Factors affecting earnings response coefficient in Jordan: applied study on the Jordanian industrial companies

Saad A Al-Sakini,Hanan Al Awawdeh,Mahmoud Nour

doi:10.21511/imfi.17(2).2020.20

Saad A Al-Sakini, Hanan Al Awawdeh + Show 1 more

Open Access

https://doi.org/10.21511/imfi.17(2).2020.20

Copy DOI

Abstract

Earnings Response Coefficient (ERC) reflects the market response to the company’s published earnings. It also reflects the quality of the company’s profits. This study aims to examine the factors affecting ERC in Jordan based on a sample of 17 Jordanian industrial companies listed on the Amman Stock Exchange during 2012–2018. The dependent variable of this study is the Earnings Response Coefficient (ERC). Five independent variables or factors were selected for testing their impact on the dependent variable, namely, leverage ratio, systemic risks, company’s size, company’s growth opportunity, and the company’s profitability. The results of panel data regression analysis showed that for companies with a higher leverage ratio, the market is less responsive to the change in their profits than those with a higher leverage ratio. Systematic risk has a negative and significant effect on ERC, which means that high systemic risks lead to a reduction in the ERC. The company’s size has no significant impact on ERC, indicating the irrelevance of the relationship between the size of Jordanian industrial companies and their profits. The company’s growth opportunity has a negative and significant impact on ERC, which means low market-to-book ratio and higher growth opportunities resulting in higher ERC. Finally, the company’s profitability measured by return on assets (ROA) has a positive and important impact on ERC, suggesting that higher profitability increases ERC. The study highlighted the importance of ERC and recommended that companies take the needed measures to increase their ERC. It also recommended raising investors’ awareness.

Highlights

Accounting earnings are one of the most important items disclosed in companies’ financial statements, as they constitute the result of all the operational, investment, and financial activities carried out by the company during the financial period
Using multiple linear regression models, the study These companies are spread over nine subsectors, results showed that the leverage ratio, growth op- namely pharmaceuticals, medical industries, chemportunities, and company size have a significant ical industries, printing and packaging, food, beverimpact on the Earnings Response Coefficient
The ages, tobacco and cigarettes, extractive and mining impact of the leverage ratio was negative on the industries, engineering and construction industries, Earnings Response Coefficient (ERC), while the growth opportunities and the electrical, clothing industries, leather and fabric company size had a positive impact on ERC

Summary

Introduction

Accounting earnings are one of the most important items disclosed in companies’ financial statements, as they constitute the result of all the operational, investment, and financial activities carried out by the company during the financial period. This makes profits to the attention of all users of the financial statements The volatility of stock prices increases during the release of the financial statements period compared to previous periods. This reflects the market’s response to stock prices to understand the Earning Response Coefficient (ERC).

Objectives

Methods

Findings

Conclusion