Earnings announcements, stock price reaction and market efficiency – the case of Saudi Arabia

Abstract

Purpose-This study aims to find the response by stock market against the announcements of quarterly earnings is empirically tested by exploiting event study methodology. Efficient market hypothesis (EMH) on Saudi stock exchange is also tried on. Design/methodology/approach-The market model is applied to help gauge the expected returns and to illustrate abnormal returns around the event date. Findings-The results established that Saudi Stock Market does not bear semi-strong form of EMH. How efficient is the Saudi market is also reflected through evidence of significant abnormal returns and postearnings announcement drift around earning announcements dates. Research limitations/implications-The authors have not used analysts' forecast as the expected earnings which are the limitation. As mentioned earlier, the authors used the quarterly earnings of the previous year as a proxy and that proxy could have been replaced by analysts' forecast. Another limitation is that the trading volume in the event window is not considered. Practical implications-The behavior of Saudi capital market is of much concern, and the study of this with a perspective of EMH is the significance of this paper. Social implications-All stakeholders closely watch earnings announcements and its share price movement around the announcement date. Recently, Saudi Arabia has opened its doors to foreign investors, and big foreign investors are going to enter into Saudi capital market, and after their entry, the behavior of market could be different. In the authors' opinion, this is the right time to study the efficiency of Saudi market before the entry of foreign investors. Originality/value-This study is based on the gap created by EMH of Saudi market using event methodology, observed in the existing literature, and it will be a contribution to literature.

Abnormal Return Testing Before and After the Earnings Announcement

“…The window dressing period used was D-day-6 to D-day+ 6 (Syed & Bajwa 2018). The estimation period used 125 days (Syed & Bajwa 2018, Das, 2014. Quantitative data used were abnormal returns that occur on days around earnings announcements.…”

“…Research conducted by Fama (1970) in Syed & Bajwa (2018) regarding the efficient market hypothesis, found that capital market prices are determined by available information. This can be interpreted that every investor does not have perfect knowledge of the information; thus, it can be said that an investor is not likely to get more returns than the market.…”

“…Likewise, earnings announcements are important information for investors to determine the decision to buy or sell shares (Syed & Bajwa (2018) because it is fascinating to discuss the information contained in earnings announcements in a company. Besides, Syed & Bajwa (2018) said that information about earnings announcements could be used by investors to assess the profitability and financial strength of the company.…”

“…These results are also in line with research by Alzahrani & Skerratt (2010), who found abnormal returns before the earnings announcement was made until the day after the earnings announcement. Syed & Bajwa (2018), said that the market reacts strongly to an announcement; when the results of earnings announcements exceed market expectations, stock prices will rise, and when the results of earnings announcements are below market expectations, stock prices will fall.…”

Force majeure events and stock market reactions in Ukraine

“…Event studies are often carried out to examine the impact of some specific events on stock markets (Ball & Brown, 1968;Fama et al, 1969;MacKinlay, 1997;de Jong et al, 1992;Corrado, 2011). A lot of papers focus on earning announcements on market variables (Falk & Levy, 1989;Cready & Gurun, 2010;Syed & Bajwa, 2018). Other studies analyze instead the effects of dividend announcements (Lonie et al, 1996), earnings per share announcements (Foster, 1973), earnings announcements through timeliness of reporting disclosure (Chambers & Penman, 1984).…”