Purpose – This study aims to find the response by stock market against the announcements of quarterly earnings is empirically tested by exploiting event study methodology. Efficient market hypothesis (EMH) on Saudi stock exchange is also tried on. Design/methodology/approach – The market model is applied to help gauge the expected returns and to illustrate abnormal returns around the event date. Findings – The results established that Saudi Stock Market does not bear semi-strong form of EMH. How efficient is the Saudi market is also reflected through evidence of significant abnormal returns and postearnings announcement drift around earning announcements dates. Research limitations/implications – The authors have not used analysts’ forecast as the expected earnings which are the limitation. As mentioned earlier, the authors used the quarterly earnings of the previous year as a proxy and that proxy could have been replaced by analysts’ forecast. Another limitation is that the trading volume in the event window is not considered. Practical implications – The behavior of Saudi capital market is of much concern, and the study of this with a perspective of EMH is the significance of this paper. Social implications – All stakeholders closely watch earnings announcements and its share price movement around the announcement date. Recently, Saudi Arabia has opened its doors to foreign investors, and big foreign investors are going to enter into Saudi capital market, and after their entry, the behavior of market could be different. In the authors’ opinion, this is the right time to study the efficiency of Saudi market before the entry of foreign investors. Originality/value – This study is based on the gap created by EMH of Saudi market using event methodology, observed in the existing literature, and it will be a contribution to literature.

Introduction

Financial information about any company is vital while appraising the value of stock prices. Investors do consider this public financial information to assess the potential future perspective of any firm. Earnings represent the measure of firm’s profits or loss from business activities and events during a stipulated period. Dividend and earnings announcements are the two most important financial information used by the investors for decisions regarding buying and selling of any firm’s share (Lonie and Abeyratna, 1996). A firm’s return represents the capital market’s measure of performance of the firm over a period. The information of earnings announcements is used by capital market as a yardstick to assess the profitability and financial strength of any firm. New financial information is normally unpredictable by definition; otherwise, it would have been reflected in the share price far before the announcement. Earnings based on current period for any firm reflects two sorts of information: current period wealth created for equity shareholders and about possible future earnings which will be ultimately distributed to the shareholders. Beaver (1968) described the following three links between earnings announcements and share prices: (1) earnings of current period provide information to predict earnings of future period; (2) earnings of current period provide information for expected dividends of future periods; and (3) earnings of current period provide information to determine the present value of expected future dividends.