Uncovering Profit Announcements: how profit announcements affect share prices

Uncovering Profit Announcements: how profit announcements affect share prices

Introduction

Aims and objectives

This proposal explores How Profit announcements on share pricesDo they affect in the positive or negative way of the business. How these changes affect the market financially, simply whether it has been beneficial or detrimental. The affect will either be significant or insignificant with their being positive or negative financial impact on companies share price. The researcher predicts there will be a significant positive profit announcement on share prices, because ethical investment is becoming more popular and vital considering the effects such as economic change are having on the world

“Profit announcements’’ in the business context means that the important information the market uses to value companies, and detainment share prices. Investors predict the reporting season with passion ranging from enthusiastic excitement to sticky foreboding depending on how they think companies might have performed, and what positive or negative news they think those companies are about to expose.

This project being completed because share prices are influencing the current market so would be constructive and significant for an investor in the current markets. While there is already explore in the topic of stock market relating to share prices, the researcher is looking to further this research as well as update it. An additional reason this assignment is essential is that it can draw attention to the area of ethical investment hopefully attract further more investors.

Literature Review

Here will look at literature on the subject of profit announcement for share to volume of share prices, how share price on profit announcement.

Ball and Brown (1968); highlight on his research ‘It was about 261 companies during 1946-65; it considered the relationship share price and profit changes. They found out their further research that the most considerable price reaction take place before announcement of annual profit and only 10% of the changes take place in the month in which announcement develops’.

The stock market reaction against the estimated profit of each share by the professional companies By Foster (1973). He stated that based upon ‘the volume and price consideration of the shares, both investors and the market estimation earning per share before the auditing into accounts because of its information content and that time, the general estimation of the share price quickly adjusted’.

Patell (1979); point out on his research ‘In order to access the information content regarding the profit prediction, he decided to test it through exposure the predicted profit on the share price. The result showed that revealing the predictions leads to the adjustment in the shares price and the transaction volume. Therefore, the predicted data entailed the information content’.

The research by Baginski (1987); this research provides evidence regarding the success

of information transfer with respect to the profit predicted by the management. This indication supports this fact that the information entailed in management’s prediction leads to the reaction he of the shares price.

The research conduct by Warneryd (2001) In order to get insight into the investor’s financial

executive and its link with in order developed in the financial markets, he measured the psychological and financial theories in details. He consequence that there is a concrete and clear relationship between the selection of financial investment and the investors’ behaviour regarding choosing the decisions.

Wayman (2002); which he considered profit earning is a main goal in the first place behind the investment. He wrap up that the profit per share is highly influences on investors’ decision making, and also he recommended investors should apply the profit of each share ratio in the financial decision making process.

Proposed Research Method

Proposed research method will discuss the methods of analysis that were applied and the relevance of the findings. The justification for collecting the relevant data and the process used for this will be explained in the following sections. Here the researcher will be conducting an ‘event study’ as a proposed research method. An event study measures the impact of specific event on a firm’s valuation. In this research event company becoming socially responsible and valuation being the change in the company‘s share price.

Research

The research was carried out with the aim of answering the secondary research question.

‘Has there been good news for companies profit announcement on share prices?’’

Data

Data can be of two types, primary data and secondary data. Primary data can be considered as first hand data, where an individual has collected information to answer a specific question or questions. This type of data collection can be done by observation, through questionnaires and by interviews.

Data that has already been collected by a previous individual or individuals is called secondary data. This type of data can be documentary data, articles, multiple sources of data and survey based data.

Share Price

Tarun Jaswani (2008,para. 1) stated that A share price is the price of a single share of the company’s stock. Once the stock is purchased, the owner becomes a shareholder of the company that issued the share.

Tarun Jaswani (2008, para .5) mention ‘In the US, a share must be priced at $1 or more to be covered by NASDAQ. If the share price falls below that level the stock is “delisted”, and becomes an OTC (over the counter stock). Technically, a stock must have a price of $1 or more for 10 consecutive trading days during each month, to remain listed.

How stock prices react to managerial decisions?

Various stock prices react to managerial decisions and effect on share prices as well.

Dr. Apostolos G. Christopoulos (2005) and Dr. Konstantinos P. Vergos (Certified Analyst) highlighted the following:

One of the factors is management; positive decision is ‘the state will proceed to further privatisation of the company, and/or new director general for the company’ where as negative decision is ‘the state will not proceed to further privatisation of the company, and/or conflicts between minister and director general’. Secondly, ‘Subsidiaries; positive decision of this factor is the company is planning to acquire, or increase stake on, profitable companies’, where as negative decision is ‘the company will not acquire, or will decrease stake on, profitable companies’. Thirdly, Investors; Positive decision is ‘Foreign investors will increase stake on the company’ where as negative decision is ‘Foreign investors will decrease stake on the company’. Fourthly, Profitability; positive decision is ‘Increased Investments to non-profitable sectors/subsidiaries’ where as negative decision is ‘decreased investments to non-profitable sectors/subsidiaries’. Fifthly, Profit Announcements; positive decision is ‘the company is expected to increase profits’ where as negative decision is ‘the company is expected to decrease profits’ Finally, Capital structure; positive decision of factor is ‘the issue of debt will favour current investors’, whereas negative decision is ‘the issue of earns will not favour current investors’. (Dr. Apostolos G. Christopoulos (2005, pp.229-255) and Dr. Konstantinos P. Vergos (Certified Analyst)

From this alone, it would be fair to say that the positive and negative decision react on managerial decision as well as profit announcement onshare prices.

Event studies conclude whether or not there has been an abnormal share price affect from the event that has happened, providing the event is unexpected. This may be a restriction of the method, because it takes the statement that the event was not announced or previously predicted, given that share price is becoming more and more popular, it may not be well thought-out fully unexpected. The justification for using this method comes from looking at research articles, which believe it the most appropriate method for what is being investigated. Furthermore, since it has been used in active research and shown to be successful, it leaves the researcher protected in the knowledge that this particular project should go the same way. Since event studies are fairly difficult it is going to be very significant to have a guide to avoid mistakes and inaccuracies occurring.

References

Journal Articles

Ball R., Brown P, An Empirical Evaluation of Accounting Income Numbers, Journal

of Accounting Research Vol.6, No.2, 1968, pp.159-178.

Brown S., Warner J, Using daily stock returns: the case of event studies, Journal of

Financial Economics, March 1985, pp.3-31.

Brown S., Warner J., Measuring security price performance, Journal of Financial

Economics, June 1980, pp.205-258.

Brown, M., The Anatomy of an Earnings Surprise, Handbook for Security Analyst

Forecasting and Asset Allocation, (John B. Guerard, Jr. and Mustafa M. Gultekin,

eds.), JAI Press, 1993, pp..13-25.

Journal of Management Research. (2009, Vol. 1, No. 2: E9)Analysis of Prediction Profit Announcement for Share to Volume of Share Transaction in Tehran Stock Exchange.

James M .Patell. (1976). Corporate Forecast of Earning Per Share and Stock Behavior, Journal of Accounting Research, No. 3.

James M.Patell. (1976). Corporate Forecast of Eaening per Share and Stock Behavior,

Journal of Accounting Research, No. 3.

Ray Ball and Philip Brown. (1968). An Empirical Evaluation of Accounting Income Number,

Journal of Accounting Research, Autumn, pp. 159-178.

Stephen P. Baginski. (1987). Information Transfer Associated with Earning, Journal of Accounting Research, Vol. 25, pp.196-213.

Vergos K. and Christopoulos A. Empirical Investigation of the effects of announcement to share prices, Advances in Applied Financial Economics, July 2005, pp.229-255

Websites

How are share prices determined?

http://www.articlesbase.com/investing-articles/how-are-share-prices-determined-582957.html

Warneryd, k. (2001). How People Value and Trade Stock, Stock Market Psychology,

Available at: www.investopedia.com/university/broker/

Wayman, R. (2002). How to Evaluate the ‘Quality’ of EPSAvailable at:

www.investopedia.com/university/