01 Adrian Denar.pmd Heni Agustina, Rizki Amalia Elfita, The Effect of Earning Surprise and Earning per Share on Stock Return 7575 The Effect of Earning Surprise and Earning per Share on Stock Return Heni Agustina, Rizki Amalia Elfita Nahdlatul Ulama Surabaya University e-mail: heni@unusa.ac.id Abstract: A lot of investors are currently focusing on corporate earnings information, resulting on stock market reacts more strongly to unexpected earnings. The reaction is caused by several factors such as earning surprise (ES) and earning per share (EPS). Based on these, the research was con- ducted to find out how ES and EPS affect on stock return of manufacturing companies listed on Indonesia Stock Exchange in 2016–2018. This research is quantitative descriptive with associative research methods. The data used in this research were annual reports of manufacturing companies listed on the Indonesia Stock Exchange (IDX) during the period 2016–2018. Sampling in this research was conducted using a purposive sampling method. The results showed that simulta- neously and partially EPS and ES variables have no effect. Keywords: earning surprise (ES), earning per share (EPS), stock return BACKGROUND Investment decision on financial market largely is influenced by financial statement in- formation. One of the main objectives of finan- cial statements is to assist users in decision making. One important factor in financial state- ments is the disclosure of information related to revenue. In an efficient capital market, one important information key for investors in in- vestment decisions is company performance (Goetzmann, 1999). Good performance of the company is an achievement of the company’s ability to produce optimal revenue. Ball (1968) shows that investor reactions to companies with good earnings reports generate positive returns. They also observed that investors’ reactions to companies with poor earnings reports resulted in negative returns. Many empirical studies focus on market reaction to information on corporate earnings. In several published studies, the stock market react more strongly to unexpected earnings for some companies than for other companies. Scott (2003) reinforces this theory with his findings indicating that various stock market reactions are caused by several reasons, including Earning Surprise (ES) and EPS. In a period of reporting corporate earn- ings, Kinney et al. (2002) explain the term Earning Surprise (ES) as the difference between the value of earnings forecast and the value of earnings announcements. Hartono (2010) states that the main rea- son for investors to invest in a company is to gain an optimal return. Stock return is the level of profit that can be gained by investors on investments made in a company. Stock return can be in form of dividends or capital gains. Weygandt et al. (2005) defines dividends as proportional distributions by companies to their shareholders. As explained by Riyatno (2007), the profit achieved by a company is one measure of per- formance and is considered by investors or creditors in making decisions to make invest- ments or to provide additional credit. Thus, it is expected that earning surprise (ES) and EPS affect the company’s return. Business and Finance Journal, Volume 6, No. 2, March 2022 76 LITERATURE REVIEW Signalling Theory Wolk, et al. (2001) state signal theory as a theory that explains the reasons for companies in presenting information for the capital mar- ket. In addition, signal theory explains the dif- ference in the proportion of information ob- tained between investors and management, which is also called information asymmetry. The rela- tionship between signal theory and this re- search relates to the signals given by manage- ment to investors and potential investors in the form of earnings per share (earnings per share realization). Maria Immaculatta (2006) states that the quality of information disclosed by management can influence investor decisions. Therefore, the signals given by management in the capital market can be divided into 2, good news and bad news. Stock Returns Ang (1997) defines stock return as a profit which is the main goal by investors of any short-term or long-term investment, both di- rectly and indirectly. There are 2 types of stock returns, dividends and capital gains (profits de- rived from the price difference). Weygandt et al. (2005) defines dividends as distributions by companies to their shareholders proportionally. Earning Surprise According to Asih and Gudono (2000), the company has a signal of reported earnings about future profits. In this case the unexpected profit “surprise” is a signalling technique intended to provide a signal for making more accurate pre- dictions. Various profit forecast models are a way to determine the expected returns. Surprise is an event or something experienced by inves- tors outside of their predictions so that it can cause various kinds of responses. Earnings per Share Supadi (2017) define that the level of profit obtained by shareholders on earnings (per share) can be seen by the ratio of Earning per share (EPS). This ratio shows the company’s perfor- mance, especially from the profitability associ- ated with the market. The higher the EPS, the higher the profit per share, and the same goes for it. This has an impact on the level of the company’s stock return ability in the capital market. Therefore, a stable company will show the stability of EPS growth, on the other hand an unstable company will show fluctuating growth. However, there are also several compa- nies whose EPS values have decreased even though their share prices have increased. Hypotheses Effect of Earning Surprise against Stock Return Research conducted by Ridhmadhantia (2010), Jones and Frank Bacon (2007), and Vestari (2012) provide empirical evidence that earnings surprises influence stock prices. This causes anomaly returns received by investors. Investor optimism causes negative earnings sur- prises therefore it has a negative effect on stock returns. While pessimism is the reason for posi- tive earnings surprises and a positive effect on stock returns. Based on the explanation above, the hypothesis stated by the researchers in this research is: H1: Earnings surprises affect stock returns Effect of Earnings per Share on Stock Returns Research conducted by (Ulfyana and Pur- wanto, 2011), (Putri and Sampurno, 2012) and Heni Agustina, Rizki Amalia Elfita, The Effect of Earning Surprise and Earning per Share on Stock Return 77 Independent Variable Earnings Surprises (ES) Earnings are expected to be related to the results of investor expectations of the financial information it receives (Skinner and Sloan, 2002). The value obtained from earning sur- prise illustrates the company’s performance to meet investor desires. In accounting, research that used expected data is measured using sun expected earnings (SUE). Therefore, earnings surprises in this re- search will be measured using the difference be- tween realized quarterly EPS and expected quar- terly EPS. The measurement of earnings surprises with the naive model is as follows (Asih, 2000): 1 1 � � � tprofit tprofittprofitUEit The results obtained will be grouped based on three indicator values, the value of -1 if earnings surprise is negative, the value of 0 if earnings surprises is 0, and the value of 1 if earnings surprises is positive. Earnings per Share (EPS) Earning per share (EPS) is a ratio that can show the level of profit that investors get, where the level of profit (per share) shows the company’s performance, especially from the profitability associated with the market. The higher the profit, the higher the company’s stock return in the capital market. In this research EPS is calculated using the formula (Fahmi, 2012. in Nurzahra, 2021): Information: EPS = Earning per share EAT = Earnings after tax or after-tax income J sb = Number of shares outstanding (Savitri and Haryanto, 2012) provide empirical evidence that EPS has a positive effect on stock prices. It also causes anomaly returns received by investors. Based on the explanation above, the hypothesis stated by the researchers in this research is: H2: EPS affects stock returns RESEARCH METHOD This research is quantitative descriptive with associative research methods. Correlations and causal relationships between variables are obtained from associative research (Sulistyanto et al., 2000). This research uses an explanatory approach. The purpose of this approach is to describe the relationship (causality) between variables through hypothesis testing (Sugiyono, 2010). Based on a quantitative approach, this research is also called a confirmatory research that focuses on confirming the theory to apply to a particular research object, both for expla- nation and prediction (Sugiyono, 2010). Operational Definition and Variable Measure- ment Dependent variable Stock Returns Weygandt et al. (2005) define dividends as distributions by companies to their sharehold- ers proportionally. This return is the level of profit that an investor gains on his investment activities. There are 2 types of stock returns, dividends and capital gains (profits derived from the price difference). In this research, stock returns is calculated using the formula (Fahmi, 2012. In Nurzahra, 2021): Busin ess and Fin an ce Jour n al , Volum e 6 , N o . 2 , M arch 20 22 7 8 T he da t a used in t his research w ere an nual repo rts of manufacturing companies list e d on the Indonesi a Stock E xchange (I D X ) during the per iod 20 15–2018 . T his research sample w as done by purposive sa mpling, w hich is the sam- p li ng t ech ni qu e w it h cer t a in co nsid e ra ti ons (Sug iyono , 2010). T he crit eria co nsidere d in rese arch sa mpling are ma nufacturing co mpa- nies tha t h ave bee n list e d on th e Indon esia Stock E xcha nge before D ecember 3 1 , 2015 and are still regist ere d as of D ecembe r 31 , 2 018 . M anufacturi ng comp anies th a t have annual re- port s ending on D ecember 31 , ma nufacturing comp anies pr esen t complet e da t a re la t ed to the varia bles of the rese arch . T he analysis t echn ique use d in th is rese arch is multiple linear regression analysis w ith the con- sidera tion tha t this analysis t echnique can be used as a prediction mo del of company perform ance w ith product innovation , process innovation , and orga niza tion al innov a tion . T his hyp o thesis t est w as carried out using the SPSS 18 .0 program. T he regr ession model used to t est t he hypo thesis w ill be fo rmula t ed as foll o ws: Y = D + E1 X 1 + E2 X 2 + E3 X 3 + e .. . . . . .. . . . . ..(1) Informa tion : Y : Stock ret urn D : C ons t an t E1....En : C oefficien t of reg ressio n direction X 1 : E arn ing surprise X 2 : E arni ng Per Share X 3 : O rganiza tional innova tion e : R esi dual E rror RESULT S A N D D IS CUS SI O N Research Result T he research results fro m the d a t a ar e in the form of descrip t ive st a tistics w hich ca n be seen as foll o ws: Table 1 Descriptive Statistics Base d on the t able a bove , it can be con- cluded th a t : 1. ES v alue ha s a mea n valu e of 0 . 21 w hich is smal ler tha n the m ean RS value of 0 .32 . In this sense , the va lue obt a ined fr om earn ings surprise ill ustr a t es th e compa ny ’s p erfo r- mance to me et the desires of in vestors . So tha t the gro w th of E S has a perform ance tha t does n o t meet the w ishes of invest ors. 2. EPS has a m ean valu e of 3 . 19 w hich is grea t er tha n the m ean RS value of 0 .32 . In this sense , the gre a t er th e compan y ’s abi lity to g enera t e profit s per sh are for its o w ner, this w ill a ffect t he comp any ’s s tock re turn on t he capi t al mar ket . Classic Assumption Test Normality Test Table 2 N ormality Test Descriptive Statistics M ean Std. Deviation N RS .3227 . 30933 74 E S .2088 . 14798 74 EPS 3. 1887 2. 28369 74 Kolmogorov- Smirnova Shapiro-Wilk Statistic D f Sig. Statistic df Sig. R esidual .064 74 .215 .990 74 . 635 K olmogorov-Smirnov t est , it can be seen tha t the significa nce of residu al erro rs is a bove 0 .05 so it can be co ncluded tha t residual er rors are n ormally distribu t ed . Autocorrelation Test Table 3 Autocorrelation Test Model Durbin-Watson 1 1 .842 H eni Agus tin a , Rizk i A mal ia E l f i t a , T h e E ffect o f E a rning Surp ris e a nd E arn ing p er Sh are on S tock R e turn 7 9 Table 4 M ulticollinity Test Table 7 Uji F (Anova) M odel Collinearity Statistic T olerance VIF E S . 72 1.40 2 EPS . 69 1.90 9 By l oo king a t the V I F number of each inde penden t variabl e belo w 10 , it can be con- clud ed tha t the ind ependen t variables are free from multicollin ity. H eteroskedastic Test Table 5 Heteroskedastic Test By using th e G lesj er Test , the significance of e ach ind ependen t variable on a bsolut e re- sidu als is no t significan t so th a t the variance of the research da t a is said to be het e roskedas tic. M ultiple Regression Analysis Table 6 M ultiple Regression (Coefficient) T he resulti ng regression e qua tion is: Stock R etur n = 0 . 310 - 0 .043 ES + 0 .00 7 EPS M ana gerial i mplica t ions of this equa tion are : 1. Stock retur n has a value of 0 .3 10 percen t w her e the o t her vari ables a re const an t . 2. Stock returns hav e a 0 .0 43 perce n t decr ease for every 1 percen t increa se in E S and o ther vari ables ar e const an t . 3. Stock returns w il l have a 0 .007 percen t in- crea se every 1 percen t increase i n EPS o ther vari ables ar e const an t . A N O VA a M odel Sum of Squares df M ean Square F Sig. 1 R egr ession . 017 2 . 008 .087 .917b R esidual 6. 968 71 . 098 T ot al 6. 985 73 a . D epe nde nt V ariable: RS b. Pr edictors: (C onstant), EPS, E S Base d on the results of the F t est , the simult aneous ES and EPS ha ve no effect on the to t al stock . Correlation and D etermination Coefficient Table 8 Correlation & Determination Coefficients M odel Summaryb M odel R R Square Adjusted R Square Std. Error of the Estimate Durbin- Watson 1 .0 49a . 00 2 -. 026 . 31 328 1. 842 a. Pred ictors : ( C onst a nt), EPS, E S b. D epen de nt V a ri able : RS Discussion 1. Hypothesis Test 1: Earning Surprise has no effect on Stock Return T his period has a mean va lue of 0 .21 w hich is sm aller t han th e mean RS valu e of 0 .32 . In th is sense , the v alue obt ained from earn ings sur prise il lustra t es the co mpany ’s per- form ance to meet th e desir es of in vestors . So tha t the gr o w th of ES has a perfo rmance tha t does no t mee t the w ishes of investo rs. E arn ings are e x pect e d to be rela t ed to the result s of investor e x p ect a tions of th e financial info rma- tion it rece ives according to Skinn er and Sloan (200 2). In t his research , the comp any did no t prov ide a good per formance of inv estors’ e x- pect a tions o r e x pect a tions of the financial in- form a tion r eceived . I t can be concluded tha t the presence or absence of earnings surpr ises does no t aff ect a company ’s stock returns , it a r ises beca use i n v es t o rs w i l l o n l y s e e t h e Business and Finance Journal, Volume 6, No. 2, March 2022 80 company’s net income on a regular basis, not earnings surprises which do not necessarily appear regularly. 2. Hypothesis Test 2: Earning per Share has no effect on Stock Return EPS has a mean value of 3.19 which is greater than the mean RS value of 0.32. In this sense, the greater the company’s ability to gen- erate profits per share for its owner, this will affect the company’s stock return on the capital market. But in this research the earnings per share that is hinted by investors are not propor- tional to the realized returns. The results of this research do not agree with Ang (1997), that the increasing EPS will increase the attractiveness of investors in investing funds into the com- pany, so that stock prices will increase. 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