Earnings Response Coefficient

Earnings Response is the relationship between a firm’s equity results and any unexpected earnings announcements. A firm’s stock price is related to information available in order to investors. Thus, news of unexpected earnings may result in buying panic even though low earnings may result in selling panic. The earnings response coefficient will be expressed as Ur = a + b(em-u) + at where r is the expected return, (em-u) would be the value of unexpected earnings, e express random movement, a would be the benchmark rate and b is the earnings response coefficient.