Earnings response coefficient

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Earnings response coefficient

A measure of relation of stock returns to earnings surprises around the time of corporate earnings announcements.

Earnings Response Coefficient

The relationship between a change in a company's stock price and any unusual statements in a company's earnings announcement. Unexpectedly high earnings can create a buying panic and while low earnings can create a selling panic. This can drive the stock price up or down. Arbitrageurs use the earnings response coefficient to estimate how much the price may change and make decisions on how to exploit the pricing inefficiency. See also: Capital Asset Pricing Model, Arbitrage.
References in periodicals archive ?
Teoh and Wong (1993) document that more precise earnings (those audited by higher quality auditors) lead to higher earnings response coefficients.
Teoh and Wong (1993) use audit firm size to proxy for auditor quality and earnings response coefficients to measure the association between earnings and returns.
TABLE 4 Regression Results for Differential Earnings Response Coefficients Model: [CAR.
Table 4 shows the relation between the insider ownership and earnings response coefficients for each size group.
The results showed the increased ability of the price and return models to explain better earnings-return relationship by providing highly significant earnings response coefficients.
Kothari, Sloan (1992) presented a method for leading period returns to control the biased coefficients of return models and extended the return measurement window to several years before the fiscal year of interest, which resulted in higher earnings response coefficients.
The effects of backdating on earnings response coefficients.
Kothari, 1989, "An Analysis of Intertemporal and Cross-Sectional Determinants of Earnings Response Coefficients," Journal of Accounting and Economics 11, 143-181.
2005 in the US, and Chen, Chen, and Su, 2001 in China) all regression results in Table 3 show that the earnings response coefficients (ERC), relating stock returns to the level and change in earnings, are positive and significant.
Based on nonaudit fees from 1978-80, the evidence indicates that smaller earnings response coefficients are associated with higher auditor provided nonaudit services.
Recently, Hughes and Reynolds (2001) and Bae and Sami (2005) examine earnings response coefficients (ERCs) for firms with environmental liabilities.
Hypothesis: Earnings response coefficients of designated firms are higher than those of non-designated firms.