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Université Libre de Bruxelles – Solvay Business School – Centre Emile Bernheim
ULB CP145/1 50, Av. F.D. Roosevelt 1050 Bruxelles - BELGIUM
Centre Emile Bernheim
Research Institute in Management Sciences
WORKING PAPER: WP-CEB 03/005
The effect of earnings release for Belgian listed companies
Marie-Paule LAURENT1
Aspirant FNRS-Bernheim
Ecole de Commerce Solvay – Centre Emile Bernheim
Université Libre de Bruxelles
Abstract
The purpose of this article is to examine whether the legal obligation for Belgian
listed companies to release annually their earnings is still useful in markets where
the quantity of information already present is important. A sample of 108 earnings
releases between January 1997 and June 1999 by Belgian companies listed on the
First Market of the Brussels Stock Exchange has been analysed. The empirical
study reveals that the earnings disclosure presents an informational content as the
stock price reacts significantly at the day of the release. Furthermore, the reaction of
the market is different depending on whether the earnings surprise – the nonanticipated part – is positive or negative. The analysts’ consensus is used as a proxy
for markets’ expectation of earnings. Two main results can be drawn from the
analysis: first the market anticipates partially the level of earnings surprises and
secondly it overreacts at the disclosure date and corrects the week after. Moreover,
the market reacts less negatively for bad news and positive earnings surprises lead to
huge positive reactions. This shows that on average investors seem to be less
optimistic than analysts are.
Consequently, the legislation on periodic information for Belgian companies is
useful for financial markets because the information released is not already
incorporated in stock prices and thus the earnings disclosure let the investors adjust
their anticipations for future corporate cash flows.
1
I would like to thank A. Farber and A. Szafarz for their useful comments.
50, avenue F. Roosevelt CP 145 / 1 – 1050 Bruxelles
Mail: [email protected]
Page 1
1. Introduction
Since December 1998, Belgian companies listed on the First Market of the Brussels
Stock Exchange have to publish a press release about their earnings. According to
studies realised by the Banking and Finance Commission (1998; 1999), such a
publication was already made on a voluntary basis by around two third of the listed
companies before 1999. The introduction of this legal obligation presents a real
interest only if the earnings anno uncement can be associated to a sensitive
information possibly leading to a market reaction. The aim of this study is to
determine to what extent there is new information in the earnings announced. This is
not obvious since the global level of corporate communication for listed companies
is relatively high.
The general scope of this study is found in the market efficiency research, which
begins with Fama in 1970. In an efficient market, stock prices reflect all available
information. Therefore, every news implies a reaction of the price that adjusts to
integrate the non-anticipated part of the information. This reaction can be studied by
observing the abnormal returns around the announcement date.
The empirical analysis has been realised on Belgian companies listed on the Brussels
Stock Exchange. A sample of 108 earnings announcement relative to fiscal years
1996, 1997 and 1998 has been examined to determine whether in Belgium the annual
earnings announcement brings a non-anticipated information to the markets and how
long it takes to be integrated in the stock price.
The first part of this article is a review of the literature concerned with the link
between earnings announcement and market reaction. The second part displays the
empirical study which is composed first by the research of the existence of an
informational content of the announcement and second by the analysis of the level of
price reaction related to the level of non-anticipated earnings. A conclusion about
the usefulness of the new legislation on annual press releases ends this article.
Page 2
2. Literature Review
The intrinsic value of a stock is generally calculated on the basis of the expected
future cash flows of the company. As the corporate earnings are a crucial factor in
the elaboration of investors’ anticipations, it is also important for the stock evaluation
[Easton (1985)]. Therefore, earnings announcement presents a major information
that should, in an efficient market, imply a market reaction. In the first study on the
existence of an informational content of earnings announcement, Beaver (1968)
shows that prices react significantly during the announcement week and that
transactions volume increases during the same period. According to Bamber and
Cheon (1995), the reactions on prices and on volumes tally with different aspects of
information assimilation: the price reaction is linked to the surprise, the non-expected
part of the information, and the volume depends on the investors’ interpretation. An
informational content exists if at least one type of reaction can be observed. In its
study of the French Stock Market, Gajewski (1999) shows that a volume reaction
also exists on smaller stock markets. The generally accepted explanation of the
diverse impacts of the earnings announcement is that investors use these
announcements to re-evaluate the future corporate cash flows and thus stock prices
adjust conseque ntly.
The main element of this informational content is the non-expected part of the
earnings. According to Ball and Brown (1968), a link between the sign of the
earnings surprise and the direction of the price reaction exists. Similarly, the study
of Redleman, Jones and Latané (1982) indicates that markets react positively when
companies reveal higher earnings than expected and penalise companies presenting
negative earnings surprises. This relation is also verified in absolute value: the
higher the surprise, the greater the reaction [Beaver, Clarke and Wright (1979)]. In
the specific case of very small surprises, Kinney, Burgstahler and Martin (1999) have
shown the existence at the announcement date of a statistically significant linear
relation between returns and earnings surprises.
However one of the issues of this research is the estimation of market’s expectations,
which are essential values but not directly observable. Brown’s synthesis (1997) of
all estimation’s methods for market’s earnings expectation classes them into two
groups. The first is on the statistical prediction methods like AR(1) or random walk
with trend. Better predictions can be obtained if one includes other factors as stock
prices or accountant rates of return. The second group stems from observable
predictions like analysts’ earnings consensus. The advantage of the analysts’
predictions can be explained by the quantity of information analysts have access to
(private information let them better distinguish between permanent and temporary
effects) and by the timing of their predictions (revisions at the light of new
Page 3
information are more regular). Nevertheless, investors’ uncertainty cannot be
captured by the dispersion observed between analysts’ predictions [Abarbanell,
Lanen and Verrechia (1995)]. Finally, an alternative method presented by Maddala
and Nimalendran (1995) is the non-observed component approach that uses earnings
surprises as a non-observed explicative variable in different equations.
Moreover, the announcement timing is also an explicative factor of market reactions.
In fact, markets anticipate the delay between the end of the fiscal year and the
announcement date because it generally remains constant. According to Trueman
(1990), a longer delay in the announcement is interpreted by the market as the fact
that the company takes time to hide bad corporate earnings, this implying a decrease
of the stock price.
The initial study of the pre-announcement period [Ball and Brown (1968)] has shown
that stock pric es largely anticipate the announced earnings. Corporate financial
communication is a first explicative factor of this market’s anticipation. In fact,
earnings surprises, and thus price reactions, are less important for big companies that
generally have a more developed financial communication system [Atiase (1985)].
Similarly, Dempsey (1989) and Alexander (1992) have noticed that the informative
value of the announcement decreases with the number of analysts following the stock
because indirect information is then more important. The second source of prior
market information is insider trading. Kabir and Vermaelen (1996) looked at the
introduction in 1987 of a regulation in the Netherlands that forbids insiders to make
transactions during the 8 weeks prior the earnings announcement. They found a
decrease in the volume usually observed during the weeks preceding the
announcement and a slower (quicker) adjustment of the price in case of good (bad)
surprise. Also in the United States, earnings announcements seem to be more
informative after the vote of the ITSFEA 2 [Garfinkel (1997)]. This tends to show
that insider trading implies an integration of private information in stock prices
before the public announcement date.
Ball and Brown (1968) have also studied the post-announcement period. They have
shown the existence of a Post Earning Announcement Drift. This drift is not the
result of a bad specification of the risk premium [Bernard and Thomas (1989);
Thomas (2000)] but comes from a certain market ine fficiency due first to transaction
costs [Bushan (1994)] and secondly to a late and partial assimilation of the
information. This late and partial assimilation has been shown by the existence of a
correlation between the quarterly earnings and the abnorma l return during the four
following quarters [Freedman and Tse (1989); Bernard and Thomas (1990)].
2
ITSFEA: Insider Trading and Securities Fraud Enforcement Act (passed at the Congress in 1988)
Page 4
Thomas (2000) explains this assimilation delay as a market under-reaction to
fundamental signals concerning future earnings. There will thus be a predictive
adjustment during the next quarter if the signal is confirmed.
Most of the empirical studies about earnings announcements and their impact on
financial markets have been made on American Stock Exchanges. Very few studies
focus on European Stock Exchange. These markets present however interesting
characteristics like smaller companies, less diversification or less volume that might
lead to different results. That is the reason why this empirical analysis concentrates
on the Belgian Stock Exchange.
3. Empirical Study
3.1. Sample choice and presentation of the data
The empirical study of earnings announcement impact on stock prices has been made
on a sample of 108 earnings announcements made by Belgian companies listed on
the First Market of the Brussels Stock Exchange. Companies have been chosen on
the basis of three criteria: (1) stock liquidity, (2) knowledge of the announcement
date and (3) analysts’ following.
(1) The stock price evolution is generally interpreted as a change in the mean of
market’s expectation with any individual market actor being able to significantly
influence prices. Stock liquidity is a guarantee of absence of individual effects on
markets. The sample selection has thus been made among companies listed on the
Term Market of Brussels Stock Exchange.
(2) Analysing the information impact on stock prices with daily data necessitates the
knowledge of the precise day of the announcement to the market. In Belgium, the
earnings announcement by press release is compulsory since the beginning of 1999
but this practice was already of large application before. In this study, the
announcement date is defined as the press release publication date. The sample
choice has been made under the condition that the announcement date found in the
BFC report 3 was the same than the one found in the JCF database 4 .
(3) A market expectation measure for earnings is necessary to analyse price reaction.
The last selection criterion is thus the availability of analysts’ consensus in the JCF
database.
3
Banking and Finance Commission, Etudes et documents n°4 (May 1998) - Etudes et
documents n°8 (May 1999) - Etudes et documents n°13 (July 2000).
4
Jacques Chahine Finance database contains information about European listed companies:
announcement dates, analysts’ predictions on earnings, cash flows, net assets, debts, … during the last
five years (Jacques Chahine Finance, Paris).
Page 5
Hence a sample of 44 companies for a total of 108 announcements has been
constituted. The announcements are equally distributed over the three analysed
fiscal year ends. However, the proportion of companies announcing their earnings
during the first two months after fiscal year end is more important in the sample than
in the global population. It has to be noticed that even with a small percentage of
companies (between 25% and 30% of total listed companies), the sample covers 13
activity sectors and presents approximately 83% of the capitalisation and 85% of the
volume of the Brussels Stock Exchange during the year 1998 5 .
Table 1: Distribution of the announcements sample
January 1997
January 1998
January 1999
[Fiscal year 1996] [Fiscal year 1997] [Fiscal year 1998]
Belgian companies listed on the
Brussels Stock Exchange
Criterion (1): stock liquidity
Criterion (2): announcement date
Criterion (3): analysts' following
Number of announcements kept
136
131
128
TOTAL
395
< 83 >
< 80 >
< 73 >
< 236 >
53
< 14 >
39
<5>
34
51
< 14 >
37
<2>
35
55
< 16 >
39
<0>
39
159
9 [27%]
22 [65%]
3 [8%]
7 [20%]
26 [74%]
2 [6%]
10 [26%]
27 [70%]
2 [4%]
< 44 >
115
<7>
108
Announcement month
January-February
March
April
26 [24%]
75 [70%]
7 [6%]
3.2. Existence of an informational content
The first part of the empirical study concerns the existence of an informational
content of earnings announcements. The analysis concentrates on the possible price
reaction and on its relative intensity around the announcement date. The study
period covers 40 markets opening days centred on the announcement date (20 days
before and 20 days after the announcement).
The price impact is measured by the non-expected part of the stock return, the
abnormal return:
ARit = Rit − E [ Rit ]
where ARit is the abnormal return for stock i at period t; Rit is the return of stock i at
period t and E[Rit] is the expected return of stock i at period t. In the present case,
the abnormal return is defined by the “market adjusted return”:
ARit = Rit − Rtm
where Rtm is the market return at period t. It is also possible to use the traditional
market model to define the expected return.
However, the coefficient of
5
A more complete table can be found in the appendix.
Page 6
determination is generally very small with daily data. Brown and Warner (1985)
have shown that alternative measures of abnormal return, as the one used here,
present a similar ability to detect abnormal performance.
The study of the price movement around the announcement date cannot be made for
all time series separately because a great amount of observed price changes are due
to information non- linked to the announcement. The consequences of these joined
events can however be significantly eliminated by the use of inter-series mean. As
the abnormal return are centred on a specific event –earnings announcement –, the
return mean should principally reflect the announcement effect and all other
information not linked to the earnings should be reduced by this mean.
The first step of this analysis is about the significance of the abnormal return. The
hypothesis of zero abnormal return is tested with the G statistic, which allows under
the null hypothesis a standard normal distribution.
ASARt
G=
st
N
Where N is the number of observations, ASARt the average standardised abnormal
return at period t, st² the inter-company variance of abnormal returns at time t and si
the standard error of the abnormal returns of stock i during the non announcement
period.
ASAR t =
1
N
N
ARit
∑
si
i =1
s t2 =
1 N
( ARit − AARt ) 2
∑
N − 1 i=1
AARt =
Table 2: Test statistic around the announcement date
Days
Test statistic
-5
-4
-3
-2
-1
0
1
2
3
4
-0,259
0,38
-0,587
0,139
0,157
1,835
4,082
0,173
-0,812
-0,575
Level
95%*
90%**
Reaction
direction
n.s.
n.s.
n.s.
n.s.
n.s.
n.s.
sign.
n.s.
n.s.
n.s.
n.s.
n.s.
n.s.
n.s.
n.s.
sign.
sign.
n.s.
n.s.
n.s.
+
+
+
+
+
+
-
n.s. : not significant– sign : significant
* The test statistic is compared to 1,960
** The test statistic is compared to 1,645
Page 7
1
N
N
∑ AR
i =1
it
Table 2 gives the test results around the announcement date. Abno rmal returns
appear to be significantly different from zero the day after the announcement and to a
smaller extend the announcement day. This shift of one day can be explained by the
fact that the communication is usually made at the end of the day. The price impact
can thus only be seen at market opening, the day after. Nevertheless, it can seem
astonishing that the observed reaction is positive and statistically significant when
the sample is studied globally because the individual reaction can go either ways.
We tend in the next chapter to explain this fact by analysing the earnings surprise
distribution and the particular reaction it induces.
The second step of this study is about the relative intensity of the reaction measured
by statistic Uit defined as:
U it =
ARit2
si2
A comparison of the reaction intensity between two periods, without taking into
account the sign, is made possible by the use of this statistic. A ratio superior
(inferior) to 1 shows that the abnormal return is superior (inferior) to the normal and
thus that the stock volatility has increased (decreased).
In the graph presenting the inter-company mean of the Ut statistic, an important
reaction at the announcement date and during the two next days is observed. On the
other hand, small reactions are observed during the two weeks prior the
announcement date. Consequently, markets seem to be in a waiting situation before
the earnings announcement. Nevertheless, stock prices react in a significant way at
the announcement. Earnings seem thus to be announced at a known date and to
present a new information to the market.
Graph 1: Inter-company mean of the daily U statistics
3,0
2,5
2,0
1,5
1,0
0,5
0,0
-10 - 9
-8
-7
-6
-5
-4
-3
-2
-1
0
1
2
Page 8
3
4
5
6
7
8
9
10
3.3. Price reaction according to earnings surprise
The second part of the research consists in determining to what extent the earnings
surprise, defined as the part of the announced earnings non-expected by the market,
is at the basis of the observed reaction. The main difficulty of this analysis lies in the
choice of the investors’ prediction model. The surprise measure chosen here is the
difference, in relative term, of the analysts’ consensus post-announcement and the
consensus pre-announcement:
Cti+1 − Cti−1
SURPRISE =
Cti−1
i
where SURPRISEi is the earnings surprise of company i and Cti is the analysts’
consensus at time t for company i.
The observed earnings surprises are grouped by size into three classes: surprises
superior to 5%, inferior to -5%, and between these two limits. In the sample, more
than half of the announcements presents a small surprise and the significant surprises
are relatively similar in size. Moreover, it seems that the analysts tend to
underestimate earnings, as there are more good surprises than bad ones.
Table 3: Earnings surprises classed by size
Proportion of observations
Median of the size within a class
Superior to 5 %
29 %
0,1165
Between - 5 % et 5 %
52 %
0,0015
Inferior to - 5%
19 %
-0,1031
The impact study is done at three different periods and concentrates on the abnormal
return of portfolios constructed by the 5% criterion. The portfolio SUP (INF) is
composed by stocks whose earnings surprise is superior to 5% (inferior to -5%) and
the portfolio ENT is composed by the others. Abnormal returns cumulated by
product correspond to the abnormal gain of a portfolio for which all intermediary
gain has been reinvested in this same portfolio. Observing a different evolution for
the three portfolios tends to show that earnings surprise is a differentiation factor
recognised by the market.
Announcement period
Table 4 shows that, whatever the analysed portfolio, stock price reaction is
significant only at the announcement date and the day after. There are no significant
values the week before or at the end of the announcement week. Moreover,
abnormal returns are more important when the earnings surprise is substantial and
positive.
Page 9
Markets’ reaction appears to be quick and limited to the earnings announcement date.
However, whereas price reaction for “good” surprises has the expected sign (a
positive reaction is associated to a good surprise), the absence of price reaction for
“bad” surprises is counterintuitive. It seems that the analysts are more optimist than
markets: a “bad” surprise according to the analysts has already been anticipated by
the market, thus the price doesn’t react to the announcement; similarly, a “good”
surprise implies a more important reaction because it wasn’t anticipated at all. This
asymmetric reaction explains the reason why the global abnormal return was
significant in the first part of this study.
Table 4: Portfolios’ test statistics around the announcement date
-5
-4
-3
-2
-1
0
1
2
3
4
SUP*
Test statistic
ENT*
INF*
SUP*
-0,355
0,217
-2,444
1,549
0,580
1,870
2,960
0,768
-0,613
0,821
0,168
0,289
0,979
0,287
-0,580
0,728
1,924
-0,508
-1,639
-1,423
0,321
0,575
0,059
0,319
0,911
0,253
0,731
-0,591
0,450
0,232
n.s.
n.s.
sign.***
n.s.
n.s.
sign.
sign.
n.s.
n.s.
n.s.
Level of 90%**
ENT*
INF*
n.s.
n.s.
n.s.
n.s.
n.s.
n.s.
sign.
n.s.
n.s.
n.s.
n.s.
n.s.
n.s.
n.s.
n.s.
n.s.
n.s.
n.s.
n.s.
n.s.
n.s: not significant – sign.: significant
*The composition of the portfolios is done on the basis of the earnings surprise size. SUP
is the portfolio with stocks whose earnings surprise is superior to 5%; INF is the portfolio
with stocks whose earnings surprise is inferior to -5% and ENT is the portfolio with stocks
whose earnings surprise is between 5% and 5%.
**The test statistic is compared to 1,645.
***Outlier
Pre-announcement period
The relative movement of the three portfolios during the 20 days preceding the
announcement reveals the evolution of markets’ expectations. Graph 2 shows that
the prior evolution of the portfolios and the final surprise are linked: good news
portfolios present cumulative returns that are positive and largely superior to other
portfolios; an inverse evolution is observed for bad surprises portfolios. These
differentiated evolutions indicate that markets expect part of the earnings surprise as
it is measured here. This phenomenon can be explained by the arrival during the
month preceding the announcement of information that is directly influencing the
stock price but not changing our surprise measure, which is defined as a monthly
difference.
Page 10
Graph 2: Abnormal returns cumulated by product
1,12
1,10
1,08
1,06
1,04
1,02
1,00
0,98
0,96
-20
-18
-16
-14
-12
-10
-8
-6
-4
-2
0
SUP
2
ENT
4
6
8
10
12
14
16
18
INF
Post-announcement period
Graph 3 presents the evolution of the three portfolios beginning the third day after
the announcement (the portfolios are composed at the end of day 2). An important
increase of the “bad news” portfolio and a decrease of the “good news” portfolio are
identifiable. This evolution difference tends to show that the surprise, as measured
here, still contains information after the first reaction. However, the sign of the
reaction indicates that it is rather an adjustment than a late assimilation: markets have
reacted too much at the announcement and must go back. In one case, good news
has been evaluated too favourably and in the second case, the future seems better for
companies judged too severely by investors because of their bad earnings surprises.
Graph 3: Post-announcement evolution of the cumulative abnormal returns
1,03
1,02
1,01
1
2
3
4
5
6
7
8
9
10
11 12
13 14 15 16 17 18 19
0,99
0,98
SUP
ENT
Page 11
INF
4. Conclusion
This article looks into the Belgian Stock Exchange and into its reaction to earnings
announcements. Since December 1998, Belgian companies listed at the Brussels
Stock Exchange are legally obliged to publish a press release about their annual
corporate earnings. This was previously already a wide practice. The objective of
this research is to determine to what extent, despite all the information available on
the market, annual earnings announcement brings really new information to the
market. Therefore, an event study has been made on a sample of 108 earnings
announcements made between January 1997 and June 1999 by Belgian companies
listed on the First Market on the Brussels Stock Exchange.
The empirical analysis has been divided into two parts: the existence of a significant
market reaction and the link between observed reaction and earnings surprise. The
first part of the study has shown the presence of a significant reaction at the earnings
announcement date. It seems consequently that the announcement implies a change
of future investors’ expectations. There is thus an incorporation of this new
information in stock prices. This attests an informatio nal content of earnings
announcement. The second part of the study underscores a behavioural difference of
portfolios created on the basis of earnings surprises. It thus seems that markets’
reaction can be at least partially explained by the level of the earnings surprise: a
good surprise implies a positive price reaction and inversely. Moreover, diverse
observations can be made at the light of the relative behaviour of the different
portfolios during the pre-announcement and the post-announcement period. First
analysts’ seem more optimistic than the markets. Then, part of the earnings
information is already incorporated in the prices but the announcement remains
informative. Finally, markets’ reaction is too high at the announcement date,
consequently stock prices adjust after.
Therefore, despite the important level of information on financial markets, earnings
announcement brings new information that let investors adjust their anticipations.
The new legislation on periodic information by Belgian companies is thus still useful
for financial markets.
Page 12
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Page 14
Appendix:
Appendix 1: Sample characteristics
Activity sector*
Number of
companies
Capitalisation
Turnover
in % (total of the Brussels Stock Exchange)
Holdings
Miscellaneous Services
Buildings
Chemicals
Metal-Electro-Electronics
Property
Retailing
Utilities
Banks and Financial Services
Insurance
Miscellaneous Industries
Non Ferrous
Oil
Total
10
7
3
3
3
3
3
3
2
2
2
1
1
6,60
1,48
3,36
16,59
27,45
14,43
2,12
0,53
2,17
0,36
4,39
0,58
2,63
10,92
1,48
4,37
10,30
20,60
17,13
3,67
0,59
2,69
1,40
6,40
0,44
4,33
43**
82,69
84,30
Source: Statistics 98 Brussels Stock Exchange, Brussels 1999.
* Activity’s sector definition and companies’ classification are due to the Brussels Stock Exchange.
** One company of the sample (BBL) has been eradicated in July 1998, it is thus not in the descriptive
statistic of the Brussels Stock Exchange at December 31st 1998.
Appendix 2: Announcements sample
Companies
Ackermans
Almanij
BBL
Barco
Befimmo
Bekaert
Belcofi
Brantano
CBR
CMB
Cobepa
Cofinimmo
Dexia Belgium
Creyf's Interim
D'Ieteren
Announcements
96-98
96-97-98
97
96-97-98
97-98
96-97-98
96-97-98
98
96-97-98
96-97-98
98
98
98
96-97-98
96-97-98
Companies
Announcements
Deceuninck
Delhaize Le Lion
Distrigaz
Electrabel
Electrafina
Fortis
GBL
Générale de Belgique
Générale de Banque
Gevaert
GIB Group
Glaverbel
Immobel
KBC
Koramic
96-97-98
96-97-98
96-97-98
96-97-98
96-97-98
96-97-98
96-98
96-97
96-97
96-97-98
96-97-98
96-97-98
96-97-98
96-97-98
96-97-98
Page 15
Companies
Petrofina
Quick
Real Software
Recticel
Royale Belge
Sofina
Solvay
Spector
Systemat
Telinfo
Tessenderlo
Tractebel
Union Minière
Van De Velde
Announcements
96-97-98
96-97-98
98
96-97-98
96-97
97-98
96-97-98
96-97-98
98
96-97-98
96-97-98
96-97-98
96-98
97