Profit Warnings Research Articles

Europe is poised for profit warnings

Europe is poised for profit warnings

The Impact of Profit Warnings on Stock Prices in Kuwaiti Firms

This research explores the link concerning informativeness regarding stock price and warnings pertaining to profit in organisations operating in Kuwait as an emerging country. An extensive set of panel data were utilised by the researchers, where such data linked to profit warnings percentages and stock price synchronicity on the Stock Exchange of Kuwait for the years 2010 through to 2020. Multi-regression was chosen to be applied as a parametric test, which provided the ability to garner more robust findings that are seen to be aligned with our belief that, as opposed to common market data. The findings present a wealth of insight concerning the effects of earnings declarations when it comes to stock prices and data content. The approach and assessment of profit warnings presented in this work might also provide further support for researchers seeking to carry out other stock price and profit warnings researches in emerging economics, particularly when considering that support in this regard is seen to be lacking in emerging regions. It is the view of the researchers that the present work is one of very few centres on developing regions, especially those in the GCC (Gulf Cooperation Council). Furthermore, adding to regression corporate governance factors as moderating variables has also been recognised as being far more valuable when compared with other regressions.  

Profit Warnings and Stock Returns: Evidence From Moroccan Stock Exchange


 
 
 
 There is an important literature focused on profit warnings and its impact on stock returns. We provide evidence from Moroccan stock market which aims to become an African financial hub. Despite this practical improvement, academic researches that focused on this market are scarce and our study is a first investigation in this context. Using the event study methodology and a sample of companies listed in Casablanca Stock Exchange, we examined whether the effect of qualitative warning is more negative compared to quantitative warnings in a short event window. Our empirical findings show that the average abnormal return on the date of announcement is negative and statistically significant. The magnitude of this negative abnormal return is greater for qualitative warnings than quantitative ones.
 
 
 

The language of profit warnings: a case of denial, defiance, desperation and defeat

PurposeTaking a communication perspective, the paper explores management's rhetoric in profit warnings, whose sole purpose is to disclose unexpected bad news.Design/methodology/approachAdopting a close-reading approach to text analysis, the authors analyse three profit warnings of the now-collapsed Carillion, contrasting the rhetoric with contemporaneous investor conference calls to discuss the profit warnings and board minutes recording boardroom discussions of the case company's precarious financial circumstances. The analysis applies an Aristotelian framework, focussing on logos (appealing to logic and reason), ethos (appealing to authority) and pathos (appealing to emotion) to examine how Carillion's board and management used language to persuade shareholders concerning the company's adverse circumstances.FindingsAs non-routine communications, the language in profit warnings displays and mimics characteristics of routine communications by appealing primarily to logos (logic and reason). The rhetorical profiles of investor conference calls and board meeting minutes differ from profit warnings, suggesting a different version of the story behind the scenes. The authors frame the three profit warnings as representing three stages of communication as follows: denial, defiance and desperation and, for our case company, ultimately, culminating in defeat.Research limitations/implicationsThe research is limited to the study of profit warnings in one case company.Originality/valueThe paper views profit warnings as a communication artefact and examines the rhetoric in these corporate documents to elucidate their key features. The paper provides novel insights into the role of profit warnings as a corporate communication vehicle/genre delivering bad news.

COVID-19 profit warnings: Delivering bad news in a time of crisis

Profit warnings (large negative earnings surprises) are important corporate reporting documents for delivering bad news and a distinctive corporate communication genre. The 2020 COVID-19 exogenous shock provides a unique worldwide crisis context for company disclosure of bad news.The research develops a genre-based typology/analytical framework for assessing COVID-19 profit warnings’ quality comprising: (1) Four profit warning/forecast quality characteristics and (2) Eight profit warning/forecast disclosures. For a sample of 160 profit-warning documents, the research manually analyses their content, culminating in a disclosure quality score/index. The research tests a model of the factors influencing disclosure quality.The research finds companies regress to silence when investors most need guidance and poor-quality disclosure, coy ambiguous language, possibly reflecting minimal regulatory guidance on this form of corporate report. Two variables are significant – Profit warnings disclosed following Financial Reporting Council guidance are of higher quality and quality varies by industry. The paper finds faux disclosure and the performativity of disclosure, which may allow boards of directors to tick-box compliance with market abuse regulations. The paper concludes with recommendations for policymakers on improvements required to enhance the quality of these highly important corporate documents.

Ownership Structure and Financial Performance of Companies Listed at the Nairobi Securities Exchange, Kenya

Performance of firms is predominantly contingent on the deliberate decisions cautiously made and executed by the owners therefore a linkage exists between ownership structure and performance financially. Owners are part of a segment that makes decisions by the virtue of their relationship with the firm. Therefore, the question of what maybe the most efficient ownership structure is relevant. Through the period 2014 to 2018, there was an increase in the listed firms that issued profit warnings with others like Kenya Airways and Uchumi Supermarket running into huge financial losses. This research aims at determining the relationship between structure of ownership on company’s performance financially and are anchored on two explicit objectives: to ascertain whether institutional local ownership impact on performance and to evaluate whether managerial ownership impact on performance. This exploration is built on, stewardship, Agency and stakeholder theories which expound an association of structure of ownership and performance financially of all Kenyan listed firmsthrough2014 to 2018. The examination adopts a causal research design. A census of the 60 listed firms is drawn in this study. Secondary data relating to ownership structure and return on assets is collected using secondary data collection sheet. Panel regression model is utilised to ascertain the relationship between the predictor and dependent variables. The effect of Institutional local ownership on Return on assets is significant as shown by the p values of 0.007. Managerial ownership is found to have an insignificant impact on Return on assets as shown by the p values of 0. 611.The study is recommending that in pursuit for high Return on assets firm can come up with incentives to encourage institutions to invest more in the company to raise performance.

Market reaction to trading statements released by Johannesburg Stock Exchange listed companies

Using the event study methodology, this study investigated the market reaction to trading statements released by a sample of the Top 100 Johannesburg Stock Exchange (JSE) listed companies since the inception of the trading statement regulatory requirements in 2010. There appears to be significant information leakages before the release of trading statements. The share prices on the JSE shows a tendency to incorporate more timely sources of information before the release of trading statements. The results show a differential market reaction in the pre-announcement period. For profit warnings, the market seems to have largely impounded the expected poor earnings before the announcement. In the case of profit upgrades, the market appears to be more cautious and requires confirmatory information for a further positive reaction. A post-announcement earnings drift occurs for a period of thirty days after the announcement. This is contrary to the Efficient Market Hypothesis (EMH) which asserts that new information is reflected in share prices almost immediately. This allows investors and portfolio managers with a trading strategy to outperform the market by investing in companies announcing profit upgrades and profit warnings. The observed market inefficiency can be mitigated by managers disseminating the earnings surprise information to a wide range of stakeholders and market participants rather than relying only on the mandatory regulatory announcement.

Profit warning and its association with stock price informativeness: experimental analysis

PurposeThis study investigates the nature of the association between profit warnings and stock price informativeness in the context of Jordan as an emerging country.Design/methodology/approachThe authors used a large panel data set that related to stock price synchronicity and profit warnings percentages on the Amman Stock Exchange for the period spanning 2007–2018. Robust regression was used as a parametric test. This enabled us to obtain stronger results that fall in line with our prediction that a profit warning encourages firm investors to collect and process more firm-specific information than common market information.FindingsOur findings show a significant positive effect of profit warnings on the amount of firm-specific information incorporated into stock price, which means that the greater the percentage of profit warnings the more likely that more firm-specific information will be incorporated in stock price synchronicity. In addition, corporate governance characteristics (moderating variables) significantly increase the level of the relationship between profit warnings and stock price synchronicity.Practical implicationsOur study results could be useful to investors, senior managers, and regulators in Jordanian firms, particularly in relation to decisions about enhancing the quality of financial statements. In addition, our results provide new evidence about the consequences of earnings announcements for information content and the informativeness of stock prices. Our methodology and evaluation of profit warnings may also demonstrate useful evidence for future researchers on profit warnings and stock price informativeness in developing economies, especially given that such evidence is scarce in developing economies.Originality/valueThis research is the first study of its kind on emerging markets, particularly in the Middle East. Moreover, entering the corporate governance variables as moderating variables to the robust regression was found to be more powerful than other regressions.

Profit Warning Announcements and the Security Prices of Companies Listed on the Nairobi Securities Exchange, Kenya

Business plays a significant role in prosperity in society and creates resources that permit social development and welfare. The market price of its securities measures the worth of business. Thus, security prices show how a company, through its commercial operations, actively contribute to progress in an economy. However, this is not the case for NSE N20 share index, which, in 2015, 2016 and January 2017 experienced price declines, prompting this study investigated the effect of Profit Warning Announcements on the Security Prices of companies listed on the NSE, Kenya. The study applied the Signaling Theory, the Efficient Market Hypothesis, and the Market Expectation Theory. It used the Event Study Methodology that employed a mixed Research Design and Longitudinal Research and administered a questionnaire and interview schedules to collect data from ten listed companies. The study used parametric statistical techniques - the ANOVA and to analyze data and test the hypothesis. The study concluded that Profit warning Announcements did not affect the performance of Securities Prices of companies listed on the NSE, Kenya. This study will guide the market activities and provide a better understanding of how Profit warning Announcements affect returns. It will enable the policymakers to assess and evaluate the current status and, provide a platform for making reviews, designs, and formulate policies to regulate and control trading activities on the financial markets, contribute to knowledge and strengthen the foundation for further research. Future research should investigate the effects of Profit warning Announcements on the performance of security prices of specific companies that were affected by the price declines.

BASF says second-quarter earnings dropped by half

The German chemical giant BASF has warned investors it expects second-quarter earnings to plummet 47%, to €1 billion (about $1.1 billion), compared with the same time last year. The company says major international chemical markets, including agriculture and auto manufacturing, are experiencing steeper-than-expected downturns. The profit warning comes less than 2 weeks after BASF announced a reorganization that will cut 6,000 workers by 2021. That plan aims to shrink administrative overhead and grow service-based businesses. The cost-cutting moves won’t come in time to keep BASF’s profits level this year. It estimates full-year 2019 earnings before interest, taxes, and special items will be 30% lower than it reported in 2018. Sales of high-margin chemicals are flagging in the face of weak growth in industrial production, BASF says in its warning. In particular, the firm pointed to Chinese auto production, which is down 13% in the first half of the year. In

The Impact of Profit Warnings on Casablanca Stock Market

On a yearly or quarterly basis, listed firms in the Moroccan Stock market publish their financLal statements. Нese statements give details and insights to stakeholders, especially investors about their numbers. НLs is a requirement and an obligation to all firms as this gives these investors the fairness of looking at the statements and making their decisions as to invest or not. In addition to the financLal statements of the company, the AMMC (L’Autorite Marocaine du Marche des Capitaux) has made it obligatory for the listed companies to publish any other document: Additional Paid in Capital Announcement, press releases about the general assemblies, and especially profit warnings. Нe announcements that the profits of the company will be lower than expected should be done, in Morocco, as soon as the company discovers of the discrepancies between the estimates and its actual returns. Many studies, and as discussed in the next sections, have looked at this topic from dL�?ٴerent angles. Нe research areas vary from, the impact of profit warnings on stock prices, to the e�?ٴects of time-varying betas on stock prices. However, very little research was done about this in Morocco. Since we’re looking at how one specLfic event impacts the prices of companies’ stock prices in Morocco, the most suitable methodology to adopt for this test would be the event study methodology. Нe market model, the most used, looks at the actual returns of the company’s securities and a certain market index. It is used to represent the dL�?ٴerence between the security’s returns on a day (inside the event window) and the average return. НLs change is the e�?ٴect that happens to the company because of the occurrence of the event and in our case the announcement of the profit warning.

Accounting Noise and the Pricing of Cocos

Contingent Convertible bonds (CoCos) are debt instruments that convert into equity or are written down in times of distress. Existing pricing models assume conversion triggers based on market prices and on the assumption that markets can always observe all relevant firm information. But all Cocos issued so far have triggers based on accounting ratios and/or regulatory intervention. We incorporate that markets receive information through noisy accounting reports issued at discrete time instants, which allows us to distinguish between market and accounting values, and between automatic triggers and regulator-mandated conversions. Our second contribution is to incorporate that coupon payments are contingent too: their payment is conditional on the Maximum Distributable Amount not being exceeded. We examine the impact of CoCo design parameters, asset volatility and accounting noise on the price of a CoCo; and investigate the interaction between CoCo design features, the capital structure of the issuing bank and their implications for risk taking and investment incentives. Finally, we use our model to explain the crash in CoCo prices after Deutsche Bank’s profit warning in February 2016.

Borrower distress and the efficiency of relationship banking

Abstract We propose that relationship bankers are able to benefit their clients even after they indicate distress. Relationship bankers continually learn about their clients to reduce the asymmetric information problem, reduce adverse selection risk and manage loan risk. We examine the consequences of corporate disclosure, namely profit warnings, as a negative information-releasing event during the normal course of business and evaluate the evolving nature of relationship banking before and after such an event. We show that lenders generally increase the cost of loans, loan security and reduce loan maturity after profit warnings. The average loan spread increases by 17–37 basis points holding all else constant. However, borrowing from relationship lenders lowers the loan spread by 17 basis points compared to borrowing from non-relationship lenders, implying that relationship lenders are able to benefit borrowers. Moreover, borrowers often choose to remain with their relationship bankers due to more favorable loan terms and the high costs of switching lenders. Ultimately, these borrowers end up reducing their default risk and improving their profitability after the profit warning. Our results remain robust even when we control for firms that did not issue profit warnings. We conclude that relationship bankers efficiently use client information to provide effective financial intermediation, even after distress.

Corporate goodness and profit warnings

Is a firm that is known for positively engaging stakeholders expected to voluntarily disclose bad financial news? If it makes the announcement, does its corporate goodness help to mitigate the stock price reaction? We examine these issues using a sample of profit warnings, and a sample of firms with negative earnings surprises that did not warn. Firms that have positive corporate social responsibility ratings are more likely to provide earnings warnings than other firms. When they do provide a profit warning, the event negative abnormal returns are of significantly smaller magnitude than the returns of other firms providing warnings. This effect does not occur for social firms that decide not to warn. They suffer the same negative stock price impact on the earnings announcement day as other firms.

Do voluntary disclosures of bad news improve liquidity?

Can managers improve market liquidity and lower the cost of capital by providing voluntary earnings guidance? This study examines the impact of profit warnings on market liquidity and finds that voluntary disclosure of bad news actually improves market liquidity. By conducting an empirical study over the period 1995–2010 on NYSE, NASDAQ and AMEX listed firms, we find that firms that issue profit warnings show enhanced market liquidity during the post-announcement period. We show that profit warnings reduce information asymmetry and lower bid-ask spreads and increase trading volumes. These results are invariant to daily (short run) and monthly (long run) data after controlling for firm specific attributes. The results have major corporate policy implications. By voluntarily disclosing negative earnings guidance by managers, firms will experience significant improvement in market liquidity, thereby lowering the cost of capital. Our results are even more profound for firms that release bad news with extremely negative stock market impact. In other words, voluntary disclosure of bad news is good for market liquidity.

The Bad, the boom and the bust: Profit warnings over the business cycle

We examine the market reaction of profit warnings (PWs) over the business cycle in the U.S. during 1995–2012. The average PW is associated with a −13.38% abnormal return during the announcement day. This is substantially higher than the abnormal return of firms who announce a negative earnings surprise without previously warning about it. We also find that the PW stock market reactions are asymmetric during the business cycle. Negative stock market reactions are greater in magnitude during expansion periods than during contraction periods. Theory suggests that this is because bad news is not expected during good times, so when it is announced, investors have a greater update to their beliefs.

Moderating Effect Of Organizational Factors Between Competitive Intelligence Practices And Performance Of Firms Listed On The Nairobi Securities Exchange, Kenya

Performance is critical for every listed firm, as it enhances shareholder’s value and capability to generate earnings from invested capital. Some of the firms listed on the Nairobi Securities Exchange (NSE) have been performing poorly as indicated by the rising number of firms issuing profit warnings. The competitive business environment is continuously working to drive down the rate of return on invested capital. To counter these competitive forces, firms have resorted to gathering information at their disposal and converting it into competitive intelligence through analysis and human judgment. Competitive intelligence can be viewed both as a process and a product. As a process, it is the set of legal and ethical methods for collecting, developing, analyzing and disseminating actionable information pertaining to competitors, suppliers, customers, the organization itself and business environment that can affect a company’s plans, decisions and operations. Competitive intelligence as a product is information about the present and future behavior of competitors, suppliers, customers, technologies, government, market and the general business environment. This study sought to determine the moderating effect of organizational factors between competitive intelligence practices and performance of firms listed on the NSE. Firm performance was evaluated using both financial and non-financial measures. The findings indicate that organizational factors specifically organizational culture, organizational structure and managerial attitudes toward competitive intelligence were found to moderate in the relationship between the competitive intelligence practices and performance of firms listed on the NSE, Kenya.

Competitive Intelligence Practices And Performance Of Firms Listed On The Nairobi Securities Exchange, Kenya

Performance is critical for every listed firm, as it enhances shareholder’s value and capability to generate earnings from invested capital. Some of the firms listed on the Nairobi Securities Exchange (NSE) have been performing poorly as indicated by the rising number of firms issuing profit warnings. The competitive business environment is continuously working to drive down the rate of return on invested capital. To counter these competitive forces, firms have resorted to gathering information at their disposal and converting it into competitive intelligence through analysis and human judgment. This study sought to determine the effect of competitive intelligence practices on performance of firms listed on the NSE. Firm performance was evaluated using both financial and non-financial measures. The non-financial measures used in the study were goal achievement and customer satisfaction, while Return on Assets (ROA) and Return on Equity (ROE) were the financial measures used. The target population was the sixty firms listed on the Nairobi securities exchange. Primary data was collected using a semi-structured questionnaire; while secondary data was obtained from the firm’s published annual reports available at the NSE using a document review guide. Quantitative data was analyzed using both descriptive and inferential statistics. The findings indicate that competitive intelligence practices have a positive and a statistically significant effect on the non-financial performance of firms listed on the Nairobi Securities Exchange. The intelligence practices were found to have a positive but statistically insignificant effect on the financial performance of listed firms. Managers of listed firms should raise the utilization level of competitive intelligence practices to enable the firms to make accurate predictions on changes in the business environment, compete better in the marketplace against rivals, improve on innovation and automation, track competitors’ activities and improve the competitiveness of their firms by identifying threats and opportunities before they become obvious. The study suggests that future researches should focus on extending knowledge on competitive intelligence practices to non-listed corporate sector firms to support the generalization of the findings to all sectors in the economy.

The Ricochet Effect of Bad News

We study the information transfer effects of profit warnings issued by U.S. firms on domestic and international non-announcing firms during expansion and contraction periods. Profit warnings contain not only idiosyncratic information about the firm but also new information about the state of the sector. We estimate an information transfer effect of approximately 10% of the negative abnormal returns originated by U.S. firms on non-announcing firms in the U.S. market and 4% for international non-announcing firms. These findings show that the information transfers follow a ricochet effect, which means that the negative impact is larger for domestic non-announcing firms compared to international non-announcing firms. We also find significant transfer effects for international non-announcing firms, especially in the chemicals and petroleum, computer equipment, electronics, transportation and communication industries. Furthermore, we find empirical support that abnormal returns of profit warning announcements during expansion periods are more negative than during contraction periods. Investor confidence increases during expansion periods, and investors extrapolate good news for firms in general during expansion periods. Also, we find that extremely negative abnormal returns during expansion periods contain information that transfers to non-announcing firms. Our research shows that bad news during the expansion stage of the business cycle magnifies the reaction to bad news relative to the contraction stage.

Analyst earnings forecast revision activity around profit warnings across four European countries

Purpose– The purpose of this paper is to report on research concerning financial analysts’ activity surrounding profit warnings issued by listed companies in the four largest European stock exchanges (France, Germany, the Netherlands and the UK). The authors address three aspects of analysts’ forecasts: ex-post accuracy of forecasts, earnings forecast revisions, and consensus forecast dispersion. The goal of the analysis is to study the differences between financial analysts’ behavior within different regulatory settings, namely common law vs civil law countries.Design/methodology/approach– The sample is composed of 1,330 profit warnings issued by listed European firms during the period 2000-2010. The authors apply event study methodology and OLS regressions to highlight the impact of the legal information environment on analysts’ reactions.Findings– The empirical analysis reveals that analyst activity depends on each country’s legal context factors, such as the legal information environment of the firm and the index of investor protection. Accordingly, the authors show that both a richer legal information environment and stronger country-level investor protection substantially improve analyst accuracy around profit warnings.Research limitations/implications– The sample is only composed on firms from four European countries owing to a lack of firms from other European countries that disclosed PW during the period 2000-2010. It would be pertinent to conduct future research dealing with an international sample from different continents.Practical implications– The paper contributes to a deeper understanding of analysts’ reactions to profit warnings. The findings can influence firms’ reporting practices and lead to future regulation policies.Originality/value– This work is the first to examine the relationship between profit warning releases and the behavior of financial analysts in a pan-European context where there are different institutional levels of investor protection.