Quarterly earnings announcement and stock prices: an event study approach

With the advent of corporate governance norms, companies communicate their financial performance to their stakeholders through quarterly audited results. Listed companies face greater scrutiny by stock exchange, institutional investors, analysts, etc. Such information is frequently used by traders to formulate profitable trading opportunities. However, in an efficient market, these earnings announcements are instantaneously absorbed and reflected in stock prices through continuous trading on the stock exchange and thus shall not create any profitable stances. This study analyzes the effect of quarterly earnings announcement on stock prices at National Stock Exchange [NSE] by using standard event study methodology on a sample of 50 companies listed on NSE. Recent quarterly earnings announcement for Q4FY15 was chosen as the event for the study. Abnormal returns for a 41-day event window were computed using the market model and tested for significance at 5% probability level using inferential statistics. The results suggest that NSE is a semi strong form efficient market. Also, the abnormal returns before earnings announcement and after it are not significantly different from each other. Furthermore, AR (1) process was used to estimate the speed of information adjustment at NSE. It was found that prices adjust slowly to any new information flowing into the markets and this creates a time lag which can be capitalized by traders to earn abnormal gains till the share prices achieve their equilibrium or intrinsic value which fully reflects the new information. The results of this study would be useful for investors, traders, stock exchange, market regulators, etc. in making investment strategies, framing reform structure, etc to enhance efficiency of stock markets.