Identify an earnings announcement made by an Australian listed company on or after 01 July 2014. Many Australian companies announce their annual results in the months of July and August. 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" in the past or expected in the future. The announcement date must be after 01 July 2014 based on the past yearly or half-year results 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!7Finance", "au.finance.yahoo.com" 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. BANK1005 Derivatives and Securities Markets Study Period 5, 2014 Assessment 2 – Investigation of an Earnings Announcement in the Equity Market  HB, September 2014 A2 3 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. No other references, in addition to the newspaper(s) and the specified article, are required for your essay. 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.