Earnings Announcement

Assignment Requirements

 

MUST FOLLOW WHATEVER HAS BEEN ASKED IN ASSIGNMENT

Assessment 2

BANK1005(2014)

Derivatives and Securities Market

INTRODUCTION

For this Assessment, you will assess the effect of an earnings announcement on the share price of a company. You will select an Australian listed company and assess the impact of earnings information on its “cumulative residual returns” (based on its share price) over a time window. You will use Excel to calculate, and present, crucial information relating to your investigation of the earnings impact.

You are asked to present your findings in an essay which is insightful and informed by the published research. The key focus of your assignment is to:

Assess the effect of an earnings announcement of an Australian listed company, over a time window, using the published academic research to inform your analysis.

 

 Submit the work as ONE document, including the cover sheet, in a type-written format using 1.5-line spacing and single-sided pages.

ASSIGNMENT REQUIREMENTS

The Task

A. Collecting the Information

1. Earnings Announcement

 

Identify an earnings announcement made by an Australian listed company between 01 July 2013 and 31 December 2013). Half-yearly results are announced during the first three months. Near the middle of the year, some companies also make announcements related to their annual results.

To determine any effects related to announcements, we need to know the precise date when the information became available to the market. The announcement date must therefore be carefully identified. In case a newspaper is used, remember that the date in the newspaper may be one day after the date of the actual announcement.

There are at least two ways to identify an announcement:

(a) Use a newspaper such as The Australian or The Australian Financial Review to find an announcement relating to earnings.Alternatively,

(b) You could select a company of your choice and seek an earnings announcement made by this company. Announcements are available on the Australian Securities Exchange web site (ASX/Announcements) and may be available using other web sites (such as Yahoo! finance) or databases (such as Thompson One Banker).

 

What is an earnings announcement?

An earnings announcement relates to an announcement of earnings upgrade or downgrade or annual or half-yearly earnings. Earnings announcements relate to company’s “profits” or “losses”. The announcement date must be between July and December 2013.

Many other corporate events (such as takeovers and CEO changes) may affect share prices. We will concentrate on investigating the impact of an earnings announcement only. Therefore you need to ensure that you exclude announcement(s) of any other events in your investigation.

 

2. Share price and Index

Record the share price of the company and the All Ordinaries Index for each day in the time period indicated below (the event window) in an Excel spreadsheet. The share price (last sale or close price) and the index at the end of each day are required over this time period.

The daily share price and index should cover a period of at least three weeks on each side of the announcement date (that is, three weeks before the announcement and three weeks after the announcement – this is your event window). A somewhat longer window may be used, if you wish, as share trading only occurs during the weekdays. We need a long enough event window to judge any announcement effects, but not too long such that other information may cloud the results.

Share prices and index data are available from the ASX site, daily newspapers, web sites (such as “Yahoo! Finance” and “Trading Room”) or databases (such as Thompson One Banker on the university’s library site). You can use any other source(s) you can find.

3. Readings

 

Read newspaper report(s) relating to your earnings announcement to use in your essay.

Read carefully the article by Ray Ball provided through the library’s e-Readings collection which can be searched under BANK 1005. Read only the following pages in the article – pages 4 to 9 (read up to “Limitations”) and page 17 (read only “Concluding Observations”). The contents of this article (on the indicated pages) should be used in your essay, using your judgement, to select what you need to assess the impact of an earnings announcement and the evidence found in your investigation.

 

B. Calculating the Returns and Cumulative Residuals

Any examination of the share price will mask the “true” effect of the announcement due to factors like the random movements in share prices, overall movements in the share market due to investor sentiment, and industry effects. We have to make adjustments for these effects.

1. Use your Excel spreadsheet to compute the daily return, for each trading day other than the first day in your event window, based on the company’s share prices (ignoring any dividends).

2. Use your Excel spreadsheet to compute the daily return, for each trading day other than the first day in your event window, on the All Ordinaries Index.

3. Next calculate the residuals. That is, subtract the return on the market index from your company’s return for each day for which return is calculated.

4. Finally, obtain the cumulative residuals which are the running total of the residuals, starting with the first residual in the event window.

 

Check the Excel Tutor folder on the course home page for an example that shows the calculations in Excel.

The word ‘return’ here is used to mean ‘rate of return’ which must be presented in percentage (to two decimal places).

The results of all these calculations must be presented on one page (in Word format) in a table in an appendix placed after your essay. So, you need to set up your Excel worksheet to be able to produce this table in Word format.

Note:

You are essentially conducting an “event study” – a technique that enables us to assess the impact of a particular event on a firm’s stock price.

To be more precise, researchers assess the impact of a particular event on a firm’s stock price using the “unexpected return” from the event. Unexpected return (residual) is the difference between the actual stock return and the return that might be expected in the absence of the event given the performance of the market. Sophisticated models are used to obtain the expected return and then the unexpected return (called “abnormal return”). An indicator of the total firm-specific stock movement for an entire period is the cumulative abnormal return – the sum of all abnormal returns over the event window.

We are investigating only one company and further simplifying the process by using residuals based on “the market” as a model for expected returns, but we can expect to obtain fairly representative results.

4. Charting the Price and Cumulative Residuals

1. Using Excel, plot the trend of the share price and index over the event window in the same graph using two axes. You should plot the raw data in this graph and not the calculated returns data.

 

Check the Excel Tutor for an example of a chart with two axes.

2. Using Excel, in another chart, plot the trend of the cumulative residual returns in percentage form.

3. Identify the announcement date clearly in each chart.

 

Again, the word ‘return’ means the ‘rate of return’ (in percentage form to two decimal places) in this case.

General Information

Using Excel

You must create the table of data, the calculated measures and graphs using Excel. Then transfer this information into an appendix to your essay in Word format, to be then converted into PDF for submission.

As an objective of the assignment is that you use Excel, copies of graphs or tables from other sources and/or presentation by other means are not acceptable.

It is your task!

Finding the sources for announcements, the price and other information is part of the assignment task as is forming a suitable team.

Plenty of suggestions are provided in this document to assist you in finding the information. However, locating and using these resources remains your task as part of your learning activities. The Essay

A. The Effect of Earnings Announcements

 

In the essay, your main focus is to:

Assess the effect of an earnings announcement of an Australian listed company, over a time window, using the published academic research to inform your analysis.

This investigation should be performed for an earnings announcement made by an Australian listed company in late 2013 (July to December).

Your essay-style assessment of the impact of earnings announcements, in no more than 800 words, should be based on the evidence you have collected, your calculations and trends of prices and returns, nature of the business as related to the announcement, readings of the academic literature and newspaper reports, as well as any other relevant matters.

(Note: the word limit shown in the Course Outline is an “equivalent word count” which takes into account the complete task including numerical work and its presentation. The essay part should be completed in a maximum of 800 words.)

Graphs and tables should not be included in this essay part. The word count must be indicated at the end of this essay clearly. (Use the facility provided in Microsoft Word under Tools on the menu bar to perform a word count.)

There will be a penalty for exceeding the word limit.

Tips

You should develop a well-integrated evaluation to assess the announcement impact, based on the evidence, as the main theme showing an application of the academic research in an essay format.

For a critical analysis expected of university students, a few simple quotes from the journal article are not adequate. To create depth in your analysis, as an example, you could identify what your findings are, consider their importance (the “how” and “why”), and certainly apply the findings in the literature to your case, perhaps making some comparisons. Furthermore, the use of the article involves an integration of the theory into the discussion rather than a simple, unrelated summary of what is in the article. A good academic essay will use a framework based on a theory, describe/use the findings (or evidence) in light of this framework and maintain focus on the main issue.

B. Appendix – Table of Returns and Residuals

 

Present the information from Tasks A and B (Collecting the Information and Calculating the Returns and Residuals) in one table in Word format, showing the daily raw price and All Ords, daily returns (stock and market), the residuals and cumulative residuals clearly on one A4-sized page. All returns information must be shown in percentage form to two decimal places. You may use 10-point or 12-point format for this data presentation.

Call this an Appendix. Label the table by assigning a table number, a suitable title, name of the company, source of data and the time period.

C. Appendix – Charts of Returns and Cumulative Residuals

 

Present the two graphs from Task C: Charting the Price and Cumulative Returns in a professional manner in the Appendix.

Show the title (with Figure number) and source of data and label both axes appropriately for each chart.

Choose the scales and presentation so as to highlight the information.

Each graph should be presented on a separate A4-sized page in a suitable format.

Other Presentation Requirements

Present your work typed, using 1.5 line spacing and single-sided pages, covering the assessment requirements as indicated above. The written part must be in 12-point font size but a 10-point or 12-point format may be used for the data presentation.

Break the report into sections through careful use of headings highlighted in bold letters, and include a reference list at the end. The journal article must be clearly identified to show the name of the authors, title of article, publication year, volume and number of journal, journal name, and page numbers. Quoting a web reference without all these details is not adequate.

Insert a contents page. Use Word to number consecutively all the pages in your document. The contents page is not included in the page numbers and certainly not the cover sheet. (Learn how to use ‘section breaks’ in Word to number pages differently in each section.)

Include the full name in the footer of the document (as an example, the month and year are shown in this document with my initials as is the word “A1” at the bottom of each page).

Record the assessment title and the name in capital letters on the cover sheet, with the surname (last name) first, followed by the first name (given name or forename) and the student number. By submitting the work with your names on the cover sheet, it is assumed that you have all followed all the requirements shown on this cover sheet.

You should read the Assessment Feedback form for this Assessment and note the listed requirements to enhance the content and presentation of your work.

 

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