The Effect of Financial Statement Disclosure on Changes in Stock Prices: Empirical Evidence of Colombo Stock Exchange

Abstract

Share price of stock change according to the information given in the market. Financial statement is one of the most important factors which publish the financial and nonfinancial information regarding the organization.  Major components of the financial statements are income statement, yearend balance sheet, cash flow statement, equity statement and notes. Financial statement disclosures provide most important information regarding the organizations to the stockholders. Information generated by the financial statement disclosure helps internal users to make a management decision regarding organizational activities. And also the information helps to external paritiesfor their investment decisions. Financial statements provide financial and non-financialinformation which helps to stockholders to make and analysis on organization’sactivities. Information disclosure helps to reduce the risk in decision making because of information provides a better understanding   on analysis the data.

The main objective of this study is to examine the effect of financial statementdisclosure on stock price movement with special reference to Colombo Stock Market. Thestudy attempts investigate the existence of abnormal return of share prices around the periodof   the financial statement disclosure by using eventstudy methodology. The data collected form secondary sources.

The behavior of share price movement will be evaluated by using daily share price of registered companies in Colombo Stock Exchange. The selected sample for the study is 20 S & P companies registered under ColomboStock Market. Share prices of 20 S & P companies are analyzed and market model is applied to estimate the expected return and then relate with actual share prices to estimate the abnormal return within the event window.

Results show a significant difference between share price before and after the financial statement disclosure. Share prices are changing due to the information provided by the financial statement. Based on financial figures shown in the financial statement will impact on share prices movements.  Research study data explain the positive relationship between financial statement disclosure and share price movement. Finally,resultsshowthatthe financial statementdisclosure effecting onthe share price.