Market Response to Earnings Announcements and Interim Reports: An Analysis of SBF120 Companies


Annales d'Economie et de Statistique

October-December 2000, n°60, pp.151-175

Departments: Finance

Starting in 1995, we follow for three years the 120 most important companies listed on the paris Bourse and examine the link between stock trading characteristics and different measures of earnings' surprises during annual and semi-annual public disclosures. After a short discussion of market organization and the regulation of financial disclosure in France, we assess intraday data to find analysts are overly optimistic of EPS and small companies are less analyzed than large ones. Studying further the evolution of portfolios sorted according to various unexpected earnings' criteria we find that, in some cases, there is a small pre-announcement drift. The study further reveals that there is a strong negative drift in prices before a negative EPS announcement and bad news agitate markets more than good news. More importantly, we find the market responds to a hierarchy of announcement surprises: a positive EPS is not enough to make investors bullish if it is decreasing. Even an increasing EPS is not engough if analysts' expectations are not met. Finally, prices adjust very quickly to public information but there is an imbalance between volume and trading intensity for the time necessary to settle back to their normal levels. This suggests institutional investors follow news more closely than small investors