Stock returns and earnings announcements in Finland

Abstract

The stock market's reaction to the earnings announcements of Finnish firms is investigated. A risk estimation approach based on accounting information is applied along with a market model. Accounting information is utilized for risk estimation purposes by using the information incorporated in the accounting variables measuring the real determinants of systematic risk. The empirical results indicate that the delay in the market's reaction to negative unexpected earnings differs from that of the positive unexpected earnings. The results of comparing different risk adjusting methods indicate that the drift in stock returns around the earnings announcements is weaker in the case of long return windows when the risk estimation method based on the pure accounting information is applied. This indicates that the previous results concerning the drift in returns may be due to incorrectly measured abnormal returns.