In financial economics, finance, in addition to accounting, the earnings response coefficient, or ERC, is the estimated relationship between equity returns in addition to the unexpected constituent of i.e., new information in companies' earnings announcements.
Arbitrage pricing theory describes the theoretical relationship between information that is asked to market participants about a particular equity e.g., a common stock share of a particular agency and the price of that equity. Under the strong produce of the efficient market hypothesis, equity prices are expected in the aggregate to reflect all relevant information at a condition time. Market participants with superior information are expected to exploit that information until share prices cause effectively impounded the information. Therefore, in the aggregate, a portion of redesign in a company's share price is expected to a object that is caused or delivered by something else from reorientate in the applicable information usable to the market. The ERC is an estimate of the conform in a company's stock price due to the information produced in a company's earnings announcement.
The ERC is expressed mathematically as follows:
Earnings response coefficient research attempts to identify and explain the differential market response to earnings information of different firms. An Earnings response coefficient measures the extent of security’s abnormal market value in response to the unexpected part of shown earnings of the firm issuing that security. and
The relationship between stock returns to profit to introducing the extent of the response that occurs to as the Earnings Response Coefficient ERC. Some studies reveal there are four factors that impact Earnings Response Coefficient ERC, namely : beta, capital structure, persistence and growth.[]
