Association between extraordinary items and stock prices and the use of extraordinary items to smooth income in publicly quoted companies in Kenya
Abstract
The focus of this study was twofold:
1. To determine which of the two figures, earnings before
extraordinary items or earnings after extraordinary items
has a stronger relationship with stock prices.
2. To determine whether publicly quoted Companies in Kenya use
extraordinary items to smooth income.
The literature reviewed brought out the requirements of the
various accounting standards as regards treatment and
presentation of extraordinary items. A section dealing with the
association between earnings per share and stock prices is
included. Lastly, literature on smoothing of income is included.
The population of interest for this study comprised of the
publicly quoted companies in Kenya, quoted as at 31st December
1988. Out of the 56 Companies, only 31 Companies were included in
this study. The rest had not reported extraordinary items during
the period covered by the study.
The findings of the study suggested that there is no
significant difference between the strengths of the relationship
between earnings before extraordinary items and stock prices and
earnings after extraordinary items and stock prices.
the findings also suggested that there is no difference
between the smoothness of earnings before extraordinary items and
earnings after extraordinary items. This indicates publicly
quoted Companies in Kenya do not use extraordinary items to
smooth income. It also raises questions about the usefulness of a
standard whose effect is,probably,minimal.
Citation
MASTER OF BUSINESS AND ADMINISTRATION.Publisher
University of Nairobi, Faculty Of Commerce, University Of Nairobi. June 1990.