The impact of profit warning on stock value of firms listed at the Nairobi Securities Exchange

Abstract

Profit warnings are a voluntary announcement made by firms disclosing management's expectation that earnings will be less than those forecasted by investment analysts. Market reaction to these announcements is highly negative; market participants will presumably interpret it as bad news. In this study, a sample of 13 firms listed at the NSE . that had made profit warnings announcements between 2005 and 2012 was used. The research strategy adopted was quantitative method using the events study model. The average Abnormal Returns and Cumulative Abnormal Returns statistical significance was then tested using the t-test.

The results show that at the NSE, profit warning announcement is generally associated with negative abnormal stock return. The study found that the stock returns experienced a high abnormality during announcement and 10 days surrounding the announcement especially on the first day (t1; p=.079) and sixth day (t6; p=.029) at 90% and 95% significance level respectively. The study further established that the cumulative returns exhibited a steadily decreasing trend in stock returns up to the announcement day and increased steadily but at lower rate after the announcement depicting little increase in abnormal returns owing to absorption of the information into the stock prices with investors benefiting infinitesimally from the public information.