Profit warning and its association with stock price informativeness: experimental analysis

Abstract

Purpose

This study investigates the nature of the association between profit warnings and stock price informativeness in the context of Jordan as an emerging country.

Design/methodology/approach

The authors used a large panel data set that related to stock price synchronicity and profit warnings percentages on the Amman Stock Exchange for the period spanning 2007–2018. Robust regression was used as a parametric test. This enabled us to obtain stronger results that fall in line with our prediction that a profit warning encourages firm investors to collect and process more firm-specific information than common market information.

Findings

Our findings show a significant positive effect of profit warnings on the amount of firm-specific information incorporated into stock price, which means that the greater the percentage of profit warnings the more likely that more firm-specific information will be incorporated in stock price synchronicity. In addition, corporate governance characteristics (moderating variables) significantly increase the level of the relationship between profit warnings and stock price synchronicity.

Practical implications

Our study results could be useful to investors, senior managers, and regulators in Jordanian firms, particularly in relation to decisions about enhancing the quality of financial statements. In addition, our results provide new evidence about the consequences of earnings announcements for information content and the informativeness of stock prices. Our methodology and evaluation of profit warnings may also demonstrate useful evidence for future researchers on profit warnings and stock price informativeness in developing economies, especially given that such evidence is scarce in developing economies.

Originality/value

This research is the first study of its kind on emerging markets, particularly in the Middle East. Moreover, entering the corporate governance variables as moderating variables to the robust regression was found to be more powerful than other regressions.

Citation

Almasarwah, A., Almaharmeh, M., Omush, A.M.A. and Sarea, A. (2020), "Profit warning and its association with stock price informativeness: experimental analysis", Journal of Investment Compliance, Vol. 21 No. 4, pp. 209-230. https://doi.org/10.1108/JOIC-10-2020-0032