Quantitative factors (PE ratios, EPS, profit margin) and qualitative variables (business nature, political stability, economic environment, the sector, the firm's products and services) etc.

Thanks, Dr. Chong. How about abnormal returns and cumulative abnormal returns as quantitative factors as well.

Hi Ahmed,

I think you can use the market model  and an event study to identify abnormal  stocks returns surrounding higher earnings announcement. Cumulative abnormal returns may give you a measure of the reaction of the financial market if it efficient in a semi-strong form.  Nowadays we use the Fama French (1992) three factors model. to be more accurate.

Hello Ahmed,

A study carried by Luke Qiu used regression model to find out the extent and patter of abnormal returns generated based on  corporate earnings announcements and the study also focused on factors influencing abnormal returns.

Thanks Dr. Patrick and Dr. Venkata. As regards the event study method, do you recommend using the standard event study method of Ball & Brown (1968) or an updated one? In addition, recently researchers use panel regression...what do you think about that?

Hello Ahme,  Basically panel regression  used when a researcher is  interested in studying change over time. By using  longitudinal data panel regression can be done. 

Hi!

I would recommend three papers:

SJ Brown, JB Warner "Using daily stock returns: the case of event studies", 1985 Journal of financial economics, 144, p 3 -31.

C. Ball W Torous '" Investigating security-price performance in the presence of event-date uncertainty", 1988, Journal of financial economics 22, p 123 -134.

P. Malatesta R Thompson "Partially anticipated events: A model of stock price reactions with an application to corporate acquisoitions", 1985 JFE, 14 , p 237 -250

First, you have to define what an unexpected (abnormal) return is. You can do it with an event study. The approach followed for the event study methodology assumes that securities returns are generated by some return-generating model (RGM). ). This model can be based on theoretical economic models like the Capital Asset Pricing Model (CAPM) and the Arbitrage Pricing Model (APT) or it can rely on a simple statistical relationship like the Mean Adjusted Returns Model or the Market Model. Then, the abnormal return is given by the difference between the actual and the expected (predicted by a model) return.

Second, you have to define what an unexpected earning is. One way to do it is to define an unexpected earning as the difference between reported earnings per share and the most recent financial forecast report.

Then, the abnormal stock market's return measured around the announcement date have to be regressed against unexpected earning.

Thanks everybody. Again, would anyone elaborate on whether to use the 1968 Event Study Method or an updated one?

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