Investigating Investors' Reaction to firms’ Annual Earnings Announcement with considering the market uncertainty and information uncertainty

Document Type : Research Paper

Authors

1 P.h.D Student of Accounting, Faculty of Administrative Sciences and Economics, University of Isfahan, Iran

2 Associate Prof. of Accounting, Faculty of Administrative Sciences and Economics, University of Isfahan, Iran

3 Assistant Prof. of Economy, Faculty of Administrative Sciences and Economics, University of Isfahan, Iran

Abstract

Introduction
There is an ambiguity about future state of the firms and capital market in conditions of uncertainty. In such a situation, the arrival of any information signal such as earnings announcement may reduce uncertainty leading to a revision of the previous beliefs of investors. Uncertainty could be divided into two groups: market uncertainty and information uncertainty. Investors’ reaction to earnings announcement may be different in these two situations. Under high market uncertainty, firms’ earnings announcement as an information signal may have a greater impact on investors' beliefs and, as a result, leads to more investors’ reaction to firms’ earnings announcement. However, more accurate information signals have a stronger impact on investors' beliefs. In other words, there is under reaction to earnings announcement, when announced earnings contain high uncertainty. Therefore, this study attempts to investigate investors’ reaction to earnings announcement with regards to market and information uncertainty. In addition, this study examines simultaneous effect of these two types of uncertainty on the investors 'reaction to earnings announcement.
Hypotheses
According to the literature, the research hypotheses include:
H1: Under high market uncertainty, investors’ reaction to earnings announcement is higher than low market uncertainty.
H2: Under high information uncertainty, investors’ reaction to earnings announcement is less than low information uncertainty.
H3: Investors’ reaction to earnings announcement under market uncertainty decreases with an increase in the level of information uncertainty.
 
Methods
In this study, in order to calculate the variables and test the hypotheses, required data was collected from the audited financial statements and its footnotes of listed companies in the Tehran Stock Exchange and the existing databases including “Rahavard Novin” and “Codal”. The sample of this study consists of 162 listed companies in Tehran Stock Exchange from 2005 to 2015. Market uncertainty was measured by the standard deviation of daily market returns during the one month prior to the firms’ earnings announcement. Information uncertainty was calculated by two criteria including quality information and cash flows volatility based on matched-firm design. Panel data method and Wald test were used to estimate models and test of hypotheses, respectively.
 
Results
Results showed the higher market uncertainty (compared to lower uncertainty), the more investors' response to firms’ earnings announcements. Results also showed, the higher information uncertainty (compared to lower uncertainty), the less investors' response to firms’ earnings announcements. Moreover simultaneous analysis of the "market and information" uncertainty on the investors' reactions to earnings announcements showed although investors' responses to earnings announcements decrease on the high information uncertainty situation, yet unexpectedly, the coefficient of unexpected earnings in the high market uncertainty is less than its coefficient in the low market uncertainty.
 
 
 
Discussion and Conclusion
Previous studies often focus on the market uncertainty or the information uncertainty. There are few studies that examine the simultaneous effect of these two types of uncertainty. Therefore, the aim of this study was investigating investors’ reaction to earnings announcement considering both market and information uncertainty. In the first hypothesis, we investigated investors’ reaction to earnings announcement, when market uncertainty is high. Results showed, investors show more reaction to earnings announcement under high market uncertainty. Therefore, the first hypothesis is not rejected. Results of the second hypothesis indicated when firms’ information such as accounting earnings is ambiguous and uncertain, there are less investors’ reaction to earnings announcement and the second hypothesis is also not rejected. Moreover, simultaneous analysis of both uncertainty on the investors' reaction showed although investors' responses to earnings announcements decrease by an increase in the information uncertainty, but unexpectedly, investors show less reaction, when there is a high market uncertainty. It may be due to behavioral bias or lack of investor knowledge for analyzing information. Therefore, the third hypothesis is rejected.
  

Keywords

References

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History

  • Receive Date: 24 October 2017
  • Revise Date: 10 February 2018
  • Accept Date: 07 February 2018

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