Share Price Reaction to Earnings Announcement on the JSE-ALtX: A Test for Market Efficiency

Abstract

Management has a duty to inform both shareholders and investors about the state of health of a firm. Earnings announcements provide a yardstick that can be utilised by the market to assess the wealth and profitability of a firm. The purpose of the study was to investigate whether there are any significant abnormal returns around the public announcement of earnings and to establish whether the efficient capital market hypothesis applies to the small ALtX market. 16The study focused on all the companies listed on the JSE-ALtX that announced annual earnings between 1 January and 31 December 2009. The method used for calculating the expected returns was the Capital Asset Pricing Model (CAPM). 17Empirical evidence demonstrates that there is substantial negative share price reaction to earnings announcements on the small ALtX stock market. The ALtX also shows the weak form of market efficiency. The study concluded that during a recessionary period, shareholders’ wealth is eroded in the small ALtX market; however, the weak form of market efficiency provides an opportunity for entrepreneurs and investors to exploit the market for profits when the market is performing well.

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