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.