Earnings response coefficient estimation: An exploratory and comparative analysis in BRICS

Abstract

This paper estimates and compares the long-term market reaction to earnings innovation (ERC) in the five main emerging economies – Brazil, Russia, India, China and South Africa (BRICS) – and analyzes the effects of nonlinearity of unexpected earnings, negative earnings and firm size on ERC. The tests are based on 31,159 firm-year observations from 1995 to 2013 from a total sample of 2,290 listed firms and the econometric estimation process is based on countryspecific longitudinal ordinary least squares regressions. The results showed that accounting information has marginal implications for stock prices in all countries; however, the determinants of ERC vary along time and across countries as context-specific components. The results also show that (i) the nonlinear effects of unexpected earnings in ERC are a common trend in all evaluated countries but Russia; (ii) the negative earnings effects on ERC are documented in Brazil, India and Russia, whereas they do not hold true for China and South Africa; and (iii) only in China a significant effect of firm size is observed in the way market agents incorporate earnings information in the long run. Keywords: accounting earnings, earnings response coefficient, emerging markets, BRICS.