Stock Market Reactions to the Release of Annual Financial Statements: Case of the Banking Industry in Sri Lanka

Abstract

The stock market reactions on the release of financial statements have been subjected to many empirical discussions in finance literature. However, in Sri Lanka only a few studies have been documented in this area of market reaction to information. By employing five year data using event study methodology, the study investigates stock market reaction to the release of annual financial statements of banks registered in the Colombo Stock Exchange (CSE). The study results show that abnormal return and cumulative abnormal return around the release of annual financial statements are positive but insignificant at 5% level. Further, the share price behavior on the announcement of annual reports was different from that outside the test period. The positive reactions of investors could be attributed to the favorable information in annual financial reports. Therefore this response has the potential of generating abnormal returns based on publicly available information in the market.

Keywords: Abnormal return, Event study, Market reaction