Capital Markets Conclusion, Limitations and Future Research

273 periods of profitable stock market and favorable market-wide news. A low market level, on the other hand, is defined as the periods of unprofitable stock market and unfavorable market-wide news. Conrad, Cornel Landsman 2002 find that asymmetric stock price reaction to earnings shocks are more pronounced at the high market level. That is, the stock price reaction to negative earnings shocks is stronger at the high market level than at the low market level. This finding is consistent with the systemic shift in investors‘ sentiment. Namely, when the market level is high, for instance, investors are optimistic in that they expect positive earnings shocks from all firms in the market, not merely from firm-specific. This finding is consistent with MW approach David, 1997; Veronesi, 1999 and implies that investors feel unsecured about the market condition so that they have to predict the market condition using information from the past. Both firm-specific and MW approach adequately explains the asymmetric behavior of stock price reaction in well-developed capital markets. Both approaches, however, lack empirical evidence from emerging capital markets. Do both approaches explain the asymmetric behavior of stock price responses in emerging capital markets? This study is designed to answer the questions. Such a study is very important for the following reasons. First, previous studies in advanced capital markets show mix findings. Some studies show a stronger reaction on positive ES, while others find a stronger reaction on negative ES. In emerging capital markets the magnitude of price fluctuations might be greater than that in advanced markets because stock prices might not reflect firms‘ fundamental values Bhattacharya et al., 2000. Second, the impact of earnings announcements in emerging capital markets might not be as strong as that in advanced markets. The reason is that investors in emerging markets are accustomed to a high price volatility so that they do not inteliggently respond to good news as do investors in advance markets. Third, in emerging markets there might be information leakage indicating the existence of insider trading. Therefore, investors have anticipated earnings announcements so that there will be no significant price fluctuations at the announcement date Huberman Schwert, 1985. Fourth, Huberman Schwert 1985 suggest that there is information leakage in emerging capital markets. Such a leakage is driven by two different types of investors — domestic and foreign investors. They behave differently in gaining stock returns. Domestic investors act to destabilize stock prices Dvorak, 2005. The proces of destabilzing is driven by their closeness to information sources. Because an information leakage is identified in emerging capital markets, earnings announcements do not positively affect the abnormal returns as well as abnormal trading volume. As a consequence, earnings announcements in emerging capital markets will not convey information contents.