MBA4643- INDIVIDUAL

PROJECT COURSEWORK
Finance and Economics MBA4643
Student Name
Kim Trang Vo (Vivian) M00437195

Lecturer
Carlos Ribeiro

Submission date
29th of July 2013

Word Count
1,491

APPLICATION AND CRITICAL EVALUATION OF

EFFICIENT MARKET HYPOTHESES FOR DIAGEO
PLC DURING 2 YEARS PERIOD OF 2011 - 2012

TABLE OF CONTENTS
1. COMPANY BACKGROUND .............................................................................................. 3
2. EFFICIENT MARKET HYPOTHESIS ................................................................................ 5
3. THE ANALYSIS ................................................................................................................... 6
3.1 DGEs Investors React to the Earnings Announcements ................................................. 6
3.2 DGEs Investors React to the Leadership Change ......................................................... 11
3.3 January Effect in DGE stock market .............................................................................. 13
4. CONCLUSION .................................................................................................................... 13
5. REFERENCES .................................................................................................................... 14
6. APPENDICES ..................................................................................................................... 16
APPENDIX 1 Condensed Multi-Step Income Statement of Diageo Plc 2010- 2012 ....... 16
APPENDIX 2 January Effect in DGE Stock Market ........................................................ 16
APPENDIX 3 Methodology for Earning Announcements Effect Analysis ..................... 18

1. COMPANY BACKGROUND
Diageos business is in brewery and distiller industry where it is leading players in premium
spirits segment holding market share of 27% followed by Pernod Ricard, Bacardi, Brown
Forman and others (Diageo Plc 2012 and 2010).

Figure 1: Share in premium spirits market in 2012

(Source: Diageo Plc 2012)

The company has performed well in the market with steadily increasing global net sales in
recent years (at average growth rate of 10%).
10,762

9,936

9,780

9,311
8,090

2012

2011

2010

2009

2008

7,481

2007

Net sales (m)

Figure 2: Diageos Net Sales from 2007 to 2012
(Adapted from Diageo Plc 2008, 2010 and 2012)

Since established by the merger of GMH (Grand Metropolitan Hotels) and Guinness, the
business has been expanded dramatically in term of scale and global present. Diageos
products are currently traded in more than 180 countries. With offices in 80 countries and
more than 25,000 employees, the companys marketing, sales and distribution activities are
3

organised across five geographic regions of North America, Latin America and Caribbean,
Europe, Africa and Asia-Pacific (Diageo Plc 2013). Diageos major markets are North
America and Europe which has strong sales performance in wine and comprised 61% of its
total net sales.

Figure 3: Diageos total net sales by geographic regions in 2012

(Source: Diageo Plc 2012)

Inheriting long-standing experience in beer and brandy production from Grand Metropolitan
and Guinness, the British company has strong competitive advantage and high position in the
market with popular brands included Guinness beer, Captain Morgan, Johnnie Walker, J&B,
Smirnoff and Baileys.

Figure 4: Diageos net sales by category in 2012

(Source: Diageo Plc 2012)

Listed in London Stock Exchange (DGE) since 1952, Diageo share prices were highly
volatile in previous 2 years. The price of Diageo stock was closed at 1,880.00p in 28 June
2013. Moreover, the company is also listed in New York Stock Exchange (coded DEO).

Figure 5: Diageos share prices in LSE from July 2011 to June 2013
(Source: London Stock Exchange 2013)

2. EFFICIENT MARKET HYPOTHESIS

An Efficient Market is defined to be a capital market that all the asset prices reflect all
publicly available information about security. Under those assumptions, all investors are riskaverse and utilize all the available and accessible information to maximize their well and
trading profits (Hodnett & Hsieh 2012). Based on the type of available and accessible
information used by investors as a tool in their trading activities, the Capital Efficient Market
is classified into three forms: Weak, Semi-Strong and Strong Form (Fama 1970).

Figure 6: Three forms of Capital Market Efficiency

(Adapted from Fama (1970))
5

In Weak Form, the asset price can be predicted via utilizing the historic price information of
the asset (called technical analyst), thus there are certain trends of asset prices movement.
Therefore, the Random Walk Model (RWM) is not applied in Weak Form Capital Market. In
Semi-Strong Form, the asset prices do not reflect the historical price patterns but the publicly
available information such as Financial Statements, Economic Factors, Announcements,
Organisational Revolution, leadership change, etc. On the other hand, in Strong Efficient
Market, asset prices instantaneously incorporate with historic, publicly and privately
information. It is argued that asset prices are random and unpredictable based on historical
information in Efficient Market. Hence, RWM can be applied to test the efficiency of the
market. It is concluded from Worthington and Higgs (2004) cited in Hamid et al. (2010) that
United Kingdom market purely follows the random walks which indicates an Efficient UK
Capital Market. Being listed in London Stock Exchange, it is assumed that Diageo stocks
(coded DGE) are traded in an Efficient Market, thus its price fully and quickly reflects the
available information in the market. However, there are also some studies prove that financial
markets might underreact or overreact to the informative events (Fama 1969). The
overreaction and underreaction hypothesis stated that the asset prices move beyond or below
the new equilibrium level which is justified by the news. After that, investors recognise their
overreaction or underreaction and take correction actions, thus the prices are adjusted back to
the new equilibrium (movement in opposite direction to initial movement) (Zhu & Li 2012).
The analysis of DGE stock behaviour will be examined on the reaction of DGE prices
towards selective information such as Earnings Announcements, Leadership change and the
January Effect in consideration of overreaction and underreaction hypothesis.

3. THE ANALYSIS
3.1 DGEs Investors React to the Earnings Announcements
It is implied that stock prices instantaneous reflects the new information, thus investors
expectation respecting to future earnings/ earnings results will be fully reflect by the stock
prices immediately (Mahmoudi et al. 2011). Therefore, investors cannot earn abnormal
returns. However, the financial markets might underreact or overreact to informative events.
It is a challenge for Efficient Market Hypothesis (EMH) theory as sophisticated investors can
earn superior returns without bearing extra risks by taking advantages of overreaction and
underreaction of the market (Barberis et al. 1998).

To analyse how Diageos investors in London Stock Exchange perceive, interpret and react to
earnings announcement news, the empirical data investigation is conducted. It is observed the
drift in stock returns after the earning announcements called Post-Earnings Announcement
Drift (PEAD) as well as the short-term drift of stock returns before the earning
announcements. The event day is the day that news of announcement first published in
London Stock Exchange during the examined period from July 2011 to June 2013. The
analysed data is prices of 20 days prior and after the event day.
The table 1 shows the empirical results for DGE stock prices reaction, abnormal returns ARs
and cumulative abnormal returns CARs 20 days before and after the earnings announcement
day in 5 September 2012 (APPENDIX 3). The EPS was announced to be at 78.2p which
indicates as a good news as EPS increased by 2.6% compared to previous year (APPENIX
1).

Date

Closed
Price

03-Oct-12
1,780.00
2 Oct 2012 (Tue)
1,760.50
1 Oct 2012 (Mon)
1,772.00
28-Sep-12
1,739.50
27 Sep 2012 (Thu)
1,744.00
26 Sep 2012 (Wed)
1,745.00
25-Sep-12
1,754.00
24 Sep 2012 (Mon)
1,722.50
21 Sep 2012 (Fri)
1,722.50
20-Sep-12
1,720.00
19 Sep 2012 (Wed)
1,708.00
18 Sep 2012 (Tue)
1,718.00
17-Sep-12
1,683.50
14 Sep 2012 (Fri)
1,683.00
13 Sep 2012 (Thu)
1,689.50
12-Sep-12
1,672.50
11 Sep 2012 (Tue)
1,699.00
10 Sep 2012 (Mon)
1,695.50
07-Sep-12
1,702.00
6 Sep 2012 (Thu)
1,764.50
5 Sep 2012 (Wed)
1,751.50
4 Sep 2012 (Tue)
1,754.00
3 Sep 2012 (Mon)
1,751.00
31 Aug 2012 (Fri)
1,725.00
30 Aug 2012 (Thu)
1,742.50
29 Aug 2012 (Wed)
1,724.00
28 Aug 2012 (Tue)
1,715.00
27 Aug 2012 (Mon)
1,713.50
24 Aug 2012 (Fri)
1,713.50
23 Aug 2012 (Thu)
1,698.00
22 Aug 2012 (Wed)
1,680.50
21 Aug 2012 (Tue)
1,684.00
20 Aug 2012 (Mon)
1,687.00
17 Aug 2012 (Fri)
1,686.50
16 Aug 2012 (Thu)
1,700.00
15 Aug 2012 (Wed)
1,708.00
14 Aug 2012 (Tue)
1,710.50
13 Aug 2012 (Mon)
1,698.00
10 Aug 2012 (Fri)
1,706.50
9 Aug 2012 (Thu)
1,715.00
8 Aug 2012 (Wed)
1,712.00

Dalily Return

Expected Return

Abnormal Return (AR)

0.0111
-0.0065
0.0187
-0.0026
-0.0006
-0.0051
0.0183
0.0000
0.0015
0.0070
-0.0058
0.0205
0.0003
-0.0038
0.0102
-0.0156
0.0021
-0.0038
-0.0354
0.0074
-0.0014
0.0017
0.0151
-0.0100
0.0107
0.0052
0.0009
0.0000
0.0091
0.0104
-0.0021
-0.0018
0.0003
-0.0079
-0.0047
-0.0015
0.0074
-0.0050
-0.0050
0.0018
-0.0026

0.0003
0.0007
0.0005
0.0001
0.0007
0.0012
0.0003
0.0003
0.0007
0.0009
0.0011
0.0000
0.0000
-0.0002
-0.0010
-0.0003
0.0000
-0.0001
0.0014
0.0012
0.0011
0.0015
0.0005
0.0007
-0.0004
0.0003
-0.0005
0.0002
-0.0001
0.0007
0.0009
0.0008
-0.0002
0.0002
0.0006
0.0008
0.0008
0.0009
0.0015
0.0014
0.0021

0.0108
-0.0072
0.0182
-0.0027
-0.0013
-0.0063
0.0180
-0.0003
0.0007
0.0061
-0.0069
0.0205
0.0003
-0.0036
0.0112
-0.0153
0.0021
-0.0037
-0.0369
0.0063
-0.0025
0.0002
0.0145
-0.0108
0.0111
0.0050
0.0014
-0.0002
0.0092
0.0098
-0.0030
-0.0026
0.0005
-0.0081
-0.0053
-0.0023
0.0065
-0.0058
-0.0065
0.0004
-0.0047

Cumulative
Abnormal Return
(CAR)
0.0101
-0.0008
0.0064
-0.0118
-0.0091
-0.0079
-0.0015
-0.0195
-0.0191
-0.0199
-0.0260
-0.0191
-0.0397
-0.0400
-0.0364
-0.0476
-0.0323
-0.0343
-0.0306
0.0063
0.0068
0.0093
0.0091
-0.0054
0.0054
-0.0057
-0.0107
-0.0121
-0.0120
-0.0211
-0.0309
-0.0279
-0.0254
-0.0258
-0.0177
-0.0124
-0.0101
-0.0167
-0.0108
-0.0043
-0.0047

Table 1: CARs and ARs 20 days before and after earnings announcement date on 5
September 2012
(Adapted from Yahoo Finance 2013)

It is found that DEGs investors seem to earn more CARs after the earnings announcement
day and there was significant increase in trading volume. However, the CARs also
significantly increases 4 days before and 1 day after the event day. It then immediately
decreases 2 days after the event day and then gradually increase from day 6 after the event
day. It means that investors of DEG have early reaction about earnings announcements
changes. Moreover, DEG stock price was also overreacted in the first day after
announcement as the ARs is significantly higher than the mean of ARs of 0.0005. Then, the
prices of stocks were adjusted as ARs and CARs significantly decreased after that.

Figure 7: CARs after earnings announcement day on 5 September 2012

It was first announced the earnings results of 76.2p for EPS (increased by 14.9% compared to
previous year) on 13 September 2013 (APPENDIX 1). The table 2 shows the empirical
results for DGE stock prices reaction, abnormal returns ARs and cumulative abnormal returns
CARs 20 days before and after the earnings announcement day.

Date

Closed
Price

12-Oct-11
1,294.00
11 Oct 2011 (Tue)
1,278.00
10 Oct 2011 (Mon)
1,271.50
07-Oct-11
1,272.00
6 Oct 2011 (Thu)
1,272.50
5 Oct 2011 (Wed)
1,229.00
04-Oct-11
1,209.50
3 Oct 2011 (Mon)
1,234.50
30 Sep 2011 (Fri)
1,232.00
29-Sep-11
1,237.50
28 Sep 2011 (Wed)
1,259.00
27 Sep 2011 (Tue)
1,273.50
26-Sep-11
1,235.00
23 Sep 2011 (Fri)
1,214.00
22 Sep 2011 (Thu)
1,204.00
21-Sep-11
1,239.00
20 Sep 2011 (Tue)
1,247.00
19 Sep 2011 (Mon)
1,208.00
16-Sep-11
1,234.00
14 Sep 2011 (Wed)
1,216.00
13 Sep 2011 (Tue)
1,195.00
12 Sep 2011 (Mon)
1,188.00
9 Sep 2011 (Fri)
1,200.00
8 Sep 2011 (Thu)
1,225.00
7 Sep 2011 (Wed)
1,225.00
6 Sep 2011 (Tue)
1,220.00
5 Sep 2011 (Mon)
1,210.00
2 Sep 2011 (Fri)
1,240.00
1 Sep 2011 (Thu)
1,255.00
31 Aug 2011 (Wed)
1,240.00
30 Aug 2011 (Tue)
1,205.00
29 Aug 2011 (Mon)
1,192.00
26 Aug 2011 (Fri)
1,192.00
25 Aug 2011 (Thu)
1,170.00
24 Aug 2011 (Wed)
1,118.00
23 Aug 2011 (Tue)
1,122.00
22 Aug 2011 (Mon)
1,121.00
19 Aug 2011 (Fri)
1,112.00
18 Aug 2011 (Thu)
1,152.00
17 Aug 2011 (Wed)
1,183.00
16 Aug 2011 (Tue)
1,194.00

Dalily Return

Expected Return

Abnormal Return (AR)

0.0125
0.0051
-0.0004
-0.0004
0.0354
0.0161
-0.0203
0.0020
-0.0044
-0.0171
-0.0114
0.0312
0.0173
0.0083
-0.0282
-0.0064
0.0323
-0.0211
0.0148
0.0176
0.0059
-0.0100
-0.0204
0.0000
0.0041
0.0083
-0.0242
-0.0120
0.0121
0.0290
0.0109
0.0000
0.0188
0.0465
-0.0036
0.0009
0.0081
-0.0347
-0.0262
-0.0092
0.0042

0.0038
0.0031
0.0021
0.0021
0.0005
0.0001
-0.0001
-0.0008
0.0001
0.0024
0.0035
0.0019
0.0020
0.0039
0.0051
0.0055
0.0043
0.0036
0.0016
0.0002
0.0001
0.0011
0.0031
0.0043
0.0027
0.0021
0.0023
0.0027
0.0012
-0.0007
-0.0017
-0.0020
-0.0036
-0.0059
-0.0063
-0.0060
-0.0066
-0.0038
-0.0018
-0.0016
-0.0018

0.0087
0.0021
-0.0025
-0.0025
0.0349
0.0160
-0.0202
0.0028
-0.0045
-0.0194
-0.0149
0.0293
0.0153
0.0044
-0.0334
-0.0119
0.0280
-0.0247
0.0132
0.0174
0.0058
-0.0111
-0.0235
-0.0043
0.0014
0.0062
-0.0265
-0.0147
0.0109
0.0298
0.0126
0.0020
0.0224
0.0524
0.0027
0.0068
0.0146
-0.0309
-0.0244
-0.0077
0.0060

Cumulative
Abnormal Return
(CAR)
0.0382
0.0294
0.0274
0.0298
0.0323
-0.0026
-0.0186
0.0016
-0.0012
0.0033
0.0227
0.0376
0.0083
-0.0070
-0.0114
0.0220
0.0339
0.0059
0.0306
0.0174
-0.0346
-0.0278
-0.0029
0.0075
-0.0203
-0.0411
-0.0038
0.0406
0.0423
0.0146
0.0244
0.0748
0.0551
0.0096
0.0215
-0.0163
-0.0553
-0.0321
-0.0017
0.0060

Table 2: CARs and ARs 20 days after earnings announcements on 13 September 2011
(Adapted from Yahoo Finance 2013)
It is seen that the CARs are fluctuated but in the trend of gradually increasing after the
announcement day. Thus, it can be concluded that DGE investors have underreaction about
earnings changes in 2011.

10

Figure 8: CARs after earnings announcement day on 13 September 2011

Analysing the stocks prices reaction to earnings announcement of DGE during the period of
July 2011 and June 2012, there is evidence to conclude that accounting information
significantly influents on DGE stock prices. Diageos investors can earn significant abnormal
returns around earnings announcement dates. The overreaction and underreaction of investors
towards earnings announcements prevents DGE stock market to be efficient due to the
asymmetric information around the event days.

3.2 DGEs Investors React to the Leadership Change

EMH implies that stock prices reflect all the available information in the market. It is
examined the effect of earnings announcements on DGE stock prices. This part will analyse
the effect of Leadership change information on DGE stock prices. It was officially announced
the change of Diageos CEO in 7 May 213. It is said that the new CEO Ivan Menezes would
replace Paul Walsh and expected no significant change in the companys strategy of M&A
focus (OBrien 2013).

11

Date
04-Jun-13
03-Jun-13
31-May-13
30-May-13
29-May-13
28-May-13
27-May-13
24-May-13
23-May-13
22-May-13
21-May-13
20-May-13
17-May-13
16-May-13
15-May-13
14-May-13
13-May-13
10-May-13
09-May-13
08-May-13
07-May-13
06-May-13
03-May-13
02-May-13
01-May-13
30-Apr-13
29-Apr-13
26-Apr-13
25-Apr-13
24-Apr-13
23-Apr-13
22-Apr-13
19-Apr-13
18-Apr-13
17-Apr-13
16-Apr-13
15-Apr-13
12-Apr-13
11-Apr-13
10-Apr-13
09-Apr-13

Closed
Price

Dalily Return

Expected Return

Abnormal Return (AR)

1,956.00
1,940.00
1,951.00
1,977.00
1,982.50
2,047.50
2,019.50
2,019.50
2,013.00
2,063.00
2,038.00
2,045.00
2,028.00
2,050.50
2,059.50
2,069.00
2,037.00
2,020.00
1,993.50
1,987.00
1,977.00
1,974.00
1,974.00
1,970.00
1,971.00
1,964.00
1,957.00
1,947.50
1,951.50
1,993.00
2,007.50
1,965.00
1,975.00
1,978.00
1,974.50
1,960.50
1,996.00
1,987.00
2,001.50
1,987.50
1,965.50

0.0082
-0.0056
-0.0132
-0.0028
-0.0317
0.0139
0.0000
0.0032
-0.0242
0.0123
-0.0034
0.0084
-0.0110
-0.0044
-0.0046
0.0157
0.0084
0.0133
0.0033
0.0051
0.0015
0.0000
0.0020
-0.0005
0.0036
0.0036
0.0049
-0.0020
-0.0208
-0.0072
0.0216
-0.0051
-0.0015
0.0018
0.0071
-0.0178
0.0045
-0.0072
0.0070
0.0112
-0.0255

-0.0008
-0.0005
0.0002
0.0004
0.0021
0.0016
0.0019
0.0016
0.0018
0.0008
0.0020
0.0014
0.0018
0.0021
0.0027
0.0011
0.0009
-0.0002
0.0000
0.0003
-0.0010
-0.0005
-0.0018
-0.0027
-0.0029
-0.0028
-0.0031
-0.0030
-0.0011
-0.0004
-0.0017
-0.0013
-0.0008
-0.0014
-0.0020
-0.0004
-0.0006
-0.0004
0.0001
-0.0010
0.0005

0.0090
-0.0051
-0.0134
-0.0031
-0.0339
0.0123
-0.0019
0.0016
-0.0260
0.0115
-0.0055
0.0070
-0.0128
-0.0065
-0.0073
0.0147
0.0076
0.0135
0.0032
0.0047
0.0025
0.0005
0.0038
0.0022
0.0065
0.0064
0.0080
0.0009
-0.0197
-0.0069
0.0233
-0.0037
-0.0007
0.0031
0.0091
-0.0174
0.0051
-0.0069
0.0070
0.0122
-0.0260

Cumulative
Abnormal Return
(CAR)
-0.0304
-0.0395
-0.0344
-0.0210
-0.0178
0.0160
0.0038
0.0056
0.0040
0.0300
0.0185
0.0240
0.0170
0.0298
0.0363
0.0436
0.0290
0.0214
0.0080
0.0047
0.0068
0.0063
0.0024
0.0002
-0.0063
-0.0127
-0.0207
-0.0216
-0.0019
0.0050
-0.0183
-0.0146
-0.0138
-0.0170
-0.0261
-0.0087
-0.0137
-0.0069
-0.0138
-0.0260

Table 3: CARs and ARs 20 days before and after Leadership Change announcements on 07
May 2013
(Adapted from Yahoo Finance 2013)

12

It is clearly seen that DGE stock prices steadily increased after the CEO change
announcement which indicates the reluctance in investors expectation towards the new CEO
ability as well as interpreting the news to be really good news. However, from 22 May
2013, the CARs suddenly decreased and turned to be negative by the end of May. It can be
explained as an effect to the news of changing Strategy Director (Diageo Plc. 2013). Hence,
it indicates a negative expectation towards the change in leadership of Diageo.
Moreover, the fluctuation of abnormal returns and daily returns of DGEs stock prices after
the leadership change announcements on 7 May and 22 May can be explained to the
asymmetric information about leadership change.

Figure 9: CARs after CEO replacement announcement 7 May 2013

3.3 January Effect in DGE stock market

(APPENDIX 2)

4. CONCLUSION
In conclusion, DGE stock market is not weak efficient market as there is no historical and
repeated pattern for its stock prices as it failed to prove the January Effect in DGE market.
However, DGE stock market is also not strong efficient to instantaneous and accurately react
to all available information in the market. The empirical findings have found the
overreaction, underreaction and early reaction of DGE stock prices towards earnings
announcements of Diageo during the examined period between July 2011 and June 2013. The
actions of investors can be explained to the failure of interpreting signal of future earnings
from the reported results. It is also indicates that the inefficient market to information creates
opportunity for Diageos investors to earn superior abnormal returns without bearing extra
risks.
13

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Barberis, N., Shleifer, A. and Vishny, R. (1998). A model of Investor Sentiment. Journal
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Branch, B. (1977). A Tax Loss Trading Rule. Journal of Business. 50, 198-207.

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Diageo Plc (DGE.L) Historical Price. [online]. (24 July 2013). Yahoo Finance. Available
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http://uk.finance.yahoo.com/q/hp?s=DGE.L&b=1&a=05&c=2011&e=30&d=05&f=2013&g=
d. [Accessed 24 July 2013].

Diageo Plc. (2010). Annual Report 2010. United Kingdom.

Diageo Plc. (2012). Annual Report 2012. United Kingdom.

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15

6. APPENDICES
APPENDIX 1 Condensed Multi-Step Income Statement of Diageo Plc from
2010 to 2012
CONDENSED MULTI - STEP INCOME STATEMENT
Fiscal Year ended 30 June
( in millions)
Revenue
Cost of Goods Sold
Gross Profit
Operating Expenses
Income from Operations
Other Revenues and Expenses
Income from Continuing Operations before Income Tax
Provision for Income Tax
Income from Countinuing Operations
Nonrecurring Items
NET INCOME
Earnings per share

2012
10,762
(4,259)
6,503
(3,345)
3,158
(37)
3,121
(1,038)
2,083
(11)
2,072
0.782

2011
9,936
(4,011)
5,925
(3,331)
2,594
(235)
2,359
(343)
2,016
2,016
0.762

2010
9,780
(4,099)
5,681
(3,107)
2,574
(335)
2,239
(477)
1,762
(19)
1,743
0.663

APPENDIX 2 January Effect in DGE Stock Market

The random movements of stock prices are one of critical examination for evaluating the
EMH. Some researches has successful to prove that there is inefficient market by proving the
calendar anomalies such as days of week effect (Muhammad & Rahman 2010), January
effect, etc.
This part will emphasis on testing the January effect on DGE stock market by interpreting
empirical data of DGE stock prices during period of July 2011 to June 2013. The January
effect was explained to the effect of tax loss hypothesis (Ahsan & Sarkar 2013). It asserts that
investors tend to sell out the stocks by the end of the year to reduce the tax paid by them on
their gains. It then results in the downward trend of stock prices. At the beginning of the year,
investors are believed to start investing on stocks which pushes the prices to go up (Branch
1977). Moreover, the window dressing hypothesis is considered to be another explanation for
the January effect (Haugen & Lakonishok 1988). This hypothesis indicates that fund
managers aim to manipulate their performance by selling the losers and leave only winners in
their portfolio. However, they tend to sell all the winners and put more new stocks in their
portfolio. Therefore, their actions contribute to create the artificial downward returns in
December and upward returns in January.

16

Month
Jun-13
May-13
Apr-13
Mar-13
Feb-13
Jan-13
Dec-12
Nov-12
Oct-12
Sep-12
Aug-12
Jul-12
Jun-12
May-12
Apr-12
Mar-12
Feb-12
Jan-12
Dec-11
Nov-11
Oct-11
Sep-11
Aug-11
Jul-11

Mean
-0.0017
-0.0002
-0.0024
0.0023
0.0027
0.0022
-0.0018
0.0022
0.0008
0.0005
0.0005
0.0019
0.0035
-0.0006
0.0016
0.0000
0.0034
-0.0001
0.0026
0.0014
0.0023
-0.0002
0.0000
-0.0010

Figure 10: Mean Monthly return of DGE during Jul 2011 Jun 2013
From the empirical results for DGEs stock prices over the examined period, the December11 mean return is positive while the January-12 mean return is negative. In contrast, the
December-12 mean return is negative while the January-13 mean return is positive.
Therefore, there was not sufficient evidence to prove the January anomaly in DGE stock
market during the examined period. However, both the tax loss selling hypothesis and
window shopping hypothesis can be seen clearly in Dec-12 and Jan-13 as there was a
suddenly decline of stock prices in December 2012 and increase in January 2013.

17

APPENDIX 3 Methodology for Earning Announcements Effect Analysis

It is calculated the stock returns for 20 days before and after the announcement day using
these equation
1. Actual Daily Returns
Rt = (Pt Pt-1)/ Pt-1
Rt Actual Daily Return of share on day t
Pt Price of stock on day t
Pt-1 Price of stock on day t-1
2. Expected Returns Average 20 day returns
E(Rt) =

t-1/20

3. Abnormal Returns ARs

ARt = Rt - E(Rt)
4. Cumulative Abnormal Returns CARs
CARt =

18