ISM UNIVERSITY OF MANAGEMENT AND ECONOMICS MASTER OF SCIENCE IN FINANCIAL ECONOMICS PROGRAMME Gerda Repe čkait ė MASTER'S THESIS EVALUATION OF BALTIC STOCK EXCHANGES’ EFFICIENCY Supervisor Dr. N. Ma čiulis 2010 _ ____________ _ Reviewer 2010 _ _____________ VILNIUS, 2010 Evaluation of Baltic Stock Exchanges’ Efficiency 2 ABSTRACT Repe čkait ė, G. Evaluation of Baltic Stock Exchanges’ efficiency [Manuscript]: Master Thesis: economics. Vilnius, ISM University of Management and Economics, 2010. In this Master‘s Thesis the Baltic Stock Exchange’s (Lithuanian, Latvian and Estonian) efficiency is valued for the period of 2004-2009. This thesis aims to evaluate the reaction of Baltic stock exchange to quarterly financial statement announcements. To reach this aim the concept of market efficiency is analyzed and related theory reviewed. The unanticipated content of quarterly financial announcements, the speed of Baltic Stock Exchanges’ reaction and adjustment to analyzed announcements are analyzed. The Baltic stock exchanges’ participants ability evaluate the stocks prices correctly also is analyzed. For this purpose the traditional short term event study is employed. The categories of the Good and Bad news were analyzed using non parametric Wilcoxon Signed Ranks and Sign tests. The major empirical research results are as follows. Firstly it was found that the announcements of the quarterly financial reports do have the unanticipated information in all Baltic Stock Exchanges. Secondly it was indicated that the Baltic Stock Exchanges are able to adjust to the information provided by the quarterly financial announcements within one day. Thus the semi- strong form of market efficiency was not rejected for Estonian and Lithuanian Stock Exchanges. The significant inefficiency in reacting to the unfavorable news was found for the Latvian Stock Exchange thus for this market the semi-strong form of market efficiency was rejected. The significant abnormal returns on the day of the quarterly financial announcements close to 3% were identified for both categories of news (good and bad) indicting that the Stock market participants are not able to valuate the performance of the stock prices correctly. The identified empirical research results enrich the EMH theory in the small and developing markets. Indicated quarterly financial reports value-relevance for investors supports the theory that it one of the major sauces of information to the market. Indicated inefficiencies in the Latvian SE could be analyzed by regulators. This Master‘s thesis limitations are based on the single research object – only quarterly financial reports announcements were analyzed. Also the results are based on EMH rationality assumption. And the analysis is provided for the good and bad news separately. Evaluation of Baltic Stock Exchanges’ Efficiency 3 SANTRAUKA Repe čkait ė, G. Baltijos šali ų akicij ų rink ų efektyvumo vertinimas [Rankraštis]: magistro baigiamasis darbas: ekonomika. Vilnius, ISM Vadybos ir ekonomikos universitetas, 2010. Šiame magistro baigiamajame darbe tiriamas Baltijos akcij ų rink ų (Lietuvos, Latvijos ir Estijos) efektyvumas 2004 – 2009 met ų laikotarpiu. Šio magistro darbo tikslas įvertinti Baltijos šali ų akcij ų rinkos reakcij ą į ketvirtini ų finansini ų ataskait ų paskelbim ą. Siekiat šio tikslo darbe pateikiama rinkos efektyvumo samprata, pateikiama susijusios literat ūros analiz ė. Tiriama ketvirtini ų ataskait ų teikiamos informacijos netik ėtumo, naujumo aspektas, taip pat analizuojama kaip greitai rinka prisitaiko prie naujos informacijos. Taip pat atsižvelgiama į Baltijos šali ų akcij ų rink ų dalyvi ų sugeb ėjim ą teisingai bei realistiškai vertinti akcij ų vert ę. Šiems tikslams pasiekti naudojama tradicin ė trumpalaikių įvyki ų analiz ė (ang. event study). Palanki ų bei nepalanki ų ketvirtini ų finansini ų ataskait ų paskelbimo sukeltos reakcijos analizuojamos naudojant neparametrinius “Wilcoxon Signed Ranks” ir “Sign” testus. Pagrindiniai empirinio tyrimo rezultatai: pirma, buvo nustatyta, jog ketvirtin ės finansini ų rezultat ų ataskaitos turi nenumatytos informacijos, naudingos Baltis šali ų akcij ų rinkos dalyviams. Antra, buvo nustatyta jog Baltijos šali ų akcij ų rinka reaguoja bei prisitaiko prie ketvirtini ų finansini ų ataskait ų suteiktos informacijos per vien ą dien ą. Dėl šios priežasties Estijos bei Lietuvos akcij ų rinkoms vidutinio stiprumo efektyvumo lygio hipotez ė negali b ūti atmesta. Ženklus neefektyvumas buvo nustatytas Latvijos akcijos rinkos dalyviams reaguojant į nepalankias naujienas ketvirtin ėje finansin ėje ataskaitoje, d ėl šios priežasties vidutinio stiprumo rinkos efektyvumo hipotez ė yra atmetama. Nustatytas reikšmingas (~3%) viršpelnis (angl. abnormal returns) finansini ų ataskait ų paskelbimo dien ą tiek palanki ų tiek nepalanki ų naujien ų grupi ų atveju leidžia teigti, jog rinkos dalyviai nesugeba teisingai vertinti įmon ės veiklos bei akcij ų kain ų teisingai. Tyrimo metu gauti rezultatai papildo Efektyvios rinkos hipotez ės teorij ą smulki ų ir besivystan čių akcij ų rink ų atžvilgiu. Identifikuota ketvirtini ų ataskait ų nauda rink ų dalyviams paremia teorij ą kad jos yra vienos iš pagrindini ų informacijos šaltini ų rinkai. Latvijos rinkoje nustatyti efektyvumo nukrupimai gal ėtų b ūti analizuojami priži ūrin čių institucij ų. Pagrindinis šio magistro baigiamojo darbo apribojimas – tiriamas vienintelis tyrimo objektas (ketvirtini ų finansini ų ataskait ų paskelbimas). Taip pat išvados daromos remiantis ERH (efektyvios rinkos hipoteze). Taip pat palanki ų bei nepalanki ų ataskait ų analiz ė atliekama atskiroms naujien ų grup ėms. Evaluation of Baltic Stock Exchanges’ Efficiency 4 THE TABLE OF CONTENT The list of tables ............................................................................................................................. 5 The list of figures............................................................................................................................ 6 1. Introduction ............................................................................................................................ 7 2. Stock Market Efficiency Literature Review........................................................................... 9 2.1. The Concept of Market Efficiency................................................................................. 9 2.2. Event Studies’ Theoretical Background....................................................................... 11 2.3. Empirical Evidence on Public Financial Announcements’ Relevance ........................ 13 2.3.1. Efficiency of Stock Valuation .............................................................................. 17 2.4. Researches in Baltic Stock Exchanges’........................................................................ 17 3. Research Problem Definition ............................................................................................... 21 4. Methodological Approach.................................................................................................... 23 4.1. Research Design........................................................................................................... 23 4.2. Event Study Methodology............................................................................................ 23 4.2.1. Variables of Interest ............................................................................................. 24 4.2.2. Event Window...................................................................................................... 25 4.2.3. Estimation Window.............................................................................................. 26 4.2.4. The Estimation of Normal Performance............................................................... 27 4.2.5. Abnormal Return Measurement ........................................................................... 30 4.2.6. Significance Tests................................................................................................. 32 4.2.7. Non-Parametric Tests........................................................................................... 34 5. Empirical research report ..................................................................................................... 37 5.1. Sample.......................................................................................................................... 37 5.2. Data and Tests Statistics............................................................................................... 37 5.3. Results of Event Study ................................................................................................. 40 5.3.1. The Content of Quarterly Financial Reports’ Announcements............................ 40 5.3.2. The Speed of Reaction to Quarterly Financial Reports’ Announcement............. 42 5.3.3. The Magnitude of Abnormal Returns for Different Categories of News............. 47 6. Discussion ............................................................................................................................ 51 6.1. An Overview of the Significant Findings of Empirical Research................................ 51 6.2. A Consideration of the Findings in the Light of Existing Research Studies................ 53 6.3. Implications for Current Stock Market Efficiency Theory and Practical Value.......... 55 6.4. Limitations...................................................................................................................