Profit Warnings and the following Stock Market Reaction - Understanding the effect of issuing profit warnings under different circumstances in the Nordics

Abstract: Our study examines the stock market reaction to profit warnings on the Nordic stock exchange. The results reveal a cumulative abnormal return of -7.09% and 6.09% associated with negative and positive profit warnings respectively, spanning from the day before the issuance to the day after. Stock market reactions are asymmetric under different circumstances, including business cycles, the quality and quantity of profit warnings, geographies, and company-specific data. Our study suggests a pattern of increased quantity but decreased quality of profit warnings during recessions. Furthermore, profit warnings exhibit dampened stock market reactions during recessions compared to booms. The conflicting forces of the surprise-factor effect, increasing market reaction to unexpected news, and observed stability of larger companies, generate an insignificance of company size to determine the reaction of a profit warning. However, distinct investment cultures and regulations across the Nordic countries, create a dampened effect of profit warnings issued by Finish companies compared to Swedish.