Earnings announcements and stock returns - A study of efficiency in the norwegian capital market

Abstract

This thesis is an event study concerning earnings announcements in the Norwegian stock market, during the time period of 2007-2010. The study serves as a method of testing the efficiency of the Norwegian capital market, originating from the efficient market hypothesis. Several studies have confirmed a high degree of efficiency in capital markets, but some have also detected delayed stock-price responses to new value-altering information; a phenomenon referred to as the post-earnings-announcement drift. The methodology applied in this thesis first estimates the expected earnings via a time-series model, before estimating the event’s abnormal returns by a market model. In this way the amount of information conveyed by earnings announcements can be determined, along with whether or not there are opportunities for earning abnormal stock returns associated with an event. My main result is that the Norwegian market appears to be largely efficient, with a couple of minor deviations. Earnings announcements that differ from expectations are confirmed to cause abnormal returns, but I find that the negative earnings surprises yield results easiest to interpret. I also detect indications that the speed of response to earnings news can be related to trading frequency and state of the economy. I do not, however, find any evidence of a post-earnings-announcement drift in my data.