Stock Market Reaction to Company Announcements in an Emerging Stock Market: The Case of Saudi Arabia

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Almajed, Sultan Mohammed A. (2020) Stock Market Reaction to Company Announcements in an Emerging Stock Market: The Case of Saudi Arabia. PhD thesis, Victoria University.


Announcement events are essential for investors and shareholders, enabling them to determine the viability of their investments. According to efficient market theory, stock prices in a semi-strong market factor in all material public information. Therefore, publicly issued financial announcements may influence demand for stocks and affect their prices. This thesis examines how announcements of annual earnings, top management changes and annual general meetings (AGMs) influence stock returns in Saudi Arabia. The thesis also explores stock price adjustment to these announcements to determine the efficiency of the stock market. Lastly, the thesis investigates whether different firm characteristics (size, government ownership and sector) are determinants of stock return reactions related to the announcements period. The study examined 171 companies and 1,637 announcements between 2014 and 2018. An event study methodology was adopted to investigate the impact of announcements on stock returns. The Fama-French three-factor model served to compute the expected returns while the Generalized method of moments (GMM) estimation method was applied to deal with endogeneity and simultaneity biases. These arise when the explanatory variable is correlated with the residual disturbance term. The results confirm that the Saudi stock market does not exhibit a semi-strong form of market efficiency because significant abnormal returns were observed on event periods. These returns imply that the market considers announcements of earnings, top management changes and AGMs to be useful. The stock market did not exhibit an efficient response to earnings announcements, suggesting a pause in the reaction to market information. Evidence of underreaction to good earnings news and overreaction to bad earnings news was observed, suggesting that the stock market is driven by the dominance of individual investors, with a lack of financial analysts. Top management change announcements led to significant negative abnormal returns, suggesting that investors continue to respond negatively, although there is no immediate response. Thus, the market is not working efficiently. Forced resignation news yielded significant positive abnormal returns on the event day, indicating that dismissal news enhances investor confidence. Retirement and voluntary departure announcements generated negative abnormal returns on the event day, suggesting that investors are worried about the new successor and the company’s future after the loss of the retiring or departing executive’s experience. New appointment announcements yielded significant positive abnormal returns on the event day although there were significant negative abnormal returns on the succeeding days, suggesting the new appointee may not have inspired investor confidence. The results also indicated that the stock market responds significantly and quickly to AGM announcements, implying that these announcements contain useful information. The findings identified size in the top management changes period, government ownership in the annual earnings announcement period and sector in all three announcement event periods as the major determinants of stock price reaction. These determinants influenced stock market efficiency in the sample period. The findings provide valuable information to market participants by clarifying the effects of announcement events on the emerging stock market and indicating whether firm factors influence stock market efficiency at times around announcements. This study lays a foundation for future research into listed companies’ public announcements in other developing countries or for comparisons with more developed countries.

Item type Thesis (PhD thesis)
Subjects Current > FOR (2020) Classification > 3502 Banking, finance and investment
Current > Division/Research > Institute for Sustainable Industries and Liveable Cities
Current > Division/Research > VU School of Business
Keywords companies; annual earnings; management changes; annual general meetings; AGMs; public announcements; stock returns; Saudi Arabia; stock price adjustment; stock market
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