Share price reaction to earnings announcement on the JSE-ALtX: A test for market efficiency
Keywordsefficient market hypothesis, earnings announcement, capital asset pricing model, post-earnings announcement drift, event studies
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AbstractManagement has a duty to inform both shareholders and investorsabout the state of health of a firm. Earnings announcements providea yardstick that can be utilised by the market to assess the wealth andprofitability of a firm. The purpose of the study was to investigatewhether there are any significant abnormal returns around the publicannouncement of earnings and to establish whether the efficientcapital market hypothesis applies to the small ALtX market.16The study focused on all the companies listed on the JSE-ALtX thatannounced annual earnings between 1 January and 31 December2009. The method used for calculating the expected returns was theCapital Asset Pricing Model (CAPM).17Empirical evidence demonstrates that there is substantial negativeshare price reaction to earnings announcements on the smallALtX stock market. The ALtX also shows the weak form of marketefficiency. The study concluded that during a recessionary period,shareholders&#8217; wealth is eroded in the small ALtX market; however,the weak form of market efficiency provides an opportunity forentrepreneurs and investors to exploit the market for profits whenthe market is performing well.