Martynyuk, A.

English

eLibrary National Mining University

Martynyuk A.People’s Friendship University of RussiaSHARE PRICE RESPONSE TO EARNINGS ANNOUNCEMENTSThe world economy before the 2007-2008 financial  crisis  was to a  largeextent  characterized  by enormously  growing corporate  activity:  financial  worldsaw numerous mergers and acquisitions, takeovers, divestitures, etc. (Frykman &Jakob, 2003). World’s leading financial indexes showed upward trends. However,Figure 1 demonstrates  that  S&P 500 index was decreasing from Jan 2008, butfurther  showed  recovery  from  Jan  2009.  The  same  pattern  can  be  seen  fromplotting  other  financial  indexes:  Dow  Jones  industrial  average,  AmsterdamExchange index, FTSE 100, etc.Chordia, Roll and Subrahmanyam (2011) report increase of value-weightedaverage  monthly  share  turnover  and  the  rise  of  average  number  of  dailytransactions on NYSE from 1993 to 2008. Figure 2 supports the fact of enlargednumber of share trading value for the period (with the downturn in year 2000),however  revealing  the  abrupt  decline  of  the  value  from  2008  with  its  clearreversion from 2009. Such a situation, both with volatility of world financial markets and sharetrading  activity,  requires  interested  parties  to  be  able  to  assess  a  value  of  acompany, in order to determine, whether the company is possibly overvalued orundervalued by market. The current value of a company can be driven downwardsby  overall  market  perception,  which is  reflected  in  values  of  various  financialindexes and the share trading activity of investors. In this case, if a company hasstrong internal financial indicators, it can possibly outperform the market, when itsperception recovers. The valuation of a company can be done by getting insight ofhow much external and internal to a company economic events influence its value. Private  investors,  valuating  entity,  can  make  justified  decisions  oninvestments on a stock market in order to be more profitable. Managers’ purpose,in their turn, is to maximize shareholder’s value. Thus, in order to understand howtheir  decisions  influence  a  company’s  value  and  hence  a  shareholder’s  value,managers first need to determine it, possessing information on what it depends on(Neale & McElroy, 2004). Therefore,  the  obvious  question  occurs:  how  is  it  possible  to  assess  acompany, obtaining its share price response to diverse corporate events?Copeland, Koller and Murrin (2000) state, that nowadays the most usefuland widely  accepted  valuation model  to  assess  a  company  is  Discounted  CashFlow (DCF) model,  which discounts expected future free cash flows to presenttime,  taking  into  account  the  corresponding  cost  of  capital  of  the  company.Authors support the idea of using cash flows in corporate valuation, claiming thatthe value of a company directly depends on how well it generates cash flows. Intheir turn, Neale and McElroy (2004) consider cash flows valuation as a theoreticalframework, converging to practice. At the same time, some researchers (e.g. Hechtand Vuolteenaho, 2006) claim the usefulness of accounting earnings as proxies forcash-flows.  The advantage  of  using accruals  is  the timing,  so cash  flows evenbeing the real underlying reason of returns variation, cannot be always reconciledwith share price movements at the same period. Thus,  by studying response ofshare  prices  to  earnings,  the  one  explores  underlying  relationship  between  acompany’s value variation and expected cash flows. There are numerous papers providing research on share price response toearnings announcements. Chari, Jagannathan and Ofer (1988) studied seasonal trends of stock returnsas a result of response to quarterly earnings announcements. The data comprised56147 quarterly announcements for 2527 firms during 1976-1984. The researchersfound significant positive abnormal returns for small size firms. The influence of quarterly earnings announcements to share returns in theNigerian Stock Market was tested by Afego (2011). Using a sample of sixteenfirms with quarterly earnings announcements during 2005-2008, listed on NigerianStock Exchange, the researcher found statistical significance of abnormal returnsaround earnings news release. Apart  from discussed  papers,  Su  (2003)  lists  other  studies,  which  foundstock price response to earnings announcements in US and non-US markets: Balland Brown (1968), Gennotte and Truemann (1996), Alford, Jones, Leftwish, andZmijewski (1993), etc.  Reference:1. Alford, A.,  Jones,  J.,  Leftwish,  R. & Zmijewski,  M. (1993). The relativeinformativeness of accounting disclosures in different countries.  Journal ofAccounting Research, 31, 183-223.2. Afego,  P.  (2011).  Stock  Price  Response  to  Earnings  Announcements:Evidence from the Nigerian Stock Market. Retrieved from Munich PersonalRePEc Archive : http://mpra.ub.uni-muenchen.de/33931/, 02 April 20123. Ball, R. & Brown, P. (1968). Using daily stock returns: The case of eventstudies. . Journal of Accounting Research, 6, 159-178.

SHARE PRICE RESPONSE TO EARNINGS ANNOUNCEMENTS

http://ir.nmu.org.ua//bitstream/123456789/1770/1/Martynyuk%20A..pdf

SHARE PRICE RESPONSE TO EARNINGS ANNOUNCEMENTS

Abstract

Similar works

Full text

Available Versions

eLibrary National Mining University