Stock Price Reactions to Earnings Announcements in Indian Stock Market

Efficient Market Hypothesis theory (EMH) which states that an investor cannot consistently beat the market based on any set of information whether it is historical, publically available information or private information is examined. The investors' expectation on the extent of excess return that they would make from trading in the stock market is based on several factors and one of them is quarterly earnings announcement news. It was examined that whether there is any significant relationship between stock returns and quarterly earnings announcement. For this purpose, we employ event study methodology. The mean adjusted model, market adjusted model and market model are used to measure the abnormal performance. t test is used (Brown & Warner, 1985) for statistical significance and Runs and Sign test for testing the hypotheses. Cohen et al. (1983) methodology is also used to see the price adjustment process during the quarterly earnings announcement. The results show that Cumulative Average Abnormal Returns (CAARs) are statistically significant for most of the days in the event window. The findings of the study support the prediction that quarterly earnings information contains information value which is not reflected in security prices and therefore, traders can outperform the market based on quarterly earnings announcements in Indian stock market.