- Executive summary
The stock prices often fluctuate after the quarterly or interim financial performance report is publicized by the companies. The impact of one such profit announcement by Woolworths Limited on 28 Feb., 2014 has been captured and investigated for its impact on the company’s stock price movements. The company has announced that the net profit after tax from continuing operations has shown an increment of 6% over the previous year.
The results substantiated very minor impact of the profit announcement on the post-announcement stock return of Woolworths Limited, which increased a bit post profit announcement. At the same time, the stock returns of two competitors, namely Wesfarmers Limited and Metcash Limited does not present any clear trend to support that the profit announcement of the Woolworths Limited had similar impact on their earnings. However, the results supported that due to information asymmetry during the profit announcement, the stock prices fluctuate widely. Thus, it can be deduced that the movement in the stock prices are impacted widely due to other factors (other than profit announcements).
Conclusively, the impact of the profit announcement is projected very little impact of stock prices. Having said that, the profit announcements obviously provides a base for analyzing the financial performance of the firm by the stakeholders.
- The objective of the report.
The purpose of the current report is to test the impact of the accounting information on the investors’ behavior. The proxy for the accounting information has been taken as the profit or the loss announcements related to the firm under investigation, and the response (proxy) of the investors’ behavior has been captured via the changes in the stock prices of the respective firm.
Having explained the above causal relationship, it is equally important to eliminate the impact of the other factors (other than the profit announcement) from the movement in the stock prices. The movement in the price of one stock can be determined partially by the overall movement in the stock market index . Thus, the proxy for these other factors has been determined by the stock market index.
Based on the above discussion, following main objectives have been delineated for the current report:
- An overview of the company, its competitors and its major industry.
Woolworths Limited (WOW) is aiming to be a business leader in food and liquor by minimizing the gap between the virtual and physical trade. The company is offering mobile applications, websites, new ways of deliveries and other virtual shopping opportunities .
The company is one of the leaders in the industry of consumer staples in Australia. The company has been selected because of its top position in the industry with the market capitalization of 46,651,112,817. The competitors Wesfarmers Limited (WES) has been chosen as it has maximum market capitalization of 49,400,910,633. The third competitor selected is Metcash Limited (MTS) with the market capitalization of 2,540,646,817. Despite huge market capitalization, second reason for selecting these two competitors are these are the only companies in the sub-industry category of food retail .
- The announcement and its expected impact
- The Profit announcement:
Quarterly announcement of firm’s earnings and interim dividends are considered as the two major profit announcements by the firms. These announcements signal about the firms’ performance and help stakeholders estimate the future performance of the firm .
According to the given requirement, the half-yearly earnings review of WOW has been chosen as the profit announcement for this report. The announcement has been publicized on 28Feb. 2014 and the complete report is available for download on the Trading room website. The report has been collated by the two news announcements on the half-yearly review to assess the impact of the market reaction.
It is substantiated by the numbers in the report that the company has reported better results as forecasted and thus, upgraded its yearly earnings forecast for the rest of the year. The company’s net profit after tax from continuing operations has shown an increment of 6% over the previous year. The company have also declared the increased dividends. Also, the company have explicated its future plans to concentrate on improving its strategic areas .
One of the immediately followed news announcement indicated that the company was on its transforming process over past two years, and the increasing profits depicts that they are on right path . However, Woolworth’s Chief Mr.Grant O'Brien have warned not to get overwhelmed by the increased profits. The increasing profits could be impacted by the industry situations of falling employments and business bankruptcies.
- Expected Impact of the Profit Announcement:
Literature depicts that the markets are very efficient and quickly replicate the impact of the profit or loss announcements on the stock prices . Many empirical researches have illustrated the decrease in the stock prices immediately after recognising the negative trends in the profit announcement . Joseph and Itzhak (1980) presented that the stock prices fell tremendously in Poland when the disappointing quarterly results were reported by the companies. However, Haribar and Collins (2002) founded significant difference of the stock reaction for firms disclosing increased earnings in comparison to decreased earnings. Babu and Kasilingan (2013) suggested that the prices fluctuate due to the information asymmetry during profit announcement time.
- Data analysis and its interpretation:
- Data analysis methods
The stock price data for three companies: WOW, WES and MTS has been downloaded from Trading Room website for 15 days before and after the event of 28 Feb. 2014. The stock prices have been transformed to calculate the returns as shown in coloumn D, G, J and M using the following formula:
RetDay1=[(P1-P0P0)] * 100
The impact of the market movement has been eliminated as shown in Column N, O and P using the following formula:
Mar RetDay1=[(M1-M0M0)] * 100
Further, the cumulative residuals for the market-adjusted stock returns has been calculated as shown in column Q, R and S. Charting has been employed as the major analysis tool. Line charts are considered best to present the stock market data over the period of time.
- Results and interpretation:
Chart 1 presents the market-adjusted stock returns of the three companies along with the market index return. The line has been drawn to highlight the impact of stock returns 15 days pre- and post-announcement market adjusted returns. The movement in returns depict that the average returns of WOW has witnessed little positive trend post-announcement, however the variability in the returns have increased. The WES have also witnessed little reduction in the negative returns after the announcement, but MTS projects the reverse trend. Thus, the chart fails to substantiate any clear trend pre- and post-announcement in stock price movement of three companies.
Chart 1: Market adjusted returns of WOW, WES and MTS along with market index return
Chart 2: Cumulative Residual Plot
Chart 2 presents the trend in the cumulative residuals for three companies after eliminating the market trend. If the sum of the cumulative residuals sum up to zero, it indicates that there is no impact of the announcement on the stock prices. If it counts to positive or negative number, it indicates that the announcement has some impact on the stock prices. This is why, the movement of cumulative residuals have been analyzed with its presumed mean of 0.
According to the above chart, the cumulative residuals of WOW present very little positive count, WES projecting the negative count, and MTS counts to very little positive. Thus, the announcement has an impact on the stock prices, however the impact is very little.
The reason for the above results can be attributed to the industry factors. For instance, the news announcement on 1March, 2014 clearly warned investors to consider the industry and economic conditions of distressed business conditions and increase in unemployment .
The above results clearly indicates that the profit announcement of WOW project very little impact on its stock prices. The charts highlighted that the stock prices of WOW increased a little, but this increase was not visible on the stock prices of its competitors WES and MTS.
Thus, it can be concluded that the macro economic factors have a major role to play in stock price determination, instead of the profit announcements by the company. Having said that, it cannot be denied that the interim profit announcements do guide the stakeholders in analyzing the company financial performance.
Babu, C., & Kasilingan, R. (2013). Impact of Quarterly Results on Share Prices. Indian Journal of Finance, 19-29.
Barbar, W., & Kang, A. (2001). Stock Price Reactions to On-target Earnings Announcement Implications for Earnings Management. GWU Working Paper.
Greenblat, E. (01. March 2014). Woolworths edges closer to target with $1.3b profit. Von Fairfax: http://newsstore.fairfax.com.au/apps/viewDocument.ac?page=1&sy=tpl_nws&pb=all_ffx&dt=selectRange&dr=1year&so=date&st=nw&sf=text&sf=author&sf=headline&rc=20&rm=200&sp=nrm&clsPage=1&docID=AGE140301GKL8J3RI74H abgerufen
Haribar, P., & Collins, D. (2002). Errors in estimating Accruals. Journal of Accounting Research, 105-134.
Hyam, R. (28. Feb 2014). Woolworths posts strong first-half profit growth. Australia.
Joseph, A., & Itzhak, S. (1980). Quarterly Dividend and Earnings Announcements and Stockholders' Returns: An Empirical Analysis. The Journal of Finance, 1-12.
Trading Room. (16. May 2014). Quotes and Charts. Von Trading Room: http://www.tradingroom.com.au/apps/qt/quote.ac?section=ca&sy=tpl&code=WOW#tabs abgerufen
Woolwoorths Limited. (2014). Half Yearly Financial Report for the Half Year Ended 5 january 2014. Sydney.
Woolworths Limited. (2012). Who We Are. Von Woolworths Limited: http://www.woolworthslimited.com.au/page/Who_We_Are/ abgerufen
Appendix A: Relevant Extracts for Profit Announcement