CORPORATE REPORTING

CORPORATE REPORTING

Introduction

Management has fiduciary responsibility for the wealth of the shareholders. In line with this responsibility is a duty to inform stakeholders about the state of the health of the firm. Earnings announcements offer a yardstick that can be used by the market to analyze the profitability and the wealth of an entity. This study main purpose is to assess whether there are significant abnormal returns during, and after the announcement of the earnings. The study carries out an analysis of companies listed on London stock exchange that forms FTSE 250 market index. The companies looked at will be Bank of Georgia Holdings, IMI PLC, Group PLC (UTG.L), The Weir Group PLC,  and Vedanta Resources PLC, which had a positive news and John Wood Group PLC, William Hill PLC, Vectura Group plc, UBM plc, and Rentokil Initial PLC which had negative news. The study commences by evaluating the relevance of earnings announcements.

Relevance of Earnings Announcements

Earning announcements refer to the official statement of the profitability of a company for a given period mainly a quarter of a financial year. Earnings are usually preceded by earnings estimates that are given by equity. Earnings announcements give the investors an opportunity to know how the entity is doing. Usually, the earnings announcement day tends to be a very volatile trading day which presents an opportunity for investors to lose or make money very quickly (Case et al., 2013). Usually, this day is associated with a huge stock move that is mainly knee-jerk reactions to the initial release, but there exist no future indication of the way in which the stock is will trade. The long run performance of the stock relies on the continual earnings creation of the entity as opposed to one-time earnings rise.

Fazzini and Owen hypothesized that the stock usually rises in the days around earnings which is driven by the predictable rise in the volume that is generated by the earning announcements. The stock premium is usually highly correlated with the trading activity concentration of the previous earning announcements, with the stock that has high volume around the announcements in a specific subsequently have both high imputed buying and high premium by the individual investors (Case et al., 2013). This means that for some stock, at least, prices are boosted before and after the announcement day by the rise in individual investors demand. Whether a bad or good or neutral announcement there is both high net individual buying and high volume traded.

Troung and Corrado (2014) noted that the high idiosyncratic activity around the announcement date may deter traders who cannot have sufficient diversification. This shows that earnings announcement is very important to the investors as it gives them an opportunity to know the future prospect of the company and, therefore, market an informed buy, sell or hold decision. Investors usually rely on the information given by the analyst, company and other sources to make their decision. Earnings announcement is one of the most relied on information that investors use to make an investment decision and given the anticipation that the announcement generates, it creates a room where a large number of shares are traded within a short period, creating an opportunity for some investors to make huge gains or losses.

Empirical Evidence on the Wealth Effects of Earnings Announcements

Lamont and Frazzini (2007a) carried out a study that correlated the announcement dates with the data on common stocks that were recorded by the Research in the Security prices between 1972 and 2004. Considering monthly and data and the expected earnings announcements to create a wide window for buying activity. Through the research, it was demonstrated that the strategy used to buy a stock that is expected to make earnings announcement within the coming month and shorting the stock that is not expected to announce yields a return of more than 60 basis points every month. This showed that the date of announcement is significant mainly among the large cap securities, lasts about four weeks. The stock that had largest predicted volume increased in the month of the announcement as forecast by the high concentration of the previous period of trading activity around the announcements of earnings tended to have a subsequent high premium (Case et al., 2013).

According to Lev (2012), individual investors makes uninformed trading decisions based on the expectations. The attention-grabbing hypothesis stipulates that individual investors are more likely to buy the stocks which seize their attention depending on the strength of the earning announcements which makes the small investors record high buy decision on the earning announcement day. This is usually the case mainly in the securities where most of the trading in the past were concentrated around the announcements. Given that it is unlikely for individual investors to sell short during the announcement period, the predictable volume rise boosts stock prices around the dates of earning announcement. This study fits within the broader literature that places a high connection between the prices and trading activity. According to Frazzini and Lamont (2007b) Understanding the link between stock processes and trading activity is supported by such elements as heterogeneous belief, information flow, liquidity, and short sale constraints.

The in which investors react, interpret and perceive news has been empirically investigated to establish the link between the accounting earnings which forms the core financial statements information and the stock returns so as to assess the usefulness of the accounting information. Ball and Brown (1968) were amongst the first scholars to report adrift in the returns of stock after the earning announcement (post-earnings announcement drift). Capital market findings have revealed that earning announcement usually has information that is believed to change the opinion of the investors concerning the value of the stock by impounding the information regarding prices. According to Doran (2015), the degree of the return-earnings link is significantly affected by the proxy accuracy set by the analyst for the expected earnings. It is usually very common for many markets reactions studies to look at the unexpected standard earnings that are defined as the actual earnings less expected to earn which are standardized by the earning variance.

The preliminary response of the stock price to the quarterly or other earnings announcements whether it has partial……………………………….