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Earnings Changes, Stock Prices, and Market Efficiency

Wiley
The Journal of Finance
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... The methodology of this study followed, basically, the one adopted by Ball & P. Brown (1968), specifically regarding the study of the association, which was also employed by Pettit (1972), Watts (1973), S. L. Brown (1978), Sarlo Neto, Loss, Teixeira, & Lopes (2005) and Nascimento, Pires, Costa, & Tasso (2006), for example, and the analysis of the relative importance of the informational content of the accounting variables analyzed. ...
... Two means were obtained for the day t, called general (ut) and cross-section (uit), which were calculated by means of expressions (4) and (5), respectively. To Fama et al.. (1969) and S. L. Brown (1978), the average abnormal return can be interpreted as the mean percentage deviation of returns concerning actions that make up the sample, of its normal relationship with the market ...
... The measures employed were: (i) Abnormal Performance Index "Cross-Section" (APIi), equation (7), already used by Ball & P. Brown (1968), Pettit (1972), S. L. Brown (1978), Sarlo Neto at al. (2005) and Nascimento et al. (2006); and (ii) Cumulated Abnormal Return (CARg), equation (8), also employed by Fama et al. (1969), S. L. Brown (1978), S. L. Brown & Warner (1980, 1985, Campbell & Wasley (1993). ...
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This research aims to evaluate the usefulness of quarterly accounting results of Brazilian companies and identify which of its metrics better captures and expresses the factors considered by market participants in the formation of the stock price. With the employment of the technical study of associations and analysis of relative importance, we analysed 6 metrics of the profit and loss statement, in a sample with 2,588 quarterly financial results, between 1999 and 2008, of 108 companies listed on BOVESPA – The Sao Paulo Brazilian Stock Exchange. The main findings show that there is a daily significant association during the quarter, notably in its completion, between each of the metrics and the stock price and the Net Income is the metric that best captures and expresses the factors considered in the formation of stock prices of Brazilian companies.
... A few examples include the works dating from the 1970s, such as that of Jones and Litzenberger (1970), who argue that the information available to the public (quarterly financial statements) is not properly (fully and timely) discounted by the market. This conclusion is shared by Joy et al. (1977), who argue that the price adjustment to earnings reports is gradual rather than instantaneous, and by Brown (1978), who found that the adjustment of stock prices to earnings takes some time. ...
... Ball and Brown (1968) use the market model logic for both (log) prices and earnings, assuming that the expected price and earnings of a specific firm are the average of the market. A similar approach is followed by Brown (1978). Foster et al. (1984) also use the CAPM for calculating abnormal returns and a univariate seasonal time-series model for estimating quarterly earnings surprises. ...
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Purpose – This research investigates the post-earnings announcement drift (PEAD) anomaly in the Latin American stock markets.Theoretical framework – The theoretical fundamentals of PEAD analysis lie in the efficient market hypothesis (EMH).Design/methodology/approach – We use firms from Argentina, Brazil, Colombia, Chile, Mexico, and Peru. We examine the PEAD anomaly by estimating the cumulative abnormal returns (CAR) around earnings announcement dates. We replicate the analysis using a sample of firms from the New York Stock Exchange (NYSE) for comparison. We analyze how firm-level and country-level (institutional) variables can explain the PEAD anomaly.Findings – Under different specifications, we find that good news firms yield positive CAR while bad news firms yield negative CAR even after a window of 20 days. We find that the effect of earnings surprises on CAR in Latin Americavaries with firms’ size and countries’ risk, while in the US it varies with firms’ size and the market-to-book (MTB) ratio.Practical & social implications of research – We fill a gap in the literature on the role of accounting in the capital markets by analyzing the Latin American markets, which are usually left unexplored. In addition, our results are important for portfolio selection strategies, since the PEAD anomaly represents an opportunity to gain abnormal returns based on earnings surprises.Originality/value – We contribute to the literature on the PEAD anomaly by providing evidence on how investors react to earnings announcements in Latin American countries. While other studies have investigated how accounting numbers are useful for investment strategies in the region, by including earningssurprises we go back a step and first investigate the reaction around these surprises. Keywords: Post-Earnings Announcement Drift, Latin America, abnormal returns, firm-level factors, country-level factors.
... Studies by Richardson, Tuna and Wu (2002), Palmrose, Richardson and Scholz (2004), and Wu (2002) investigate the recent phenomenon of fmancial restatements. Most of the published research, among others, relating to the stock price reaction on the announcement of accounting eamings fmd that the market is semi-strong form efficient, e.g.. Ball and Brown (1968), Brown (1978), Watts (1978), and Fried and Givoly (1982). In addition to eamings announcement studies, many other studies attempt to analyze the stock price reaction to eamings announcement fi-om different perspectives, for example, dividend announcement (Aharony and Dotan, 1980;and Kane, Lee and Marcus, 1984), timing of the eamings announcement (Chen andMohan, 1994 andChambers andPenman, 1984), speed of the price adjustment (Defeo, 1986), variation in stock price response when eamings are announced during trading and non-trading hours (Francis, Pagach and Stephan, 1992), and existence of options market (Jennings and Starks, 1986). ...
... In order to estimate the abnormal retum and cumulative abnormal retum we apply the standard event study methodology as suggested by Brown (1978) and Brown and Warner (1980). ...
... This method was employed as early as 1933 by Dolley where he examines the price effects of stock splits, investigating nominal price changes at the time of the stock split were he tested the effect of unexpected dividend changes on the changes of stock prices and is taken to be a major breakthrough in testing market efficiency. Over the past half century, event studies have been employed in much research and their sophistication has been greatly improved by authors such as and Brown andWamer (1980, 1985). ...
... In addition, are free from joint hypothesis problem (Fama, 1991, Copeland andWetson, 1983) in (Oludoyi 1998). Studies in which the market model has been used include Ball and Brown (1968), , Scholes and Williams (1977): Brown (1978), Dimson (1979), Collins and Dent (1984); Brown et al. (1988), Haw and Ro (1990); Kross and Schoeder (1990), Barthov (1992), Husnan and Theobald (1993), Oludoyi (1998), Michelle and Shiguang (2002), Olatundun (2003) etc. The market-adjusted model is an offshoot of the market model. ...
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This study tests the consistency of the Nigerian Stock Market with the efficient market hypothesis (EMH) in the semi-strong form using bonus issues as the information generating event. Using daily data,a total of 121 bonus issues were observed and examined for the period 2002-2006. The stocks which were tested were classified according to the size of their bonus issues and also according to the price of the stock to know the impact of information released on the price of different categories of stock. Using the event study methodology,the market and the market adjusted models as well as the vector auto regression models,the study discovered that information release impacts significantly only in the year 2002. Also,it reveals that small bonus issues responded speedily to bonus issues more than medium and large bonus issues. In addition,the test between penny stocks and blue chips shows that only penny stocks were significantly affected.
... Meanwhile, market dynamics are the factors that influence the movements and trends of asset prices, such as market volatility, and efficiency. The earlier debate on Efficient Market Hypothesis (EMH) stated that in the efficient market, no abnormal returns are expected following events (Brown 1978). We posit these three concepts are interrelated and essential for understanding the behaviour and performance of financial markets, especially in times of uncertainty and crisis. ...
... Brown (1978, p.17) defines efficient capital markets as "one in which it is impossible to earn an abnormal return by trading on the basis of publicly available information". Fama (1965) and Brown (1978) definitions have a common element: the assumption of available information about the earnings of a firm, traditionally expressed by Earning per share (EPS). Ball and Brown (1968) tried to explain the behaviour of the stock market which was not of main interest by economists but statisticians. ...
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The purpose of this paper is to create awareness of a number of existing theories in Finance area of specialization. The compilation and analyses on the theories will help scholars quickly identify theories existing in finance and application of the theories in a scholarly manner. However the theories analyzed are not exhaustive. Scholars are allowed to add to the list of analyses.
... Market efficiency refers to the extent to which the stock market accurately reflects all the available information that determines equity prices, which is also influenced by the hopes and fears of stock market participants (Malkiel, 1989). While studying not only market efficiency but also earnings change and stock prices, Brown (1978) discovered market inefficiencies between 1963 and 1971. However, stock markets have experienced numerous economic events, and in an era of globalization where international trade increases significantly, individual countries are more affected by international economic events. ...
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Article History Keywords Market efficiency Efficient market hypothesis (EMH) Economic events Dummy variable regression model Indian stock market Sectoral indices. JEL Classification: G01, G1, G4. Stock markets act as barometers of economies; thus, a nation's stock market returns are expected to be affected by not only domestic but also global economic events. This also raises questions about the validity of the efficient market hypothesis (EMH). This study therefore examines the impact of both expected and unexpected economic events on stock market returns in India, as represented by the benchmark NIFTY 50 Index and other sectoral indices. Using dummy variable regression models to determine the effects before, on, and after the date an event occurred, the current study concludes that despite investors' immediate positive or negative reactions to economic events, their responses are short term and the Indian stock market quickly recovers. In addition, the findings contradict the EMH in the Indian context: unexpected economic events exert a greater impact than those expected, indicating the potential for investors and traders to earn abnormal profits when such events occur. Contribution/Originality: This study contributes to the existing body of literature on stock market efficiency. Its primary contribution is evidence of the impact of both expected and unexpected economic events on stock market returns in India.
... 11 Zie daarvoor de literatuuropgave bijBall (1978). 12 Zie echterBasu (1978),Brown (1978)enWatts (1978). 13 Vergelijk ook Beaver en Dukes(1972, 1973). ...
... The combined model (Table 10) showed a negative correlation between earnings per share and share return. Chang et al. (2008) and Brown (1978) where EPS were correlated positively with the stock return in non-REITs firms. The findings are also not in line with (Foo Sing et al. 2002) who find that the property stock market EPS plays a significant role in both long term and short term. ...
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We examine the determinants of REIT returns in a highly developed trade-oriented market economy - Singapore. For the period from 2004 to 2013, we conduct panel data analyses on the impacts of REIT characteristics and macroeconomic factors on the returns of Singapore Real Estate Investment Trusts (S-REITs). Our results indicate that the returns of S-REITs are affected by the book-to-market value but not earnings per share, the debt-to-equity ratio, or the dividend yield. From the macroeconomic perspective, both local and international economic conditions, including the gross domestic product, inflation rate, exchange rate, and money supply are significantly related to the returns of S-REITs, indicating that the market of S-REITs is an imperfectly integrated one.
... To investigate the first, we identify unexpected additional cash flows by earnings surprises and analyze the influence of CSR on BHARs via earnings surprises. Given that earnings surprises are known to induce abnormal returns (Brown 1978;Watts 1978;Rendleman, Jones, and Latane 1982;Kane, Lee, and Marcus 1984), this facilitates us to quantify the effect of CSR-induced unexpected additional cash flows on abnormal returns. To quantify the scope of the effect of the second hypothesis, we estimate the influence of additional demand by employing both conservative and relaxed figures for the price elasticity of demand. ...
Article
This paper presents new evidence on the implications of corporate social responsibility (CSR) on stock returns. By implementing a long-term focus as well as using subdivided measures for CSR, we cater to the intangible nature and the heterogeneity of CSR activities. We use a novel classification of these activities into nine areas, each belonging to one of the standard environment, social, and governance (ESG) dimensions. Using cross-sectional return regressions and buy-and-hold abnormal returns, we find that firms with strong CSR significantly outperform firms with weak CSR in the mid and long run in certain areas. Firm returns increase up to 3.8% with respect to a one-standard-deviation increase of the CSR rating. In a two-stage least squares (2SLS) approach we verify that the main economic channel for the appreciation of strong CSR stocks is unexpected additional cash flows. The results are relevant for assessing the efficiency of CSR, and have broader implications for asset managers who can expect abnormal returns by investing in firms that exhibit a high CSR in the respective scores and holding the stocks for a longer period.
... To investigate the first, we identify unexpected additional cash flows by earnings surprises and analyze the influence of CSR on BHARs via earnings surprises. Given that earnings surprises are known to induce abnormal returns (Brown 1978;Watts 1978;Rendleman, Jones, and Latane 1982;Kane, Lee, and Marcus 1984), this facilitates us to quantify the effect of CSR-induced unexpected additional cash flows on abnormal returns. To quantify the scope of the effect of the second hypothesis, we estimate the influence of additional demand by employing both conservative and relaxed figures for the price elasticity of demand. ...
Article
This paper quantifies the long-term financial effects of strong (weak) corporate social performance (CSP). We contribute to the literature by seeking such effects on a broad range, i.e. different CSP dimensions which are depicted by so-called ESGEc scores - an acronym for environment, social, governance, and economic - and for 18 sub-scores of these four dimensions. Our central strategy is to analyze the time structure of abnormal firm returns dependent on CSP rating data. We find positive mid- and long-term effects in all four dimensions of up to 6.82% abnormal return with respect to a change from the lowest to the highest possible ESGEc score. These effects are robust to controlling for common risk factors, accounting data, and industry fixed effects. We identify market inefficiencies for certain sub-scores and verify that the economic channel for the appreciation of strong CSP stocks are both additional cash flows and additional demand during our sample period. Thus, investments in firms with a high CSP are profitable in the long run.
... Security analysts' forecasts of company earnings are an integral part of the information set for equity investors. The role of analysts' earnings forecasts as a representative of the market's earnings expectations is well documented in the literature (see Brown, 1978;Fried and Givoly, 1982;Rendleman et al., 1982;and Brown et al., 1987). Also, analyst following is a good indicator of interest in and potential growth of an equity market. ...
Article
We examine the properties of individual analysts' forecasts of annual earnings for Turkish companies. Using a sample obtained from the Institutional Brokers Estimate System (I/B/E/S) database of earnings forecasts, we measure individual analysts' forecast errors and relative optimism, and test for serial correlation in these measures. We also compare the forecast accuracy of analysts working for Turkish brokerage firms to the forecast accuracy of those employed by non-Turkish firms. An important contribution of this paper is that it is the first study to focus on the earnings forecasts of Turkish companies at the individual analyst level.
... Muhasebe literatüründe, kâr ilanları ile piyasaya arz edilen bilginin fiyatlara yansıma hızını ortaya koymaya çalışan araştırmacılar; kâr ilanlarına bağlı olarak yaptıkları analizde, ilanlar aracılığı ile piyasaya aktıran bilginin hisse senedi fiyatlarının belirlenmesinde dikkate alındığını, bununla birlikte ilan gününde meydana gelen fiyat sapmalarının, ilandan sonra oldukça uzun sayılabilecek bir dönemde hala sistematik olarak ortaya çıkmaya devam ettiğini ortaya koymaktadır (Bkz., Ball, 1978;Joy ve Jones, 1979;Brown, 1978;Latane ve Jones,1979;Bidwell ve Riddle, 1981;Rendlemen, Jones ve Latane, 1982). Yapılan bu araştırmalara göre, hisse senedi getirilerindeki değişmenin kârların içerdiği bilgi doğrultusunda ilan öncesinde ve ilan anında ortaya çıkmasının yanı sıra, kâr ilanlarından sonra da mevcut olduğunu ve bu değişmenin ani olmaktan ziyade, aşama aşama meydana geldiğini (Jones, Rendleman ve Latane, 1982, s. 31) ortaya koymaktadır. ...
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Bu çalışmada, De Bondt ve Thaler'in (1985, 1987) zıtlık portföyleri stratejilerini ortaya koyan ve akademisyenler arasında çok büyük ilgi ve tartışmanın odağı olmuş, aşırı tepki verme hipotezi (Overreaction Hypotesis) incelenmektedir. Çalışmanın amacı, aşırı tepki verme hipotezini tanıttıktan sonra, hipoteze gerek literatürde gerekse tarafımızca yöneltilen eleştirileri ele alarak, bir değerlendirme yapmaktır.
... To investigate the first, we identify unexpected additional cash flows by earnings surprises and analyze the influence of CSR on BHARs via earnings surprises. Given that earnings surprises are known to induce abnormal returns (Brown 1978;Watts 1978;Rendleman, Jones, and Latane 1982;Kane, Lee, and Marcus 1984), this facilitates us to quantify the effect of CSR-induced unexpected additional cash flows on abnormal returns. To quantify the scope of the effect of the second hypothesis, we estimate the influence of additional demand by employing both conservative and relaxed figures for the price elasticity of demand. ...
Article
This paper explores the long-term performance of stocks with high corporate social performance (CSP), measured by so-called ESG scores depicting the environmental (E), social (S), and governance (G) dimension. We investigate the buy-and-hold abnormal returns of a long/short investment strategy including the top and low 20% stocks with respect to each of the ESG dimensions. The results of the bootstrap tests in a world-wide perspective indicate that financial markets are not capable to price different levels of CSP in the short run and in particular in the long run properly. The zero investment strategy produces significantly positive abnormal returns up to 20% in North America and Europe in a five year period. We also identify regional differences, for instance, a high social score does not pay in Japan and strong corporate governance yields significantly negative abnormal returns in Asia Pacific.
... Actually, abundant evidence exists which supports the argument that analysts' earnings forecasts are informative for investors. For instance, several papers compare the predictive ability of analysts' earnings forecasts with time-series models (Brown, 1978;Brown and Rozeff, 1978;Collins and Hopwood, 1980;Brown et al. 1987). Their results suggest that security analysts' earnings forecasts are more accurate than time-series model forecasts. ...
Article
We examine whether more analyst coverage translates into more informative stock prices and apply this to both developed and emerging markets. We measure price informativeness using the association between current stock returns and future earnings. We argue that more informative stock prices contain more information about future earnings. Results indicate that analysts' activities do not contribute to the impounding of future earnings information into current stock prices, in accordance with the view that analysts are outsiders who do not have full access to firm-level information. We also find that analysts specialize according to industry and that "industry expertise" is limited to developed countries. Overall, our evidence is consistent with the explanation that analysts focus on gathering and mapping industry- and market-level information (macroeconomic information) into stock prices.
... The Ball and Brown study raised the question of whether or not AFRs contain any new information. Griffin (1977), Foster (1977), Brown (1978), Watts (1978), Aharony and Swary (1980), and Joy, Litzenberger and McEnally (1977) have focused on quarterly earnings reports where information revealed to the market is (perhaps) more timely than AFRs. ...
Article
In this paper, we reviewed the efficient market hypothesis and the theory of behavioural finance with some past scientific research work relevant to these theories. Market efficiency refers to the speed and accuracy with which current market prices reflect investor expectations, such that mispriced securities are rare. This study, which is essentially a literature review, intends to explain the behaviour of stock prices with respect to information. It considers efficiency in relation to block transactions, new issues, stock splits and mutual fund performance with a consideration of empirical models that have found extensive use in the EMH research. Also, the issue of information adequacy and redundancies of annual financial reports (AFRs) in Nigeria is also discussed. Most of the evidence obtained from scholarly works on the EMH is consistent with the strong form but cases where market anomalies exist to depart from EMH lend credence to the impact of imperfections of market conditions. As a result, we conclude with a case for Behavioural finance which studies how cognitive or emotional biases create anomalies in market prices and returns.
... Security analysts are potential intermediaries in the process of information disclosure. Their role as producers of firm-specific information has been widely investigated for developed markets, see Brown (1978) and O'Brien (1988), among many others. In emerging markets, the availability of firm-specific information is hampered for a variety of reasons, such as the limited set of regulations on information disclosure or the lack of enforcement thereof, see Morck et al. (2000), Bae et al. (2006) and Bae et al. (in press), among others. ...
Article
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This dissertation consists of five empirical studies on financial markets. Each study can be read independently and covers a specific market, either private equity, corporate bonds or emerging markets. The first study documents that risk factors cannot account for the significant excess returns of selection strategies based on value, momentum or earnings revisions indicators in the emerging equity market. The second study presents empirical evidence that security analysts do not efficiently use publicly available macroeconomic information in their earnings forecasts for emerging markets’ companies. The third study focuses on the emerging currency market and shows that a combination of macroeconomic variables and technical trading rules can be exploited to implement profitable trading strategies. Combining these two types of information improves the risk-adjusted performance. In the study on the corporate bond market we document that common risk factors do a good job in explaining the cross-section of returns on corporate bond portfolios with medium to long maturity, but significantly underestimate the returns on corporate bonds with a short maturity. Comparable evidence of a short-term corporate bond anomaly also shows up in portfolios of corporate bond mutual funds. In the last study we set out a commitment strategy that allows an investor in private equity to maintain a constant portfolio allocation to private equity given the uncertain nature of future cash flows and the limited liquidity.
... N 1. See Pettit (1972), Charest (1978), Aharony & Swary (1980), Woolridge (1982), Asquith & Mullins (1983), Brickley (1983), Divecha & Morse (1983), Benesh, Keown & Pinkerton (1984), Dielman & Oppenheimer (1984), Eades, Hess & Kim (1985), Wansley & Lane (1987), Ghosh & Woolridge (1988), Aharony, Falk & Swary (1988), Born (1988), Healy & Palepu (1988), Ghosh & Woolridge (1991), John & Lang (1991) and Marsh (1993) for the evidence on the dividend announcement effect. The earnings announcement effect has been examined by Ball & Brown (1968), Beaver (1968), Brown (1970), Foster (1975Foster ( , 1977, Brown (1978), Watts (1978) 3. Lintner's survey revealed that 'the level of current earnings was almost invariably the starting point in management's consideration of whether dividends should be changed' (pp. 101-102). ...
Article
Numerous studies conducted in different countries have documented evidence that the announcements of changes in dividends and earnings convey specific information to the capital market. However, recent studies which have examined simultaneous announcements by firms have discovered that the signals of dividends and earnings may interact with one another; one announcement may either corroborate or contradict the other and, in consequence, influence the level of any abnormal share returns which are earned by investors (see Kane, Lee & Marcus, 1984; Easton, 1991; Eddy & Seifert, 1992). This problem is of special relevance to the UK where the announcement of dividends and earnings news on the same day is common practice. This simultaneous release of a variety of different combinations of dividend and earnings signals may make it more difficult for investors to decode complex messages contained in mixed signals and also make it harder for them to decipher relevance information conveyed by the individual components of combined signals.
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This article presents the newly reconstructed daily gold price from 1919 to 1968 for the world's primary gold market during the London Gold Fixing auction, when gold was the cornerstone of the world's monetary system. We assess whether this market conformed to the Efficient Markets Hypothesis, which posits that prices are unpredictable, or the Adaptive Markets Hypothesis, which posits that a market efficiency will evolve based on changes in the market structure. We find that the Gold Fixing price was inefficient in periods when prices were market-based from 1919 to 1925 and again in the 1930s when private hoarders began to have a significant impact on the market. We find the Gold Fixing was also inefficient during gold standard periods when central bank interventions limited gold's ability to react to new information, despite two episodes where prices rose above the official ceiling.
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Purpose This study aims to determine whether the stock holdings of equity mutual funds are informative for predicting future stock performance in the Chinese market. It is a puzzle that actively managed mutual funds underperform passive benchmarks, whereas retail investors still delegate investment decisions to the fund managers. The present study sheds light on whether mutual fund managers possess security selection skills in their top ten holdings. Design/methodology/approach By regression analysis and portfolio sorting, this study focuses on 830 Chinese A-share stocks in the industry research reports from the Guotai Junan Securities Company. It collects mutual fund's top ten holdings data from the Wind Financial Terminal between 2019Q1 and 2021Q1. As robustness checks, the result holds for the fixed-effect model, an additional measure of ranks in the top ten holdings, the predictability test based on the confusion matrix and two stage least square (2SLS) regression. Findings The authors find that the top ten holdings by equity mutual funds are informative for predicting stock performance and can provide valuable information for investors to support their decision-making. Practical implications The findings of this study provide insightful guidance for retail investors in making investment decisions and support the hypothesis that active fund management adds value. Originality/value Firstly, the authors find that the top ten holdings of Chinese mutual funds show significantly positive signals for future stock excess returns, indicating the selection skills of fund managers. Secondly, the above positive relationship exhibits a diminishing marginal effect with more funds holding this stock. Thirdly, the authors find that the predictability horizon of the number of overweighing funds is up to three quarters and then diminishes in the fourth quarter. Finally, investors have a 59% prediction accuracy for the whole stock sample and an 85% precision conditional on the predicted positive subsample to outperform the market. The authors also address the endogeneity and reverse causality issues.
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We examine the effect of fund managers’ voting on the optimistic bias of sell-side analysts by exploiting the exogenous event of New Fortune Magazine suspending the Sixteenth Star Analyst Contest. Our results show that the disappearance of voting makes analysts face less pressure from funds, which leads to less optimistic bias and lower error in earnings forecasts. Moreover, the effect is more pronounced in the samples of analysts who work in small brokerages and have less star experience. Further, we find that analysts reduce listed firm joint site visits with small fund managers but still conduct single site visits, suggesting analysts are diligent but not catering to small fund managers anymore. In addition, we find the opposite result as the effect of the cancelation reverses. In general, our findings indicate that the voting right of the star analyst ranking has become a self-interest tool for fund managers, driving analysts to provide biased reports and soft services, becoming another source of pressure for analysts.
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This study shows that analysts generate firm-specific information, rather than market-wide information. Whereas previous studies report only the positive relationship between stock price synchronicity and analyst coverage, we suggest that the positive relation can be attributed to the interaction between analyst coverage and firm performance cyclicality. After controlling for the interaction effect between the analyst coverage and cyclicality, synchronicity decreases with the analyst coverage. Both effects diminish with the high analyst forecast dispersion, namely, we observe the decreasing effect of increasing analyst coverage on synchronicity and the increasing effect of interaction between analyst coverage and cyclicality.
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Using event study methodology and regression analysis method, this study had examined quarterly earning announcement and its impact on the stock returns. The earning announcements were divided in to three groups: (1) Good news (quarterly positive earnings announcement), (2) No news (quarterly neutral earnings announcement) and (3) Bad news (quarterly negative earnings announcement). The study result confirmed that both the good news and the bad news had a strong impact which is significant statistically on the share returns. While no news did not show any impact which is significant statistically. The study is in line with the information content hypothesis, as the good news (bad news) event announcement had impacted to the abnormal returns positively (negatively) and significant statistically. The study also found a positive and statistically significant relationship between quarterly earnings and stock price.
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Chapter
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There is empirical evidence in the finance literature showing that information incorporated in the consensus estimate of earnings per share (EPS) is efficiently reflected by share prices while the market is quite inefficient in discounting consensus shifts. In this situation, it is possible that investors earn excess returns by trading on information related to earning revisions of financial analysts. The question of whether in all conditions EPS revisions convey valuable information motivates this article. Empirical results show that stocks with best EPS monthly change and lowest dispersion earn higher abnormal returns. Therefore, dispersion gives credibility to the prospective changes of a firm estimated by financial analysts. Copyright © 2001 Asociación Española de Contabilidad y Administración de Empresas.
Article
One of the thorniest problems in investment research is to integrate academic research into a viable investment product. Research techniques that have shown promise in academic studies do not translate well into financial products. The concern of this paper is the academic research that indicates that there is usable information in earnings announcements. A number of articles have explored analysts' earnings estimates, analysts' forecasting ability and the reaction of stock prices to earnings announcements. One research area is the group of stocks whose earnings announcements constitute positive "earnings surprise" given a consensus of analysts' expected earnings. The consensus derives from a twenty quarter, seasonally adjusted earnings trend and the median analysts' forecasts from I/B/E/S, Inc. The quantitative research department of a major securities firm has identified and published a list of "earnings surprise" stocks for the past 9 years. The major issue addressed in this paper is whether the information contained in earnings announcements is useful as a security screening technique for a portfolio selection process, i.e., Do earnings announcements add value to the performance of a portfolio? Previous studies focused on individual securities. There have been no attempts at integrating earnings surprise into a systematic portfolio approach. The study conducts a comprehensive backtest of whether there is new investment information in earnings surprise data when used with a portfolio selection algorithm. Since the focus is on a usable financial product, this study uses economic return performance to evaluate its results rather than the more commonly used statistical methodology. The results indicate that using earnings surprise information in a periodic revision of a portfolio does not add value. Any value added derives from the portfolio selection algorithm not from the fact that the stocks in the analysis are "earnings surprise" stocks. In addition, the earnings surprise stocks are a source of increased volatility when used in 15-30 asset portfolios.
Article
The purposes of this study are: (1) to propose a more general method—moving stochastic dominance (MSD)—for testing market efficiency, (2) to compare and contrast the MSD method with the cumulative average residual (CAR) risk-return analysis, and (3) to illustrate the MSD methodology on a sample of stock splits. The constant CAR analysis results are consistent with previous studies. The moving CAR results are in conflict with previous studies and indicate that investors are worse off after a stock split irrespective of the subsequent dividend change. The MSD results indicate that investors are approximately equally well off irrespective of the subsequent dividend change.
Article
In December, 1972, the AICPA published its second audit guide dealing with the insurance industry. This paper examines the capital market impact of the Audit Guide on a portfolio of selected life insurance company stocks. The vehicle used to analyze the impact is the market model, a statistical model that removes the influence of the market from the performance of the selected stocks. The research findings are consistent with the semi-strong form of the efficient market hypothesis: The Audit Guide's impact was quickly impounded in the security prices of the affected companies so that investors' could not reap abnormal returns.
Article
Large losses are a major concern of a firm and represent a special problem for its risk manager. The risk manager's function is to minimize the impact of these losses as part of the overall objective of maximizing the wealth of the owners of the firm. This paper evaluates the behavior of the firm's stock price once a large loss occurs and shows that large losses generally have an impact on the market price of the firm's stock.
Article
We use a probit selection model to investigate whether the relation between stock returns and their fundamental determinants varies for China-concept and non-China-concept stocks. In addition, an ordered probit selection model is used as well to explore whether the determinants of stock returns change due to the different level of investments in China. There are a lot of reasons for Taiwanese firms to invest in China. The stock of a firm with capital investments in China is called China-concept stock. A firm can decide whether to go for its capital investments in China or not. It is interesting to investigate whether a firm's decision to invest in China affects the determination of stock returns or not. This investment decision should not be treated as exogenous in examining the determinants of stock returns. Hence, a two-stage selection model is employed for this purpose. We find that heavy-level-investment-in-China firms do exhibit a different relation between stock returns and their fundamental determinants. Book-to-market ratio is the most important determinant of stock returns for all firms.
Article
This paper investigates the impact of the Global Financial Meltdown of 2008 on the stock returns of the underlying domestic shares of the Indian companies' listed ADRs / GDRs issues in NYSE, NASDAQ and LSE. An event study was conducted on the stock returns of the underlying domestic shares of the 11 Indian ADRs and 17 GDRs. For the study 15th September 2008 was considered the event day when two important events announced related to the US based big financial Arms, first was about the bankruptcy of Lehman Brothers and second was about the sale of Merrill Lynch to Bank of America. The Abnormal Returns (ARs), Average Abnormal Returns (AARs) and Cumulative Average Abnormal Returns (CAARs) were computed based on the single index model using daily closing price data of the underlying companies and S&P CNX Nifty. The behavior of these variables was examined for 30 days before and 30 days after the event day. The study found that the impact of the announcement on the event day was significant for the basket of underlying domestic shares of Indian ADRs while insignificant for the basket of underlying domestic shares of Indian GDRs. However during the event window of 61 days (i.e. -30 to +30) AARs and CAARs were negative on most of the days for both the baskets of ADRs / GDRs, that clearly indicated that announcements possess important information which leads changes in the underlying stock prices. Therefore study concluded that the announcements about the failure of big financial institutions meltdown hold important information to the basket of underlying domestic shares of Indian ADRs / GDRs. Further the trend of CAARs that declined continuously even several days after the event day indicated slow assimilation of information to the stock prices that concluded that Indian stock market was inefficient in the semi strong form of Efficient Market Hypothesis (EMH) during the study period.
Article
The author finds that there are systematic differences in analyst forecasts for negative and positive earnings firms. Analysts are overly optimistic concerning the future of negative earnings firms, and there is greater risk attached to forecasting for negative earnings firms. This risk is not reflected in market performance for the period studied.
Article
This paper examines the information content and value of corporate financial accounting disclosures to financial analysts and investors generally in Kuwait. The focus is on four major releases of information, the preliminary announcement, annual report, annual general meeting and the interim report. Daily share price data for a sample of firms is used and the issue of thin trading is explored. Particular attention is paid to the incremental information content of the annual report, an issue that has received inadequate research focus to-date in Kuwait. The issue of thin trading is explored in detail and the Scholes and Williams method is used to reduce bias in systematic risk (beta). The relationship between size of firm and announcement information content is also discussed. Moreover, Using OLS tests, the average beta was 81 whereas when estimating the risk measure using an estimating method designed to avoid thin trading bias, the average beta rose to 1.03. Despite the company sample being drawn from actively traded companies, results clearly demonstrate the need for such approaches to reduce bias and the inadequacy of restricting samples to larger companies in an attempt to overcome this bias. The results of this study, inter alia, suggest that the annual report in general contains little apparent information of value to investors for decision-making purposes, although such results may still be consistent with price sensitive information being disclosed in individual firm cases. An inverse relationship between company size and announcement information content is also reported.
Article
Numerous studies observe abnormal returns after the announcement of quarterly earnings. Ball (1978) suggests those returns are not evidence of market inefficiency, but instead are due to deficiencies in the capital asset-pricing model. This paper tests whether abnormal returns are observed when steps are taken to reduce the effect of deficiencies in the capital asset-pricing model. Significant abnormal returns are observed, but do not cover the transactions costs unless one can avoid direct transactions costs (e.g., a broker). The paper also investigates whether those abnormal returns can be attributed to a deficiency in the capital asset-pricing model. The conclusion is they cannot.
Article
This study provides further empirical evidence on the informational content of dividends hypothesis. To reduce the misclassification of unfavorable and favorable dividend announcements, which can result when small dividend changes are included, the analysis is restricted to cases where a substantial shift in dividend policy has occurred. Specifically, the authors examine the aggregate market response to announcements of (1) omitted dividends, (2) dividend decreases of at least 25 percent, (3) dividend increases of at least 25 percent, and (4) initial dividend payments. The results indicate that announcements of dividend omissions and large decreases have a pronounced downward impact on stock prices even though the market has anticipated the forthcoming news to a large degree. Similarly, the market reaction to initial dividend declarations is found to be substantial and much greater than previously found for favorable dividend classifications in general.
Article
This paper examines the efficiency of the CDS market by conducting a comparative event study in which both the CDS and the stock markets' responses to earnings announcements are considered. I find that both markets have statistically significant reactions to earnings announcements and both markets anticipate these informational events up to 90 trading days prior to announcement. I further find that neither markets' reaction to earnings announcements is entirely efficient as there is evidence of both over- and under-reaction to earnings news. However, results are sensitive to both the categorization of earnings and the model used to generate abnormal performance.
Article
Changes in inventory costing methods, especially those involving the last-in, first-out (LIFO) cost-flow assumption, can generate potentially large changes in a firm's cash flows due to their impact on taxable earnings. These cash-flow effects provide not only a motive for LIFO changes (which is consistent with the market value rule) but also implications for associated stock price effects: if investors react to LIFO's cash-flow implications rather than to its effects on reported earnings, then positive stock price adjustments should be associated with LIFO adjustments. However, it was noted that the previous studies have considered only a dichotomous variable, whether or not a firm has adopted LIFO. Most firms switching to LIFO now reveal in their financial statement disclosures the tax savings which have been realized. This study uses these disclosures to examine the association between unsystematic returns and the magnitudes of first-year LIFO tax savings for all NYSE firms which adopted or extended their use of LIFO during the period 1972-80. The research design employs within-group comparisons based on cumulative monthly unsystematic (excess) returns with appropriate controls for unexpected earnings performance. This design avoids several methodological weaknesses inherent in the previous studies and allows more definitive tests of hypotheses relating investor reactions to the income and cash-flow effects of LIFO adoptions. As reported more fully below, results based on LIFO adoptions made in 1974 are consistent with a positive association between cumulative excess stock returns and the magnitudes of LIFO tax savings. The results also provide evidence that changes in systematic risk may accompany LIFO adoptions. However, contrary to previous studies, most of the sample firms exhibit downward rather than upward changes in systematic risk.
Article
We point out that autocorrelated error terms require modification of the usual methods of estimation and prediction; and we present evidence showing that the error terms involved in most current formulations of economic relations are highly positively autocorrelated. In doing this we demonstrate that when estimates of autoregressive properties of error terms are based on calculated residuals there is a large bias towards randomness. We demonstrate how much efficiency may be lost by current methods of estimation and prediction; and we give a tentative method of procedure for regaining the lost efficiency.* We wish to express our thanks for the considerable assistance we have received from Richard Stone.
Book
Richard Brealey presents a brief, nontechnical description of current research on investment management and its implications for the investment manager. He covers market efficiency, valuation, and modern portfolio theory in a book that The New York Times noted "rates high as reading for every professional investor." Brealey's easy-to-understand approach to modern investment theory will also prove invaluable to students. The book evaluates the use of technical models and fundamental analysis for common stock selection, examining the implications of the random walk hypothesis, publicly available information, and the efficient market theory. It takes up the valuation of common stocks and reasons for fluctuations in earnings and deals with the choice of a common stock portfolio, discussing how stocks move together, the effect of the market on stock prices, passive and active portfolios, risk and return, and measuring investment performance. Richard A. Brealey is Midland Bank Professor of Corporate Finance and Director of the London Business School's Institute of Finance and Accounting.
Article
Typescript (carbon copy). Thesis (Ph. D.)--New York University, Graduate School of Business Administration. Includes bibliographical references (leaves [1]-[4]).
The Adjustment of Stock Prices to New Information
  • Eugenefama