COMMERCE 4AF3 Chapter Notes - Chapter 5: Abnormal Return, Financial Statement, Efficient-Market Hypothesis
17 Nov 2017
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Investors are responsible for predicting future firm performance with the help of financial reporting to provide useful information. Usefulness of financial statement information is evaluated by magnitude of response of security price to the information. Investors have prior probabilities of future firm performance. Market react quickly to new information, so it is important to know when current year"s reported net income first becomes publicly known. If the market is going to react, it should do so in narrow window of a few days surrounding the dates. Proxies are usually based on previous earnings or analyst earnings forecasts. It is important to separate market-wide and firm specific factors on share returns. Measures the extent of a security"s abnormal market return in response to the unexpected component of reported earnings of the firm using the security. %&"()*+, . +)0 )012)" (4 56"7(5 . 2))(2"76"8 7+10 (9 0+)"6"8 )0,0+. 0) Erc is abnormal return per dollar of unexpected earnings.
