Persistency & trends : Stock price impact of interim reports

Abstract: Problem: Interim and annual reports are some of the most crucial sources of information regarding companies’ performances. Interested parties such as analysts and investors assess this information and compare it with expectations. Analysts’ expectations of companies’ interim reports are of great importance when analysing the future development of share movement. Possible deviations between analysts’ expectations and actual presented results from the individual companies might change the perceptions of specific future stock prices. Furthermore business sectors have different characteristics and might respond differently to unexpected earnings news. Over- and underperformance of the presented results in relation to analysts’ expectations could create specific stock price movements over a forthcoming period depending on the nature of the report. The authors label this phenomenon as persistent trends. Purpose: The purpose of this thesis was to establish whether persistency and trends could be observed in the future development of companies’ stock prices with regard to analysts’ expectations and the true result presented by the companies. Method: With a quantitative approach the authors conducted an event study aiming to fulfill the purpose of this thesis. The study consisted of all fourth quarter reports presented 2001 throughout 2004 by the companies presently listed on the Most traded section of the Stockholm stock exchange A-list. The authors defined the nature of the studied reports as positive or negative depending on whether the pre-tax earning exceeded or were lower than the analysts’ expectations. Furthermore the authors constructed a mathematical formula which distinguished if the possible deviation of actual results compared to expectations was significant. The share price performance for two months subsequent to the earnings announcement was recorded and compared with the OMXS30 development for the equivalent time, thereby the authors gathered empirical evidence to fulfill the purpose. Furthermore the data was also divided into business subcategories to provide answers to whether there was uniform response to unexpected earnings information among business sectors. Results: The authors presented empirically founded evidence for the existence of persistent trends following the presentation of both positive and negative reports. The authors also rejected the presence of a uniform response to deviating earnings information in the business sectors.