Mandatory disclosure of financial returns is the core of all securities regulations in the world. Companies listed on a stock exchange must publish data about their financial performance, including earnings reports, revenue totals, and other important financial measures. These announcements offer crucial information about a company’s profitability, expansion, and financial health (Pandey et al., 2022). Financial announcements represent the financial position of a company and also make the stock attractive for the investor based on the return availability.
The immediate effect of financial returns announcement
When a company posts higher returns than its previous year, its stock tends to witness a rise in prices immediately after the announcement. This could be due to the existence of more earning possibilities resulting in making that particular stock preferable for the investors. The opposite effect would take place in case of lower-return stocks or returns not as per market expectations and sentiments.
However, previous research has also indicated that sometimes there is no effect of financial returns announcement on the share price, even if the returns are higher than before. On the other hand, some studies have pointed out that the effect is only present in the case of some sectors.
Moreover, in the case of some studies, the effect of financial returns has been studied using proxy variables such as dividend announcements, public announcements, and corporate announcements. Therefore there is a lot of ambiguity about the impact of the information of financial returns on the share price of a company.
However, it is also essential that an investor studies this effect diligently so that future movements of stock prices can be anticipated. The purpose of this article is to understand empirically how previous researchers have studied the effect of financial return announcements on share prices. The overarching objective is to find out the variables, testing methods, and approaches they have used to study the effect. This information will further be used to empirically examine the effect in the case of companies listed on the Bombay Stock Exchange from 2018 to 2023.
Empirical studies on the impact of financial return announcements on share prices
Martin Joshy & Malar, 2021, aimed to study the impact of dividend announcements on the share price for the period of January 2013 to December 2017. A sample of 150 was drawn from companies listed on the National Stock Exchange (NSE). Variables considered for the study were:
- abnormal returns,
- market returns,
- daily returns,
- and share prices.
Using the event study methodology, the data was analyzed by K-means clustering using SPSS. To determine the difference between the dividend announcement and the abnormal stock returns, one-way ANOVA was used. The study claims that dividend announcement’s positive impact can vary sector-wise. Out of 6 sectors considered for the study, only 2 sectors had positive results in dividend declaration. The remaining 4 have the presence of abnormal returns around dividend announcements. Hence, it can be concluded that dividend announcements have an influence on the share prices but this impact could vary.
Kaluarachchi, 2019, examined how dividend announcements affected the share prices of 19 companies using 161 dividend announcements from 2013 to 2017, from the Colombo Stock Exchange (CSE). The author used the event study methodology using Average Abnormal Returns (AAR), market price and expected return as the main variables. The study found that dividend announcements affected share prices before and after the declaration was made.
Pandey et al., 2022, investigated the impacts of corporate announcements on stock returns during the pandemic stress. The authors used event study methodology and a sample of 90 events (announcement and ex-dates) from 01 January 2020 to 31 December 2020 with variables:
- abnormal return,
- average abnormal return,
- cumulative average abnormal returns,
- daily closing price,
- and benchmark indices.
The study revealed that all corporate announcements do not affect stock prices. The study also revealed that the bonus announcements positively affected the share prices on the event date. Contrarily, the rights issue announcements and stock split announcements did not cause any fluctuations in the share prices. Lastly, in the study, the authors suggested that before making such announcements, the firms should wait till the market recovers from a situation like the pandemic as even the positively impacting events could result negatively during the pandemic because of instability.
Bhuvaneshwari & Ramya, 2014, investigated how stock split announcements affect share prices for CNX nifty listed companies of the National Stock Exchange of India. 15 companies were selected for the study wherein data from January 2006 to December 2013 were collected. Herein, for assessing the announcement effect, the 30 days before the announcement and 30 days after the announcement were considered making an event window of 61 days. The variables considered are average abnormal returns, cumulative average abnormal returns, expected returns, abnormal returns, and share price. With the usage of event study methodology, the authors invested in the relationship between variables using paired t-tests. The analysis revealed that the presence of stock split announcements results in providing abnormal returns to investors. This impact, results in having a positive influence on share prices around the announcement date. Hence the linkage defines the contribution of the announcements, making it an important factor to predict market efficiency and future returns.
Stankeviciene & Akelaitis, 2014 investigated the relationship between public announcements and share prices in the case of Lithuania. This research undertakes the companies listed on the Vilnius Stock Exchange. A simplified version of event study methodology was used in this study to calculate the average absolute and abnormal returns, so the variables for the same are abnormal returns and abnormal average returns. In this study, every announcement the firm makes is considered a new information signal. They estimated it by replacing the calendar date and the event date. The event date is said to be the announcement date. The study found that public announcements do not cause the prices of stock to move.
There are many more such studies examining the effect of financial return announcements on the share prices of companies. Therefore, a systematic review of these studies was also done to better understand the commonalities and differences in the approaches and findings cohesively.
A systematic review of studies on the impact of financial returns announcements on share prices of companies
|Authors and year||Title of study||Aim||Country||Methodology||Variables||Findings||Gaps||Proxy|
|Dsouza and Mallikarjunappa, 2016||Quarterly Earnings and Stock Prices Reactions – A Study of BSE-500 Companies||The study aims to examine the significance of quarterly earnings announcement news on the Indian stock market and to test the semi-strong form Efficient Market Hypothesis (EMH).||Bombay Stock Exchange, India||Event study methodology used includes 61 days event window i.e. 30 days before and 30 days after the event (i.e., t = – 30,…,0,…, +30 ). For estimation, 1 year trading days are used consisting of 250 days i.e. -280… -31. The tests used are the t-test, runs test, sign test, First Pass Beta And R Square, and trend analysis.||Average abnormal returns(AAR), Cumulative Average Abnormal return (CAAR), Standardized abnormal return (SAR), standardized cumulative average abnormal returns (SCAR)||The findings of this paper are significant for investors who wish to hold internationally diversified portfolios.|
The overall result shows that the market is failing to adjust rapidly to the quarterly earnings news and therefore the market is inefficient in semi-strong form.
The CAARs are statistically significant and this shows delayed price response which is an indicator of market inefficiency.
|The study developed the linkage but without the inclusion of any financial indicator of the company. The examination is specifically focused on announcements only wherein there are many important financial factors of a company like revenue, profit, or D/E ratio which tend to contribute to affecting the role of announcement.||The earning announcement defines the capability of the company to generate profit and financial performance therefore it is included as a proxy for representing the financial status of the company.|
|Naik, Parab, and Reddy, 2017||Impact of Dividend Announcements on Stock Prices and Liquidity: Evidence From India||To find out evidence of whether the announcement of dividends has any effect on the stock prices and on the stock liquidity||NIFTY 50 index of the National Stock Exchange (NSE), India||The event study methodology was used and data from 1st January 2011 to 31st December 2015 was collected for 240 dividend announcements made by 50 companies.|
The national stock exchange was considered for data collection.
Tests like t-test, variance, and standard deviation were used.
|Daily stock return, market return, daily stock volume, daily market volume, expected return, expected volume, Abnormal Return (AR), Abnormal Volume (AV), Average Abnormal return( AAR), Average Abnormal Volume ( AAV), Cumulative Average Abnormal Return (CAAR), and Cumulative Average Abnormal Volume (CAAV) were used.||In this study, it was also found that the variance and volatility levels of CAAR and CAAV were lower in the pre-announcement period. This suggests that the movements in CAAR and CAAV were higher in the announcement period.|
The study also shows a significant post-event impact on trading volume but the degree of impact on the stock prices is higher as compared to trading volume.
Also, the study reveals that there is no daily impact of the event but instead, an aggregate positive long-term impact is found when the daily changes in stock prices are cumulated over the window period.
|The study though added stock volume as an element for representing the liquidity of the company, but the variable is used as the dependent variable. The company’s liquidity position also affects the share price therefore the inclusion of financial performance indicators of the company other than announcements is needed. Even a statistical model is not used for assessing the impact which is required for making significant conclusions about the linkage.||The dividend is the returns earned by shareholders and as dividends are distributed based on the profits of the company, thus, the dividend announcement is selected as a proxy to represent the financial position of the company.|
|Hutagaol, Erlina and Rujiman, 2022||The Effect of Financial Performance on Stock Prices with Dividend Policy as a Moderating Variable in the Consumer Goods Industry Sector of Manufacturing||This study aims to examine and analyze the effect of financial performance on stock price including dividend policy as a moderator.||Indonesia Stock Exchange, Indonesia||This study used the method of casual research to see the effect of financial Performance using secondary data. Data was derived from the website of the Indonesia Stock Exchange of 23 companies from 2016 to 2020. The tests like Chow test, Hausman test, normality test, multicollinearity test, autocorrelation test, heteroskedasticity test, and panel regression analysis are used||Current Ratio, Debt to Equity Ratio, Price to Book Value, Return on Equity, stock prices, and dividend was used||The current ratio partially has an insignificant negative effect on stock prices, the Debt-equity ratio partially has a significant negative effect on stock prices and Price to Book Value partially has a significant positive effect on stock prices.|
Return on equity partially has an insignificant negative effect on the stock price
Dividend policy as a moderator can strengthen the current ratio and debt-to-equity ratio relationship but not of price to book value and return on equity.
|The study consists of financial performance indicators but dividend announcement is included as moderator therefore the direct role of information availability could not be determined. This results in making the market inefficient as in the real world the time-to-time updates are available to the investor which directly contribute to affecting investment decisions. Hence, its inclusion as an independent variable is required.||The study includes various financial variables like current ratio, debt-to-equity ratio, price-to-book value and return on equity as independent variables. All these variables are considered as the financial indicators of the company’s performance. However, dividend in the study is included as moderator as its announcement contributes towards affecting the linkage between variables|
|Mohamed, 2010||The Effect of the earnings announcement on the stock prices of companies listed at the Nairobi Stock Exchange.||This study aimed to determine whether earnings announcements have an impact on stock prices.||Nairobi Stock Exchange, Kenya, Africa||This research used event study methodology wherein secondary data was collected from the Nairobi Stock Exchange for the period 1st January 2004 to 31st December 2008. The daily stock values for 3 months before and preceding the announcement were collected. SPSS is used as the analysis tool with trend analysis and t-test as the analysis methods.||Average Abnormal Return (AAR ), Capital Asset Pricing Model (CAPM ), Cumulative abnormal Returns (CAR ), Market Adjusted Abnormal Return (MAAR )||The study finds that investors do not benefit from earnings announcements. Although, Over the period starting from 30 days before the earnings announcement to 30 days after the announcement of the earnings payment, investors incurred losses of up to 52.14% of the stock value on average. There existence of a negative reaction of stock prices to the earning announcements||The financial performance indicators are not added as independent variables apart from having announcements. Even no statistical model is used for relationship building which results in hampering the process of tracking financial return impact on stock prices||The earning announcements represent the amount that the shareholder will receive as a return from the profit. As the value defines the return-generating capacity of the company and also indicates financial performance therefore it is used as a proxy for return in the study|
|(Sehgal, 2015)||Stock Price Reactions to Earnings Announcements: Evidence from India||This study aims to examine the stock price reaction around earnings announcements for India.||India||The event study methodology was used for analysis wherein a sample of 469 companies was collected from December 2002 to December 2011. The 20 days prior and post-announcement data is considered within the estimation window of -120 to -21 days. The analysis methods used were OLS regression, the Durbin-Watson test, and the GLS method.||Cumulative Average Abnormal Return (CAAR), Standard Cumulative Average Abnormal Return (SCAAR), Average Return (AR), Abnormal Average Return (AAR), Cumulative abnormal Returns (CAR ), and stock prices.||The finding results of pre-and post-event abnormal return patterns have not changed significantly for the pre-and post-global economic crisis period. In the final findings, it is observed that periods of higher aggregate corporate earnings result in lower post-event CAAR and vice versa. It seems that investors react more to bad news (lower aggregate earnings) than to good news (higher aggregate earnings).||The study restricts itself to the earning announcement impact without the inclusion of any other financial performance indicator. This prevents complete measurement of the factors affecting share price which results in the development of an inefficient model for impact assessment||The earning announcement is used as the company’s financial performance indicator as the measure helps in defining the earning possibilities for the company. The indicator defines the financial performance broadly therefore it is regarded as the proxy for return measurement in the study|
|(Owusu et al., 2016)||The effects of earning announcement on the share price of manufacturing companies of the Ghana Stock Exchange.||To examine changes in share prices due to the earning announcements.||GSE (Ghana Stock Exchange), India||The event study methodology is used with the inclusion of data for 6 years i.e. from 2008-2013 for 9 listed manufacturing companies. The quarterly earning announcement data is collected along with data 10 before and preceding the announcement and the 60-day estimation window. The data analysis tools used are normality, autocorrelation, linearity, homoscedasticity, and regression analysis||Standardized Excess Return, daily return, abnormal return, average abnormal return, and share price were considered.||The findings of a study showed that the abnormal returns around earnings announcements were not significant at a 5% margin of error. Thus, there is no significant impact of earning announcements on share price making the Ghana stock exchange not efficient in semi-strong form.||The study restricts itself to the inclusion of returns are the independent variables. No financial indicators like revenue, D/E, or profit were considered which helps in supporting the investor in making a decision||The earning announcement is used as the proxy to define the financial performance of the company as the decision of the investors are affected by the information available to them|
|(Agarwal & Vangad, 2019)||A study on the Impact of Annual Results Announcement on Share Prices of Selected Companies listed on the National Stock Exchange ( NSE ), India||To examine the impact of annual announcements on the share prices of selected NSE companies.||NSE(National stock exchange), India||This study used a descriptive research design with the collection of secondary data from the website and annual reports of respective companies while historical prices and Index data were collected from the NSE website. The data for 2018 was collected and analyzed using T-test, trend analysis, and correlation analysis with MS Excel by the inclusion of 10 observations before and after the announcement.||Revenue, net profit, net worth, and share price.||The results reveal that there is existence of positive impact of a company’s financial results on share price while a negative change in financial results leads to a fall in share price.||The data lacks in having statistical analysis using the regression models and even the statistical software for linkage assessment. This results in reducing the efficiency of results. Even return announcement data is not included which is also an important element for influencing the share price of the company.||The revenue, net profit, and net worth are the financial performance indicators of the company and were used by the authors as independent variables to track annual results impact as they help in briefly providing financial position detail to investors.|
|(Kedia & Vashisht, 2018)||Impact of Quarterly Results on Share Prices ‘ An Analytical Study of Automotive Companies ’||The study aims to examine the impact of quarterly results on the share price for the S&P BSE AUTO index.||Bombay Stock Exchange, India||The secondary data for the study is collected from the BSE website for the period 2014-2015 for 13 companies that are listed in the S&P BSE AUTO index for the 2nd quarter. The independent T-test is used for the analysis.||Share price, returns on the share, Sensex returns.||The study reveals that out of 13 companies, 9 companies had a significant effect of quarterly announcements on share prices. About 10 companies’ share prices are different before and after the announcement. Thus, quarterly results announcement is relevant.||The study lacks to include financial indicators of the company as an independent variable which also has a major role in affecting the share price.||The share returns are considered an independent variable. No other proxy variable included.|
Financial return announcement is a key event affecting share prices
A company’s share price may change as a result of the market response, which reflects investors’ perceptions of the company’s financial performance. Although price movements persist over time as investors re-evaluate their expectations, the impact of these announcements goes beyond the immediate term. Furthermore, investor behaviour, cross-sectional disparities, market conditions, analyst recommendations, and macroeconomic factors all influence the relationship between financial return announcements and stock prices.
The studies reviewed in this article revealed that the most common indicators of financial announcements are:
- stock splits,
- and corporate announcements as the independent variables.
Some other studies included revenue, net worth, or profit as the independent variable but in these studies, the authors failed to track the influence of returns or dividends on the share price. Therefore it is advantageous to include both elements i.e., financial indicators and announcements, as the independent variables while measuring the changes in share prices.
However, most of these studies drew a comparison of stocks rather than analysing the impact. They therefore used review methods like descriptive statistics and trend analysis, or comparative statistics like paired t-tests as the assessment method. Only a few studies applied OLS or panel regression models for impact examination.
Current literature finds that when a company reports a rise in revenues or profits, its share prices rise. However, measuring the impact of financial announcements on share prices is important, as it would give investors an advantage in predicting future prices. Hence, further examinations are required to empirically assess these relationships and verify the significance of financial results in the stock market.
- Bhuvaneshwari, D., & Ramya, K. (2014). Impact of Stock split announcement on stock prices. International Journal of Management, 5(3), 36–46.
- Dsouza, J. J., & Mallikarjunappa, T. (2016). Quarterly Earnings and Stock Prices Reactions – A Study of BSE-500 Companies. Amity Journal of Finance, 1(1), 9–35.
- Hutagaol, N., Erlina, & Rujiman. (2022). The Effect of Financial Performance on Stock Prices with Dividend Policy as a Moderating Variable in Consumer Goods Industry Sector of Manufacturing Companies Listed on the Indonesia Stock Exchange. International Journal of Research and Review, 9(6), 278–289.
- Kaluarachchi, D. G. P. (2019). Impact of Dividend Announcement on Stock Price: Empirical Evidence of Colombo Stock Exchange. Journal of Accounting, Finance and Auditing Studies, 5(1), 213–225. https://doi.org/10.32602/jafas.2019.011
- Kangai, M., Kiremu, G., Box, P. O., & Box, P. O. (2013). Stock Price and Volumes Reaction to Annual Earnings Announcement : A Case of the Nairobi Securities Exchange. International Journal of Business, Humanities and Technology, 3(2).
- Legenzova, R., Jurakovaitė, O., & Galinskaitė, A. (2017). The analysis of Dividend announcement impact on stock prices of Baltic Companies. Central European Business Review, 6(01), 61–76. https://doi.org/10.18267/j.cebr.173
- Martin Joshy, A., & Malar, M. S. (2021). Impact of Dividend announcements on the market price of shares. Research Gate.
- Mohamed, M. H. (2010). The effect of the earnings announcements on the stock prices of companies listed at the Nairobi stock exchange. In University of Nairobi (Issue September).
- Naik, P. U., Parab, P. P., & Reddy, Y. V. (2017). Impact of Dividend Announcements on the Stock Prices and Liquidity : Evidence From India. Amity Journal of Finance, 1(2), 51–63.
- Pandey, D. K., Kumari, V., & Tiwari, B. K. (2022). Impacts of corporate announcements on stock returns during the global pandemic : evidence from the Indian stock market. Asian Journal of Accounting Research, 7(2), 208–226. https://doi.org/10.1108/AJAR-06-2021-0097
- Stankeviciene, J., & Akelaitis, S. (2014). Impact of public announcements on stock prices : relation between values of stock prices and the price changes in Lithuanian stock market. Procedia – Social and Behavioral Sciences, 156, 538–542. https://doi.org/10.1016/j.sbspro.2014.11.236