THE INFORMATION CONTENT OF EARNINGS AND SYSTEMATIC RISK IN CHANGING ECONOMIC CONJECTURE : THE TURKISH CASE A THESIS SUBMITTED TO THE GRADUATE SCHOOL OF SOCIAL SCIENCES OF MIDDLE EAST TECHNICAL UNIVERSITY BY FATMA AKSOY IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION OCTOBER 2008 Approval of the Graduate School of Social Sciences Prof. Dr.Sencer Ayata Director I certify that this thesis satisfies all the requirements as a thesis for the degree of Master of Business Administration. Prof. Dr.Cengiz Erol Head of Department This is to certify that we have read this thesis and that in our opinion it is fully adequate, in scope and quality, as a thesis for the degree of Master of Business Administration Prof. F. N. Can Şımga-Mu ğan Supervisor Examining Committee Members Assoc. Prof. Zeynep Önder (BILKENT UNIVERSITY, BA) Prof. F. N. Can Şımga-Mu ğan (METU, BA) Assist. Prof. Engin Küçükkaya (METU, BA) I hereby declare that all information in this document has been obtained and presented in accordance with academic rules and ethical conduct. I also declare that, as required by these rules and conduct, I have fully cited and referenced all material and results that are not original to this work. Name, Last name : Fatma, Aksoy Signature : iii ABSTRACT THE INFORMATION CONTENT OF EARNINGS AND SYSTEMATIC RISK IN CHANGING ECONOMIC CONJECTURE: THE TURKISH CASE Aksoy, Fatma M.B.A., Department of Business Administration Supervisor : Prof. Dr. F. N. Can Şımga-Mu ğan October 2008, 73 pages This thesis analyses the information content of inflation adjusted financial statements for investors and the informational value of accounting earnings and systematic risk in explaining stock returns in Turkey. Information content of inflation accounting is tested by using event study methodology. Results show that, contrary to 2002, there exist abnormal returns/(losses) in the period surrounding the announcement of 2004 financial statements. However, due to non-company specific political and economic conditions around the announcement days, we cannot precisely state that either the inflation adjustment or the political forces cause the abnormal price activity at the time of research. Second part of the thesis is based on the regression study methodology which shows the significance of accounting earnings and firms’ systematic risk in explaining stock returns, in different economic conjectures. Results show that earnings have informational value for 2003 and 2004 fiscal years while systematic risk is significant in the period before 2003. This may imply that earnings become significant in good periods of the economy while the systematic risk becomes significant when the economy is in recession or recovery periods. Keywords: Inflation accounting, Earnings, Systematic risk iv ÖZET FİNANSAL TABLO KÂRI VE S İSTEMAT İK R İSK İN DE ĞİŞ EN EKONOM İK KONJENKTÜRDE SA ĞLADI ĞI B İLG İ: TÜRK İYE ÖRNE Ğİ Aksoy, Fatma Yüksek Lisans, İş letme Bölümü Tez Yöneticisi : Prof. Dr. F. N. Can Şımga-Mu ğan Ekim 2008, 73 sayfa Bu çalı şma, enflasyona göre düzeltilmi ş finansal tabloların yatırımcılar için bilgi içeri ği olup olmadı ğını ve finansal tablolardaki kârın ve sistematik riskin hisse senedi getirilerini açıklamadaki anlamlılı ğını analiz etmektedir. Enflasyon muhasebesinin bilgi içeri ği olay çalı şmaları metodu kullanılarak test edilmektedir. Analiz sonuçları, 2002 mali tablolarının aksine, 2004 mali tablolarının açıklandı ğı dönemde normalin dı şında getirilerin/(kayıpların) gerçekle şti ğini göstermektedir. Öte yandan, günlük anormal getiriler/(kayıplar) incelendi ğinde, anormal hareketlerin enflasyona göre düzeltilmi ş mali tabloların etkisi ile de ğil, yabancı yatırımcının yatırım kararlarının dünya piyasalarındaki hareketlerden dolayı de ğişmesinden kaynaklandı ğı görülmü ştür. Tezin ikinci kısmında ise mali tablo kârının ve sistematik riskin farklı ekonomik konjektürlerde hisse senedi getirilerini açıklamaktaki anlamlılığı, regresyon analizi yöntemi ile test edilmektedir. Sonuçlar, mali tablo kârının 2003 ve 2004 mali dönemleri için hisse senedi getirilerini açıklamada anlamlı oldu ğunu fakat sistematik riskin ise 2003 yılından önceki dönemler için anlamlı oldu ğunu göstermektedir. Bu sonuç, mali tablo kârının ekonominin iyi oldu ğu dönemlerde anlamlı oldu ğunu, sistematik riskin ise ekonominin toparlanma a şamasında ya da durgun oldu ğu dönemlerde bilgi içeri ğinin oldu ğu şeklinde yorumlanabilir. Anahtar Kelimeler: Enflasyon Muhasebesi, Kâr, Sistematik Risk v TABLE OF CONTENTS PLAGIARISM................................................................................................. iii ABSTRACT..................................................................................................... iv ÖZET ................................................................................................................ v TABLE OF CONTENTS ................................................................................ vi LIST OF TABLES......................................................................................... viii CHAPTER 1. INTRODUCTION .................................................................................. 1 2. LITERATURE REVIEW....................................................................... 3 2.1. LITERATURE REVIEW ON EVENT STUDIES................................ 3 2.2. LITERATURE REVIEW ON REGRESSION STUDIES................... 10 2.3. BACKGROUND ON TURKEY........................................................ 23 2.3.1. Istanbul Stock Exchange (ISE).................................................... 23 2.3.2. The Capital Markets Board (CMB)............................................. 27 2.3.3. Economy of Turkey .................................................................... 28 2.3.4. History on Inflation Accounting in Turkey.................................. 30 3. DATA AND METHODOLOGY .......................................................... 33 3.1. SAMPLE SELECTION .................................................................... 34 3.1.1. Sample Selection for Event Study............................................... 34 3.1.2. Sample Selection for Regression Study....................................... 35 3.2. HYPOTHESES................................................................................. 37 vi 3.3. METHODOLOGY ........................................................................... 39 3.3.1. Event Study Methodology .......................................................... 39 3.3.2. Regression Study Methodology .................................................. 42 4. RESULTS.............................................................................................. 46 4.1. EVENT STUDY RESULTS.............................................................. 46 4.2. REGRESSION STUDY RESULTS................................................... 53 5. CONCLUSION ..................................................................................... 65 5.1. SIGNIFICANCE OF THE STUDY ................................................... 65 5.2. LIMITATIONS OF THE STUDY..................................................... 66 5.3. FURTHER RESEARCH................................................................... 67 5.4. IMPLICATIONS .............................................................................. 67 REFERENCES............................................................................................... 70 vii LIST OF TABLES TABLES Table 1. ISE Market Volume between 1986 and 2005 ......................................26 Table 2. Descriptive Statistics of ISE-Composite Index Values between 1999 and 2004 .............................................................................27 Table 3. Sample Selection and Loss of Data .....................................................36 Table 4. CAR Values for 2002 and 2004 ..........................................................48 Table 5. Daily Average AR and Cumulative AR Values for 2002 and 2004......................................................................................51 Table 6. Descriptive Statistics between 1999 and 2002- Without Inflation Accounting ....................................................................53 Table 7. Descriptive Statistics for 2003 and 2004- With Inflation Accounting .........................................................................54 Table 8. Result of Pooled Cross-sectional Regression Analysis ........................54 Table 9. Results of Yearly Regression Analysis................................................56 Table 10. GNP-GDP between 1998 and 2005 ...................................................58 Table 11. ISE -Composite Index Monthly Closing Values ................................60 Table 12. Average Return and Systematic Risk of Sample Firms......................61 Table 13. Yearly Average Percentage Change in WPI 1998-2005.....................62 viii CHAPTER 1 INTRODUCTION The information content of accounting earnings attracted researchers since the study of Beaver (1968) and Ball and Brown (1968). There are many studies regarding accounting figures and stock returns in the literature, however, the number of studies on Turkish stock market is limited. Istanbul Stock Exchange (ISE) is the only stock exchange in Turkey which was established in 1986. In this study, we will analyze stock returns and accounting earnings of non-financial listed companies in ISE. The purpose of this study is twofold. Firstly, we would like to investigate the information