Adjustment of stock prices to earnings announcements: evidence from Euronext Paris
Purpose – The aim of this paper is to study both the information content of accounting figures and the speed at which the new information is incorporated into stock prices. Design/methodology/approach – The sample is composed of 117 overnight announcements published by Reuters during the period 2001-2003. For every date, the event is classified into one of three categories: good news, bad news or no news. The paper uses intraday event study methodology to examine market reaction just before and just after the event. Findings – The intraday analysis reveals several results. Firstly, investors react positively to good news and negatively to bad news. Secondly, abnormal returns dissipate within 15?min. Thirdly, prices converge to equilibrium more quickly for good news than for bad news. Fourthly, we present evidence of price reversal 30?min following bad news announcements. Finally, earnings releases are accompanied by a rise in volume which remains even after the equilibrium price is attained. Research limitations/implications – Price discovery is analyzed only in the stock market. It is pertinent to verify if the option market and foreign markets can contribute to the incorporation of new information into stock prices. Practical implications – This work can help investors to determine their trading strategies around earnings announcements. The paper shows that it is not possible to realize trading profits after 15?min following the time of the announcement. Originality/value – The study contributes to both financial accounting and microstructure literature. First, it focuses on the information content of accounting figures using very short horizon (intraday analysis). Second, the paper sheds light on the role of the Euronext preopening period in the incorporation of the overnight information flow.
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