stock repurchase announcements: a test of market ... - Asbbs.org

Quarterly Earnings Announcements
the event of inside information, and still does not make an above normal return, the market is
strong form efficient.
“Because information is reflected in prices immediately, investors should only expect to
obtain a normal rate of return” (Ross, 342). However, does market efficiency hold for public
announcements of quarterly earnings? Semi-strong form efficiency states that a company’s stock
price reflects all publicly available information, while strong form efficiency argues that the price
is a reflection of all information, public and private. While efficient market theories have merit,
this study confirms the existence of the post earnings announcement drift in the case of positive
earnings surprise and negative earnings surprise stocks for at least 30 days after the earnings
announcement. This study also confirms the information content of quarterly earnings
announcement by establishing a correlation between observed change in market value of the
company and the information about quarterly earnings.
METHODOLOGY AND STUDY SAMPLE
In this study, if earnings disclosures have information content, higher than expected
quarterly earnings would be associated with increases in the value of the equity and lower than
expected earnings with decreases. To capture this association each earnings announcement is
assigned to one of 3 categories:
1)good news: If actual earnings exceed expected earnings by more than 5%
2)bad news: If actual earnings fall short of expected earnings by more than 5%
3)no news:If actual earnings equal expected earnings.
This study sample includes 30 randomly selected quaterly earnings announcements in each
category between the time period February 1, 2007 and August 1, 2007. The random sample was
selected from quartely earnings announcements for stocks traded either on the NYSE or
NASDAQ. The stocks selected are of small, medium and large market capitalization companies.
Table 1: DESCRIPTION OF STUDY SAMPLE
Good
News Good News Companies
Date: Name Ticker
market
cap
1 5-Feb-07 Telephone and Data Systems TDS 7.66 b
2 12-Feb-07 Potlatch Corp PCH 1.76 b
3 26-Feb-07 Abraxis Bioscience ABBI 3.35 b
4 27-Feb-07 Astek Industries ASTE 1.14 b
5 5-Mar-07 Maidenform Brands MFB 393.53 m
6 12-Mar-07 Take-Two Interactive Software TTWO 1.08 b
7 22-Mar-07 General Mills Inc. GIS 18.46 b
8 30-Mar-07 Global Payments Inc. GPN 3.20 b
9 4-Apr-07 Immucor Inc BLUD 2.31 b
ASBBS E-Journal, Volume 4, No.1, 2008 22