dc.description.abstract | Use of accounting information for valuation of equity is an area which has drawn the
interest of different categories of individuals including investors who monitor companies
accounting earnings and earnings changes patterns of the companies of their interest so as
to make informed decisions in their investments. In the recent past this field made
seminal contribution with the publication of Ball and Brown (1968) and also the works of
Easton and Harris (1991) both explaining on the relevance of accounting information in
explaining stock returns. Company’s earnings is a critical variable affecting the market
value of equity share and once a company’s earnings increases, its equity value or equity
return increases. Specifically, the study establishes the effect of earnings change on stock
returns (capital gains) of companies listed at the Nairobi Securities Exchange as at
December 2014.The study borrows many concepts from the works of Easton and Harris
(1991).The study used a descriptive research design. The population of study was all 61
companies listed at the Nairobi Securities Exchange as at December 2014.The census
approach was applied and only 51 companies whose complete secondary data was found
were considered. The secondary data collected covered 2010 to 2014 period (5 years).The
secondary data was obtained from the financial statement of the companies, from Nairobi
Securities Handbook from 2009 to 2013 and monthly average stock prices were obtained
from the Nairobi Securities Exchange and annualized to get annual average stock prices.
A multivariate regression model was used to link the independent variables to the
dependent variable. The study concludes that earnings change has an insignificant effect
on stock returns (capital gains) of all companies listed at the NSE. The study also
concludes that stock liquidity and firm size have a negative relationship with stock
returns for all companies listed at the NSE. The study recommends that companies should
concentrate on increasing its earnings but not its earnings changes because from this
study, it is evident that it is earnings not earnings changes that play a role in prediction
and explaining stock returns and this is in line with findings of Easton and Harris (1991)
that earnings changes do not play any role in predicting and explaining stock returns. To
the investors, potential investors, financial analysts and researchers, the study
recommends that other factors other than earnings, stock liquidity and firm size should be
considered and their effect on stock returns measured because the results of this study
show that the above mentioned variables explain only a small percentage of the stock
returns (capital gains). | en_US |