Determining the Impact of Corporate Earnings Announcements on Stock Prices

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Determining the impact of corporate earnings announcements on stock prices

How to conduct a well designed event study using Bloomberg data

Case Study

This case was written by Dr Renaud Beaupain and Dr Eric Dor from the IESEG School of Management (LEM - CNRS). It is intended to be used for class discussion rather than to illustrate the effective or ineffective handling of a management situation. This case uses This case uses the data extraction tools of Bloomberg and assumes that the users have access to this service.

© 2013 Renaud Beaupain and Eric Dor, , IESEG School of Management.

No part of this publication may be copied, stored, transmitted, reproduced or distributed in any form or medium whatsoever without the permission of the copyright owner.

1 The problem

You are a financial analyst working for an investment bank. You are requested to determine whether the stock price of any company generally reacts to an announcement of better than expected yearly profits. The outcome of this research would indeed have important strategic implications for the bank. Suppose for example that the study leads to the conclusion that the stock price of a company tends to increase following an announcement of better than expected profits. Then, before the results are communicated, if the internal analyses of the bank indicate that the profits of a firm should be better than what is currently expected by the market, it would be interesting to invest in stocks of this company or to recommend this investment to the clients. If the analyses of the bank are right, buying stocks of the company represents an investment that will yield a good return.

Your bank is a client of Bloomberg services. Therefore you have access to the data and the software of Bloomberg. Of course the computers of the bank are equipped with Excel. Using these tools, you can perform the tasks that are required to achieve your mission.

2 Tasks to perform

To achieve the above question, it is necessary to analyse what did happen in the past with the stock prices of firms having announced better than expected profits, and to compare that with their behaviour before this event.

The historical stock prices of a set of representative companies having announced better than expected profits in the past must be collected. It is decided to concentrate on the last announcements of yearly profits, which occurred in the third semester of 2012, at dates that may of course differ among firms. Among the companies of the US market having announced better-than expected announced earnings per share in 2012:Q3, it is wise to select the 20 firms with the largest capitalizations. The market for such stocks is indeed sufficiently liquid to allow informational efficiency. Restricting the choice to the companies of the SP100 is thus an obvious choice. Therefore the 20 companies with the largest capitalizations must be selected among the firms of the SP100 having announced better-than-expected profits in 2012:Q3.