Effect Of Profit Warning Announcement On Stock Returns Of Companies Listed At The Nairobi Securities Exchange

Abstract

TheistudyusoughtUtopestablishithe impactiof profit warning announcementcon share returns of companies that have been listedcatcthebNairobihSecuritiesgExchange. Thus the study analyzed the reaction of share returns of 11 listed firms that had made profit warning announcement in 2017. The data collected included particulars of profit warning announcements namely; the issuing company, the date of the warning, and the daily average shareKprices within a timeline of 14 daysybeforexthezwarninggand 14odaysGafterOthe warning.PEvent study methodology was used to analyse the data. The finding of the study established that profit warning declaration has a cumulative negative impact on share returns of entities listed at the NSE, with 63.64% of the firms reacting negatively to profit warning announcement and 36.36% reacting positively. The study found theIeffectiofiprofit warning announcementionitheireturnsiof the companiesilistediatithe to be only statistically significant in 27.27% of the cases, evidenced by P=<0.05. The study found out that there was an abnormal reaction to profit warning announcement though not statistically significant. This can be attributed to speculative trading at the Nairobi Securities Exchange. This indicates a need for investor education as way of reducing speculative trading which results to abnormal reaction. The capital Markets Authority should develop policies, rules, regulations and trading guidelines to monitor the trading activities of the Nairobi Securities Exchange as this make the market efficient and reduce abnormalities that make the investors loose or gain unfairly. Additional research ought to be undertkane to determine the effect of the timing of profit warning announcement so as to determine the effect of issuing profit warning earlier on in the financial year and issuing the warning towards the end of the financial year. This will assist in determining whether investors react differently when their profit expectation are managed earlier on in the financial year. In addition the study south to assess only one corporate action for the entities listed at the NSE, it would therefore be significant for a study to be carried out for all the corporate actions combined to be able to get a clearer analysis of which corporate action brings about more reaction on the Kenyan market and hence design various ways to smoothen their effect.