... 14 Anticipated method of analysis and findings .......................................................................................... 15 Ethical consideration ............................................................................................................................. 15 Conclusion ............................................................................................................................................ 17 Time Scale............................................................................................................................................. 17 References ............................................................................................................................................. 18

primary market is a market that involves newly issue of securities. options and swap. Also stock exchange working as a clearing house while maintaining liquidity and credibility of whole financial structure. debentures. bonds etc. These shares can either be traded in primary market or secondary market. Broadly stocks can be divided in to two namely equity/ common shares and preference shares. Equity instruments include common stocks. derivative contracts such as futures.Title How quarterly profit announcements influence the share prices of Top 10 listed companies in London stock exchange? Research Brief Stock market is a place where companies trade their equity and debt instruments. Therefore stock markets play an intermediary service to facilitate these trades. . More frequently corporations have preferred choice for stock in meeting their finance requirements and therefore they issue different classes of stocks to the general public. where as secondary market engages trading of securities which have already issued. Debt instruments include bank notes. Selling and buying actions of shares are done by the public basically with the aim of earning more returns.

It may be due to reasons such as reputation of the company. In this study. earning announcements and future earnings expectations. Earning announcements convey information to investors and it is a signal for them to revise stock prices and thereby enter into stock transactions. economic and political circumstances of the country etc. If investors perceive information has a positive effect on future performance. . contributions to the corporate social responsibility projects. Quarterly profit announcements are considered to be timelier and thus more relevant than when compared with annual profit announcements. key management changes. then they try to demand more shares. One of the common methods use by corporations to attract more investors is by announcing their profit/performance. Whenever new information is released to the market. Earnings and earning potential are fundamental factors that determine value of a firm. quarterly profit announcements are considered as the information that influence the investors stock transaction decision.There are many reasons which motivate investors to buy shares of corporations. bonus and right issue declarations. This study is mainly focus on how quarterly profit announcements affect share prices. dividend declarations. investors change their expectations about investments in the stock market and thus enable investors to react either positively or negatively.

Financial Market Efficiency The concept of market efficiency is central to financial and investment markets. if the current market prices instantly and dully reflect all the relevant and available information. A market is informationally efficient. Allocative efficiency refers to the productivity in allocating scare capital resources among investment opportunitieswith the aim of achieving best marginal returns. Normally there are three forms of market efficiency as follows. Weak market efficiency. Market efficiency has three dimensions namely allocative. then such a market is known as operationally efficient. In a perfectly efficient market both these allocative.If the market is operated in such a way which minimizes the transaction cost to investors as well as only normal profitsis attributable to investment brokers for their investment transactions. 1. Strong market efficiency 2. . Semi-strong market efficiency 3. operational and information contexts are occurring concurrently and efficiently. operational and informational.

4. 2. To provide recommendations based on my research findings to enhance investment decisions of both existing and potential investors. 3. To examine whether there is a relationship between stock prices and quarterly profit announcement. . To critically examine the theoretical and conceptual framework governing trading the earning announcements. I intended to look at how quarterly profit announcements of selected listed companies in LSE influence to their share prices and identify the relationship between those profit announcements and their stock prices. 5. My aims and objectives are 1. To analyze the fluctuations in stock prices with regards to quarterly profit announcements. To identify what extent quarterly profit announcements of selected companies in LSE has impacted on their stock prices.Research aims and objectives In my research.

Research questions Setting research questions are helpful to direct the research towards achievement of research objectives. How we identify the fluctuations of stock prices on quarterly profit announcements of selected listed companies? 2. I wish to answer the following research question. 1. How we measure the extent of influence done by quarterly profit announcements on stock prices? . How we isolate impact of other factors affecting stock price fluctuations? 3. Therefore to guide my research objectives and conduct a high quality study.

2006. Factors that determine the stock prices William. Quarterly profit announcement can be only a single determinant of the share price among many. Here they have discovered that if a firm reduces the minimum trading unit. Brian and Thomas. Mendelson and Uno revealed that there is a positive relationship between share price and number of shares in issue. it will drastically increase the individual investor base of the firm and the liquidity of its stocks will be increased.736). As a result stock prices will be significantly increased. Also Amihud. p. Stock prices will be increased in line with the increase in number of shares holders. Thus it requires having an idea of other factors that influence towards the share price. Amihud . Following discussion is on the previous work regarding the matter. . Mendelson and Uno (1999) find evidence on pricing effect of share holders.Literature review Study focuses on how the quarterly profit announcements affect to the share price in the London Stock Exchange context.And here they have discussed two hypotheses which explain impact of repurchase trade on stock pricesand the timing identification hypothesis. Brian and Thomas (2006) examine how stocks prices are influenced by the impact of the price fluctuations in open market repurchase trades. According to Koshi and Michaely find that information aspect of trading transactions associated to the stock price changes even though it includes the impact of insider trading (as cited in William. They have done this study based on Tokyo Stock Exchange during the period of 1991-1996 with a sample of 66 stocks listed in that exchange. To find out this evidence they analyzed the data base of 60000 individual repurchase trades from the Toronto Stock Exchange .

Factors that determine the stock trading volume Chae (2005) examined how private information influenced the traders in respect of the scheduled and unscheduled corporate announcements and how it is affected to trading volumes. They discovered that development in financial structures resulted stock markets being highly exposed to external influences. This study identified there is an inverse relationship between cumulative trading volume and information asymmetry before the schedule announcements.117). Dellas and Hess (2002) has examined how changes in the degree of financial development impacted on relative contribution of external factors that influence the movements in the stock prices. higher stock prices are occurring as a result of increased value of a tax trading followed by a higher post-split volatility.al 1999. Also they noted that there is a positive relationship between trading volume and information asymmetry after the announcement. 1999.According to Lamoureux and Poon. To identify these relationships.p.Relative significance of domestic prices has been calculated to demonstrate that relationship. . he has used 65912 of earnings announcements from NYSE and AMEX.1171) Kadlec and Connell found that stock prices have increased as a result of moving from NASDAQ stock exchange to New York Stock Exchange.( as cited in Amihud. p. So it¶s proved that other factors related to listing in an exchange has a potential to increase the stock prices (as cited in Amihud et.Therefore financial development influences stock prices to increase. Mendelson and Uno. Similarlythey examined that before unscheduled announcements there was a huge increase in the trading volumes and noted that correlation to the information asymmetry was low.

in light of Modigliani and Miller¶s irrelevance theory says that firms underling investment policy and cash flows. Here they have discovered that stock prices have significantly linked with the current year dividends and earning announcements. This research was done in Japan where corporate managers have announced their dividend and earnings simultaneously.How ever numerous empirical studies show dividend also may affect stock prices. But earnings potential that is fundamental determinants of firm value . Conroy. Therefore dividends do not change the firms¶ underlined cash flows and investment policy (Miller and Modigliani (1961).It has examined the independence of firm¶s value to dividend policy (Dividend irrelevant theory).George .415). If they analyzed independently they have discovered that earning variable has the greater influence over the movement of share prices.Kaul. Effect of current dividends and earnings announcements on stock prices In modern corporate finance theory.p. Eades and Harris (2000) have examined how dividend and earning announcements influence stock prices. 2005. and Nimalendran have developed theoretical argument which state that increased liquidity trading has resulted high trade volumes immediately after corporate announcements (as cited in Chae. dividend policy is irrelevance to firm value. So this is in line with the Miller and Modigliani¶s prediction of there is no real effect of dividend on stock prices. However they did not examine the effect of current dividend surprises effect of significantannouncements. .

This study consist the sample of 296 New York and American Stock Exchange and they use market model to analyze the data. stock prices move in the same direction as of the earnings ( as cited in Christophe. Lee and Marcus. earnings and financial announcements. P. . earnings and financial announcements . if a firm announces current dividends and earnings simultaneously. once a firm announced its earnings. Kross and Schroeder (1990) investigated whether small firms¶ stock prices responses to fourth quarter earnings announcements are different from their responses to interim earnings announcements. 2004 . Using those methods they found that return responses are high to the last quarter of earnings than compared with the interim quarter results. it will convey greater information to the investors and thereby influence the stock prices (as cited in Conroy. Ferry and Angel . Edde Loyola college Bruce Seifert.According to Kane.the consistency of information transmitted from joint announcements and the differential price effects between joint announcements non contemporaneous announcements .1863). Old Dominion University (1985) examine the interactive effect to include dividend.They found that if there were any interactive effects the abnormal mean stock price response from a joint announcement was compared to the abnormal mean stock price response from non contemporaneous announcements . This is mainly due unexpected earnings are attributable to the final quarters of earnings. Eades and Harris 2000. This study examines the patterns of dividends . According to Ball and Brown.This study based on a sample of 225 industrial firms covering the period 1983-1985. P.1200). they found that.

researcher has chosen the positivism research paradigm to reach conclusions.Even though there are lacking of studies related to London stock market context. The methodology of conducting a research need to be more systematical since it has a direct impact on the conclusions reached at the end of the research. Positivism involves ³working with an observable social reality and that the end product of such research can be law-like generalizations similar to those produced by the physical and natural scientists´. 1998:32). In this study. but in different degrees. Further previous work will contributes in designing the research methodology and in analysis part since the matter of the study can broadly be recognized as an event study. As per Collis and Hussey (2009). This Therefore researcher will use reality that is separated from the researches¶ . Thus it is interesting to research how earning (profit) announcements have an effect towards the stock prices in London Stock Exchange. however after making necessary adjustments for specific circumstances related with stock market of United Kingdom. Therefore it is considered as an essential part of the academic theory which proves applicability of theories and concepts in the real practical world. there are two major research philosophies which govern the research strategy and methodology used to carry out a research namely positivism and interpretivism research paradigm. the assumption is that ³the researcher is independent of and neither affects nor is affected by the subject of the research´ (Remeneyi et al. Research methodology As per Oxford dictionary Research is defined as the systematic investigation in to and study of materials and sources in order to establish facts and reach new conclusions. studies carried on other countries suggest earning announcement affects to the Stock trading volume and the prices.

describe and get better understand of the actions. In this study.knowledge of the area and helps to develop objective reality against which researchers and the stakeholders can compare and ascertain the truth. it will be used Experimental method as a research strategy and it try to analyze the relationship of earning announcements with the market prices. define and understand the relationship between stock price movements and quarterly profit announcements through numerical evaluation. Then the study will identify actual market return over the pre and post event period and identify the abnormal return as the difference between expected and actual return. ³experimental´ or ³deductive´ approach. define and understand issues. processes. Therefore this study is mainly utilized quantitative methodology to identify. The calculation of average cumulative abnormal return is use to prove the influence of quarterly profit announcement over share price movements and establish whether there is a relationship between stock prices and quarterly profit announcements. Also positivism paradigm will enable for me to use results of my research more widely and even beyond the boundary of the context since my study is conducted free from bias and with a high reliability. problems and meanings in their social context. Research methodology can either be qualitative or quantitative. The research will be conducted in a value free way because regardless of what I perceive. Quantitative is the use of numerical data about activities events and occurrences to identify. . I cannot alter the stock price movements influenced by the quarterly profit announcements. Qualitative is the use of nun numerical information about phenomena that helps us to define. The positivism paradigm is often associates with the ³scientific¶. problems and processes. First it will identify the expected return of the selected listed companies stocks for the preand post event period (15 days +/window from the profit announcement date) using the Capital Asset pricing model (CAPM).

analyse and make recommendations about research findings. Interviews will also be used as a data collection method which will helps me to collect reliable and well funded data relevant to research aims and objectives and thereby answer to research questions more relevantly. web pages of selected companies to get information about quarterly profit announcement. This study will use the news paper advertisements. processed and stored with the objective of retrieving them for different purposes (Saunders. This research will mainly make use of data base published by London Stock Exchange to obtain information about daily price movements of selected 10 listed companies. I will be making use of secondary data. This research will undertake both semi structured and unstructured interviews to collect data relevant for the study and I will interview Representatives of London Stock Exchange Representatives of the selected 10 listed companies Stock brokers and analyst Major shareholders and investors y y y y . financial year 2009 and 2010 will be used as a time frame to collect. Secondary data is a data that have already been collected.Research Method For the purpose of this study. et al 2007).In order to achieve the objectives of this research.

Data analysis has significant importance to the decision makers since it enable them to highlight vital information. qualitative researches have more ethical concerns than quantitative researches. Even though all researches subjected to ethical issues. leads researcher to become free from moral and ethical disturbances. calculation of actual returns of individual stocks.Anticipated method of analysis and findings Data analysis isa process that analyzes raw data to describe facts. trends and patterns of a scenario and assist them to reach quality recommendations and conclusions. construct explanations and test hypothesis. In my research I will use semi structured and unstructured interviews to gather information . In this research. expected returns of stock using the CAPM model. Therefore researcher needs to act morally and responsible way though out the research. Also SSAP software and regression modules will be used in the analysis of data to identify whether there is a relationship between quarterly profit announcements and stock price movements. the methods use to collect and process data and reporting findings of the research. Since majority of data use to carry out this research is of quantitative nature and those will be derived from open public sources. identify patterns.The appropriateness of researcher¶s behavior with regards to rights of the persons who become subject of the research work or affected by the work is known as research ethics. Ethical consideration Research ethics governs ethical aspects of formulating& clarifying research tropic. abnormal returns of individual stocks & hypothesis testing will be conducted as a part of analysis.

required for the study. The respondents will be voluntarily participants and will provide full information relevant for the research. . theories and concepts. Authors of those books. articles to support the research conclusion with a sound academic theories and concept. articles will be identified and appropriately referred in the research together with avoiding any misinterpretations of their thoughts. I will respect the confidentiality and anonymity of those participants unless participants have given their consent to be identified in the research. I will refer various books.

Conclusion The research will highlight influence of quarterly profit announcements on stock prices and find the relationship between profit announcements and stock price movement. Time Scale April Week May June July August September Task 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 Written proposal (draft) Written proposal (final) Info. Further I will provide a signal to the existing and prospective investors regarding behavioral aspect of stock prices. & data collection Interviews Analyze data Final writing of dissertation Submission .

ShOJi selling prior to earnings announcements. & Harris. Mendelson. The journal of Finance. & R adhakrishna.. Thejou mal of Finance. 3( 1-2). A. 54(3). Journal of B usiness F inance a n d A cco u nting. K. How trades aro und earn ing s an no u ncem ents? E vidence fro m T O R Q data. (2004). M.. (2002). Eades.References Amihud. Fen'i. 413 -442. G. 1169-1184. R. . J. & Angel. S. Conroy. H. Number of shareholders and stock prices: Evidence from Japan. (2000). H. M.. A test of the relative pricing effects of dividends and earnings: Evidence from simultaneous announcements in Japan. Information Asymmetry and Timing Information. B. J. M. S. Financial development and the sensitivity of stock markets to external influences.. (1999). & Uno. 269-291. J. (2005). M. The journal of Finance. Chae. K. E. Chistophe. Dey.. & Hess.. J. Thejour- Dellas. 54(4). 60 (l).. K. (2007).525-538. Review of International Economics. R. 1845-1875. Trading volume. M.. 10(3).

Lobo. & Schroeder. W. & Schroeder.Kross. 851-868. An investigation of seasonality in stock price responses to quarterly earnings announcements. 24(6). L. 33(1)&(2). Relation between pre disclosure infolmation asymmetry and trading volume reaction around quarterly earnings announcements. S. & lung. L.. 24(6). &lung. How investors trade around interim earnin ings announcements. An investigation of seasonality in stock price responses to quarterly earnings announcements. Lobo. l.Journal of Busines -s Finance & Accounting. Vieru. Journal of Business Finance &accounting. (1997). M. G. (1990).Journal of Business Finance & accounting. (1990). D. S.. .. 17(5). 851-868. Journal of Busines -s Finance &Accounting.. Relation between pre disclosure infolmation asymmetry and trading volume reaction around quarterly earnings announcements.. D.. & Schadewitz.145- Kross. G. Perttunen. (2006). (1997). H. 17(5). W. Journal of Business Finance & Accounting.

Journal of Business Finance & Accounting. Perttunen. (2006).. H. l. & Schadewitz..145- .Vieru. How investors trade around interim earnin ings announcements. M. 33(1)&(2).

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