Assessment 2 BANK1005 (SP5, 2014) Derivatives and Securities Markets Course Coordinator: Harjap Bassan BANK1005 Derivatives and Securities Markets Study Period 5, 2014 Assessment 2 – Investigation of an Earnings Announcement in the Equity Market HB, September 2014 A2 1 INTRODUCTION For this Assessment, your team will assess the effect of an earnings announcement on the share price of a company. You will select an Australian listed company and assess the impact of earnings information on its “cumulative residual returns” (based on its share price) over a time window. You will use Excel to calculate, and present, crucial information relating to your investigation of the earnings impact. You are asked to present your findings in an essay which is insightful and informed by the published research. The key focus of your assignment is to: Assess the effect of an earnings announcement of an Australian listed company, over a time window, using the specified published academic research article to inform your analysis. DEADLINE, WEIGHTING AND SUBMISSION Deadline for Submission: Week 10 (Monday, 13 October 2014 at 11.00 am – Adelaide time) Extensions will not be given and late submissions will receive a zero mark. Supplementary assessment, re-submission and re-marking are not available in this course. The date of return of the feedback will depend on the number of projects submitted, but effort will be made to complete the marking within three weeks of submission date. Your written work will not be returned but feedback will be provided on the feedback form. This assessment forms 20% of the course assessment. You should submit your Assessment online, using the Learn Online facility, as one PDF document including the submission cover sheet. Your Excel workings are not required for submission. You must use the assignment cover sheet showing the full name and student identification number of each team member clearly. Submit the team’s work as ONE document, including the cover sheet, in a type-written format using 1.5-line spacing and single-sided pages. The assignment can be submitted by any one of the team’s members. Insert the names of each team member in the footer of your document. GROUP WORK Students should work in groups of up to three students (that is, between one to three students per group) consisting of any students taking this course. You are responsible for forming your own group and managing its activities. A group size of four is considered desirable, in view of the nature of the task and opportunities for collaborative learning experience. Therefore, a smaller group size should only be considered in exceptional circumstances – but the decision is left to you. It is important that each team member participates in every part of this activity to derive the benefit of learning together. In addition, to “see the whole picture” and the relationship of numbers to theory, it is essential for each member to work on the whole assignment.Each member of the group will receive the same mark for the work submitted by the group. The group should nominate a “team leader” who can be contacted, if necessary. The “team leader” must be identified on the list of names for the team and his or her e-mail contact should be provided. BANK1005 Derivatives and Securities Markets Study Period 5, 2014 Assessment 2 – Investigation of an Earnings Announcement in the Equity Market HB, September 2014 A2 2 ASSIGNMENT REQUIREMENTS The Task A. Collecting the Information 1. Earnings Announcement Identify an earnings announcement made by an Australian listed company on or after 01 July 2014. Many Australian companies announce their annual results in the months of July and August. To determine any effects related to announcements, we need to know the precise date when the information became available to the market. The announcement date must therefore be carefully identified. In case a newspaper is used, remember that the date in the newspaper may be one day after the date of the actual announcement. There are at least two ways to identify an announcement: (a) Use a newspaper such as The Australian or The Australian Financial Review to find an announcement relating to earnings.Alternatively, (b) You could select a company of your choice and seek an earnings announcement made by this company. Announcements are available on the Australian Securities Exchange web site (ASX/Announcements) and may be available using other web sites (such as Yahoo! finance) or databases (such as Thompson One Banker). What is an earnings announcement? An earnings announcement relates to an announcement of earnings upgrade or downgrade or annual or half-yearly earnings. Earnings announcements relate to company’s “profits” or “losses” in the past or expected in the future. The announcement date must be after 01 July 2014 based on the past yearly or half-year results Many other corporate events (such as takeovers and CEO changes) may affect share prices. We will concentrate on investigating the impact of an earnings announcement only. Therefore you need to ensure that you exclude announcement(s) of any other events in your investigation. 2. Share price and Index Record the share price of the company and the All Ordinaries Index for each day in the time period indicated below (the event window) in an Excel spreadsheet. The share price (last sale or close price) and the index at the end of each day are required over this time period. The daily share price and index should cover a period of at least three weeks on each side of the announcement date (that is, three weeks before the announcement and three weeks after the announcement – this is your event window). A somewhat longer window may be used, if you wish, as share trading only occurs during the weekdays. We need a long enough event window to judge any announcement effects, but not too long such that other information may cloud the results. Share prices and index data are available from the ASX site, daily newspapers, web sites (such as “Yahoo!7Finance”, “au.finance.yahoo.com” and “Trading Room”) or databases (such as Thompson One Banker on the university’s library site). You can use any other source(s) you can find. BANK1005 Derivatives and Securities Markets Study Period 5, 2014 Assessment 2 – Investigation of an Earnings Announcement in the Equity Market HB, September 2014 A2 3 3. Readings Read newspaper report(s) relating to your earnings announcement to use in your essay. Read carefully the article by Ray Ball provided through the library’s e-Readings collection which can be searched under BANK 1005. Read only the following pages in the article – pages 4 to 9 (read up to “Limitations”) and page 17 (read only “Concluding Observations”). The contents of this article (on the indicated pages) should be used in your essay, using your judgement, to select what you need to assess the impact of an earnings announcement and the evidence found in your investigation. No other references, in addition to the newspaper(s) and the specified article, are required for your essay. B. Calculating the Returns and Cumulative Residuals Any examination of the share price will mask the “true” effect of the announcement due to factors like the random movements in share prices, overall movements in the share market due to investor sentiment, and industry effects. We have to make adjustments for these effects. 1. Use your Excel spreadsheet to compute the daily return, for each trading day other than the first day in your event window, based on the company’s share prices (ignoring any dividends). 2. Use your Excel spreadsheet to compute the daily return, for each trading day other than the first day in your event window, on the All Ordinaries Index. 3. Next calculate the residuals. That is, subtract the return on the market index from your company’s return for each day for which return is calculated. 4. Finally, obtain the cumulative residuals which are the running total of the residuals, starting with the first residual in the event window. Check the Excel Tutor folder on the course home page for an example that shows the calculations in Excel. The word ‘return’ here is used to mean ‘rate of return’ which must be presented in percentage (to two decimal places). The results of all these calculations must be presented on one page (in Word format) in a table in an appendix placed after your essay. So, you need to set up your Excel worksheet to be able to produce this table in Word format. Note: You are essentially conducting an “event study” – a technique that enables us to assess the impact of a particular event on a firm’s stock price. To be more precise, researchers assess the impact of a particular event on a firm’s stock price using the “unexpected return” from the event. Unexpected return (residual) is the difference between the actual stock return and the return that might be expected in the absence of the event given the performance of the market. Sophisticated models are used to obtain the expected return and then the unexpected return (called “abnormal return”). An indicator of the total firm-specific stock movement for an entire period is the cumulative abnormal return – the sum of all abnormal returns over the event window. BANK1005 Derivatives and Securities Markets Study Period 5, 2014 Assessment 2 – Investigation of an Earnings Announcement in the Equity Market HB, September 2014 A2 4 We are investigating only one company and further simplifying the process by using residuals based on “the market” as a model for expected returns, but we can expect to obtain fairly representative results. Charting the Price and Cumulative Residuals 1. Using Excel, plot the trend of the share price and index over the event window in the same graph using two axes. You should plot the raw data in this graph and not the calculated returns data. Check the Excel Tutor for an example of a chart with two axes. 2. Using Excel, in another chart, plot the trend of the cumulative residual returns in percentage form. 3. Identify the announcement date clearly in each chart. Again, the word ‘return’ means the ‘rate of return’ (in percentage form to two decimal places) in this case. General Information Using Excel You must create the table of data, the calculated measures and graphs using Excel. Then transfer this information into an appendix to your essay in Word format, to be then converted into PDF for submission. As an objective of the assignment is that you use Excel, copies of graphs or tables from other sources and/or presentation by other means are not acceptable. It is your task! Finding the sources for announcements, the price and other information is part of the assignment task as is forming a suitable team. Plenty of suggestions are provided in this document to assist you in finding the information. However, locating and using these resources remains your task as part of your learning activities. Learning Resources As indicated earlier, some examples of the calculations in Excel are available in the Excel Tutor folder on the course web site. The university provides guidelines and suggestions for good writing through its Learning and Teaching Unit. A link is provided under the Learning Resources on the course web site to the Language, Literacies and Learning (L3 ) site for the Business School. As you will be writing an essay for this assessment, you will find the guidelines for writing essays (under the Assignments link) very useful. There are also several other resources on this web site for you to use. BANK1005 Derivatives and Securities Markets Study Period 5, 2014 Assessment 2 – Investigation of an Earnings Announcement in the Equity Market HB, September 2014 A2 5 Objectives/Achievements By doing this work conscientiously, you will enhance your knowledge and skills in many areas: academic writing with an emphasis on reading, understanding and applying theory to a specific event, using the evidence in the data to support your arguments and conclusions; learning the basic ideas behind an important technique used in financial research to study the impact of an event (research and learning nexus); working with actual data of a company; learning to apply the financial markets concepts in a real situation; locating and obtaining data from external sources; using Excel to make basic calculations and to prepare charts and a table; organising and presenting data in charts and tables; working as a team; and more. BANK1005 Derivatives and Securities Markets Study Period 5, 2014 Assessment 2 – Investigation of an Earnings Announcement in the Equity Market HB, September 2014 A2 6 The Essay A. The Effect of Earnings Announcements In the essay, your main focus is to: Assess the effect of an earnings announcement of an Australian listed company, over a time window, using the specified published academic research paper to inform your analysis. This investigation should be performed for an earnings announcement made by an Australian listed company in 2014 (in July and later). Your essay-style assessment of the impact of earnings announcements, in no more than 800 words, should be based on the evidence you have collected, your calculations and trends of prices and returns, nature of the business as related to the announcement, readings of the academic literature and newspaper reports, as well as any other relevant matters. (Note: the word limit shown in the Course Outline is an “equivalent word count” which takes into account the complete task including numerical work and its presentation. The essay part should be completed in a maximum of 800 words.) Graphs and tables should not be included in this essay part. The word count must be indicated at the end of this essay clearly. (Use the facility provided in Microsoft Word under Tools on the menu bar to perform a word count.) There will be a penalty for exceeding the word limit. Tips You should develop a well-integrated evaluation to assess the announcement impact, based on the evidence, as the main theme showing an application of the academic research in an essay format. For a critical analysis expected of university students, a few simple quotes from the journal article are not adequate. To create depth in your analysis, as an example, you should reflect on your findings, consider their importance (the “how” and “why”), and certainly apply the literature (the one specified article) to your case, perhaps making some comparisons. Furthermore, the use of the article involves an integration of the theory into the discussion rather than a simple, unrelated summary of what is in the article. A good academic essay will use a framework based on a theory, describe/use the findings (or evidence) in light of this framework and maintain focus on the main issue. Read the feedback form carefully as it includes ideas about the content of the required discussion and analysis. B. Appendix – Table of Returns and Residuals Present the information from Tasks A and B (Collecting the Information and Calculating the Returns and Residuals) in one table in Word format, showing the daily raw price and All Ords, daily returns (stock and market), the residuals and cumulative residuals clearly on one A4-sized page. All returns information must be shown in percentage form to two decimal places. You may use 10-point or 12-point format for this data presentation. BANK1005 Derivatives and Securities Markets Study Period 5, 2014 Assessment 2 – Investigation of an Earnings Announcement in the Equity Market HB, September 2014 A2 7 Call this an Appendix. Label the table by assigning a table number, a suitable title, name of the company, source of data and the time period. C. Appendix – Charts of Returns and Cumulative Residuals Present the two graphs from Task C: Charting the Price and Cumulative Returns in a professional manner in the Appendix. Show the title (with Figure number) and source of data and label both axes appropriately for each chart. Choose the scales and presentation so as to highlight the information. Each graph should be presented on a separate A4-sized page in a suitable format. Other Presentation Requirements Present your work typed, using 1.5 line spacing and single-sided pages, covering the assessment requirements as indicated above. The written part must be in 12-point font size but a 10-point or 12-point format may be used for the data presentation. Break the report into sections through careful use of headings highlighted in bold letters, and include a reference list at the end. The journal article must be clearly identified to show the name of the authors, title of article, publication year, volume and number of journal, journal name, and page numbers. Quoting a web reference without all these details is not adequate. Insert a contents page. Use Word to number consecutively all the pages in your document. The contents page is not included in the page numbers and certainly not the cover sheet. (Learn how to use ‘section breaks’ in Word to number pages differently in each section.) Include the full names of each team member in the footer of the document (as an example, the month and year are shown in this document with my initials as is the word “A2” at the bottom of each page). Record the assessment title and the name of each member of your group in capital letters on the cover sheet, with the surname (last name) first, followed by the first name (given name or forename) and the student number. By submitting the work with your names on the cover sheet, it is assumed that you have all followed all the requirements shown on this cover sheet. Submit only one document for your team, which can be done by any one member of the team. You should read the Assessment Feedback form for this Assessment and note the listed requirements to enhance the content and presentation of your work. ASSESSMENT FEEDBACK FORM The Assessment Feedback form, provided at the end of this document, gives the key components of this Assessment that will be relevant to the requirements and be useful in improving your submitted work. Assessment feedback BANK 1005Derivatives and Securities Markets Assessment 1: Group Assignment – Investigation of an Earnings Announcement in the Equity Market Due Date: Monday, 13 October 2014 at 11.00 am (Adelaide) via Learnonline Weighting (as % of total for the course): 20% Key components of this assignment Performance on this component Comments/Suggested improvements Very Good Good Fair Poor Very Poor A: The Effect of Earnings Announcements (Essay) – 50% Introduction sets the scene interestingly addressing key concepts and a point of view Body Examines the announcement and its importance as information. Links the announcement to theory and the company’s business using the newspaper. Demonstrates a clear understanding of the conduct/design of the investigation. Shows good understanding of Ball’s article and the importance of its content. (25%) Body Evaluates the data analysis as to the evidence it provides. Links the evidence to the theory, integrating this evidence into the discussion. Makes application of the content of Ball’s article. Conclusion Leads to an informative and compelling conclusion. (20%) Overall the essay is well-presented, structured, has logical and integrated flow as a whole with a clear focus. It is written in your own succinctly chosen words with sound grammar. Presentation Presents the work informatively, neatly and clearly following the essentials for good presentation. Numbers all the pages sequentially, shows references, and includes a contents page. (5%) Appendix: Data Analysis – 50% A: Table – Returns and Residuals Presents the data accurately in a table using proper formatting and units for the numbers. Shows the title, columns headings and the source of data. Shows neat and compact presentation on a single page with good visual appeal to highlight what is important. Exhibits accuracy in the calculations and shows efficient use of Excel in their presentation. B: Charting Price and Cumulative Returns Presents each graph neatly and accurately to enhance visual appeal using a single page for each. Shows title (and figure #), source of data, uses suitable scales/axes and Excel charting tool effectively to highlight the information (including dates). Summary comments/Suggestions for improvement:
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