3. REASERCH METHOD
3.1 HYPOTHESIS DEVELOPMENT
國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
25
3. REASERCH METHOD
3.1 HYPOTHESIS DEVELOPMENT
In this section, there are two hypotheses discussed and provided as follows:
3.1.1 Financial Reporting and the Market Response
Because of financial news articles mostly provide timely information, they are usually presented in a shorter and simplified format to convey the most important news to the public. But financial reporting are not presented in the same way, there are financial reporting standards, such as International Financial Reporting Standards (IFRS), require the information should be conveyed and format should be laid out clearly and formally. As a rule of thumb, most financial reports contained four statements and footnotes to detailed textual and numerical explanation. By referring to the footnotes to financial statements, people can better understand the calculation why and how the numbers occur.
Asquith et al. (2005) incorporate the contents of analyst reports in their entirety rather than just the individual summary elements such as the stock recommendation and reach to the conclusion that analysts both provide new information and interpret previously released information. “In the end, stock ratings and target prices are just the skin and bones of analysts’ research. The meat of such reports is in the analysis, detail, and tone’’ (‘‘When a stock’s rating and target collide’’, Business Week Online, April 25, 2002). Therefore, this study scores part of the footnotes to financial statements based on certain scoring criteria (explained in later chapter) and tries to find possible connections between annual financial reports and the stock market. In addition, this study expects a positive relationship between the information abundancy of the notes to the financial statements and stock price movement during the financial statements announcement period.
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
26
Hypotheses 1:
Footnotes to financial statements provide information and are associated with market returns around annual financial reports released dates.
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
27
3.1.2 The Relationships between News Articles and Stock Price Movement
Can stock market responses be better explained with the aid of financial news articles? This study aims to investigate the information content gap between financial news articles and footnotes to financial statements by referring to the stock market response. Financial news articles contain timely updates of information on firm value.
Since annual financial reports have been audited to provide confidence of the past performance to the financial report users but usually have time lag because of time required to conduct the audit process, financial news articles can provide more timely information ahead of financial reporting to the market. Since different goals for annual financial reports and financial news articles aim to provide, the “price lead earnings”
viewpoint suggests that investors would have incorporated the information from financial reporting into stock prices before the financial reporting announcements (Beaver et al. 1980). Because prices lead earnings, the specification using the earnings-level-deflated-by-price variable in a price-earnings regression is ‘better’, in terms of bias in the estimated earnings response coefficient and explanatory power, than specifications using earnings-change-deflated-by-price and earnings-deflated-by-lagged-earnings variables. An accurate proxy for unexpected earnings, however, outperforms the earnings-level- and earnings-change-deflated-by-price specifications (Kothari 1992). In addition, compared to financial reporting, financial news articles are easily catchable and readable; takes financial news articles alone may explained some parts of the market reaction to a certain level. Odean (1998) suggests that the tendency of investors to hold losing investments too long and sell winning investments too soon.
Investors demonstrate a strong preference for realizing winners rather than losers. That is, when there are chances of winning, investors will act on the information. On the other hand, when a bad information suggests chances of losing, investors may refuse to change his position. As a result, this study expects a positive relationship between
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
28
financial news reporting and market reaction especially with positive news sentiment.
Hypotheses 2:
Positive sentiment and information content in financial news articles
combined with financial reporting around annual financial reports released dates is more associated with market responses than footnotes to financial statements alone.
Figure 3-1 schematically shows the hypothesized relationships in the research model. This study uses event study approach. An Event study is a statistical method to assess the impact of an event on the value of a firm. For example, the announcement of a merger between two business entities can be analyzed to see whether investors believe the merger will create or destroy value. The basic idea is to find the abnormal return attributable to the event being studied by adjusting for the return that stems from the price fluctuation of the market as a whole. Measured by the cumulative abnormal return (CAR), the thick arrow indicates the relationship between the footnotes to financial statements and cumulated abnormal returns and the upper arrow indicates the relationships between the footnotes to financial statements combined with information content in the financial news articles and cumulated abnormal returns. Hypothesis 1 asserts the relationships between information content in footnotes to financial statements and market reaction. Hypothesis 2 asserts that sentiment and information content in financial news articles strengthen the relationship with the stock price movement than merely footnotes to financial statements alone. That is, test for the information content gap between news articles and annual financial reports.
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
29
Figure 3-1. Research Model and Hypotheses
Hypotheses 1:
Footnotes to financial statements provide information and are associated with market returns around annual financial reports released dates.
Hypotheses 2:
Positive sentiment and information content in financial news articles
combined with financial reporting around annual financial reports released dates is more associated with market responses than footnotes to financial statements alone.
H2 Financial
News
H1
Cumulated Abnormal
Return Financial
Reporting
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
30