The earnings response coefficient, or ERC, is the estimated relationship between equity returns and the unexpected portion of (i.e. , new information in) companies' earnings announcements. In financial economics, arbitrage pricing theory describes the theoretical relationship between information that is known to market participants about a particular equity (e.g. , a common stock share of a particular company) and the price of that equity.

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  • The earnings response coefficient, or ERC, is the estimated relationship between equity returns and the unexpected portion of (i.e. , new information in) companies' earnings announcements. In financial economics, arbitrage pricing theory describes the theoretical relationship between information that is known to market participants about a particular equity (e.g. , a common stock share of a particular company) and the price of that equity. Under the efficient market hypothesis, equity prices are expected in the aggregate to reflect all relevant information at a given time. Market participants with superior information are expected to exploit that information until share prices have effectively impounded the information. Therefore, in the aggregate, a portion of changes in a company's share price is expected to result from changes in the relevant information available to the market. The ERC is an estimate of the change in a company's stock price due to the information provided in a company's earnings announcement. The ERC is expressed mathematically as follows: <math>R = a + b(ern-u) + e</math> R = the expected return a = benchmark rate b = earning response coefficient (ern-u) = (actual earnings less expected earnings) = unexpected earnings e = random movement
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  • The earnings response coefficient, or ERC, is the estimated relationship between equity returns and the unexpected portion of (i.e. , new information in) companies' earnings announcements. In financial economics, arbitrage pricing theory describes the theoretical relationship between information that is known to market participants about a particular equity (e.g. , a common stock share of a particular company) and the price of that equity.
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  • Earnings response coefficient
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