Stock price reaction to earnings announcements: Evidence from the Colombo stock exchange, Sri Lanka

Authors

  • Rishan Sampath Hewage Faculty of Management Studies Sabaragamuwa University of Sri Lanka, Belihuloya, Sri Lanka
  • Norashida Othman Faculty of Business and Management, Universiti Teknologi MARA Puncak Alam
  • Jaafar Pyeman Faculty of Business and Management, Universiti Teknologi MARA Puncak Alam

DOI:

https://doi.org/10.24191/jeeir.v11i2.21362

Keywords:

Earning announcements, Informational value, Semi-strong form efficiency, Event study

Abstract

This study investigates the reactions of stock prices to earnings announcements of the companies listed on the Colombo Stock Exchange (CSE), Sri Lanka. To verify the informational value of announcements, and possess market efficiency, the standard event study method was utilized. 158 companies were used to collect the data considering five years period, from 2015 to 2019. There were 334 earnings announcements for the sample period. Panel Ordinary Least Square analysis and the market model were used to estimate each company's expected and abnormal returns. The results indicated that investors react immediately and positively to good news announcements while negative reactions to bad news with lag reactions. Surprisingly, it could be noted that there was a sudden reaction in the market day before the good news announcement. Overall, there was a substantial price change of all the securities on the announcement day ignoring whether it is good news or bad news. This proves that earnings announcements possess informational value. Further, the share prices change on the event day shows that the market reacts immediately to the earnings information confirming that CSE follows a semi-strong form efficient hypothesis for earnings announcements. This is important for stakeholders to make investment decisions and financial decisions. Further, regulatory agencies need to build and implement rules and regulations in the market.

Author Biographies

Rishan Sampath Hewage, Faculty of Management Studies Sabaragamuwa University of Sri Lanka, Belihuloya, Sri Lanka

Rishan Sampath Hewage is Senior Lecturer in the Department of Accountancy and Finance, Faculty of Management Studies, Sabaragamuwa University of Sri Lanka, Belihul Oya, Sri Lanka (https://orcid.org/0000-0001-7107-876X). He got his bachelor’s degree from the Sabaragamuwa University of Sri Lankan in Financial Management. Further, a Master’s degree from the University of Sri Jayewardeneura. He can be contacted at the Department of Accountancy and Finance, Faculty of Management Studies, Sabaragamuwa University of Sri Lanka, Belihuloya 70140, Sri Lanka.

Norashida Othman, Faculty of Business and Management, Universiti Teknologi MARA Puncak Alam

Norashida Othman, PhD is a senior lecturer from Universiti Teknologi MARA, Puncak Alam campus (https://orcid.org0000-0003-2461-8385). She pursued her degree in Economics at Universiti Kebangsaan Malaysia and then continued her Master Degree, specializing in Economics Development at Universiti Kebangsaan Malaysia. She received the scholarship to pursue her Ph.D. in International Economics at Universiti Putra Malaysia. She is very interested in research and is actively involved in a number of research grants as well as consulting projects.

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Published

2023-05-01

How to Cite

Hewage, R. S., Othman, N., & Pyeman, J. (2023). Stock price reaction to earnings announcements: Evidence from the Colombo stock exchange, Sri Lanka. Journal of Emerging Economies and Islamic Research, 11(2), 1–15. https://doi.org/10.24191/jeeir.v11i2.21362

Issue

Vol. 11 No. 2 (2023): May 2023 Issue

Section

Articles

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Copyright (c) 2024 Rishan Sampath Hewage, Norashida Othman

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