Abstract

Stock price reaction to the announcements of accounting earnings is investigated using event study approach in the Finnish stock market. The main finding of this study is that the permanent and temporary losses cause different price reactions in Finland. The temporary losses, i.e. the loss cases that do not continue to cause any statistically significant price reaction when earnings announcements are classified to positive or negative surprises. On the other hand, negative surprises in the permanent losses (losses which continue in the future) cause significant reductions in stock prices, i.e. the permanent losses have a significant information content. These results suggest that investors do not value temporary components of losses because they believe that the temporary components are not reflected in future cash flows. Consistent with earlier evidence, news in profits lead to significant price reaction.

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