Delayed price response to the announcements of earnings and its components in Finland

Several studies report that even after accounting earnings are announced, estimated cumulative unexpected returns continue to drift up for firms that report unexpectedly good earnings and down for firms that report unexpectedly bad earnings. This paper shows that because Finnish companies tend to pay more attention to tax considerations than so-called economic reality when preparing their financial reports, this drift does not exist for reported earnings, i.e. net profit based on Finnish accounting regulations. It appears, however, that several other income levels assessed by financial statement analysis are important in this respect. The results imply that firms that make extensive adjustments for tax purposes have high unexpected returns. This is explained by the fact that those firms have enough income to extensively exploit the depreciation and other earnings management possibilities.