Effect of profit warnings on stock returns at the Nairobi securities exchange
Abstract
The main purpose of the study was to establish the effects of profits warnings on stock
returns at the Nairobi Stock Exchange. The study adopted the use of descriptive design.
For the research purpose, the population constituted of all the listed companies at the
NSE that issued profit warnings announcement between the years 2003 to 2013. The
population of study included fifteen companies as shown in appendix one. A census was
done for all the fifteen companies. The study relied on secondary data from the NSE daily
market reports, press websites such as nation media and standard media and stock brokers
research departments. The data collected included corporate announcements in form of
profit warnings, company details, the date of the warning, the industry in which the
company belonged and the primary reason given for the warning as well as daily
observed average prices for the periods between 2003 to 2013. This data was collected
from the published financial statements of listed companies, NSE website, Capital market
authority website as well as libraries and libraries of the Kenyan media houses.
Secondary data available at the NSE database on daily prices and corporate
announcements as well as published data in the internet and print media was used.
Stratified and convenient sampling was used to determine size and nature of the sample
included in the study. Data was analysed using event study methodology. The study
findings established that the significance of returns reaction to the profit warning
announcements at the NSE is dependent on the company issuing the announcement.
Generally, the actual returns, abnormal returns, market returns, expected returns,
cumulative returns and cumulative abnormal returns generally have the same trend on
profit warning announcements except for instances where cumulative actual return
deviates. The standardized cumulative abnormal returns swing around the trend with
sharp declines on the profit warning announcement day and an increase thereafter. Since
6.7 percent and 13.3 percent of issuing companies abnormal returns and cumulative
abnormal returns respectively deviate as a result of the profit warning announcement, it is
understood that there may be instances of prior market expectations of the profit
warnings announcements with does not affect investor expectations and sentiments in the
stock market. This prior information to the market should be avoided to make the markets
effective.
Citation
Degree of Masters of Business Administration (MBA), School of Business, University of NairobiPublisher
University of Nairobi