The Impact of Public Announcements on the Stock Prices

Absent information about investors’ earnings quality concerns, it is likely to be the case that most of the variation in P/E ratios is due to differences in growth opportunities and (to a lesser extent) risk.

The weekly performance of IBM stock presented a contestant growth. One highlight of the falling of stock price in the 6th week in the investment period was when IBM presented the 3rd quarter financial report. The investors weren’t satisfied with the profit report which they expected to be better especially when other IT companies were doing well in the 3rd quarter. One mistake I made was that I didn’t follow closely to the financial report of the company; therefore, I missed the peak of the stock price. From this experience, I learned that financial reports and current news are important indicators of the stock price. By following closely to the current event and analyzing the financial report, investors can maximize the profit and also become more familiar to the market.

It is believed that Efficient Market Theory is based upon some fallacies and it does not provide strong grounds of whatever that it proposes. More importantly the Efficient Market theory is perceived to be too subjective in its definition and details and because of this it is close to impossible to accommodate this theory into a meaningful and explicit financial model that can actually assist investors in making the investment decisions (Andresso-O’Callaghan, B., 2007).

As Chapter 10 questions, if further evidence continues to surface that capital markets do not always behave in accordance with the efficient market hypothesis, then should we reject the research that has embraced the EMH as a fundamental assumption? In this regard we can return to earlier chapters of this book in which we emphasised that theories are abstractions of reality. Capital markets are made of individuals and as such it would not (or perhaps, should not) be surprising to find that the

Using a sample data comprised 297 NYSE and American Stock Exchange companies for 1977 to 1980-time period, indicating twelve quarterly announcements for each of the company. MacKinlay (1997) utilised 30 companies which comprised into Dow Jones Industrial Index, as a sample to test the impact of quarterly earnings announcements to stock prices. The researcher examined totally 600 quarterly announcements, thus MacKinlay (1997) obtained stock price response separately to bad news, good news and no news cases of earnings per share (EPS) announcements.

We use the updated empirical analysis to assess the extent to which the findings in three seminal papers still hold, and provide some additional results that do not appear in the original work. This paper can serve as a resource for those interested in a deeper appreciation for the capital market consequences associated with accounting earnings. We organize this review using the three theoretical links between earnings and share prices developed by Beaver (1998). These “three links” are: 1) current period earnings provides information to predict future periods’ earnings, which 2) provide information to develop expectations about dividends in future periods, which 3) provide information to determine share value, which represents the present value of expected future dividends. We describe how this theoretical structure provides a practical framework for analyzing and understanding the valuation implications of earnings information in the capital market. We then provide empirical evidence on the relation between earnings and stock returns by extending three classic studies using data from 1988 through 2002. Our first set of empirical results provides evidence on links 1–3 by showing a

In 2008, share prices dropped mainly due to the US sub-prime crisis, which started in 2007 (Lixi, 2008). This had a huge impact on the P/E ratio for 2008, which is slightly below the threshold of 10 times. The P/E ratio for ANZ was higher than NAB in 2009 and there was lesser fluctuation in ratio. Share prices tend to rise with improved economic conditions, and with stimulus packages being distributed all over the world, there was uplift in the global economy, hence driving share prices (Larsen, 2012). However, falling earnings over 2009 caused both P/E ratios to rise. NAB’s P/E ratio increased a significant amount and overtook ANZ’s. Over the 5 years, NAB’s P/E ratio fluctuation is observed to be consistently higher than ANZ’s. Moreover, NAB’s higher P/E ratio might be due to investors’ high expectations, which were not supported by earnings.

I choose these firms because of the lower price per earnings relatively to higher revenue generated for each firm. A low P/E indicate either that a firm have done a great job relative to its past trends. In general, lower the price per earnings, the better performance of the firm. Since JPMorgan has the lowest price per earnings, that is the significant reason of why I invest more in that firm, correspondingly, it has generate highest revenue for the firm, which is $104,211,998,720.00. I also choose to invest 35 % in SunTrust Banks because it has a price per earnings of $12, slightly higher than JPMorgan Chase however lower than US Bancorp and a revenue of $8,785,999,872 that are lower than JPMorgan Chase and US Bancorp. I emphasize more on price per earnings and a positive total return regardless of the amount of revenues generated in the current year. US Bancorp has the highest price per earnings among these three, $13.36, which it could lead to lower value of a firm and a revenue of $22,112,999,936 that are lower than JPMorgan Chas’s. All the total return for each firm have a positive value, which indicates a good sign for the firm’s

The premise of an efficient market is that stock prices adjust accordingly as information is received. The speed and accuracy of the pricing changes are a reflection of the strength of the market efficiency, where in theory a perfectly efficient market will re-adjust prices immediately and precisely with new information. The efficient market hypothesis aligns with beliefs about whether technical and fundamental analyses are useful in making investment decisions or whether a passive approach is appropriate. In a perfectly efficient market, these types of analyses are not able to predict stock price trends (based on market inefficiencies or price abnormalities) which could assist in portfolio positioning or investment management. However, some investors belive that the market pricing is not precise and that there are timing windows and pricing trends that can be identified through analysis of past performance and finding price abnormalities where all information is not correctly reflected in the stock price (Hirt, Block and Basu, 2006).

According to the data above, Allianz Company and Manulife Company show the higher P/E ratio which is 8.11 and 20.99 in year 2013. The P/E ratio became lower and lower from 2013 to 2015 in both company. As the data above, we can see that the P/E ratio of Manulife Company is much higher compare to Allianz Company. This show that it is not attractive because the P/E ratio is higher. When the P/E ratio is higher, the shares is in short supply and the prices are going up, then investor will chase the rally and buy it. This shows that the stocks was popular and at the same time, also mean that the room for the stock will become smaller and the possibility of the share price will fall hugely. TTM refers to the last 12 month period for a selected financial

Another concern relates of insider trading of market efficiency of stock market. In his classical study Fama (1970) proposes efficient market Hypothesis, which suggests that stock price reflects all available information (historical price, public and private) in

A number of papers have argued that equities with high book value to share price ratios and/or high earnings to

Efficient Market Hypothesis has been controversial issues among researcher for decades. Until now, there is no united conclusion whether capital markets are efficiency or not. In 1960s, Fama (1970) believed that market is very efficient despite there are some trivial contradicted tests. Until recently, both empirical and theatrical efficient market hypothesis was being disputed by behavior finance economist. They have found that investor have psychological biases and found evidences that some stocks outperform other stocks. Moreover, there are evidences prove that market are not efficient for instance financial crisis, stock market bubble, and some investor can earn abnormal return which happening regularly in stock markets all over the world. Therefore, the purpose of this essay is to demonstrate that Efficient Market Hypothesis in stock (capital) markets does not exist in the real world by proofing four outstanding unrealistic conditions that make market efficient: information is widely available and cost-free, investor are rational, independent and unbiased, There is no liquidity problem in stock market, and finally stock prices has no pattern.

The weak-form efficiency cannot explain January effect. In semi-strong-form efficient market, to test this hypothesis, researchers look at the adjustment of share prices to public announcements such as earnings and dividend announcements, splits, takeovers and repurchases. As time goes, later tests tend to be not supportive to EMH. For instance, semi-strong-form efficiency cannot explain the pricing/earning effect. In strong-form efficiency, the highest level of market efficiency, Fama (1991) pointed out the immeasurability of market efficiency and suggested that it must be tested jointly with an equilibrium model of expected. However, perfect efficiency is an unrealistic benchmark that is unlikely to hold in practice.

Even though there are flaws in the CAPM for empirical study, the approach of the linearity of expected return and risk is readily relevant. As Fama & French (2004:20) stated “… Markowitz’s portfolio model … is nevertheless a theoretical tour de force.” It could be seen that the study of this paper may possibly justify Fama & French’s study that stated the CAPM is insufficient in interpreting the expected return with respect to risk. This is due to the failure of considering the other market factors that would affect the stock price.