An empirical investigation of the information content of profit warnings announcements for companies quoted at the NSE
Abstract
There are several theories that have been advanced to explain why companies issue
profit warning announcements. A major reason advanced as motivation for issuing of
profit warnings is the avoidance of shareholder lawsuits over failure by management
to provide timely negative information. Other reasons include need to comply with
regulatory requirements besides being used as a strategy by management to affect the
overall market reaction to earnings news based on the assumed informational value.
A mandated disclosure requirement was issued by the Capital Markets Authority
(CMA) through legal notice no 60 of May 2002 stipulating that, an issuer shall
disclose all material information and make a public announcement of any profit
warning, where there is a material discrepancy between the projected earnings for the
current financial year and the level of earnings in the previous financial year.
This paper examined the information content of profit warning announcements at the
Nairobi Stock Exchange. This was achieved by studying fourteen companies that had
issued profit warning between the periods 2002 to 2010.The study made use of the
stock returns and market returns data to determine whether profit warning
announcement elicit any reaction in the Kenyan stock market. The study made use of
daily adjusted prices for sample stocks for the event window of 31 days, consisting of
15 days before and 15 days after the profit warning announcement. The event study
methodology was employed in the determination of the effects of the profit warning
announcement. Abnormal returns were calculated by use of the market model and tests
are conducted to test the significance.
The study found out that the Kenyan Stock market reacts negatively to profit warning
announcements as shown by a general decline in mean abnormal returns around the
profit warning announcement period. This is consistent with the hypothesis that profit
warnings have information content which is associated with a negative revaluation of
the firm. The study equally found out that there are negative abnormal returns that are
statistically significant at 5% level, around the profit warning announcement date.
There is therefore evidence of investor reaction before and after the profit warning
announcement.
Citation
MBA ThesisSponsorhip
University of NairobiPublisher
School of Business, University of Nairobi
Subject
Market efficiencyDescription
Empirical investigation of the information content of profit warnings announcements for companies quoted at the NSE