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Management has fiduciary responsibility for the wealth of the shareholders. In line with this responsibility is a duty to inform stakeholders about the state of the health of the firm. Earnings announcements offer a yardstick that can be used by the market to analyze the profitability and the wealth of an entity. This study main purpose is to assess whether there are significant abnormal returns during, and after the announcement of the earnings. The study carries out an analysis of companies listed on London stock exchange that forms FTSE 250 market index. The companies looked at will be Bank of Georgia Holdings, United Group PLC (UTG.L), William Hill PLC, Vectura Group plc, and UBM plc for positive news and The Weir Group PLC, and Vedanta Resources PLC, which had a positive news and IMI PLC, John Wood Group PLC, William Hill PLC and Rentokil Initial PLC which had negative news. The study commences by evaluating the relevance of earnings announcements.
Relevance of Earnings Announcements
Earning announcements refer to the official statement of the profitability of a company for a given period mainly a quarter of a financial year. Earnings are usually preceded by earnings estimates that are given by equity. Earnings announcements give the investors an opportunity to know how the entity is doing. Usually, the earnings announcement day tends to be a very volatile trading day which presents an opportunity for investors to lose or make money very quickly (Case et al., 2013). Usually, this day is associated with a huge stock move that is mainly knee-jerk reactions to the initial release, but there exist no future indication of the way in which the stock is will trade. The long run performance of the stock relies on the continual earnings creation of the entity as opposed to one-time earnings rise.
Fazzini and Owen hypothesized that the stock usually rises in the days around earnings which is driven by the predictable rise in the volume that is generated by the earning announcements. The stock premium is usually highly correlated with the trading activity concentration of the previous earning announcements, with the stock that has high volume around the announcements in a specific subsequently have both high imputed buying and high premium by the individual investors (Case et al., 2013). This means that for some stock, at least, prices are boosted before and after the announcement day by the rise in individual investors demand. Whether a bad or good or neutral announcement there is both high net individual buying and high volume traded.
Troung and Corrado (2014) noted that the high idiosyncratic activity around the announcement date may deter traders who cannot have sufficient diversification. This shows that earnings announcement is very important to the investors as it gives them an opportunity to know the future prospect of the company and, therefore, market an informed buy, sell or hold decision. Investors usually rely on the information given by the analyst, company and other sources to make their decision. Earnings announcement is one of the most relied on information that investors use to make an investment……………………