Effect of Earnings Announcement on Share Prices of Companies Listed at the Nairobi Securities Exchange
European Business & Management
Volume 3, Issue 2, March 2017, Pages: 29-36
Received: Feb. 13, 2017;
Accepted: Feb. 27, 2017;
Published: Mar. 24, 2017
Views 1751 Downloads 155
Olang Margaret Akinyi, Faculty of Business Studies, Chuka University, Chuka, Kenya
Akenga Grace Melissa, Faculty of Business Studies, Chuka University, Chuka, Kenya
Limited companies are characterized by separation of management and ownership, at the end of each financial period managers have a duty to communicate to the shareholders on the financial performance of the firm which is usually done through earnings announcement. Managers strive to maximize shareholders wealth by making rational financial decisions. Earnings announcements are important since it determines the firm’s financial performance in terms of profits and wealth. The inefficiencies in our markets today raise an issue on whether investors should cash in on the inefficiencies or encourage professionalism. Through market research investors can move from observing trends to a solid and more grounded investing that has an inclination to long term positive gains. The objectives of the study were; to determine how efficiently share prices react to earnings announcements, and the influence of the content of earnings announcements to investment decisions made by investors. The target population was all the 61 companies listed at the Nairobi securities exchange (NSE). Purposive sampling technique was used to select 8 companies as a sample size. The event study methodology was used to determine the effect of earnings announcement on share prices. Data was analyzed descriptively using mean and standard deviation while inferences were made using correlation analysis and t- statistic. The results obtained indicate that the abnormal returns around the earnings announcements date were not significant at 5% level. The study found negative relationship between the content of earnings announcements of firms listed at the NSE. There was also a significant difference between earnings announcement and share price changes. The study found that shares have positive returns before earnings announcement and negative returns in months immediately following the announcement. This study also established that all stocks studied have a positive beta value indicating that they adjust linearly to the performance of the market index. Five of them have a beta above one meaning that their systematic risk or return volatility is greater than the stock market. Increased volatility means more risk to the investors and there are higher abnormal returns for stocks which have a beta greater than one. The study provides information to investors to help them analyze the earnings in order to determine the firm’s profitability and wealth.
Olang Margaret Akinyi,
Akenga Grace Melissa,
Effect of Earnings Announcement on Share Prices of Companies Listed at the Nairobi Securities Exchange, European Business & Management.
Vol. 3, No. 2,
2017, pp. 29-36.
Aharony, J and Swary, I (1980). Quarterly Dividend and Earning Announcements and Stockholders’ Return: An Empirical Analysis. Journal of Finance, March 1980.
Annuar, M. N. and Shamsher, M (1993). The Efficiency of Kuala Lumpur Stock Exchange. Pernerbit Universiti, Pertanian Malaysia.
Atiase, R (1985). Predisclosure Information, Firm Capitalization, and Security Price Behavior around Earnings Announcement. Journal of Accounting Literature Vol 23, pp 21-36.
Ball, R. and Brown, P (1968). An Empirical Evaluation of Accounting Income Numbers. Journal of Accounting Research Vol 6, pp 159-178.
Beaver, W. H (1968). The Information Content of Annual Earnings Announcement. Journal of Accounting Research Vol 6 (3), pp 67-92.
Bernard, V. L. and Thomas, J. K (1990). Evidence that Stock Prices Do Not Fully Reflect the Implication of Current Earnings to the Future Earnings. Journal of Accounting and Economics Vol 13, pp 305-340.
Bodie, Z., Kane, A., & Marcus, A. (2008). Investments. Singapore: Mc Graw Hill. International.
Chan, W. R et al (2004). Testing Behavioral and Finance Theories using Trends and Sequences in Finance Performance. Journal of Accounting and Economics Vol 38, pp 3-50.
Cornell, B. and Landsman, W. R (1989). Security Price Response to Quarterly Earnings Announcements and Analysts’ Forecast Revisions. The Accounting Review Vol LXIV No 4.
Debondt, W. and Thaler, R (1985). Does the Stock Market Over-react. Journal of Finance Vol 40, pp 793-805.
Fama, E. et al (1969). The Adjustment of Stock Prices to New Information. International Economic Review Vol 10, pp 1-21.
Fama, E (1970). Efficient Capital Markets: A Review of Theory and Empirical Work. Journal of Finance Vol 25, pp 383-417.
Fama, E (1978). Foundations of Finance. New York: Basic Books.
Fama, E (1998). Market Efficiency, Long Term Returns, and Behavior Finance. Journal of Financial Economics Sep 1998, pp 283-306.
Jensen, M (1968). The Performance of Mutual Funds in the Period 1945-1964. Journal of Finance Vol 23, pp 389-416.
Kok, K. L. and Goh, K. L (1995). Malaysian Securities Market. Selangor: Pelanduk Publications.
Kormendi, R. and Lipe, R (1987). Earnings Innovation, Earning Persistence, and Stock Returns. Journal of Business Vol 60 (3), pp323-345.
Mandelker, G. N et al (1992). The post-Merger Performance of Acquiring Firms: A Re-examination of an Anomaly. Journal of Finance Vol 47, pp 1605-1621.
Osei, K. A (1996). Analysis of Factors Affecting the Development of an Emerging Capital Market: The Case of the Ghana Stock Market. AERC Research Paper 76 Nairobi, Kenya.
Pandey, I. M (2004). Financial Management (9th ed). New Delhi: Vikas Publishing House Pvt Ltd.
Ross, S. et al (2005). Corporate Finance (7th ed). US: McGraw-Hill Cos.
Sharpe, W. F (1964). Capital Asset Prices. A Theory of Market Equilibrium under Conditions of Risk. Journal of Finance Vol XLX (3), pp 425-442.
Shleifer, A. and Vishney, R (1996). A Model of Investor Sentiment. CRSP Working Paper 443 Graduate School of Business, University of Chicago.
Watts, R. L. and Zimmerman, J. L (1986). Positive Accounting Theory. Eanglewood Cliffs, New Jersey: Prentice-Hall Inc.