Does top management trustworthiness affect the capital market's response to unexpected earnings? - A study on the effect of top management trustworthiness on earnings response coefficients

Sammanfattning: The Earnings Response Coefficient (ERC) measures the magnitude of the capital market's reaction to announced earnings surprises, and varies depending on intertemporal and cross-sectional factors. Since factors such as trust and credibility have been shown to have a significant impact on the capital market's perception of a company, we hypothesize that these factors may also affect the capital market's reactions to earnings surprises. As the first study in the Nordic region, this study examines the effect of the capital market's perception of top management trustworthiness on the ERCs for Nordic Large- and Mid cap companies between 2011 and 2015. Using a linear regression, we find that high perceived top management trustworthiness has a magnifying effect on the ERC, suggesting that the capital market reacts stronger to earnings surprises presented by companies with high perceived top management trustworthiness. Additionally, we find that the explanatory power of an ERC regression can be markedly improved by including trust variables.