Effect of Earnings Announcement on Share Prices of Companies Listed at the Nairobi Securities Exchange

Abstract

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.