Earning Changes and the Investors' Reactions

Several decades have passed when the modern portfolio theory dominated the arena in illustrating and explaining investors' performance. Such domination was based on some assumptions such as rational behavior of investors, and the Efficiency Market Hypothesis. Due to the existence of experimental testimonies, inexplicable by the traditional models, the field of behavioral finance through the use of psychology, the social sciences and anthropology has tried to offer a more viable explanation as to the investors' behavior. This paper attempts to study the investors' behavior vis-à-vis the new earning announcements. It uses the prospect theory of Kahnman & Tversky, and tries to answer this question that: whether the prior earning announcement can be used as a reference point. In order to conduct this research, the behavior of the capital market in response to published announcements in the official site of the Tehran Stock Exchange (www.codal.ir) has been studied during 2006-2011 (1385-1390) in a three-day period by using the regression models. The results show that investors' reactions to an increase and a decrease in earnings per share are different. This behavior was explained by the value function of Kahnman & Tversky.