The Semi-Strong Form of the Market Efficiency Hypothesis and the Post Earnings Announcement Drift on Swiss Stock Markets

The Semi-Strong Form of the Market Efficiency Hypothesis and the Post Earnings Announcement Drift on Swiss Stock Markets
By:Christoph Wagner
Published on 2007 by

This study takes a sample of 21 SMI stocks to test for the semi-strong form of the Efficient Market Hypothesis. For each stock semi-annually or quarterly released reports since the date of its listing in the SMI are used to compare published Earnings per Share values with investors' expectations. Based on a quantified measure for investors' surprise it is tested whether cumulative abnormal returns can be realized around earnings announcements. Although this study finds evidence for the existence of positive cumulative abnormal returns in pre-announcement periods as well as in periods of one to ten days after announcements both for positive and negative surprises, the results do not question the semi-strong form of the Efficient Market Hypothesis. All observations are grouped for quantiles according to their absolute values of earnings surprises. For each of the quantiles a portfolio is formed which takes a long position in observations with positive surprises and a short position in those with negative ones. It is tested whether the cumulative abnormal returns time series for the portfolios display a Post Earnings Announcement Drift and whether this drift depends on the level of surprise. However this study does not find any reliable evidence for the existence of such a drift on Swiss Stock Markets. The analytical framework of this study is critically assessed to show how variations in the setting can yield future research results which are more reconcilable with other studies.

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