The Impact of Earnings Announcements on Stock Returns of Cross-listed Stocks in the East African Security Exchanges

Abstract

The EMH theory has been built on the premise of the existence of an abundance of information in the stock markets which is costless, and there is an immediate absorption of this information into the security prices. Due to the critical role played by earnings announcements, it is considered a significant component which is utilized when testing the levels of efficiency of a security market. Stock markets in developing countries provide investors with portfolio diversification benefits and research on market efficiency in these developing markets is vital. If stock markets are efficient, asset allocation remains the key factor which influences the overall risk and return of an investor. The selection of securities is also irrelevant since there are no undervalued or overvalued stocks. Despite the benefits associated with an efficient market and financial liberalization, minimal studies which establish the level of efficiency of the East African Security Exchanges as a whole exist. The objective of the study, therefore, was to establish the impact of earning announcements on stock returns of cross-listed stocks at the East African Security Exchanges. Several studies which describe the correlation between earnings announcement and the stock returns have been documented. The study used event study methodology to establish how the East African Security markets react to earnings announcements over an event window of twenty (21) days. The study was a census of all East African firms that have crosslisted in the Security markets in East Africa. The study concludes that a strong form of market efficiency does not exist at East African Security Exchanges. The Nairobi Stock Exchange and Uganda Stock Exchange show a semi-strong level of market efficiency while Rwanda Stock Exchange and Dar-es-Salaam Stock Exchange have shown a weak form of market efficiency. This study adds to the prevailing literature on the behavior of the East African stock markets with an aim of ascertaining the efficiency of these markets