Share Price Response to Earnings Disclosures in Emerging Economies: Malaysia and Mexico

Abstract

This study aims to evaluate the relevance and usefulness of accounting information, specifically earnings disclosures, as the key determinant for stock price changes. The main objective is to investigate whether ERC behaviour could explain more fully the stock price changes, as to the reason why the stock price change is not equal to the amount of announced earnings. The study reports significant findings from applying portfolio method, which shows major stock price reactions and very large earnings response coefficients to accounting earnings disclosed to the stock exchange markets of two major emerging economies, Malaysia and Mexico, for the period 2001-2014. The abnormal return to disclosure events are significantly positive when earnings increases and negative when earnings decreases. Two measures of abnormal returns are regressed against the size of the announced earnings. The first regression uses measures from individual events. The second regression uses a new measure; that is, from portfolios made out of all observations sorted by size of earnings into ten portfolios for each country and combination of countries. The portfolio method used was aimed at controlling possible idiosyncratic-errors-in-variables problem using individual event measures. The results using individual-event measures resulted in reasonable-size earnings response coefficients with high R2 explanatory power, a little higher than those reported in prior studies on other countries. Meanwhile, the portfolio method led to much bigger size of earnings response coefficients that strongly support the value relevance accounting theory. This finding is new to this literature.

Keywords: Earnings announcements, Share prices, Earnings response coefficient, Emerging economies, Malaysia, Mexico, Earnings relevance, Portfolio method

JEL Classification: G12, G14, G21