Share Price Response to Earnings Disclosures in Sweden
35 Pages Posted: 19 Aug 2019
Date Written: August 15, 2019
The aim of this study is to evaluate the usefulness and relevance of earnings disclosures, as the key determinant for share price changes. The main objective is to examine whether earnings response coefficient (ERC) behavior could explain more fully the share price changes, as to the reason why the stock price change is not equal to the amount of announced earnings. The study is conducted on Sweden as a developed economy for a recent period of fourteen years, 2001-2014. 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 portfolio measure; that is, from portfolios that are made of all observations sorted by size of earnings into ten portfolios. The aim of the portfolio method was to control possible idiosyncratic-errors-in-variables problem using individual event measures. The findings using individual-event measures resulted in reasonable ERC sizes with high R2 explanatory power, a little higher than those reported in prior studies on other countries. Importantly, the portfolio-based ERC of the country is somewhat close to the magnitude of the earnings which supports the famous value relevance theory in accounting. This finding is new to this literature.
Keywords: Earnings announcements, Share prices, Earnings response coefficient, Sweden, Earnings relevance, Portfolio method
JEL Classification: JEL Classification: G12, G14 & G21
Suggested Citation: Suggested Citation