This paper investigates the stock market reaction associated with earnings announcements in the Indian stock market, and to verify whether these announcements possess any informational value. An event study was conducted on 50 companies, comprising the CNX Nifty Index, which made earnings announcements in March 2004. The sample is divided into two sub-samples of `good' and `bad' news announcements respectively. In the case of full sample, the study found an insignificant Average Abnormal Return (AAR) on the announcement day. In contrast, the AARs for `good' news sub-sample is greater than zero on the announcement day. There is also a clear run-up in prices before the announcement of earnings. The AAR is less than zero on the announcement day in the case of sub-sample of `bad' news. It has been observed that the price reaction in the case of `bad' news is much larger than in the case of `good' news. The results for the sub-sample indicate that the market reacts sharply to a decline in earnings on the announcement day. Thus, the results of the study indicate that earnings announcements contain important information which cause stock prices to change.

Investors assign a great deal of significance to announcement of earnings reports as it reflects the financial performance of the company and is an indicator of the future direction of the company. Earnings announcements provide the market participants with the single most important piece of public information by which they can evaluate the performance of a firm. The market is filled with anticipation at the time when financial results of a company are to be announced as they form the basis for revalidation of the future growth prospects of a company which would be reflected in a buy, hold or sell strategy. Thus, the adjustment of stock prices to the announcement of earnings reports is an important empirical issue.

Extensive research has been conducted on the issue of whether the earnings disclosures possess any information value. Research has also centered to determine the return pattern around and after the earnings have been announced. Most studies conclude that a surprise in the earnings announcement leads to abnormal returns in the period following the announcement. Ball and Brown (1968) provided the first comprehensive evidence of the adjustment of stock prices to earnings announcements. They conclude that no more than 10-15% of the information contained in announced earnings had been anticipated by the month of the preliminary announcement. Beaver (1968) opined that announcements are said to contain information if they alter investors’ beliefs about the value of an asset.

Applied Finance Journal, Indian Stock Market, Average Abnormal Return, AAR, Earnings Announcements, Center for Monitoring Indian Economy, CMIE, Cumulative Average Abnormal Return, CAAR, Standardized Abnormal Returns, CNX Nifty Index, Financial Economics, Corporate Governance, Trading Strategies.