Stock Price Response to Earnings Announcements: United Kingdom

This study aims to evaluate the usefulness and relevance of earnings disclosures, as the key determinant for stock price changes. The main objective is to examine whether earnings response coefficient (ERC) behavior could explain more fully the stock price changes, as to the reason why the stock price change is not equal to the amount of announced earnings. The study is conducted on the United Kingdom as a major developed economy for the period of 2001-2014. Two measures of abnormal returns are regressed against the size of the announced earnings. The first regression uses measures from individual events. The second regression uses a new measure; that is, from portfolios made out of all observations sorted by size of earnings into ten portfolios. The portfolio method used was aimed at controlling possible idiosyncratic-errors-invariables problem using individual event measures. The results using individual-event measures resulted in reasonable ERC sizes with high R2 explanatory power, a little higher than those reported in prior studies on other countries. Importantly, portfolio-based ERC, 0.86, is very close to the magnitude of the earnings which supports the famous value relevance theory in accounting. This finding is new to this literature.