Earnings Surprises and Stock Price Reactions of Quoted Companies in Nigeria

Abstract

<jats:p>This study focuses on examining the relationship between stock prices and earnings surprises in quoted companies of Nigeria. This study applied a longitudinal research design which studies the effect of earnings surprises on stock prices using panel data. A sample of 64 companies was chosen to study in all sectors of the Nigerian Stock Exchange. The research data were obtained from secondary sources of the annual reports for the selected companies covering the period from 2013 to 2017. The measurement for earnings surprises used in the study is the residual or unexplained component of earnings persistence model commonly referred to as first-order autoregressive AR (1) regression of reported earnings. Were, the data analysis was carried out by regression using the generalised least squares technique. The regression results for positive earnings surprise shows that share prices react negatively to positive surprises with a coefficient of (-2.4109) in tandem with the return news hypothesis which suggests that positive earnings news results in a negative stock-price reaction. The negative earnings surprise results show that stock prices react positively to negative earnings surprises with a positive coefficient of (0.1136). This is in line with the premise of return news, which indicates that negative earnings news leads to a positive reaction to the share price. The study recommends that there is a need to regulate the stock market to improve the level of market efficiency in stock markets. This will improve the rate at which earnings news will be reserved at stock prices. Secondly, there is a need to improve investor confidence in the disclosed profits made by companies.</jats:p>

Earnings surprise and share price of firms in Nigeria

“…Ekpe et al [12] examine earnings surprise and stock prices reactions of quoted companies in Nigeria. The study used a sample of 64 firms chosen from all sectors of the Nigerian Stock Exchange within the period 2013 to 2017.…”

“…Earnings are essential indicators of business success and, as such forms, the essential parameter through which the business of firms is assessed by investors. Therefore, analysts and managers forecast earnings that are used by investors in making accurate investment decisions [12]. These earnings forecasted by analysts and managers sometimes fall below or above the actual earnings of firms.…”

“…Earnings surprise is a determinant of share price of firms [9,12,16,19,20,22,24,35]. Earnings surprise is when a company's reported profits are above or below analyst expectation [3].…”

“…The earnings reported tend to move share price either upward or downward. In several of the leading studies in this research area conducted in both developed and developing economies [9,12,16,19,20,22,24,35], a fundamental weakness was observed. The studies did not show how earnings surprise interacts with book value per share (BVPS) and earnings per share (EPS) in determining share price.…”

“…The idea that earnings surprise and share price may be dynamically and endogenously related is not new. Prior studies in developing economies did not explore the dynamic endogeneity [12,23]. Therefore, this study adopts the advanced panel vector autoregressive (PVAR) technique so as to explore the dynamic relationship between the different variables in the system.…”