a. Find Abitibis ERC (abnormal stock return divided by unexpected earnings) for its earnings surprise in its 2004Q3 earnings announcement. To find the abnormal stock return, you must remove market-wide effects from Abitibis announcement-day stock return . shows how to use the market model to estimate the return attributable to market-wide factors. By removing market-wide effects from Abitibis announcement-day stock return, you can isolate the stock return that is attributable to the earnings surprise.

b. Do you feel that the increase in Abitibis share price on October 21 was consistent with efficient market securities market theory, or do you agree with the CEO? Explain.

19. On October 21, 2004, Abitibi-Consolidated Inc., a large Canadian-based newsprint and groundwood producer, reported net income for its third quarter, 2004, of $182 million. This compares with a net loss for the same quarter of 2003 of $70 million. Sales for the quarter were up, to $1,528 million, and earnings excluding low-persistence items were $82 million. The analyst forecast for the third quarter, 2004, excluding low-persistence items, was a loss of $27 million. The low-persistence items included a gain of $239 million before tax from foreign exchange conversion. Much of the company's long-term debt is denominated in U.S. dollars. The foreign exchange gain arose because of the rising value of the Canadian dollar, rela- tive to the U.S. dollar, during the quarter. Comparable figures for the third quarter of 2003 were as follows: sales of $1,340 mil- lion, a loss before low-persistence items of $32 million, and foreign exchange conversion gain of $13 million. There is no mention of R&D costs in the company's third quarter report. Its 2003 annual report mentions R&D only in passing, with reference to forest conservation. Presumably, R&D expenditures are relatively low. Abitibi-Consolidated's share price rose $0.59 to $7.29 on the Toronto Stock Exchange on October 21, 2004. The S&P/TSX Composite index gained 59 points to close at 8,847 on the same day. According to media reports, the increases were driven by a "red-hot" materials and energy sector (including Abitibi-Consolidated). In a conference call accom- panying its third quarter report, Abitibi-Consolidated's CEO complained that investors were too pessimistic about the company. The company's beta, according to Yahoo! Finance, was 0.779. The risk-free interest rate at this time was approximately 0.00020 per day. Note the theoretical relationship a; = Rf (1 B;)