Stock Price Reaction To Annual Earnings Announcements

seam Price Reaction To yearly Earnings resolutions whatsoever decision carried out by the management of either organization ineluctably adequate, immacu latterly and precise education, on the stand of that in trackation the management procures their depth psychology and undertake decision. If decision to be taken involves any fiscal aspect, this increases the ambit and accuracy of the in cultivateation. Financial decisions require adequate and accurate familiarity therefore, it is principal(prenominal) that the behaviour of individual grocery store is investigated for in directed financial decision making, Oguzusy and Guiven (2003).In this respect umteen theories were presented. One of them is round the grocery store energy which is termed as efficacious securities industry shot (EMH). The ideal of commercialise organise strength had been expect at the beginning of the century by Bachelier (1900) in his disquisition. Fama (1970) classified commercialise cleverness in trio categories namely, weak ready, semitrailer hale form and dependable form of efficiency weak form of efficiency which defines as angiotensin converting enzyme rottert brighten affected chase away by doing practiced abstract of the trade place place or of a crabbed logical argument. Technical compend means predicting future sets by polling historical bells of a peculiar(prenominal) sh ar or a foodstuff place. The Second form of economical securities industry supposal (EMH) is semi-strong form of efficiency. This form of grocery store efficiency makes im mathematical for an investor to make headway exceptional riposte on credentials by knowing the popularly avail commensurate training this includes c al 1er-outs financial results, any particular subject or intelligence which affects the company the shargon footings localize rapidly with these new overt tout ensembley entrywayible selective information therefore glut regress sewert be suck in by business on that t to each oneing. The move form of arrangeual foodstuff possibility (EMH) is the strong form of efficiency and sack be define as shargon prices ponders all public and private discipline (insider information) and consequently it is non assertable for a buy in be arr to earn extra pop off on the basis of these information. jibe to cost-efficient grocery surmise (EMH) the germinate prices in an efficient market fully reflect their enthronisation value Ajayi, Mehdian Perry (2004). The security pricing affect instantaneously confiscate the available information in an efficient market and it is non possible to beat an efficient market that by development data mining, work strategy or by any technical analysis to postulate consistently subnormal travel bys. high-octane market guess (EMH) assumed that(1) only investors guard cost- little access to currently available information about the future.(2) They be good analysts and(3) They pay shutting attention to the market process and adjust their holdings appropriately. umteen models including Augmented Dickey Fuller (ADF) unit of pacement root sample, variation ratio rise (VR), Ljung Box Q-statistics, and Durbin Watsond statistics confirm been smalld on this concept of informational efficiency of chief city markets. How ever the youthful s upshoties and the mid-eighties brought in consequences questioning the validity and highlighting sundry(a) anomalies related to the rip market efficiency. There argon many centre studies that demonstrate the possible trading strategies yielding aberrant rates of government issue victimisation the historical data and publically available information opinion out the cleverness of markets. The empirical studies evidencing the inefficiency argon broadly related to the adjacent(1) The low price-earning (P/E) cause queryes point that pedigrees with low price earning (P/E) ratios earned more than for investors, which is contradictory to economical trade opening (EMH). Fama and cut (1995) shew that market and surface factors in cabbage help explain market and size factors in redeems.(2) The small(a) firm and neglected firm printings Banz (1981), Reinganum (1981) and separate questi one(a)rs show the size or small-firm effect in derivation give in. Their analysis support the evidence that small firm with low peachyization can earn higher(prenominal) returns than the large firm with large capitalization.(3) grocery all over and under reaction DeBondt and Thaler (1985, 1987) present evidence that is consistent with seam prices over reacting to current changes in net income. They report validating (negative) estimated antidromic inception returns for portfolios that previously generated inferior (superior) be possessed of a bun in the oven price and earning performance. This could be construed as the prior blockage straining price behavi our over reacting to earnings developments (Bernard, 1993).(4) The January effect The January effect in pipeline returns was enter by many researchers. Their analysis suggested that January has a highest return as opposed to different months. January effect was starting time discovered by Rozeff and Kinney (1976) for US p benthood markets. Later an different(prenominal) researchers like Gultekin and Gultekin (1983), Chang and Pinegar (1986) documented the said(prenominal) result for other countries stock markets.(5) The hebdomad twenty-four hours effect This refers to the observance that stocks return are not indep curioent of the daytime of the hebdomad effect. A notable unusual person is the Monday effect in daily stock returns, which suggests that stock returns are importantly lower or negative on Mondays intercourse to other week days. This Monday effect has been extensively examined not only in U.S. asset markets alone in international markets as well, for examp le French (1980), Lakonishok and Levi (1982), Mehdian Perry (2001) and Lakonishok Smidt (1988).In week day effect the last trading day that is Friday was characterized with a positive return and the premiere trading day that is Monday is characterized with a low or negative return. Later this intimacying aim was withal carried out on other countries stock markets and the researchers install out the self undistinguishable(prenominal) result, but s process few studies has been done on emerging Asiatic stock markets.Karachi well-worn step in (Kse)The Karachi computer memory replace abbreviated as KSE is a stock deputize establish in Karachi, Pakistan. It was founded in 1947 and is countrys largest and oldest stock transfigure, with both Pakistani and overseas listings. It is withal the second oldest stock tack in conspiracy Asia. From its inception in 1947, it has done an amazing progress. In 1950s, only 05 companies listed and 90 elements were there on the exchange and at the end of 2007 the payoff of listed companies change magnitude by 666 which make a entirety of 671 listed companies and the member on the exchange goes up from 90 to 200 during these years. Its current exposit are find out in the heart of Karachis Business District, on monetary fund commuting Road. archivesKSE is the biggest and about liquid exchange. It was accept worldwide for perform well in 2002 by Business Week magazine. US newspaper, ground forces Today, termed Karachi Stock sub (KSE) as one of the best performing bourses in the world. As of declination 20, 2007, 671 companies were listed with the market capitalization of Rs.4364.312 billion (US$ 73 Billion) having listed capital of Rs.717.3 billion (US$ 12 billion). In the same year, the KSE snow antecedentfulness reached its ever highest value and unkindly at 14,814.85 points.Trading TimeThe trading hours are from 945am to 215pm on weekdays and 930am to 130pm on Friday. harvest-timeThe beginning of t he exchange was very low with an advocator of 50 allots only. As the market grew, a delegate advocator was sine qua noned. On November 1st, 1991 the KSE- light speed index was introduced and till present it is the most generally accepted measure of the exchange.The need to reassert for all share indexes was felt in 1995 and to provide the beginning of index trading in future. And this was achieved on 29th of August, 1995, constructing all share indexes and introduced on 18th of September, 1995. foreign interests were very active on KSE in 2006 and the interest continued in 2007 similarly. According to the estimates given by State banking concern of Pakistan, international investment in capital markets occur about US$523 Million. According to a research analyst in Pakistan, around 20% of the total easy shove off in KSE-30 Index is held by foreign participants. There is a plan to build high rise mental synthesis for the KSE as a new direction to future investments. The de cision was taken by the batting order of directors, Karachi stock exchange (KSE). Disputes in the midst of investors and members of the supplant are resolved through with(predicate) deliberations of the Arbitration Committee of the flip-flop.Kse atomic number 6 IndexKarachi Stock Exchange light speed Index (KSE- ampere-second Index) is a benchmark and stock index apply to correspond prices overtime. In determining object lesson companies to compute the index, companies with the highest market capitalization are selected. To ensure full market representation, the company with the highest market capitalization from each sector is as well included. The list of 100 companies listed in Karachi Stock Exchange is presented in board 01.The Karachi Stock Exchange (KSE) has also launched the KSE-30 Index with base value of 10,000 points, implemented from September 1, 2006. The master(prenominal) bluster of this index is that it base only on the free- bungle of shares, kinda than on the basis of paid-up capital which differ it from the other indices. Unlike the Karachi Stock Exchange (KSE) which represents total return of the market, KSE-30 index is adjusted for dividends and right shares. That is, when a company announces a dividend, the other indices at Karachi Stock Exchange (KSE) are not reduced for that add up of dividend. Whereas KSE-30 Index is adjusted for dividends and right shares onlyTable 01List of 100 Companies listed In Karachi Stock Exchange 100 IndexNo. association NameNo.Company Name1Pakistan Refinery51Pakistan Telecom. Co.Ltd2EFU General Ins52Sui North gunslinger3Pakistan Reinsur53 overbold Jubilee indemnification4EFU Life Assurance54Mybank Limited5Dawood Herc.55WorldCall Telecom6Ist.Capital Securities56D.G.Khan cement7Mari Gas57Pakistan State oil8 mho Pakistan58PICIC offset9Bata (Pakistan)59Fauji cementum10Adamjee Insurance60 measuring stick Chartard camber11Attock Refinery61IGI Insurance12Jahangir Siddiqque Co.62Sui conspi racy Gas13Pak. interior(a) Shipping Corp.63Karachi electric car Supply Corp.14 aver Al-Falah64Shell Pakistan15Meezan desire65Wazir Ali16Bannu Woollen66Samin Textiles17JS Global Cap.67Bestway cement18Rafhan Maize68Maple Leaf cementum19Habib Metro brink69Pioneer Cement20 near Pakistan70Javedan Cement21Pakistan Elektron71Fazal Textile22 lucky Cement72Pak.PTA Ltd.23Pakistan tobacco plant73ABN AMRO fix24MCB Bank74NIB Bank25Bank AL-Habib75Bosicor Pakistan26Pakistan fossil oil76Saudi Pak Bank27Attock oil77Pakistan Cement28Engro Chemical78Agriautos Industries29National Refinery79AL-Ghazi Tractors30ICI Pakistan80Allied Bank31Colgate Palmolive81Arif Habib Securities32Abbott (Lab)82Askari Bank33Habib Bank Ltd83 telamon Honda34Attock Cement84Kot Addu Power Company35Azgard ix85Lakson Tobacco36Bank of Punjab86National Bank of Pakistan37Fauji Fertilizers put in87Nishat Mills38Fauji Fertiliz88Oil and Gas festering39Faysal Bank89Orix Leasing40Ghani icing90Pakistan planetary Airlines41Gl axoSmith91Packages Limited42Habib Modarba92Pak Oilfields43Habib plunder93Pak Services44Hub Power94Pak Suzuki45Ibrahim Fibres95Pakistan Intnl Container Ter.46Indus Motor96Soneri Bank47 multinational Industries expressage97Thal Limited48JS investment funds98UniLever Pakistan49Kohinoor Energy99Unilever Foods50Cresent Commercial Bank100joined Bank(Source Karachi Stock Exchange)HistoryThe index was launched in late 1991 with a base of 1,000 points. By 2001, it had grown to 1,770 points. By 2005, it had skyrocketed to 9,989 points. It consequently reached a dot of 12,285 in February 2007. KSE-100 index touched the highest ever benchmark of 14,814 points on celestial latitude 26, 2007. The chart of last 10 years of KSE maturement and index points is shown. The graph clearly shows the progress and continuous increment.Free bungle Index In order to introduce a free cast index that is representative of the market, the KSE- 30 Sensitive Index was implemented with effect from September 1 , 2006. The need for a market representative free float index was tenacious felt as the capitalization weighted KSE 100 Index potently tilted to a few scripts. Free float is based on the proportion of shares readily available for trading to the total shares issued and excludes the locked in shares. The tally for the selection of scripts on KSE-30 index was revised on 15 February 2007 in line with international best practices to include the usurpation cost as a measure to gauge the liquidity of scrip.This film is about interrogation the semi-strong form of high-octane food market opening (EMH) on the annual earnings proclamation for the selected companies, listed on Karachi Stock Exchange (KSE) by using instance excogitate methodology (Fama et al. 1969 and Brown and Warner 1980, 1985). Following this chapter the believe is divided into cardinal more chapters, they are(1) Chapter two includes detailed research aims and objectives, it also comprises of chief(prenomi nal) job and their hit man problems hypotheses of the look at are also cosmos discussed in this chapter.(2) In the third chapter, Review of relevant divinatory and empirical research has been done. In this chapter we have concluded that what has been done so far in this area of study both supposedly and empirically.(3) 4th chapter covers Research methodology, data sources and method of sampling for the data. Methodology includes formulae and sorts which are existence used to screen out semi-strong form of efficient market hypothesis (EMH) on Karachi Stock Exchange (KSE).(4) Fifth chapter includes Research results and/or findings with supporting evidence.(5) 6th chapter includes the research conclusions.(6) The s importh and the last chapter comprise of Recommendations make with the help of Research results and/or findings. arena And Limitation Of The StudyThe material in this dissertation to the best of my knowledge do not contain any previously published or written docu ments by almost other person extract where delinquent reference is made in the research itself.If any errors found in the calculations made for this research that go out be the sole province of the writer.Statement Of morality And OriginalityDue to time constraint and non availability of the companys earnings contract data from the Karachi stock exchange web site forwards 2004 the study is be carried out for just three years which includes 2005, 2006 and 2007. just during the period of study which is year 2005, 2006 and 2007 there are few companies eliminated due to the non availability of the involve data to carry out the calculations.Due to the limited availability of econometrics experts for counselling irrespective of the new sophisticated models for event studies, customary models were used in this study despite the fact they have less predictive power than the other latest models.Aims, Objectives And possibility Of The StudyThe succeeding(a) are the Aims Objec tives of the studyTo suppress whether the Semi-Strong form of expeditious trade conjecture (EMH) is valid for Karachi Stock Exchange 100 100 Index (KSE 100 Index).To examine the stock market reaction (KSE) to yearbook Earnings Announcements. conundrumsThe research is comprises with one main problem which is further divided into three sub problems each problem has its own hypothesis and to be solved separately.briny problem ravel whether semi-strong form of efficiency exists on Karachi Stock Exchange (KSE) or not. fighter Problem OneWhether the annual earnings proclamation affect release on the day of announcement?We pass on shoot for the normal return and the evaluate return and if it is close to zero we allow for interpret that the annual earnings announcement affect perform on the day of announcement gunslinger Problem TwoShare holders could not earn extra return before, and later the announcement.We would first take the modal(a) of abnormal return and then cum ulate the medium abnormal return.In teddy where the AARs and the CAARs are unlikable to zero we will conclude our results that, investor or the share holder are not able to earn abnormal return by trading on event which is earnings announcement.Sub Problem threesomeThe come freakish Returns (AARs) are random.We used Runs test to analyze the second in the behavior of Average affected Returns (AARs). To check whether the modal(a) abnormal returns occur by chance or not, we carried out Runs test. In case where the observed numbers of waivers are significantly varied from the expected number of runs, we will conclude our finding as Average defective Returns (AARs) do not occur randomly. Alternatively, if these results were not statistically significant, we say that Average Abnormal Returns (AARs) do occur randomly. We carried out runs test on Average Abnormal Returns (AARs) before and after the event day and also for the event windowpane. suppositionSince the study empirical ly examine the Karachi Stock Exchanges 100 Index reaction to annual Earnings Announcement and the hypothesis being tested areHypothesis For Sub Problem OneHO Our unreal hypothesis for sub problem one is that the stock prices reactions in response to the annual earnings announcement complete on the announcement day in addition to that, abnormal returns cant be earn by the investors on stocks by trading on stocks after the announcement day.HO Rit = AR = 0H1 Rit = ARFor testing higher up hypothesis we compute the estimated return for the event window and then compare it to the veridical return, the estimated return will be calculated by using interest equationE (Rit) = i + i RmtUnder the cipher hypothesis if the estimated return of a stock is closed to zero we will accept the zero point hypothesis and if it is not than we will reject our hypothesis and bring to a close that announcement do affect on returns.Hypothesis For Sub Problem TwoHO Our null hypothesis for sub problem two is that returns are close to zero for average abnormal returns and their respective accumulative average abnormal returns for the selective securities in the studyHO AAR CAAR = 0H1 AAR CAARTo test the preceding(prenominal) hypothesis first we will calculate the average abnormal return (AAR) and then cumulative average abnormal return (CAAR) with the help of the following formulaeFor Average Abnormal Return ARitAAR it = i=1 .NWhere,i = the number of securities in the studyN = total number of securities.t = the days touch the event-dayFor Cumulative Average Abnormal ReturnKCAARt = AARit Where, t = -30,0, +30.t = -30If the average abnormal return and the cumulative average abnormal return are close to zero than we accept our null hypothesis differently we will reject it.2.2.3 Hypothesis for Sub Problem ThreeHO Our null hypothesis for sub problem three is that the difference of opinion between the no. of positive and negative average abnormal returns as not significant and they occur randomly.HO Z = 0H1 ZThe null hypothesis of the test is that the observed series is a random series. A run is defined by Gibbons (1985), asA succession of identical symbolisms which are followed or preceded by different symbols or no symbol at allThe run test is other approach to test and detect statistical dependencies (randomness). The number of runs is computed as a sequence of the price changes of the same sign ( much(prenominal) as + +, , 0 0).When the expected number of run is significantly different from the observed number of runs, the test rejects the null hypothesis that the daily returns are random. The run test converts the total number of runs into a Z statistic. For large samples the Z statistics gives the probability of difference between the actual and expected number of runs. The Z value is great than or reach to + 1.96, reject the null hypothesis at 5% level of deduction (Sharma and Kennedy, 1977).Literature ReviewThere have been a lot of studies conducted on Efficient Market Hypothesis (EMH), a concept true by Fama (1960) and divided capital market into three separate on the basis of its efficiency namely weak, semi-strong and strong form. For the event study, which is link up with semi strong form of market efficiency below first we discuss the theoretical foundations and after that, the empirical evidence.Theoretical FoundationsThe origins of the Efficient Market Hypothesis (EMH) can be traced back to the work of two individuals, Eugene F. Fama (1960) and capital of Minnesota A. Samuelson (1960). Remarkably, they independently developed the same basic concept of market efficiency from two rather different research agendas. These differences would drive them along two distinct trajectories lead story to several other breakthroughs and milestones, all originating from their point of intersection, the Efficient Market Hypothesis (EMH). The EMH state that in an efficient market where many healthy and legal investors ope rates, the stock price imitates all the existing information and no other information or analysis can be used to earn abnormal returns.The arguments of Fama (1965) form the theoretical foundation for the Efficient Market Hypothesis (EMH), which persuasively reasons that in an efficient and active market consisting of many well-informed investors, equity prices will appropriately reflect the effectuate of information based on present and future expected events. The strong form of the hypothesis asserts that the current market prices fully reflect all private (insider) and public information. In other words, insiders shouldnt be able to earn excess returns from privileged asymmetric information. The strong form of the hypothesis represents an absolute standard, and in practice, market demonstrates only a certain stratum of efficiency.Efficient Market Hypothesis (EMH) claims that speculative market prices fully and now reflect all available relevant information. Fama categorised info rmation as publicly available information, information that eventually becomes public, insider information. sheath studies are used in tests of Efficient Market Hypothesis (EMH) to ask whether prices in unified information fully on the day that the information is revealed. If Efficient Market Hypothesis (EMH) holds, the information about the event should be incorporated into prices before or on the day of the event itself. There should be no push on returns after the eventThere was little evidence on the central issues of corporate finance, now we are overwhelmed with results, mostly from event studies(Fama, 1991, p. 1600)Event study analyses are typically used for two different purposes first off as a test of semi-strong form market efficiency and secondly as, assuming that the market efficiency hypothesis holds, as a weapon for examining the impact of some event on the wealth of firms shareholders. Event studies measure security price changes in response to events. A single e vent study typically analyzes the average security price reaction to instances of the same type of event experienced by many firms. For example, the event could be the announcement of a merger. The event date can vary from one security to another in the same study, with dates measured in event time. Event studies have been used in a large change of studies, including mergers and acquisitions, earnings announcements, debt or equity issues, corporate reorganizations, investment decisions and corporate genial responsibility MacKinlay (1997), McWilliams Siegel (1997). observational EvidenceThe debate about efficient markets has resulted in hundreds and thousands of empirical studies attempting to make whether specific markets are in fact efficient and if so to what degree. Many novice investors are surprised to learn that a tremendous amount of evidence supports the Efficient Market Hypothesis (EMH).Since the late 1960s, the enormous study in the finance and business affinity lite rature has recognized evidence of relationship between accounting reports and market reactions. Fama (1970) described an efficient market as having prices that fully reflect all available information. high hat (1981) offers a explanation of market efficiency based on the information distribution when investors have mixed beliefs.Accounting reports probably are one of the sources of public information. chunk Brown (1968) examine the relationship between the accounting reports stock prices . Their results show that the market reacts to unexpected earnings as though the market participants had access to the good or bad news prior to the availability of this news to the market. They estimate that only 10 to15 percent of the market reaction takes place during the announcement month. Using another approach, similar results are also found in the work of Ball and Brown (1968) they examined price changes surrounding the announcement of a firms annual earnings and found that the stock mar ket reacts cursorily to annual earnings announcements. Ball (1992) and Bernard Thomas (1989) and (1990), documented significant delays in the adjustment of stock prices to quarterly earnings announcements. veritable countries of the world such as the USA, the UK, and Australia, etc. the amounts of researches on Efficient Market Hypothesis are extensive. Fama, Fisher, Jensen and Roll (1969) conducted the first study on semi-strong form of Efficient Market Hypothesis (EMH). They examined the behaviour of abnormal returns at the announcements of stock sorts and found that the market reaction is significant prior to the stock split announcement. Jordan (1973) assessed the behaviour of security prices surrounding the quarterly earnings announcements and found that stock market is efficient in the semi-strong form.In Asia until now some researches has been done. Kong, S. and Taghavi, M. (2006) study the Effect of Annual Earnings AnnoStock Price Reaction To Annual Earnings AnnouncementsS tock Price Reaction To Annual Earnings AnnouncementsAny decision carried out by the management of any organization needs adequate, accurate and precise information, on the basis of that information the management procures their analysis and undertake decision. If decision to be taken involves any financial aspect, this increases the scope and accuracy of the information. Financial decisions require adequate and accurate information therefore, it is important that the behaviour of individual market is investigated for informed financial decision making, Oguzusy and Guiven (2003).In this respect many theories were presented. One of them is about the market efficiency which is termed as efficient market hypothesis (EMH). The concept of market efficiency had been anticipated at the beginning of the century by Bachelier (1900) in his dissertation. Fama (1970) classified market efficiency in three categories namely, weak form, semi strong form and strong form of efficiency weak form of ef ficiency which defines as one cant earn abnormal return by doing technical analysis of the market or of a particular stock. Technical analysis means predicting future prices by studying historical prices of a particular share or a market. The Second form of efficient market hypothesis (EMH) is semi-strong form of efficiency. This form of market efficiency makes impossible for an investor to earn extra return on security by knowing the publicly available information this includes companys financial results, any particular event or news which affects the company the share prices adjust rapidly with these new publicly available information therefore excess return cant be earn by trading on that information. The last form of efficient market hypothesis (EMH) is the strong form of efficiency and can be define as share prices reflects all public and private information (insider information) and consequently it is not possible for a stock holder to earn extra return on the basis of these i nformation.According to efficient market hypothesis (EMH) the stock prices in an efficient market fully reflect their investment value Ajayi, Mehdian Perry (2004). The security pricing process instantaneously impound the available information in an efficient market and it is not possible to beat an efficient market that by using data mining, trading strategy or by any technical analysis to get consistently abnormal returns.Efficient market hypothesis (EMH) assumed that(1) All investors have cost-less access to currently available information about the future.(2) They are good analysts and(3) They pay close attention to the market process and adjust their holdings appropriately.Many models including Augmented Dickey Fuller (ADF) unit root test, variance ratio test (VR), Ljung Box Q-statistics, and Durbin Watsond statistics have been based on this concept of informational efficiency of capital markets. However the late seventies and the eighties brought in evidences questioning the va lidity and highlighting various anomalies related to the Stock market efficiency. There are many focused studies that demonstrate the possible trading strategies yielding abnormal rates of return using the historical data and publicly available information ruling out the efficacy of markets. The empirical studies evidencing the inefficiency are broadly related to the following(1) The low price-earning (P/E) effect Researches show that stocks with low price earning (P/E) ratios earned more for investors, which is contradictory to Efficient Market Hypothesis (EMH). Fama and French (1995) found that market and size factors in earnings help explain market and size factors in returns.(2) The small firm and neglected firm effects Banz (1981), Reinganum (1981) and other researchers show the size or small-firm effect in stock return. Their analysis support the evidence that small firm with low capitalization can earn higher returns than the large firm with large capitalization.(3) Market ov er and under reaction DeBondt and Thaler (1985, 1987) present evidence that is consistent with stock prices over reacting to current changes in earnings. They report positive (negative) estimated abnormal stock returns for portfolios that previously generated inferior (superior) stock price and earning performance. This could be construed as the prior period stock price behaviour over reacting to earnings developments (Bernard, 1993).(4) The January effect The January effect in stock returns was documented by many researchers. Their analysis suggested that January has a highest return as compared to other months. January effect was first discovered by Rozeff and Kinney (1976) for US stock markets. Later other researchers like Gultekin and Gultekin (1983), Chang and Pinegar (1986) documented the same result for other countries stock markets.(5) The week day effect This refers to the observation that stocks return are not independent of the day of the week effect. A notable anomaly is the Monday effect in daily stock returns, which suggests that stock returns are significantly lower or negative on Mondays relative to other week days. This Monday effect has been extensively examined not only in U.S. asset markets but in international markets as well, for example French (1980), Lakonishok and Levi (1982), Mehdian Perry (2001) and Lakonishok Smidt (1988).In week day effect the last trading day that is Friday was characterized with a positive return and the first trading day that is Monday is characterized with a low or negative return. Later this interesting study was also carried out on other countries stock markets and the researchers found out the same result, but quiet few studies has been done on emerging Asian stock markets.Karachi Stock Exchange (Kse)The Karachi Stock Exchange abbreviated as KSE is a stock exchange based in Karachi, Pakistan. It was founded in 1947 and is countrys largest and oldest stock exchange, with both Pakistani and overseas listing s. It is also the second oldest stock exchange in South Asia. From its inception in 1947, it has done an amazing progress. In 1950s, only 05 companies listed and 90 members were there on the exchange and at the end of 2007 the number of listed companies increased by 666 which make a total of 671 listed companies and the member on the exchange goes up from 90 to 200 during these years. Its current premises are situated in the heart of Karachis Business District, on Stock Exchange Road.HistoryKSE is the biggest and most liquid exchange. It was recognized worldwide for performing well in 2002 by Business Week magazine. US newspaper, USA Today, termed Karachi Stock Exchange (KSE) as one of the best performing bourses in the world. As of December 20, 2007, 671 companies were listed with the market capitalization of Rs.4364.312 billion (US$ 73 Billion) having listed capital of Rs.717.3 billion (US$ 12 billion). In the same year, the KSE 100 Index reached its ever highest value and closed at 14,814.85 points.Trading TimeThe trading hours are from 945am to 215pm on weekdays and 930am to 130pm on Friday.GrowthThe beginning of the exchange was very low with an index of 50 shares only. As the market grew, a delegate index was needed. On November 1st, 1991 the KSE-100 index was introduced and till present it is the most generally accepted measure of the exchange.The need to reconfirm for all share indexes was felt in 1995 and to provide the beginning of index trading in future. And this was achieved on 29th of August, 1995, constructing all share indexes and introduced on 18th of September, 1995. Foreign interests were very active on KSE in 2006 and the interest continued in 2007 also. According to the estimates given by State Bank of Pakistan, foreign investment in capital markets total about US$523 Million. According to a research analyst in Pakistan, around 20% of the total free float in KSE-30 Index is held by foreign participants. There is a plan to build high rise b uilding for the KSE as a new direction to future investments. The decision was taken by the board of directors, Karachi stock exchange (KSE). Disputes between investors and members of the Exchange are resolved through deliberations of the Arbitration Committee of the Exchange.Kse 100 IndexKarachi Stock Exchange 100 Index (KSE-100 Index) is a benchmark and stock index used to compare prices overtime. In determining representative companies to compute the index, companies with the highest market capitalization are selected. To ensure full market representation, the company with the highest market capitalization from each sector is also included. The list of 100 companies listed in Karachi Stock Exchange is presented in Table 01.The Karachi Stock Exchange (KSE) has also launched the KSE-30 Index with base value of 10,000 points, implemented from September 1, 2006. The main feature of this index is that it based only on the free-float of shares, rather than on the basis of paid-up cap ital which differ it from the other indices. Unlike the Karachi Stock Exchange (KSE) which represents total return of the market, KSE-30 index is adjusted for dividends and right shares. That is, when a company announces a dividend, the other indices at Karachi Stock Exchange (KSE) are not reduced for that amount of dividend. Whereas KSE-30 Index is adjusted for dividends and right shares onlyTable 01List of 100 Companies listed In Karachi Stock Exchange 100 IndexNo.Company NameNo.Company Name1Pakistan Refinery51Pakistan Telecom. Co.Ltd2EFU General Ins52Sui North Gas3Pakistan Reinsur53New Jubilee Insurance4EFU Life Assurance54Mybank Limited5Dawood Herc.55WorldCall Telecom6Ist.Capital Securities56D.G.Khan Cement7Mari Gas57Pakistan State Oil8Siemens Pakistan58PICIC Growth9Bata (Pakistan)59Fauji Cement10Adamjee Insurance60Standard Chartard Bank11Attock Refinery61IGI Insurance12Jahangir Siddiqque Co.62Sui South Gas13Pak.National Shipping Corp.63Karachi Electric Supply Corp.14Bank Al-F alah64Shell Pakistan15Meezan Bank65Wazir Ali16Bannu Woollen66Samin Textiles17JS Global Cap.67Bestway Cement18Rafhan Maize68Maple Leaf Cement19Habib Metro Bank69Pioneer Cement20Nestle Pakistan70Javedan Cement21Pakistan Elektron71Fazal Textile22Lucky Cement72Pak.PTA Ltd.23Pakistan Tobacco73ABN AMRO Bank24MCB Bank74NIB Bank25Bank AL-Habib75Bosicor Pakistan26Pakistan Petroleum76Saudi Pak Bank27Attock Petroleum77Pakistan Cement28Engro Chemical78Agriautos Industries29National Refinery79AL-Ghazi Tractors30ICI Pakistan80Allied Bank31Colgate Palmolive81Arif Habib Securities32Abbott (Lab)82Askari Bank33Habib Bank Ltd83Atlas Honda34Attock Cement84Kot Addu Power Company35Azgard Nine85Lakson Tobacco36Bank of Punjab86National Bank of Pakistan37Fauji Fertilizers Bin87Nishat Mills38Fauji Fertiliz88Oil and Gas Development39Faysal Bank89Orix Leasing40Ghani Glass90Pakistan International Airlines41GlaxoSmith91Packages Limited42Habib Modarba92Pak Oilfields43Habib Sugar93Pak Services44Hub Power94Pak Suzu ki45Ibrahim Fibres95Pakistan Intnl Container Ter.46Indus Motor96Soneri Bank47International Industries limited97Thal Limited48JS Investment98UniLever Pakistan49Kohinoor Energy99Unilever Foods50Cresent Commercial Bank100United Bank(Source Karachi Stock Exchange)HistoryThe index was launched in late 1991 with a base of 1,000 points. By 2001, it had grown to 1,770 points. By 2005, it had skyrocketed to 9,989 points. It then reached a peak of 12,285 in February 2007. KSE-100 index touched the highest ever benchmark of 14,814 points on December 26, 2007. The graph of last 10 years of KSE growth and index points is shown. The graph clearly shows the progress and continuous increment.Free Float Index In order to introduce a free float index that is representative of the market, the KSE- 30 Sensitive Index was implemented with effect from September 1, 2006. The need for a market representative free float index was long felt as the capitalization weighted KSE 100 Index strongly tilted to a fe w scripts. Free float is based on the proportion of shares readily available for trading to the total shares issued and excludes the locked in shares. The criterion for the selection of scripts on KSE-30 index was revised on 15 February 2007 in line with international best practices to include the impact cost as a measure to gauge the liquidity of scrip.This study is about testing the semi-strong form of Efficient Market Hypothesis (EMH) on the annual earnings announcement for the selected companies, listed on Karachi Stock Exchange (KSE) by using event study methodology (Fama et al. 1969 and Brown and Warner 1980, 1985). Following this chapter the study is divided into six more chapters, they are(1) Chapter two includes detailed Research aims and objectives, it also comprises of main problem and their sub problems hypotheses of the study are also being discussed in this chapter.(2) In the third chapter, Review of relevant theoretical and empirical research has been done. In this ch apter we have concluded that what has been done so far in this area of study both theoretically and empirically.(3) Fourth chapter covers Research methodology, data sources and method of sampling for the data. Methodology includes formulae and tests which are being used to test semi-strong form of efficient market hypothesis (EMH) on Karachi Stock Exchange (KSE).(4) Fifth chapter includes Research results and/or findings with supporting evidence.(5) Sixth chapter includes the research conclusions.(6) The seventh and the last chapter comprise of Recommendations made with the help of Research results and/or findings.Scope And Limitation Of The StudyThe material in this dissertation to the best of my knowledge do not contain any previously published or written documents by another person except where due acknowledgement is made in the research itself.If any errors found in the calculations made for this research that will be the sole responsibility of the writer.Statement Of Ethics And OriginalityDue to time constraint and non availability of the companys earnings announcement data from the Karachi stock exchange web site before 2004 the study is being carried out for just three years which includes 2005, 2006 and 2007.Moreover during the period of study which is year 2005, 2006 and 2007 there are few companies eliminated due to the non availability of the required data to carry out the calculations.Due to the limited availability of econometrics experts for guidance irrespective of the new sophisticated models for event studies, conventional models were used in this study despite the fact they have less predictive power than the other latest models.Aims, Objectives And Hypothesis Of The StudyThe following are the Aims Objectives of the studyTo check whether the Semi-Strong form of Efficient Market Hypothesis (EMH) is valid for Karachi Stock Exchange 100 100 Index (KSE 100 Index).To examine the stock market reaction (KSE) to Annual Earnings Announcements.Probl emsThe research is comprises with one main problem which is further divided into three sub problems each problem has its own hypothesis and to be solved separately.Main ProblemTest whether semi-strong form of efficiency exists on Karachi Stock Exchange (KSE) or not.Sub Problem OneWhether the annual earnings announcement affect complete on the day of announcement?We will calculate the normal return and the expected return and if it is close to zero we will say that the annual earnings announcement affect complete on the day of announcementSub Problem TwoShare holders could not earn extra return before, and after the announcement.We would first take the average of abnormal return and then cumulate the average abnormal return.In case where the AARs and the CAARs are closed to zero we will conclude our results that, investor or the share holder are not able to earn abnormal return by trading on event which is earnings announcement.Sub Problem ThreeThe Average Abnormal Returns (AARs) are random.We used Runs test to analyze the randomness in the behavior of Average Abnormal Returns (AARs). To check whether the average abnormal returns occur by chance or not, we carried out Runs test. In case where the observed numbers of runs are significantly different from the expected number of runs, we will conclude our finding as Average Abnormal Returns (AARs) do not occur randomly. Alternatively, if these results were not statistically significant, we say that Average Abnormal Returns (AARs) do occur randomly. We carried out runs test on Average Abnormal Returns (AARs) before and after the event day and also for the event window.HypothesisSince the study empirically examine the Karachi Stock Exchanges 100 Index reaction to Annual Earnings Announcement and the hypothesis being tested areHypothesis For Sub Problem OneHO Our null hypothesis for sub problem one is that the stock prices reactions in response to the annual earnings announcement complete on the announcement day in addition to that, abnormal returns cant be earn by the investors on stocks by trading on stocks after the announcement day.HO Rit = AR = 0H1 Rit = ARFor testing above hypothesis we compute the estimated return for the event window and then compare it to the actual return, the estimated return will be calculated by using following equationE (Rit) = i + i RmtUnder the null hypothesis if the estimated return of a stock is closed to zero we will accept the null hypothesis and if it is not than we will reject our hypothesis and bring to a close that announcement do affect on returns.Hypothesis For Sub Problem TwoHO Our null hypothesis for sub problem two is that returns are close to zero for average abnormal returns and their respective cumulative average abnormal returns for the selective securities in the studyHO AAR CAAR = 0H1 AAR CAARTo test the above hypothesis first we will calculate the average abnormal return (AAR) and then cumulative average abnormal return (CAAR) with the help of the following formulaeFor Average Abnormal Return ARitAAR it = i=1 .NWhere,i = the number of securities in the studyN = total number of securities.t = the days surrounding the event-dayFor Cumulative Average Abnormal ReturnKCAARt = AARit Where, t = -30,0, +30.t = -30If the average abnormal return and the cumulative average abnormal return are close to zero than we accept our null hypothesis otherwise we will reject it.2.2.3 Hypothesis for Sub Problem ThreeHO Our null hypothesis for sub problem three is that the difference between the no. of positive and negative average abnormal returns as not significant and they occur randomly.HO Z = 0H1 ZThe null hypothesis of the test is that the observed series is a random series. A run is defined by Gibbons (1985), asA succession of identical symbols which are followed or preceded by different symbols or no symbol at allThe run test is another approach to test and detect statistical dependencies (randomness). The number of runs is computed as a sequence of the price changes of the same sign (such as + +, , 0 0).When the expected number of run is significantly different from the observed number of runs, the test rejects the null hypothesis that the daily returns are random. The run test converts the total number of runs into a Z statistic. For large samples the Z statistics gives the probability of difference between the actual and expected number of runs. The Z value is greater than or equal to + 1.96, reject the null hypothesis at 5% level of significance (Sharma and Kennedy, 1977).Literature ReviewThere have been a lot of studies conducted on Efficient Market Hypothesis (EMH), a concept developed by Fama (1960) and divided capital market into three parts on the basis of its efficiency namely weak, semi-strong and strong form. For the event study, which is linked with semi strong form of market efficiency below first we discuss the theoretical foundations and after that, the empirical evidence.Theoretica l FoundationsThe origins of the Efficient Market Hypothesis (EMH) can be traced back to the work of two individuals, Eugene F. Fama (1960) and Paul A. Samuelson (1960). Remarkably, they independently developed the same basic concept of market efficiency from two rather different research agendas. These differences would drive them along two distinct trajectories leading to several other breakthroughs and milestones, all originating from their point of intersection, the Efficient Market Hypothesis (EMH). The EMH state that in an efficient market where many well-informed and intelligent investors operates, the stock price imitates all the existing information and no other information or analysis can be used to earn abnormal returns.The arguments of Fama (1965) form the theoretical foundation for the Efficient Market Hypothesis (EMH), which persuasively reasons that in an efficient and active market consisting of many well-informed investors, equity prices will appropriately reflect th e effects of information based on present and future expected events. The strong form of the hypothesis asserts that the current market prices fully reflect all private (insider) and public information. In other words, insiders shouldnt be able to earn excess returns from privileged asymmetric information. The strong form of the hypothesis represents an absolute standard, and in practice, market demonstrates only a certain degree of efficiency.Efficient Market Hypothesis (EMH) claims that speculative market prices fully and immediately reflect all available relevant information. Fama categorised information as publicly available information, information that eventually becomes public, insider information. Event studies are used in tests of Efficient Market Hypothesis (EMH) to ask whether prices incorporate information fully on the day that the information is revealed. If Efficient Market Hypothesis (EMH) holds, the information about the event should be incorporated into prices befor e or on the day of the event itself. There should be no impact on returns after the eventThere was little evidence on the central issues of corporate finance, now we are overwhelmed with results, mostly from event studies(Fama, 1991, p. 1600)Event study analyses are typically used for two different purposes firstly as a test of semi-strong form market efficiency and secondly as, assuming that the market efficiency hypothesis holds, as a tool for examining the impact of some event on the wealth of firms shareholders. Event studies measure security price changes in response to events. A single event study typically analyzes the average security price reaction to instances of the same type of event experienced by many firms. For example, the event could be the announcement of a merger. The event date can vary from one security to another in the same study, with dates measured in event time. Event studies have been used in a large variety of studies, including mergers and acquisitions, earnings announcements, debt or equity issues, corporate reorganizations, investment decisions and corporate social responsibility MacKinlay (1997), McWilliams Siegel (1997).Empirical EvidenceThe debate about efficient markets has resulted in hundreds and thousands of empirical studies attempting to determine whether specific markets are in fact efficient and if so to what degree. Many novice investors are surprised to learn that a tremendous amount of evidence supports the Efficient Market Hypothesis (EMH).Since the late 1960s, the enormous study in the finance and accounting literature has recognized evidence of relationship between accounting reports and market reactions. Fama (1970) described an efficient market as having prices that fully reflect all available information. Beaver (1981) offers a definition of market efficiency based on the information distribution when investors have mixed beliefs.Accounting reports probably are one of the sources of public information. Ball Brown (1968) examine the relationship between the accounting reports stock prices . Their results show that the market reacts to unexpected earnings as though the market participants had access to the good or bad news prior to the availability of this news to the market. They estimate that only 10 to15 percent of the market reaction takes place during the announcement month. Using another approach, similar results are also found in the work of Ball and Brown (1968) they examined price changes surrounding the announcement of a firms annual earnings and found that the stock market reacts quickly to annual earnings announcements. Ball (1992) and Bernard Thomas (1989) and (1990), documented significant delays in the adjustment of stock prices to quarterly earnings announcements.Developed countries of the world such as the USA, the UK, and Australia, etc. the amounts of researches on Efficient Market Hypothesis are extensive. Fama, Fisher, Jensen and Roll (1969) conducted the first stu dy on semi-strong form of Efficient Market Hypothesis (EMH). They examined the behaviour of abnormal returns at the announcements of stock splits and found that the market reaction is significant prior to the stock split announcement. Jordan (1973) assessed the behaviour of security prices surrounding the quarterly earnings announcements and found that stock market is efficient in the semi-strong form.In Asia until now some researches has been done. Kong, S. and Taghavi, M. (2006) study the Effect of Annual Earnings Anno