Market reaction on earnings announcement information contents: Analysis from book-to-market

Published: Sep 13, 2024

Abstract:

Purpose: This study examines the market’s reaction to information content during earnings announcements from the viewpoint of changes in the book-to-market ratio.

Research methodology: This study used a quantitative approach and an event study methodology as the primary measurement. It applies a market model based on Indonesia’s equity market daily stock returns to analyze the cumulative average abnormal returns in firms with upward/downward book-to-market value changes.

Results: The findings reveal that stock prices in Indonesia's stock equity grew significantly above the firms' book values, indicating that investors pay more attention to expected future returns than the accounting value. This study also reveals that changes in book value may cause more significant changes in market value, following the direction of information content. The study found that the market is more sensitive to bad news than to good news and noted a significant relationship between book-to-market and post-earnings announcement abnormal returns.

Limitations: This study did not cover the long-term impact of the long-horizon test. A long-horizon test may provide evidence of market efficiency from the long-term perspective. Accordingly, this study suggests an issue for future research.

Contribution: This study contributes to the literature by suggesting that testing market efficiency from the view of changes in book-to-market provides robust grounds to explain the market reaction to good or bad news information content.

Novelty: Our findings show that Rp. One adjustment in book value in the Indonesian stock market corresponds to an average value of Rp. 16.43 adjustment in market value. This result implies that book value changes can lead to more significant changes in the market value.

Keywords:
1. Information content
2. Book-to-market
3. market efficiency
Authors:
Rexon Nainggolan
How to Cite
Nainggolan, R. (2024). Market reaction on earnings announcement information contents: Analysis from book-to-market. International Journal of Financial, Accounting, and Management, 6(2), 183–196. https://doi.org/10.35912/ijfam.v6i2.1965

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References

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    Afifah, T. E., Hasanah, N., & Irfany, M. I. (2023). Testing the efficient market hypothesis with Indonesian Islamic Stocks during the Covid-19 pandemic. Annals of Management and Organization Research, 4(3), 175-191.

    Ali, A., Hwang, L.-S., & Trombley, M. A. (2003). Arbitrage risk and the book-to-market anomaly. Journal of Financial Economics, 69(2), 355-373.

    Aqel, S. (2021). Does comprehensive income provide value relevant information? Montenegrin Journal of Economics, 17(1), 185-195.

    Arunrungsirilert, T., Sangiumvibool-Howell, P., & Kitticharoenrerk, P. (2022). Value Relevance of Accounting Profit: An Extended Analysis in Thailand. Thammasat Review, 25(2), 175-196.

    Ayu, S., & Supriana, T. (2021). Impact of diversification of CPO to biodiesel on financial performance and stock price of palm oil plantation company. Paper presented at the IOP Conference Series: Earth and Environmental Science.

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    Ball, R., & Brown, P. (1968). An Empirical Evaluation of Accounting Income Numbers.

    Ball, R., Gerakos, J., Linnainmaa, J. T., & Nikolaev, V. (2020). Earnings, retained earnings, and book-to-market in the cross section of expected returns. Journal of Financial Economics, 135(1), 231-254.

    Bildik, R. (2023). Trading halts and the advantage of institutional investors: Historical evidence from Borsa Istanbul. Borsa Istanbul Review, 23, S6-S18.

    Brookfield, D., Boussabaine, H., & Su, C. (2020). Identifying reference companies using the book-to-market ratio: A minimum spanning tree approach New Facets of Economic Complexity in Modern Financial Markets (pp. 129-152): Routledge.

    Conrad, J., Cornell, B., & Landsman, W. R. (2002). When is bad news really bad news? The Journal of Finance, 57(6), 2507-2532.

    Fama, E., & French, K. (2021). The Value Premium. The Review of Asset Pricing Studies, 11 (1), 105-121.

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    Fama, E. F., & French, K. R. (1992). The cross?section of expected stock returns. The Journal of Finance, 47(2), 427-465.

    Hall, J. H. (2024). Corporate shareholder value creation as contributor to economic growth. Studies in Economics and Finance, 41(1), 148-176.

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    Lev, B. (2000). Intangibles: Management, measurement, and reporting: Rowman & Littlefield.

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    Majid, M. S. A., & Benazir, B. (2015). An indirect impact of the price to book value to the stock returns: An empirical evidence from the property companies in Indonesia. Jurnal Akuntansi Dan Keuangan, 17(2), 91-96.

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    Mrad, S., Hamza, T., & Manita, R. (2024). Corporate investment sensitivity to equity market misvaluation. Review of Accounting and Finance, 23(1), 1-38.

    Nugroho, B. Y. (2020). The effect of book to market ratio, profitability, and investment on stock return. International Journal of Economics and Management Studies, 7(6), 102-107.

    Polillo, S. (2020). The Ascent of Market Efficiency: Finance That Cannot Be Proven: Cornell University Press.

    Rahmawati, Y., & Hadian, H. N. (2022). The influence of debt equity ratio (DER), earning per share (EPS), and price earning ratio (PER) on stock price. International Journal of Financial, Accounting, and Management, 3(4), 289-300.

    Supawat, L., & Arnat, L. (2023). Market Reaction to Corporate Releases and News Articles: Evidence from Thailand’s Stock Market. International Journal of Financial Studies, 11(3), 111.

    Yang, Y. S., & Yung, C. (2024). Do analysts distribute negative opinions earlier? Journal of Financial Markets, 67, 100856.

  1. Abdeljawad, I., Abu Alia, M., & Demaidi, M. (2024). Financing constraints and corporate investment decisions: Evidence from an emerging economy. Competitiveness Review: An International Business Journal, 34(1), 208-228.
  2. Afifah, T. E., Hasanah, N., & Irfany, M. I. (2023). Testing the efficient market hypothesis with Indonesian Islamic Stocks during the Covid-19 pandemic. Annals of Management and Organization Research, 4(3), 175-191.
  3. Ali, A., Hwang, L.-S., & Trombley, M. A. (2003). Arbitrage risk and the book-to-market anomaly. Journal of Financial Economics, 69(2), 355-373.
  4. Aqel, S. (2021). Does comprehensive income provide value relevant information? Montenegrin Journal of Economics, 17(1), 185-195.
  5. Arunrungsirilert, T., Sangiumvibool-Howell, P., & Kitticharoenrerk, P. (2022). Value Relevance of Accounting Profit: An Extended Analysis in Thailand. Thammasat Review, 25(2), 175-196.
  6. Ayu, S., & Supriana, T. (2021). Impact of diversification of CPO to biodiesel on financial performance and stock price of palm oil plantation company. Paper presented at the IOP Conference Series: Earth and Environmental Science.
  7. Baek, S., Mohanty, S. K., & Glambosky, M. (2020). COVID-19 and stock market volatility: An industry level analysis. Finance research letters, 37, 101748.
  8. Ball, R., & Brown, P. (1968). An Empirical Evaluation of Accounting Income Numbers.
  9. Ball, R., Gerakos, J., Linnainmaa, J. T., & Nikolaev, V. (2020). Earnings, retained earnings, and book-to-market in the cross section of expected returns. Journal of Financial Economics, 135(1), 231-254.
  10. Bildik, R. (2023). Trading halts and the advantage of institutional investors: Historical evidence from Borsa Istanbul. Borsa Istanbul Review, 23, S6-S18.
  11. Brookfield, D., Boussabaine, H., & Su, C. (2020). Identifying reference companies using the book-to-market ratio: A minimum spanning tree approach New Facets of Economic Complexity in Modern Financial Markets (pp. 129-152): Routledge.
  12. Conrad, J., Cornell, B., & Landsman, W. R. (2002). When is bad news really bad news? The Journal of Finance, 57(6), 2507-2532.
  13. Fama, E., & French, K. (2021). The Value Premium. The Review of Asset Pricing Studies, 11 (1), 105-121.
  14. Fama, E. F., Fisher, L., Jensen, M. C., & Roll, R. (1969). The adjustment of stock prices to new information. International economic review, 10(1), 1-21.
  15. Fama, E. F., & French, K. R. (1992). The cross?section of expected stock returns. The Journal of Finance, 47(2), 427-465.
  16. Hall, J. H. (2024). Corporate shareholder value creation as contributor to economic growth. Studies in Economics and Finance, 41(1), 148-176.
  17. Hulten, C. R., & Hao, X. (2008). What is a Company Really Worth? Intangible Capital and the" Market to Book Value" Puzzle. Retrieved from
  18. IDX. (2019). FACT BOOK.
  19. Kale, A., Kale, D., & Villupuram, S. (2024). Decomposition of risk for small size and low book-to-market stocks. Journal of Asset Management, 25(1), 96-112.
  20. Lev, B. (2000). Intangibles: Management, measurement, and reporting: Rowman & Littlefield.
  21. Lev, B., & Gu, F. (2016). The end of accounting and the path forward for investors and managers: John Wiley & Sons.
  22. Mahmoudi, V., Shirkavand, S., & Salari, M. (2011). How do investors react to the earnings announcements. International Research Journal of Finance and Economics, 70, 145-152.
  23. Majid, M. S. A., & Benazir, B. (2015). An indirect impact of the price to book value to the stock returns: An empirical evidence from the property companies in Indonesia. Jurnal Akuntansi Dan Keuangan, 17(2), 91-96.
  24. Monteiro, A., Cepêda, C., & Silva, A. (2022). EU Non-Financial Reporting Research. International Journal of Financial, Accounting, and Management, 4(3), 335-348.
  25. Mrad, S., Hamza, T., & Manita, R. (2024). Corporate investment sensitivity to equity market misvaluation. Review of Accounting and Finance, 23(1), 1-38.
  26. Nugroho, B. Y. (2020). The effect of book to market ratio, profitability, and investment on stock return. International Journal of Economics and Management Studies, 7(6), 102-107.
  27. Polillo, S. (2020). The Ascent of Market Efficiency: Finance That Cannot Be Proven: Cornell University Press.
  28. Rahmawati, Y., & Hadian, H. N. (2022). The influence of debt equity ratio (DER), earning per share (EPS), and price earning ratio (PER) on stock price. International Journal of Financial, Accounting, and Management, 3(4), 289-300.
  29. Supawat, L., & Arnat, L. (2023). Market Reaction to Corporate Releases and News Articles: Evidence from Thailand’s Stock Market. International Journal of Financial Studies, 11(3), 111.
  30. Yang, Y. S., & Yung, C. (2024). Do analysts distribute negative opinions earlier? Journal of Financial Markets, 67, 100856.