Price reaction to earnings announcements a study of vietnam stock market

MINISTRY OF EDUCATION AND TRAINING
UNIVERSITY OF ECONOMICS HOCHIMINH CITY


DƯƠNG THÚY AN

PRICE REACTIONS TO EARNINGS
ANNOUNCEMENTS: A STUDY OF VIETNAM
STOCK MARKET

MASTER THESIS

Ho Chi Minh City – 2011


MINISTRY OF EDUCATION AND TRAINING
UNIVERSITY OF ECONOMICS HOCHIMINH CITY


DƯƠNG THÚY AN

PRICE REACTIONS TO EARNINGS
ANNOUNCEMENTS: A STUDY OF VIETNAM
STOCK MARKET

MAJOR: FINANCE – BANKING
MAJOR CODE: 60.31.12

MASTER THESIS
SUPERVISOR: Ph.D. TRƯƠNG TẤN THÀNH

Ho Chi Minh City – 2011


ACKNOWLEDGEMENT

Firstly, I would like to express my profound gratitude and deepest appreciation to my
supervisor, Ph.D. Trương Tấn Thành, for his intensive support, precious guidance,
insightful comments as well as constructive direction throughout my thesis. Due to his
support, I can overcome many problems during doing this thesis.
I’m very grateful to nvtrungkr (an admin of forum ) for his help in
finding many valuable journal articles. Special thanks to Vu Khanh Hoang for his
assistance in collecting the data.
I would like to express my appreciation to all instructors at Faculty of Banking and
Postgraduate Faculty, University of Economics Ho Chi Minh City for their support and
valuable knowledge during my master course.
Finally, I wish to thank my beloved family for their boundless support, abundant love
and encouragement in my life.

iii


ABSTRACT

A substantial number of empirical studies has investigated the information content of
earnings announcements. While most of studies focus on United of States data or data
from other developed countries such as United of Kingdom, Europe, Australia etc,
other emerging and developing markets are largely unexplored. This motivates us to
further explore this issue in Vietnam stock market. The study investigates the price
reactions to annual earnings announcements on the Vietnam stock market. We conduct
an event study method on a sample of 109 listed firms of Ho Chi Minh Stock Exchange

(HOSE) over the two fiscal years (2009 – 2010) to examine stock price reactions to
annual earnings announcements. We find that significant abnormal returns before
earnings announcements date. It provides evidence of informational value of earnings
information release. The results of this study also provide that stock prices respond
more strongly to negative than positive earnings surprises. Our findings are robust
across several sensitivity analyses.
Keywords: price reactions, earnings announcements, event study, Vietnam stock
market.

iv


Table of Contents
LIST OF ABBREVIATION ................................................................................... vii
LIST OF FIGURES................................................................................................ viii
LIST OF TABLES.................................................................................................... ix
CHAPTER 1: INTRODUCTION .......................................................................... 1
1.1. Background ........................................................................................................... 1
1.2. Research objectives and research questions.......................................................... 3
1.3. Research methodology and scope ......................................................................... 3
1.4. Structure of the thesis ............................................................................................ 3
CHAPTER 2: LITERATURE REVIEW.............................................................. 5
2.1. Informational effects ............................................................................................. 5
2.2. Stock price reactions to earnings announcements ................................................ 5
2.3. Post Earnings Announcements Drift ..................................................................... 9
2.4. Other reactions to earnings announcements........................................................ 10
2.4.1 Trading volume and earnings announcements

10

2.4.2 Liquidity, information asymmetry and earnings announcements

11

2.4.3 Volatility and earnings announcements

13

2.5. Information disclosure regulation on listed firm in Vietnam.............................. 13
2.6. Summary ............................................................................................................. 15
CHAPTER 3: DATA AND METHODOLOGY ................................................ 16
3.1. Data ..................................................................................................................... 16
3.1.1 Sample selection

16

3.1.2 Data collection

16

v


3.1.3 Sample description

17

3.2. Methodology ....................................................................................................... 18
3.2.1 Descriptive statistics

18

3.2.2 Event study

19

3.3. Hypotheses development .................................................................................... 22
CHAPTER 4: DATA ANALYSIS AND FINDINGS ......................................... 24
4.1. Descriptive statistics ........................................................................................... 24
4.2. Results of the price analysis ................................................................................ 25
4.3. Results of price response to unexpected earnings............................................... 30
4.4. Sensitivity analysis .............................................................................................. 32
4.4.1 Concurrent disclosures

32

4.4.2 Rank test

34

CHAPTER 5: CONCLUSIONS AND REMARKS ........................................... 37
5.1. Conclusions ......................................................................................................... 37
5.2. Implications ......................................................................................................... 37
5.3. Limitations .......................................................................................................... 38
5.4. Recommendations ............................................................................................... 38
REFERENCES ........................................................................................................ 39
APPENDIX .............................................................................................................. 44

vi

LIST OF ABBREVIATION

AR

Abnormal return

AAR

Average abnormal return

EPS

Earning per share

HOSE

Ho Chi Minh City Stock Exchange

HNX

Ha Noi Stock Exchange

NYSE

New York Stock Exchange

PEAD

Post Earnings Announcements Drift

SSC

State Securities Commission of Vietnam

vii


LIST OF FIGURES

Figure 3.1 Time line of event study........................................................................... 19
Figure 4.1 Plot of cumulative abnormal return for earnings announcements from day
-20 up to day 20 ......................................................................................................... 28
Figure 4.2 Plot of cumulative abnormal return for earnings announcements from day
-20 up to day 20 ......................................................................................................... 31

viii


LIST OF TABLES

Table 3.1 Sample selection ........................................................................................ 17
Table 3.2 Sample distributions by timing of announcement ..................................... 17
Table 3.3 Firm sample distributions by sector .......................................................... 18
Table 4.1 Descriptive statistics for stock price, stock return, and market value in
event window............................................................................................................. 24
Table 4.2 AARs with their t-test around event window [-20; 20] ............................. 25
Table 4.3 Cumulative abnormal returns of four periods: pre-event period,
announcement day, post-event period and whole period .......................................... 27
Table 4.4 AAR with their t-test for positive and negative portfolios ........................ 30

Table 4.5 AARs with their t-test around event window for sample without major
concurrent disclosures ............................................................................................... 33
Table 4.6 Rank test around event window [-20; 20] ................................................. 35

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Price reactions to earnings announcements: A study of Vietnam stock market

CHAPTER 1: INTRODUCTION

1.1.

Background

Companies that trade stocks in the public financial markets are required to report their
financial statement. Earnings announcement 1 is an official public statement of a
company's profitability for a specific time period, typically a quarter or a year.
Earnings announcements play an important role in the stock market. Earnings
statements provide much useful information to shareholder, investor, and analyst. It
reveals how healthy a company’s operation. It is one of main factors influenced the
value of its stock. Investors are dependent on information disclosure of company to
determine whether buying or selling stocks of that company.
A large body of researches in finance and accounting studies the impact of earnings
announcements on financial markets. Specifically, many researchers have provided
evidences on the market response to earnings announcements particularly in developed
countries. For example: Ball & Brown (1968), Beaver (1968), Morse (1981), May
(1971), Kiger (1972), Beaver, Clarke & Wright (1979), Morse (1981), Patell &
Wolfson (1984), Foster, Olsen & Shevlin (1984), Jennings & Starks (1985), Bamber &
Cheon (1995). They find the effect of earnings announcements on stock price,

liquidity, volatility, and information asymmetry.
Vietnam stock market was established lately in 2000, but it has been a rapid growth. It
has two stock exchanges: Ho Chi Minh Stock Exchange (HOSE) and Ha Noi Stock
Exchange (HNX). HOSE was firstly established in July 28th 2000 with 2 listed firms.
At the end of 2010, there are 275 listed firms in HOSE. The total capitalization value
on HOSE at the end of 2010 has reached 591.345 billion VND, 19.4% higher than of
2009. The world financial crisis in 2008 has been impacted strongly the performance

1

According to definition of website www.investopedia.com.

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Price reactions to earnings announcements: A study of Vietnam stock market

of Vietnam stock market. The trading volume of 2010 2 has reached more than 11
billion securities, equivalent to a value of VND 362,000 million, a 6% rise in volume
but an 11% fall in value compared to those of 2009.
Previous researches on the information content of earnings announcements mostly
focus on developed countries such as United States, United Kingdom and other
countries in Europe. To date, more and more studies provide new evidences from
developing and emerging markets. For example: Fan-fah, Mohd and Nasir (2008) in
Malaysia, Alzahrani (2010) and Alzahrani & Skerratt (2010) in Arab Saudi, Mlonzi,
Kruger & Nthoesane (2011) in South African. However, there is lack of empirical
evidence about this issue in Vietnam stock market. Trần (2010) has investigated the
efficiency of stock market to dividend announcements of three listed firms: STB,
VNM, and FPT in Vietnam. This motivates us to analyze the stock price reactions to
annual earnings announcements in Vietnam stock market.

The thesis contributes to existing literature and reality in several aspects as follows:
First, the study explores the stock return reactions to annual earnings announcements
on the Vietnam stock market. By using daily data, the thesis provides new empirical
evidences in the Vietnamese context that has some distinguished characteristics with
other markets such as order – driven trading method, no derivative products, forbidden
short-selling, low liquidity and lack of analysts’ forecast. We employ standard event
study method to investigate the effect of the earnings event.
Secondly, our findings may be useful caution for listed firms in disclosing accounting
information in practice. Earnings information is an important issue that largely effect
price behaviour of investors. Thus, listed firms should put more attentions to
information disclosures.
Last but not least, the results of this study also provide evidence for policy makers to
enforce strictly laws on earnings information disclosure and enhance corporate
governance of listed firms.

2

According to HOSE’s annual report in 2010.

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Price reactions to earnings announcements: A study of Vietnam stock market

1.2.

Research objectives and research questions

Research objectives
This study is conducted to investigate the association between stock prices and annual

earnings announcements on the Vietnam stock market in short-term horizon. On the
other hand, we examine whether the earnings information releases possess
informational value.
Research questions
The research objectives defined above lead to the following research questions:
 Do stock prices respond to annual earnings announcements before and after
release?
 How quick are stock price reactions to annual earnings announcements?
1.3.

Research methodology and scope

The object of this research is all listed non-financial companies in Ho Chi Minh Stock
Exchange (here after HOSE) of period from 2009 to 2010. Our sample is unbalanced
panel data, including 211 annual earnings announcements.
Standard event study is employed to test the relationship between stock prices and
annual earnings announcements. Market model is used to estimate expected return.
This model was widely used in previous studies (Beaver, 1968; Bhattacharya, Daouk,
Jorgenson, & Kehr, 2000; Chen, Firth, & Gao, 2002; Cheung & Sami, 2000; Morse,
1981; Sponholtz, 2008).
We use Stata 11 as a data analysis tool to implement the study.
1.4.

Structure of the thesis

The layout of the thesis is organized as follows:
 Chapter I introduces background, motivation and objectives of this thesis.
 Chapter II discusses a literature review of the market reaction to earnings
announcements.
 Chapter III performs a general task to describe the sample coverage, data

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Price reactions to earnings announcements: A study of Vietnam stock market

selection process, and methodology approach used in this thesis.
 Chapter IV presents the empirical results and explanations.
 In conclusion, Chapter V summarizes the findings, implications and put
forwards recommendations for further research.

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Price reactions to earnings announcements: A study of Vietnam stock market

CHAPTER 2: LITERATURE REVIEW

The purpose of this chapter is to summarise reviews and discuss the literature related
to the information contents of earnings announcements and the links with our study.
Specifically, we mainly focus on the relation between stock prices and earnings
announcements. Moreover, we also briefly review other reactions to earnings
announcements. As the theory and empirical work in this area is so vast, we only
provide a review of a few most relevant ones for our limited scope.
2.1.

Informational effects

Accounting information plays an extremely important role for all market participants
in stock market. Market – based accounting research has developed fast since 1960s. It

investigates the relation between published accounting information and individual
investor’s behaviours as well as characteristics of stock such as share prices stock
return, trading volume (Lev & Ohlson, 1982). Since then, numerous studies in
literature have documented the relationship between market reactions and accounting
reports. Obviously, accounting data conveys information content to investors.
According to Fama (1970), in an efficient market, prices fully reflect all available
information. He proposes three subsets of efficient market: weak-form with prices just
reflect historical prices; semi-strong form with prices adjust to all publicly available
information and strong-form with prices absorb all information relevant. Among
variety of accounting information, earnings are one of the most important source for
investors and analysts.
2.2.

Stock price reactions to earnings announcements

The seminal paper by Ball & Brown (1968) is the first to investigate empirically the
information content of earnings announcements. Employing the monthly data, they
examine the association between accounting income numbers and stock prices. The
sample consists of 261 firms on the New York Stock Exchange covering the period
1957 - 1965. They also divide earnings announcements into two types: bad news if

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Price reactions to earnings announcements: A study of Vietnam stock market

income forecast error is negative, good news if income forecast error is positive.
Applying Abnormal Performance Index (API), they show that there are the
relationships between the sign of income forecast error and stock return residual.
Surprisingly, they also report that the drift of API persists for two months after the

announcements. Later on, this phenomenon is namely Post Earning Announcement
Drift.
In the same year, Beaver (1968) uses weekly dataset of New York Stock Exchange to
study the information content of annual earnings announcements from 1961-1965. He
employs Sharpe model to remove the effect of market-wide events upon the stock price
change. He finds that volume and price changes are higher than average in the weeks of
announcements. In addition, he realizes market responses very quickly such as finding
of Fama et al. (1969).
In a theory article, Kim & Verrecchia (1991) show that the price reaction at the time of
announcements is proportional to both the unexpected portion of the announcement and
its relative importance across the posterior beliefs of traders. They explain that the
relative importance is increasing with the precision of the announcement and
decreasing in the precision of the preannouncement information.
Since 1960s, a large body of empirical researches on stock market reaction to earning
disclosure has been conducted in the context of United States such as findings of May
(1971), Kiger (1972), Beaver, Clarke & Wright (1979), Morse (1981), Patell &
Wolfson (1984), Foster, Olsen & Shevlin (1984), Jennings & Starks (1985), Bamber &
Cheon (1995).
May (1971) conducts empirical study to test the influence of the quarterly earnings
announcements on stock price changes. Using weekly dataset of American Stock
Exchange from 1964-1968, he provides evidence that stock price responds significantly
with quarterly earnings announcements within weeks of disclosure than non
announcement weeks. In addition, he also finds that stock price response to annual
earnings disclosure is greater than response to quarterly earnings announcements.
Following May (1971), Kiger (1972) works on a sample of 87 firms in New York
Stock Exchange during the period 1966 – 1969. Using correlation analysis, he also

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Price reactions to earnings announcements: A study of Vietnam stock market

documents the positive correlation between adjusted price changes and hypothesized
price changes surrounding the announcement date of interim report.
Applying Spearman rank correlation, Beaver, Clarke and Wright (1979) indicate a
positive relationship between unsystematic security returns and the magnitude of
earnings forecast errors. Their results base on two earning forecast models: one based
on the process of a Martingale with drift and one assumed that expected earnings have
a linear relation with average earnings of market.
The subsequent study by Morse (1981) on daily data reports large price changes on the
day prior, the announcement day and two days following the quarterly earnings
announcement in The Wall Street Journal from 1973 – 1976. His findings imply it
seems to take several time to absorb and adjust price at the individual and portfolio
level. He also finds no considerable differences for both exchange securities portfolio
and over the counter securities portfolio.
Using intraday data, Patell & Wolfson (1984) test mean return, return variance and
serial correlation of stock price to examine the speed of stock price adjustment to
earnings and dividends announcements occurring from 1976 - 1977. Quarterly and
annual earnings expectations are Value Line Investment Survey forecasts. Their results
show that there are quickly reactions to disclosure. Stock returns are positively detected
in the announcement day, the overnight period and the opening of trading on the next
day, particularly at 30 minutes before and after announcement. For dividends
announcements, the stock price response is similar but weaker than earnings
announcements.
Empirically evidences of price reactions to earnings announcements can be witnessed
not only in United State data, but also in other markets.
In the context of Australia, Brown (1970, according to Cheung & Sami (2000))
provides evidence that there is more price reaction to annual and semiannual earnings
announcements in the announcement month. This evidence can be explained by some
reasons: Australian firms issue semiannual reports instead of quarterly reports and the

size of the Australian firms are much smaller than NYSE firms.

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Price reactions to earnings announcements: A study of Vietnam stock market

In a working paper, Louhichi (2004) uses intraday data to investigate market reaction
around earnings announcements in the Paris Bourse during the period 2001 – 2003.
Based on the difference between actual earning and financial analysts’ expectations, the
sample is split into three categories: good news, bad news and no news. Applying event
study method, he finds that returns react positively to good news and negatively to bad
news. In addition, returns do not react significantly to no news. He also offers evidence
that Euronext Paris is efficient at semi-strong form level.
By replicating Morse (1981), Cheung & Sami (2000) investigate the price changes and
trading volume reactions to annual earnings releases of 191 firms listed on the Stock
Exchange of Hong Kong (SEHK) over the years 1992 to 1995. Their results materially
confirm the findings of Morse (1981). Price changes are observed significantly within
four days starting the day of announcements. Expanding Morse (1981), they also find
that price reactions of non blue chip stocks prolong over time than reactions of blue
chip stocks. This implies that analyst and investors give less attention for non blue chip
stocks.
Su (2003) uses a sample of 183 earnings announcements during the period from 1997 –
1998 on the Shanghai and Shenzhen securities exchange, including firms issue both A
and B shares: domestic A-shares and international B-shares. Based on the outcome of
the event, firms in the sample are assigned to two portfolios: group I if actual EPS
exceeds last EPS or group II if actual EPS is equal or less than last EPS. Using event
study methodology, he finds that A-shares investors react positively and negatively for
group I and group II, respectively, during two days before announcements. The
reaction trend for group I and group II keep persisting after announcements. These

imply that A-share investors fail to reflect earnings information rapidly and B-share
investors quickly incorporate earnings release. These findings can be explained by the
following reasons: most A-share investors are individuals with short-term investment
horizon while most B-share investors are large institutions that can access more
detailed and accurate financial information.
Sponholtz (2008) in a study in Denmark finds significant positive abnormal returns
accompanying the earnings announcements. In addition, abnormal returns persist

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Price reactions to earnings announcements: A study of Vietnam stock market

several days after earnings announcements; show a signal of inefficiency market. The
study also shows that a positive correlation between the information content and
predisclosure information, contrary to previous evidence of a low level of preannouncement information. The results confirm that analyst forecast models are the
best proxy for unexpected earnings. In this study, she uses lumped procedure, uniform
ones, and trade-to-trade ones for stock return due to thin trading of small stock market
Denmark.
Recently, Mlonzi, Kruger & Nthoesane (2011) in a study in South African find
empirical evidence that there is large negative share price reaction to earnings
announcements on the ALtX stock market. These results come from earnings
announcements during a recessionary period, leading to share market erosion of the
selected sample. The study also shows the weak form of market efficiency of ALtX
stock exchange.
Evidences of price reactions to earnings announcements keep growing in other markets
in the world. See more: Ariff, Loh & Chew (1997) in Singapore, Chen, Cheng & Gao
(2005) in China, Abad, Sanabria, & Yagüe (2005) in Spanish, Chan, Watson and Wee
(2005) in Australia, Louhichi (2008) in France, Fan-fah, Mohd and Nasir (2008) in
Malaysia, Alzahrani (2010) and Alzahrani & Skerratt (2010) in Arab Saudi.

2.3.

Post Earnings Announcements Drift

Post Earnings Announcements Drift (here after PEAD) was first reported in a seminal
study of Ball & Brown (1968). This phenomenon is described as abnormal return of
good news (bad news) continue to drift up (down) in positive (negative) direction after
earnings announcements (Nguyen, 2009).
PEAD has been confirmed for the last four decades and continued to a challenge to the
efficient market hypothesis. For example: Foster, Olsen & Shevlin (1984), Bernard &
Thomas (1989, 1990), Abarbanell & Bernard (1992), Ray & Ball (1992), Bhushan
(1994), Rangan & Sloan (1998), Liu, Strong & Xu (2003), Booth, Kallunki &
Martikainen (1996), Forner, Sanabria & Marhuenda (2009). Some explanations for the
existence of PEAD are under-reaction to earning surprise, information biased

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Price reactions to earnings announcements: A study of Vietnam stock market

processing, deficient asset pricing model, misspecification of risk, and stock liquidity
(Nguyen, 2009).
2.4.

Other reactions to earnings announcements

Previous studies also provide evidence of other reactions to earnings announcement, as
measured by volatility, trading volume, liquidity, and information asymmetry. As
mentioned at the introduction of this chapter, we just brief some key studies concerned
with these reactions.

2.4.1 Trading volume and earnings announcements
The important difference between price and volume reaction is that the price reaction
reflects changes in the expectation of the aggregate market while the volume reaction
reflects changes in the expectation of individual investors (Beaver, 1968).
Kim & Verrecchia (1991) in their theory study also show that the volume reaction at
the time of the public announcement is proportional to both the absolute price change
and a measure of differential precision across traders. The newly public announcement
just is important to investors with less precise private predisclosure information. It
means that the differential precision of private information before announcements
cause differential reaction of investors in trading volume. In their following theory
study, Kim & Verrecchia (1994) also present that trading volume respond to earnings
announcements due to informed opinions resulting from disclosure.
Various empirical studies have confirmed the link between trading volume and
earnings announcements3, for example: Beaver (1968), Kiger (1972), Morse (1981),
Bamber (1983, 1987), Gajewski (1999), Cheung & Sami (2000), Landsman & Maydew
(2002), Otogawa (2003), Abad, Sanabria, & Yagüe (2005), Alzahrani (2010).
Beaver (1968) is the first to examine volume reactions to earnings announcements. He
states that there is a large mean volume residual in the announcement weeks than the
mean volume residual during the non-report period.

3

See Bamber, Barron & Stevens (2011) for a more detailed literature review.

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Price reactions to earnings announcements: A study of Vietnam stock market

Using two different tests (a parametric chi square test and a non parametric binomial

test), Morse (1981) also investigates trading volume reaction to interim and annual
earnings announcements. Similar to price reaction, he observes significant abnormal
trading volume during four days surrounding quarterly earnings release.
As discussed above, Cheung & Sami (2000) extend Morse’s study. They also find
substantial volume reactions around earnings announcements date for blue chip stocks
portfolio as well as non blue chip stocks one in the context of Hong Kong.
2.4.2 Liquidity, information asymmetry and earnings announcements
Both theoretical and empirical studies have examined liquidity and information
asymmetry surrounding earnings announcements. Kim & Verrecchia (1994) suggest
that there may be more information asymmetry at the time of an announcement than in
non announcement periods due to the different ability of processing public information
of traders. As a result, it implies that bid-ask spreads increase, suggesting that market
liquidity decreases at the time of an earnings announcement.
There are a lot of empirical papers studying the impact of earnings announcements on
liquidity and information asymmetry. Nevertheless, findings from these studies are
mixed. See Morse & Ushman (1983), Venkatesh & Chiang (1986), Lee, Mucklow &
Ready (1993), Krinsky & Lee (1996), Yohn (1998), Gajewski (1999), Acker, Stalker
and Tonks (2002), Affleck-Graves, Callahan & Chipalkatti (2002), Otogawa (2003),
Ranaldo (2003), Hegde & McDermott (2003), Wael (2004), Abad, Sanabria, & Yagüe
(2005), Alzahrani (2010).
Morse & Ushman (1983) find that no significant changes in bid-ask spreads around
earnings announcements.
Venkatesh & Chiang (1986) use bid-ask spread as a proxy of information asymmetry in
earnings and dividend announcement. They classify three group of announcement: joint
announcement, fist announcement – announcement is announced prior to another
announcements in thirty days, second announcement – announcement followed the first
announcement by at least ten days and no more than thirty days. The results find an

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Price reactions to earnings announcements: A study of Vietnam stock market

increase in information asymmetry only before the second announcement and almost
no increase before the joint and first announcement.
Lee, Mucklow & Ready (1993) study a sample of 230 NYSE firms, covering period
January 4 to December 30 in 1988, and using intraday data. They offer that spreads
widen and depths fall before quarterly earnings announcements. In addition, increased
spreads are observed during and after the announcement.
Similarly to Lee, Mucklow & Ready (1993), Krinsky & Lee (1996) show the impact of
earnings announcements on three components of bid-ask spread: (1) adverse selection
costs increase substantially before and after the announcements, (2) inventory holding
component is lower during event and predisclosure period, (3) order processing cost are
decreased significantly surrounding earnings release.
Affleck-Graves et al. (2002) find that an increase in adverse selection costs on the day
prior to earnings announcements affect only NASDAQ firms with less predictable
earnings.
Acker, Stalker and Tonks (2002) investigate the determinants of inside spreads and
their behaviour around corporate earnings announcement dates, using a sample of 195
less-liquid stocks on the London Stock Exchange over the period 1986 - 1994. They
observe spread start to narrow 15 days before an earnings announcement, and narrow
further by the end of the announcement day. Consistent with the findings of Acker,
Stalker and Tonks (2002), Otagawa (2003) also finds evidence that there are large
decreases in daily bid-ask spreads and slight increases in daily depth during the
announcement period and the period just after releasing quarterly earnings in Japan.
In contrast, Ranaldo (2003) conducts a detailed analysis of market behaviour around
real-time news release arrival for a sample of 30 liquid stocks on Paris Bourse. The
result indicates that the spread is tighter and the market depth is thick, especially in few
minutes around news release arrival. It also documents a decrease in adverse selection
cost around the public information disclosure.

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Price reactions to earnings announcements: A study of Vietnam stock market

2.4.3 Volatility and earnings announcements
Employing intraday data, Krinsky & Lee (1996) find that volatility increase before and
following quarterly earnings announcements in the context of United States.
Acker (2002) examines volatility increases following annual earnings announcements
by a sample of 379 announcements in UK’s FTSE 100 over period November 1989 and
October 1996. Sixty firms in the sample have option quoted on their shares. Based on
the sign of earning surprise and the standard deviation of firm’s reported EPS changes,
the earnings announcements are split into portfolios: good news and bad news, easy-tointerpret and difficult-to-interpret. He applies implied standard deviations by options
prices to measure volatility of stock price. The results report that the volatility reactions
to easy-to-interpret and good news announcements are highest on the day of
announcements. For difficult-to-interpret and bad news portfolios, the volatility
reactions are lower than good news announcements on the day of announcements.
Moreover, the reactions to bad news also are delayed until the following day. He
argued that the delays of bad news may reflect market uncertainty about the
implications of the news.
In despite of raised concern about the decrease of informative of earnings information,
Landsman & Maydew (2002) report evidence of an increase overtime in the
informativeness of quarterly earnings announcements in the past three decades since
the study of Beaver (1968), as measured by abnormal trading volume and abnormal
volatility.
2.5.

Information disclosure regulation on listed firm in Vietnam

Circular No 09/2010/TT-BTC of The Ministry of Finance dated 15 January 2010 on
Disclosure of Information on the securities market regulate a standard on disclosure
reporting for listed firms. In particular, listed firms in Vietnam have obligations to
disclose regulated information that involve periodical disclosure of information,
extraordinary one, and disclosure of information on request from the SSC or Stock
Exchange. SSC also encourage public company and listed firms to announce voluntary
disclosure related to firm’s activities and performances.

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Price reactions to earnings announcements: A study of Vietnam stock market

Listed firms have to disclose three types of financial statements:
1. Annual financial statements
Annual financial statements must be audited by approved auditing firms which satisfies
practicing conditions in accordance with regulations of the Ministry of Finance. The
date of completion of annual financial statements shall be no later than 90 days from
the end of fiscal year. Within 10 days from expiry of the date for completion of annual
financial statements, listed firms must present their annual audited financial statements
to SSC, Stock Exchange. In addition, listed firm must publish the full text of the annual
audited report in 1 edition of a newspaper published nationwide accompanied by the
website address where the financial statements are provided, in order to enable
investors to refer to such statements.
Disclosed annual financial statements comprise balance sheet, income statement, cash
flow statement, and notes to the financial statements. In the case where a listed firm is
the parent company of another institution, disclosure of annual financial statements
shall include the financial statements of the parent company as well as consolidated
financial statements.
2. Quarterly financial statements

Listed firms must provide their quarterly financial statements to SSC and Stock
Exchange within 25 days from the end of a quarter. If the listed firm is the parent
company which is required to prepare consolidated financial statements, the period for
disclosure of information shall be 50 days after the end of the quarter. In addition,
listed firms have to publish the full text of quarterly financial statements on their
websites.
Quarterly financial statements include balance sheet, income statement, cash flow
statement, and notes to the financial statements. If a listing firm has subsidiary
companies, it must submit both quarterly financial statements of the parent company
and consolidated financial statements to the SSC and Stock Exchange.
If the profit after corporate income tax stated in the report on results of business
operation as between the reporting period and the same reporting period of the previous
year fluctuates 10% or more, then the listed firm must explain the reasons leading to
such unusual fluctuation in its quarterly financial statements.

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Price reactions to earnings announcements: A study of Vietnam stock market

3. Semi-annual financial statements
In addition to announce quarterly and annual financial statements above, listed firms
must also prepare and disclose semi-annual financial statements which have been
examined by an approved auditing firm within a period of 45 days following the end of
the second quarter of each year. If the listed firm is the parent company which is
required to prepare consolidated financial statements, the period for disclosure of
information shall be 60 days from the end of the second quarter of each year.
Semi-annual financial statements must be disclosed on the information disclosure
media of the SSC and SE and on the website of listed firms.
In order to enhance more transparency and enforceable stock market, State Securities

Commission intends to issue a new circular replaced Circular No 09/2010/TT-BTC in
next year.
2.6.

Summary

In summary, the issue market reactions to earnings announcements have been
discovered in many aspects of market since 1960s. It can be seen that voluminous
studies focus on developed market such as US, UK and other developed countries.
There are very few studies examined the impact of earnings announcements in
emerging market, especially in Vietnam. Trần (2010) investigates the efficiency of
stock market to information in Vietnam. She examines price behaviour of three listed
firms: STB, VNM, and FPT to dividend announcements. Obviously, there is lack of
empirical evidence on informational effect in the context of Vietnam. This motivates us
to conduct this study to investigate the association between stock price and annual
earnings announcements in Vietnam stock market.

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Price reactions to earnings announcements: A study of Vietnam stock market

CHAPTER 3: DATA AND METHODOLOGY

Based on the research objectives, research questions and scope in the first chapter,
and literature review in chapter 2, chapter 3 mentions detailed data in the sample,
research methodology applied in the thesis as well as development of hypotheses.
3.1.
3.1.1

Data
Sample selection

Vietnam has two stock exchanges: Ho Chi Minh Stock Exchange and Ha Noi
Stock Exchange. For this study, we choose firms listed on HOSE because HOSE
was set up first and has been a four – year longer history before Ha Noi Stock
Exchange.
The study focuses on annual earnings announcements of listed firms for two fiscal
years 2009 – 2010. The sample selection includes firms that have been listed on the
HOSE through 2008 to 2011 inclusive. We exclude financial companies, such as
banks, insurance firms, funds and financial firms in the thesis because their
characteristics are different. We also require firms that have no missing data and a
listing history longer than 270 trading days before earnings announcements.
Thin trading problem may cause misspecification of statistical tests (Cowan &
Sergeant, 1996). Thus, we remove from the sample stocks that do not trade for at
least 80% of the days in either the event or estimation period.
According to the selection criteria, we remove all unsatisfied earnings
announcements. We have a final sample of 211 annual earnings announcements
involving 109 listed firms. The details of firms are given in the appendix.
3.1.2

Data collection

We define annual earnings announcements date (event date) is the earliest date on
which fourth quarter financial statement is publicised to the HOSE. Firstly, these
financial statements are published on the website of HOSE (www.hsx.vn). Then,

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