Market reaction to trading statements released by Johannesburg Stock Exchange listed companies

Abstract

Using the event study methodology, this study investigated the market reaction to trading statements released by a sample of the Top 100 Johannesburg Stock Exchange (JSE) listed companies since the inception of the trading statement regulatory requirements in 2010. There appears to be significant information leakages before the release of trading statements. The share prices on the JSE shows a tendency to incorporate more timely sources of information before the release of trading statements. The results show a differential market reaction in the pre-announcement period. For profit warnings, the market seems to have largely impounded the expected poor earnings before the announcement. In the case of profit upgrades, the market appears to be more cautious and requires confirmatory information for a further positive reaction. A post-announcement earnings drift occurs for a period of thirty days after the announcement. This is contrary to the Efficient Market Hypothesis (EMH) which asserts that new information is reflected in share prices almost immediately. This allows investors and portfolio managers with a trading strategy to outperform the market by investing in companies announcing profit upgrades and profit warnings. The observed market inefficiency can be mitigated by managers disseminating the earnings surprise information to a wide range of stakeholders and market participants rather than relying only on the mandatory regulatory announcement.