andreas editan - AN EMPIRICAL INVESTIGATION OF THE MARKET...

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SIMPOSIUM NASIONAL AKUNTANSI VI Surabaya, 16 – 17 Oktober 2003 AN EMPIRICAL INVESTIGATION OF THE MARKET RESPONSE TO THE GOOD AND BAD NEWS EARNINGS ANNOUNCEMENTS WITH AND WITHOUT CONFOUNDING EFFECTS ANDREAS LAKO Yogyakarta ABSTRACT The main limitation of most empirical studies investigating the market response to earnings announcements is not examining the market response to the good news (GN) and bad news (BN) earnings announcements with confounding effects (WCE) and without confounding effects (WOCE), especially from the corporate macro events. Consequently, the conclusions that earnings announcements have information content to stock market are not yet conclusive. This study analytically investigates the market response to the GN and BN earnings announcements WCE and WOCE using market model. The samples are taken from the LQ45 firms from Jakarta Stock Exchange (JSX) that release annual earnings of 1998, 1999 and 2000. The results show that the market responses positively to the GN and BN earnings announcement WCE and WOCE at the announcements date. The market response to the GN earnings announcements tends to smaller than the response to the BN earnings. Statistically, however, this study finds that there is no significant difference in the market response to the GN and BN earnings announcements WCE and WOCE for all categories of the announcements. The results also indicate that: 1) there is a market anomaly that inconsistent with Efficient Market Hypothesis (EMH), especially respecting the market response to the BN earnings announcements WCE and WOCE. The evidence implies that the JSX is not yet efficient from the informationally and decisionally semi-strong form market efficiency; and 2) the confounding effects from the corporate macro events have significant impacts on the market response to the GN and BN earnings announcements. Keywords: good and bad news earnings, confounding effects, market efficiency, event study, and market anomaly. I. INTRODUCTION This paper extends some research issues from my two previous papers. The first paper (Lako 2002b) investigated the market reaction to earnings announcements with and without confounding effects and documented that the market reacts significantly to earnings announcements around event period of the announcements 1 . The second paper (Lako 2003a) investigated the investor reaction to good news (GN) and bad news (BN) earnings announcements 2 . The results also point out that 1 The motivation of this research is due to inconclusiveness results of most empirical studies which have posited that market reacted to earnings announcements around event period of earnings announcements (Ball and Brown 1968, Beaver 1968, Morse 1981, Chamber and Penman 1984, Defeo 1986, Ball and Kothari 1991, Potter 1992, Pattel and Wolfson 1982, and Bamber 1994). Most of the researchers ignore the confounding effects (CE) from the corporate micro-macro events such as dividend and investment announcements as well as political, social and macro-economic events occurred around event periods of earnings
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andreas editan - AN EMPIRICAL INVESTIGATION OF THE MARKET...

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