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Earnings Response Coefficient

The Earnings Response Coefficient (ERC) measures the relationship between a company’s earnings announcements and the corresponding change in its stock price. It reflects how strongly investors react to unexpected earnings news, indicating the sensitivity of a stock’s price to its earnings results. A high ERC suggests that investors react significantly to earnings surprises, while a low ERC indicates a muted response. ERC is used by investors and analysts to understand the market’s perception of a company’s earnings quality and its impact on stock prices.

Example

If a company reports earnings much higher than expected and its stock price jumps, it has a high ERC, showing strong investor reaction to earnings surprises.

Key points

• Measures how stock prices respond to earnings announcements.

• High ERC means strong investor reaction; low ERC means weaker response.

• Indicates the market’s perception of a company’s earnings quality.

Quick Answers to Curious Questions

ERC measures the relationship between a company’s earnings announcements and the change in its stock price.

It helps investors understand how sensitive a stock is to earnings news, indicating the market’s perception of earnings quality.

A high ERC indicates that the stock price responds strongly to earnings surprises, reflecting significant investor reaction.
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