Study of Declaration of Quarterly Results on Stock Prices of
Selected Companies
Submitted By:
1) Devanshi Thakkar
2) Nihal Jani
Roll No- 171116
Roll No- 171135
Institute of Management, Nirma University, Ahmedabad
Institute of Management, Nirma University, Ahmedabad
Email- dthakkar_17@nirmauni.ac.in
Email- njani_17@nirmauni.ac.in
3) Riya Shah
4) Ayush Saxena
Roll No- 171
Roll No- 171
Institute of Management, Nirma University, Ahmedabad
Institute of Management, Nirma University, Ahmedabad
Email- rshah_17@nirmauni.ac.in
Email- asaxena_17@nirmauni.ac.in
5) Harshit Maheshwari
Roll No- 171
Institute of Management, Nirma University, Ahmedabad
Email- hmaheshwari_17@nirmauni.ac.in
Abstract- The aim of study is to know the significance of declaration of quarterly earnings announcement by the
companies listed on Indian Stock Market and to test the theory of Efficient Market Hypothesis (EMH). The study
considers the companies listed on NSE Midcap 100. Sharpe (1936) single index model (SIM) is used to calculate
the abnormal returns. The statistical significance between the behavior of share prices and the earning
announcements is tested by using t tests. The study shows that there is no significant difference between the
abnormal returns pre-earnings and post earnings announcement.
Keywords- Efficient Market Hypothesis, Quarterly Earnings, Abnormal Returns.
I. INTRODUCTION
The Indian economy has been one of the fastest growing economies of the world in recent few years. With this
growth there has been a tremendous growth in the Indian capital markets in terms of technology, regulations &
settlement processes. The market participants have increased both in terms of companies and investors. The ease
of investing into capital markets have become extremely smooth and investor friendly. The regulatory body i.e.
is Securities & Exchange Board of India (SEBI) have taken enough steps to ensure fair gains to participants of
the capital markets. Such developments have made Indian Capital Markets efficient in terms of absorbing the new
information that flows in the markets. Earnings announcements is one such information i.e. public and available
to all. When the companies release their earnings, investors/analyst compares them with the predetermined
expected earnings and such expectations leads to a phenomenon referred to as Post Earning Announcement Drift
(PEAD). Numerous researches over the years have documented that the stock prices tend to drift after the earnings
announcement.
The earnings form an important part of investors research because the estimates are based out of firms past
financial performance, news about the firm whether good or bad and any effect of macroeconomic conditions that
affects the firm’s performance and future cash flows. The earnings announcement whether higher or lower than
analyst expectations are called earnings surprise. The surprise earnings significantly affect the stock prices.
Positive surprise earnings drive up the prices of stocks as it affirms the investors about the future cash flows.
Similarly, a negative earnings surprise will make investors lose confidence in the future cash flows of the firm
and the stock prices will drift down. Thus, the objective of the study is to know the significance of the earnings
announcement on the stock prices for the companies listed at Indian Stock Market. The study considers 10
companies from various sector listed at NSE Midcap for the analysis. The abnormal returns are calculated with
the help of William Sharpe (1963) Single Index Model and then the significance is tested by using the statistical
tool to establish a relationship between stock prices and the earnings announcement.
II.
LITERATURE REVIEW
A review of various economies across the globe was done to understand the difference in impact as well as
difference in the magnitude of impact of earnings of a company on its stock prices. As per the research papers it
was understood that in the economy of Malaysia (Raj & Seetharaman, 2011) on the whole, there is a significant
effect of the announcement of profits on the stock exchange prices of the bank's shares in Berhad (Malaysian
Company). However, the results showed a important discrepancy in the dynamics of stock prices after the
announcement of quarterly earnings. (Akinyi & Melissa, 2017) Whereas in case of Nairobi Stock Exchange in
total 61 companies were observed and it was seen that stock prices react to earnings announcements in the month
of the profit declaration, as well as during the 1st few months after the announcement of the earnings.
(Wickramasinghe & Dissanayake, 2016) Colombo Stock Exchange showed that EPS and PE significantly affect
the volatility of stock prices, DPS does not have a significant positive impact on the behaviour of stock prices,
and PE has a negative impact on the behaviour of stock prices. (Syed & Bajwa, 2018) In case of Saudi Arabia
Efficient Market Hypothesis (EMH) was done. It was seen that All stakeholders are looking closely at
employment information and transferring shared prices when date of notification come close, and it after opening
its doors for foreign investors the markets behavior is further changing. There has been unusual returns in the
market be it due to important dates or post-employment earnings. (Enow & Brijlal, 2016) In Johannesburg Stock
Exchange of South Africa using a multiple regression analysis, the result shows that DPS, EPS, P.E accounts
57.8% of price movements when the information related to companies comes out in South Africa. (Kong &
Taghavi, 2006) The degree of reconnaissance rewards of the changes in the Chinese Stock Markets is greatly
reduced with a fuller total value of employment reporting before the release of the release and subsequent
promotion, supporting a conviction of strong energy. Moving ahead not only were companies observed but also
specific sectors of such countries were tried and highlighted in the study (Ademola, O, & M, 2016) when
companies of Nigerian stock exchange were taken into consideration it was seen that there was a significant and
advanced impact of the stock price volatility by accounting information. Each division divide the greatest
variations of stock prices at the risk of manufacturing companies in Nigeria (M & Man, 2013) The banking
industry in Sri Lanka showed a positive correlation as to there existed positive information on financial reporting
information and investors respond positively to the published annual report. Therefore, those response have the
potential to create unusual outputs based on available public information. (Lonroth, Moller, & Thinggaard, 2011)
In response to such effect on a small cap market of Denmark it was seen that reaction are slower in the market as
it is compared to US stock exchange. The reason behind this is that the incorporation of this important information
regarding corporate annual announcements gets done within two days so there is not much opportunity available
for the investors to take benefit of these information’s. (Angelovska, 2017) During recession as well a trend was
being observed in the Macedonian Stock Exchange. The reports suggests that the Macedonian investors do not
react so much to the positive news coming from the companies which gives us another trait that it depends on the
investing pattern of the people and it differs from country to country. As it was seen that from company to
company as well as from country to country there was a difference in the impact, for better understanding overall
sectors of India were observed to check whether such gap existed in different sectors of the same country as well
or not. (Kumar, 2015) Eight different companies from the Auto sector were chosen for the same. The study
conclude that earnings per share proved to be a precise strong predictor of the market price of the share of selected
companies. The ratio of price and profit significantly affects the forecasting of the market price of shares and
earnings per share, which is the main leading reflector in relation to the market price of the share. (Hemadivya
& Devi, 2013) In a similar reference the entire Primary Secondary and Tertiary Sectors were compared using the
correlation coefficient and the Difference Analysis. There are various factors that affect the market price of the
share. Among them, one of the important factors considered in the study is earnings per share. There is no direct
control of such impact of earnings on the stock prices, and there will exist a minor impact which needs to be
ignored. But in case of territories where such an impact is high in numeric
is a place of concern either due to important information being transplanted out of the company to benefit a few,
or due to the strong opinions formulated in that country or industry. Such impact is going to exist in all phases of
the business be it boom or during recession. Stock prices will continue to rise and fall based on the earnings of
the company but to minimize such impact is what the economies need to aim for a fair and just future ahead.
III.
RESEARCH METHODOLOGY
The study has been done to establish a significant relationship between the announcement of earnings and the
behavior of stock prices. The research consists of non-probabilistic purposive sampling of 10 companies out of
100 companies listed at NSE Midcap. The daily closing prices of all the 10 companies were considered from
period 1st January 2013 to 6th August 2018. The sample for the study was arrived for those securities which were
listed during the period of study, made their regular earning announcements and had been actively traded. The
data was analyzed with the help of various statistical tools like descriptive statistics, inferential statistics, etc.
A model was created where first the Beta of the stock is calculated between the actual return of stock price of
company with the actual return of the index which in our case is NSE Midcap. The Beta was calculated by the
following formula:
Company
β
Century Textiles
1.661560888
The above are the calculated Betas of the selected companies.
Biocon
0.842046875
The next step to build the model was calculating the expected return. The
Arvind
1.305544166
expected return was calculated with help of Willian Sharpe (1963) Single
DHFL
1.484393832
Index Model. This model was chosen because we have only selected single
Torrent Pharma
0.574185467
index i.e. NSE Midcap for our study. William Sharpe Single Index is simple
United Breweries 0.843036823
asset pricing model which helps in measuring both the risk and return of the
TVS
0.887923438
stock. Single Index Model is expressed as:
Page Industries
0.58432491
Edelweiss
1.212830645
Tata Chemicals
0.997098301
(Table 1)
Where,
α = Represent the abnormal returns,
β = Beta represent the volatility of price of stock with respect to the Index,
е = It represents residual returns,
Rm = Actual return of the market,
Ri = Expected Return on the Asset or Security.
The above single index model is used to calculate the expected returns of the stock of the company. The
abnormal return was then calculated by subtracting the expected returns from the actual returns. The abnormal
return forms the basis of the analysis for the study. The abnormal return around the announcement date was
examined for the study. For the analysis abnormal returns for the 30 days prior to announcement of earnings
and 30 days post the announcement was examined for the study, However, the day of announcement of earning
was taken as 0 (Zero).
(Figure 1)
(Figure 2)
(Figure 3)
The above graph shows the abnormal returns plotted on the graph 30 days prior to earnings announcement and
30 days post earnings announcement. The above graphs represent the abnormal return of Biocon, Torrent
Pharma & DHFL. The pattern is clear that during the earnings announcement the return drifts depending on the
type of result, whether positive or negative. The pattern is common among all the companies examined under
the study.
Hypothesis of the study
H0 = There is no significant mean difference among the returns before earnings announcement and after the
earnings announcement.
H1 = There is significant mean difference between the returns before and after earnings announcement.
(Null Hypothesis states that there is no significance between the returns before or after earnings announcement)
IV.
RESULT & DISCUSSIONS
We have used the t test: Paired for two sample means were the average returns of 30 days prior to earnings was
the one variable and other variable was average returns for 30 days post earnings announcement.
Mean
Company
Pre Earnings
Post Earnings
P(T<=t) two-tail
Century Textiles
-0.0025
0.0066
0.0861
Biocon
-0.0007
0.0021
0.4725
Arvind
-0.0002
0.0004
0.8395
DHFL
-0.0037
-0.0016
0.6199
Torrent Pharma
-0.0001
-0.0027
0.5598
United Breweries
-0.0077
0.0001
0.1305
Tvs
0.0038
0.0025
0.7507
Page Industires
0.0021
-0.0043
0.1671
Edelweiss
0.0007
-0.0038
0.4208
Tata Chemicals
-0.0016
-0.0003
0.7220
Significance
No
No
No
No
No
No
No
No
No
No
(Table 2)
The above data shows the mean difference between the abnormal returns pre-announcement and the abnormal
return of post announcement using the paired t test. The data shows that there is no significant mean difference
between the abnormal return pre and post announcement of the earnings. Hence, we do no reject the null
hypothesis since the p- value of all the companies is greater than 0.05 at 95% confidence interval. This result
shows that there is no mean difference between the abnormal returns pre-earnings announcement and post
earnings announcement. So, we accept the H0 for the study where the companies selected have shown no mean
difference between the abnormal returns.
V.
CONCLUSION
We conclude that there is no significant returns difference during the earnings announcement of the company.
During the literature review of various other research paper on the same topic, it was noticed that there is a change
in behavior of stock upon earning announcement but there is not much difference in the abnormal returns of the
stock. This research helps us understand the behavior of the stock prices upon earnings announcement and help
us validate the efficient market hypothesis that information regarding the stock prices is already present in the
market. To further validate this research the sample size can be increased and also the time horizon can be
increased to know the more accurate effect.
V.
Market
Sl. No.
Name of Author Understu
dy
John
1
Rudolph Malaysia
Raj
and
A. Stock
Seetharaman
2
Akinyi
Akenga
and
Grace
Melissa
Period of
Study
Methodology
Author's Explanation
Used
A substantial irregularity in the
1991-92 to dynamics of stock prices after the
2010-11
Market
Olang Margaret
ANNEXURES
announcement
of
the
announcement of earnings.
Securities
Exchange
2014 and
2015
Neutral
Networks with
Sharpe-Linter
form of CAPM
Stock prices react to earnings
Nairobi
Artificial
announcements in the month of the
income announcement, as well as
during the starting months after the
announcement of the earnings
Chi-
Square
Test,
T-Test,
Regression
Analysis
Income per share has observed to
be
3
Dr.Pankaj
Kumar
Automobil
e Sector :
India
an
exceptionally
solid
forecaster of market cost of offer,
2011-12 to while value profit proportion affect
2015-16
fundamentally on the expectation
of market cost of offer of select
Multiple
Regression
Analysis
organizations of auto area as
entirety
Primary,
K.
4
Hemadivya
and Dr. V. Rama
Dev
There
Manufactu
ring
and 2010-11 to
Service
Sector
India
2012-13
of
are
diverse
elements
influencing the market cost of an
offer. Among them one of the vital
calculate taken the examination is
Earnings per share
Exploratory
Research,
Coefficient
Correlation,
Analysis
Variance
of
EPS and PE significantly affect the
Mihiri
5
Wickramasinghe
and
Tosh
Dissanayake
and
Ishtiaq
Stock
Exchange
2010-11 to
2014-15
volatility of stock prices, DPS does
not have a significant positive
impact on the behaviour of stock
prices
Ali Murad Syed
6
Colombo
Ahmad
Bajwa
Correlation
Analysis
and
Regression
Analysis
Saudi Stock Market does not bear Estimated
Saudi
Stock
Exchange
2011-12 to
2016-17
semi-strong form of Efficient Market Model
Market Hypothesis as substantial of
Sharpe,
irregular returns were established Robustness
in the days close to announcement. Test
Significant average abnormal price
changes can be found, however,
Helle L. Lonroth,
7
Peder Fredslund
Moller and Frank
Thinggaard
Copenhag
en
Stock
Exchange
two and three days after the
1993-94 to announcement day. The Danish Regression
1996-97
capital market has become more Model
efficient
and sophisticated during the last
two decades.
It
was
normal
that
income
declarations amid a recessionary
8
Macedoni
Julijana
an
Angelovska
Stock
Exchange
2008-09 to
2009-10
period would result in positive
value response, the investigation
has shown that the data substance
of profit was past speculators'
Event
Study
Methodology
and Hypothesis
Testing
advantage
EPS
Samuel
9
Enow
Tabot Johannesb
and urg Stock
Pradeep Brijlal
Exchange
2008-09 to
2013-14
and
value
altogether
income
are
emphatically Multiple
corresponded to share costs in Regression
spite of the fact that profit per share Analysis
was definitely not
More than predictable earnings
Shuhong Kong
10
and
Shanghai
Majid Stock
Taghavi
Exchange
1998-99 to
2002-03
announcement
indicates
to
a Event Analysis,
growth in the average of stock M-EGARCH
returns
on
days
before
the Approach
announcement and a decrease later
Statement of financial statement
11
Wang Man and
Menike M.
Colombo
Stock
Exchange
2007-08 to
2012-13
might
have
information
had
and
positive
investors
responded definitely to the annual
financial.
12
Osundina,
J.
Ademola
,
Jayeoba,
Olajumoke
and
O.
Olayinka,
Ifayemi M
Nigerian
Stock
Exchange
Each division divide the greatest
2004-05 to variations of stock prices at the risk
2013-14
of manufacturing companies in
Nigeria
Event
Study
Methodology
and Hypothesis
Testing
Cross
Section
Fixed
Effect
Model,
Research
Hypothesis