Research Papers

Semi-Strong Form of Market Efficiency Research Paper

Announcements are essential for investors and shareholders to enable them to determine the viability of their investments. According to efficient market theory, stock prices in a semi-strong market factor in all material public information. Therefore, publicly issued financial announcements have the potential to influence the demand for various stocks and, in turn, affect their prices. The literature survey has uncovered a gap in empirical research in relation to three company specific announcements and the determinants of the stock market reaction to them in the Saudi context by previous researchers. The announcements are company announcements of annual financial results, changes to the board of directors/CEO and annual general meetings. Event study methodology and event parameter approach will be adopted in this study to investigate the effect of the above announcements. To calculate abnormal returns, in addition to the widely used market model, the Fama-French three-factor model will be employed.

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The latter model has not been applied to calculate the abnormal returns in prior studies in the Saudi context. This model is a widely used approach and has been tried and tested in event studies to detect abnormal returns. Besides, it provides significantly more explanatory power than the one-factor CAPM. To corroborate the results using the above models, this study employs an alternative approach to examine the impact of the above announcements on share prices, namely, event parameter approach. This approach has been adopted by only a few previous studies. This study will focus on a sample of 80 companies comprising the Tadawul All-Share Index (TASI) that made the above announcements between 2014 and 2018. A 31-day window forms the period during which abnormal returns are tested. The results of this study will show whether there are statistically significant abnormal returns due to the announcements. The study will also examine how firm age, size, insider ownership and sector affect the reaction to the above announcements. Additionally, the finding of this study will provide valuable information to investment managers and policymakers by clarifying the effects of these announcement on the Saudi stock market.

Keywords: Saudi Arabia, TASI, annual financial results, annual general meetings, changes to the board of directors/CEO, event study

This project aims to test the semi-strong form of market efficiency of the Saudi stock exchange (Tadawul) using data on company announcements of annual financial results, changes to the board of directors and the CEO, and annual general meetings (AGMs). In addition, it will investigate how firm age, firm size, insider ownership and sector of company affect the share market reaction to the above announcements. The sample of the study will consist of 80 randomly selected listed companies included in the Tadawul All-Share Index (TASI) of Saudi Arabia. The study employs the event study methodology and event parameter approach.

This study aims to achieve the following four objectives:
To analyse all annual financial results announcements.
To analyse all changes to the board of directors/CEO announcements.
To analyse all of the convening of general assembly meeting announcements.
To examine the efficiency of Saudi stock market in semi-strong form.
To explore the determinants of stock price reaction to the announcements of annual financial results, changes to the board of directors/CEO and annual general meetings.

For the purpose of achieving the research aims and objectives, this study will address the following four research questions:
Do announcements of annual financial results have a statistically significant impact on stock prices?
Do announcements of changes to the board of directors/CEO have a statistically significant impact on stock prices?
Do announcements of the convening of annual general meetings have a statistically significant impact on stock prices?
Is the Saudi stock market efficient in the semi-strong?
What are the determinants of stock price reactions to the announcements of annual financial results, changes to the board of directors/CEO and annual general meetings?

4.4 Determinants of stock price reaction

4.4.1 Firm Size

Size of the firm is an important factor in determining the price stock reaction. Ramady (2005) argues that announcements made by larger companies tend to have a bigger impact in the stock price reaction. Most investors remain keen on announcements made by major companies in the market in terms of size and that any announcement made with regard to annual general meetings, profit shares, change of directors and their financial impact has a direct impact on the stock prices.

Hypothesis: If a firm of larger size makes an annual general meeting, financial performance and change of directors announcement, the impact is directly shown in the change in the prices of stocks.

4.4.2 Firm
AgeAndréosso-O’Callaghan & Royall (2013) start off this debate when they note that older companies in the market tend to have an established market profile and trust levels with the investors. Most investors would look to these companies because they trust in their stability and business model.

As a result, any announcement that might affect the business conduct of such companies is taken with high regard by investors. If the information is positive, it results to positive addition in prices and when negative, it results to the negative.

The international journal of accounting (2000) notes the importance of announcements in business and states that the more a business makes announcements, the more likely the investors keep a keen eye on the general performance of such a business. Businesspersons will always look at the possible ROI (Return on Investment) before making decisions and in cases where the company involved is old in terms of age, their trends are already known hence their announcements will be weighed on the previous trends set by the company.

Hypothesis: Announcements on annual general meeting, financial performances and change of top management are most likely to affect older companies in the market as compared to newer ones.

4.4.3 Firm Sector
Nationen (2002) discusses the importance of understanding a firm’s sector for new investors. His main idea is that companies pass information through different announcement. Such announcements could be concerning their financial performance, annual general meetings scheduling and decisions, and a change of leadership in business (most likely the directors). All these are important factors and vary depending on the business sector. For example, in the oil industry, announcements of a company’s financial performance is very important as compared to that of the annual general meeting. In such a sector, stock prices are controlled depending on the official announcement of a company’s financial performance.
Change in leadership or change of directors affects the trust people have in the whole business model. Most business in Saudi Arabia are controlled by reliable directors, proof of this is in the fact that most companies in the market are currently performing well. In case a change of directors is announced when the directors were top performers, it is likely that the business’s stocks will go down. This will scare away investors and in return lower the stock prices which has a negative impact on the company’s general profile.

Hypothesis: Companies belonging to different sectors come with different impacts when they make announcement of their financial performance, general meetings and change of leadership.

4.4.4 Firm Insider Ownership
An insider ownership relates to the company’s prospect and division of shares. Saudi Arabia & Oxford Business Group (2008) have indicated that the company owner’s profile is very important to investors before they choose whether they can invest or not. From this, announcements made following this perception also bring in an additional weight. Announcements pertaining to annual general meetings, financial performance and change of directors will bear a different impact depending on the insider ownership.

Organization of Petroleum Exporting Countries (1966) warns that existing shareholders in a petroleum company determine the weight of any information disseminated by the company. In case the insider owners are business elites, most of the announcements will have a bigger weight as compared to when the owners are mostly commoners.

Hypothesis: Announcements of financial performances, annual meetings and change of directors have an impact on stock reflection depending on the firm insider ownership.

5.1 Data
5.1.1 Data Collection
Secondary data from TASI will be used in this study in the form of daily data for stock prices and the companies’ public announcement dates over a five year period from January 2014 to December 2018. This will be used to determine the price sensitivity of stock prices to company public announcements of annual financial results, changes to the board of directors/CEO, and AGMs. The population for this research is particularly heterogeneous. Therefore, stratified sampling of 50 companies that are listed and continuously traded on TASI is selected to ensure a significant degree of representativeness of all companies in the population.

Daily closing prices will be obtained from Thomson Reuters DataStream for each share. Also, the data for each company’s public announcements will be collected from the Bloomberg database and the official site of the Saudi stock market ( It is available from the section covering company announcements with details of the date and time being collected manually from the Tadawul website. A t-test will be used to test the hypotheses. For the firm age, the research will need to look at five company’s old enough in the market compared to five others that are still new. Firm size data can be collected from the K-reports of companies online and focus more on two small companies, one medium sized and two other large size companies. Firm sector can be collected by focusing on the online reports of how sectors perform; this should be set up not leaving out the petroleum sector. Data on firm inside ownership can be collected through company profile analysis. Most of the company profiles can be found online and be relied upon to offer such data.

5.4 Event Parameter Approach
The event parameter approach also considers the use of log returns in analysing securities. Until the 1987 stock market crash, it was assumed that log-returns were usually Gaussian distributed. However, subsequent analysis discredited the assumption, revealing that extreme log returns are more probable than had been suggested. Possibly rejection has been bound to large kurtosis which contradicts the normality assumption (Fergusson & Platen, 2006).

When undertaking a short-term event study, one would assume that the capital market operates on semi-strong form efficiency. Thus, this presumption would suggest that all asset prices include relevant price information that factors in all information that is publicly available (Jarrow & Larsson, 2012). The event in this case is concentrated on the evaluation on the TASI based on three key market parameters: financial results, changes to the board of directors/CEO and AGMs. To ensure the accuracy of data, the data analysis will exclude events that are announced concurrently with new price information. The exclusion would help to eliminate systemic bias resulting from jointly submitted information. Thus, in the mean examination of the daily dividend returns, one would eliminate dividend information that was released concurrently with information such as share repurchases and special announcements. Also considered is the change in price that may result from mergers and acquisitions and other business proceedings. In this respect, each of the analysed securities will be critically reviewed for potential changes to the identifiers in the Saudi stock market. The estimation method for the expected return should also be consistent for each of the assets. In this respect, this study will use the constant mean return model whose procedure has been described in the data analysis section. The method generally presumes the average return of an asset over a given period and uses market means to establish the expected asset market return (Menike & Man, 2013). On the Saudi stock market, the beta factor shall be used to establish the sensitivity of a specific security to the market portfolio.

Event parameter analysis has been used by authors to analyse various stock markets. The technique has revealed that most stock markets presume a semi-strong to strong market, thus limiting the ease of predicting market behaviour. Using these insights, this study aims to establish the semi-strong characteristics of the Saudi market and how is it affected by market factors.

5.4.1 Parameter Test Statistics T-test
The t-test statistic for to test the null hypothesis H0: =0 is given as:
Where (18)
= the standard deviation of abnormal returns (in estimation window).
= the number of non-missing return values in the estimation window.
The t-test statistic for the cumulative abnormal returns for each company to test the null hypothesis H0 : = 0 is given by:
Where (20)
= the length of event window ( )
= the latest day of the event window
= the latest day of the estimation window Cross-Sectional Test
The cross-sectional test for average abnormal returns on day t () will be calculated using the following equations to test the null hypothesis H0: =0
Where (22)
= the standard deviation of the average abnormal returns across companies at time t
N = the number of securities.
The cross-sectional test statistics for cumulative average abnormal return for testing H0: =0 will be calculated using the following equations:
Where (24)
= the standard deviation of the cumulative average abnormal returns across the sample at time t
N = the number of securities.

5.5 Determinants of stock price reaction
Generally, the steps involved in obtaining the abnormal returns, average abnormal returns, cumulative abnormal returns and t-statistics in the market models are the same for the determinants of stock price reaction. To compute the determinants that influence abnormal returns, the following linear regression will be run:

= the cumulative abnormal returns,
= the age of the firm, the number of calendar years since the company went public by listing on the stock market.
= the size of the firm, the natural log of the market value of equity.
= the insider ownership of the firm, the percentage of shares held by insiders of a firm.
= the firm’s sector. Tadawul has 21 sectors.
= the error terms.
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