In this report, it is given that reporting frameworks of organization are depends upon the accounting standards and reporting framework of organization. Capital market fluctuation is highly dependent upon the disclosure of information of companies whose shares are listed in stock exchange. This research contains the information related to impact of earning to the reaction of capital market. With the increasing ramified economic changes, capital market is depended upon the various macro and micro factors such as economic policies, investor’s budget, foreign direct investment and company’s financial reporting frameworks. However, in order to win over the investors trust in capital market, many big listed companies are following international financial reporting standards in determined approach. This research has also reflected the key understanding on the factors affecting the fluctuation of capital market and its relation with the earning of companies
There are several issues and factors that have bearing on the capital market reactions due to the changes in earning. However, due to the uncertainty of market factors and capital market reactions, various investors have to face high amount of loss in their capital when they invest their money in capital market. The main problem in this research is to quantify the impact of earning on the capital market reaction (Grewal, Riedl, and Serafeim, 2015).
Capital market could be defined as a part of a financial system that concerned with the raising capital by shares, bonds, debentures and other financial instruments. Ideally, this market could be defined as place where investors invest their money to create value on their investment and organizations raise money for their business functioning. With the ramified changes and economic growth, capital market is bifurcated into two parts such as primary and secondary market (Griffin and Sun, 2013). Primary market is accompanied with the issues of initial public offers and further public offers which is accepted by investors by filling the application forms in the market. On the other side, in secondary market, investors indulged in consistent trading related to buy and sell their financial instruments with a view to create value on their investment. After collecting data from the various sources, it is determined that if listed company could make proper disclosure through their reporting frameworks then it capital market would be less unstable and accompanied by less risk (Clinton, Pinello, and Skaife, 2014) It is considered that company having higher earnings will be more open in the market trading and investors would be ready to buy these stocks to create value on their investment.
Practical implication of listed company’s earning and its impact on the capital market
Capital market is used by listed companies to raise capital from the market and by investors to create value on their investment. Fluctuation of share prices and value of the issued capital depends upon information of the company disclosed in the market. Capital market would be more unstable if company fails to disclose its earning in market. For instance, if some investors have idea about the company’s business functioning and gathered undisclosed information from unethical means then in that case trading of those shares would be highly unstable (Hostak, et al, 2013). In case of Sun Pharm and Ranbaxy case, market was highly fluctuated and resulted loss and profit to investors in the trading of both shares. Ideally, listed stock exchange bane the trading of shares of particular company in case of disclosure made or when they company entered into strategic transactions with a view to save the investors from high loss. This reflects that if disclosure made by company is related to expansion, strategic alliance or plugging back the money in their value chain activities then share prices of the companies will increase so will market capitalization (Hostak, et al. 2013). On the other hand, if disclosure of information is not irrelevant or reflects downward slope of business then share price or market capitalization will be down and investors will have to face loss in their investment value. In simple word, it could be inferred that earning capacity of company has great impact on the investor’s investment decisions (Brochet, Naranjo, and Yu, 2016). For instance, if in the financial reporting of five companies named GE capital, Woolworth, Wesfarmers and Tesco, it is observed that Woolworth and Tesco had complied with international and domestic financial reporting standard and also reflected high amount of increment in their total turnover and earning capacity as compared to other companies. In that case, investors would be more inclined towards investment of their capital only in Wesfarmers and Tesco Company (Kim, et al. 2013). This has shown that financial information or earning capacity of companies in the market put high impact on the investment decisions of investors. Nonetheless, there are several cases in which investors enter into insider trading investment process. This is the unethical business strategy of investors in which they use undisclosed financial information. This information is grasped by investors from the unethical means (Pevzner, Xie and Xin, 2015). In that case, capital market consisted with primary and secondary market will be highly fluctuated and investors who possess this undisclosed information would be able to drive high amount of profit from their investment process. In addition to this, market capitalization will also be high in case of unstable capital market. Investors in the unstable capital market are tending to more active in their investment activities with a view to save themselves from the possible investment losses. Therefore, conclusion about the capital reaction to the reporting frameworks could be defined on the basis of evidence of from the large number of companies whose shares are listed on stock exchange. Capital market reaction to the financial reporting relies on the underlying assumption that equity market are more efficient than other instruments such as bonds, debentures and gilt securities (Mishra, Moriyama and N’Diaye, 2014).
It is evaluated that if companies are proving more return on their shares to investors on the basis of amount of income earned by these companies. In this case, capital market will reflects high return on capital invested by the investors to their shareholders. However, if the financial statements of companies are reflecting that company has earned high amount of profit in particular years then investors will be more inclined towards investing their money in that particular companies (Bischof, Brüggemann, and Daske, 2014). It has shown that investors are vigilant and they make their investment in capital market on the basis of information disclosed by companies in their annual report. Nonetheless, investors who invest their money in capital market firstly evaluate company’s business performance trend after evaluating financial statements and analyzing these details. These accounting and financial information reflects the trend of company and their earning capacity. It is observed that if return on capital employed by company is high then value of shares in market would also increase and vice-versa (Chen, et al. 2016).
Throughout the time, financial analysis tools are gaining momentum and investors are more inclined towards using these tools before investing their capital in market. It has been observed that ratio analysis, cash flow statement analysis and vertical analysis are the key tools which could be used by investors before investing their money in capital market (Barth, 2013). For instance E capital, Woolworth, Wesfarmers and Tesco are the following listed companies which has shown the proper compliance reporting program. Investors after analyzing the financial statements and their documents could analysis whether they should invest their money in their capital or not. After analyzing the financial statements of GE capital, it is inferred that company has increased its overall turnover by average 28% since last five years. This level of changes in the financial statement of GE capital has shown that investors by investing their money in GE capital could create value on their capital (Schmid and Dauth, 2014). This financial statement and disclosed information reflects that if investors would invest their money in GE capital then they could easily create value and earn at least 28% return from their investment. This level of information will attract more investors to invest their money in organization. In addition to this, consistent increase in buying shares of GE capital will increase the overall market capitalization of shares of GE capital. Capital market has become a place where investors invest their money to create value and big companies raise funds from the market. However, investors use critical analysis technique before investing their money in particular shares (Palea, 2013). If company has disclosed in its financial statement or annual report that company has high amount of earning and expanding its business by investing or plugging back more money in its business then all the investors would invest their capital in that company (Johnston, and Petacchi, 2017). This reflects that investment decisions of investors highly dependent upon the financial reporting of companies on domestic and international level. Share price of company in capital market is depended upon the several factors such as disclosed information of the relevant company, return on earning and strategic planning implemented by organization. In addition to this, brand image of company also put positive impact on the value of shares traded in the capital market. However, as per the listing rules and regulation, it is observed that if company fails to file their annual reporting then after certain period trading of share of that company will be barred from the capital market. For instance, Trading of Larsen and Turbo banned due to the wrong financial reporting and disclosure of wrong information to shareholders (Crawford, Lont, and Scott, 2014).
As per the perception of Cline, Garner, and Yore, 2014 it is reflected that Each and every listed company needs to comply with the listing requirements and regulations. It is observed that listed company should establish proper level of harmonization in its domestic and international reporting frameworks with a view to attract more international clients. It is considered that investors are attracted towards investing in the share capital of companies that are listed on the international stock exchange. However, if listed companies fail to comply with the listing and reporting laws and regulations then investors would not invest their capital in their share capital. Failure of listed companies to comply with the listing rules and reporting standards will result to decrease in overall market capitalization (Thompson, 2013).
This research has been prepared on the basis of data collected from the secondary sources. In order to conduct this research, annual report, financial statements and other documents of various listed companies have been analyzed. However, clear nexus has been established in the market capitalization and disclosure of information by the listed companies. Nonetheless, all the information collected is limited to some articles, news and shared information of stock exchange (Aobdia, Lin and Petacchi, 2015). Another limitation of this research is related to the core understanding on the impact of earning to the capital market reaction (Atkins and Maroun, 2015). However, due to the other uncertain factors, capital market reflects stable reaction for the some companies even if they are not making proper level of reporting compliance. The methodologies used to collect the data from the market are secondary sources which could be wrong and unfaithful on the basis of some contingent factors. It is determined that to the safer side, reader should also evaluate other articles and books before determining any investment decisions after reading this research on reporting compliance and its impact on the capital market. Accounting theories and practice should contain the international standard and reporting rules. If company fails to comply with these rules and standards then it would put negative impact on capital market and result to high fluctuation of capital market on domestic and international level (Felman, et al. 2014).
Conclusion
Capital market could be defined as place where investors invest their money to create value on their investment and organizations raise money for their business functioning. This capital market assists both investors and organizations to fulfill their needs and wants in determined approach. There are several investors who have affected due to the wrong information disclosure by the listed companies in the market. The main impact of wrong information disclosure and non-effective reporting frameworks of listed companies could be seen by analyzing the ups and down of capital market. If capital market is accompanied by the cheat place such as insider trading, wrong information disclosure and non-effective reporting frameworks of listed companies then investors would have to face high amount of capital investment risk and unstable capital market fluctuation. Now in the end it could be inferred that, capital market is subject to market risk and investors could analyze the company’s annual report and financial statement only when listed companies have followed proper level of reporting compliance program.
This research has shown nexus between capital market reaction and earning of listed companies. It has found that investors are more inclined towards investing their money in the share capital of company that have shown high amount of earning and less fluctuation in their share price. Earning of company is not limited to the performance of company but also reflects the fair views of company’s assets. After evaluating all the internal and external factors of reaction of capital market due to impact of earning of company, it is inferred that investors should implement proper level of trend analysis for their investment decision It could be inferred that stock exchange should strengthen the listing rules and regulations for better handling market capitalization and stock trading of companies for identifying their earing. Nonetheless, stock exchange and accounting and reporting authority should strengthen the listing and reporting rules and regulation to curb the fluctuation of capital market in determined approach (Drake, Roulstone, and Thornock, 2015).
References
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