The Effect Of Profit Alerts On Stock Returns Of Firms Listed At Nairobi Securities Exchange

Abstract

Listed Companies at Nairobi Securities Exchange (NSE) usually disclose information to investors about the performance of the company or the future plans of the company. All firms are required by CMA to disclose the information which includes profitability, profit warning alerts. If a company expects its financial performance to be lower by twenty five percent from the previous year’s earnings, they are required under the Capital Markets Act to make a profit warning announcement. In this study, a sample of 13 firms that issued profit warnings between 2014 and 2015 was analyzed using event study methodology where data was collected from Nairobi Securities Exchange for a period of 51 days (-25, +25). The event date was denoted as time zero (t=0) and a 51 day event window made up of 25 days prior to the event and 25 days after the profit warning announcement. Abnormal returns and Cumulative abnormal returns statistical significance was tested using the t-test. The study found out that stock returns are negatively affected by profit warning announcements as evidenced by a decline in abnormal returns around the event announcement period. The decline especially one day after the profit warning announcement and on the second day (t=-3.4235, P=0.0365) and (t=-2.7645, P=0.0211) was found to be statistically significant at 5% level. The study also established that there was a slight improvement in the stock returns from day +10 where the stocks resumed their earlier pattern although the market took long to recover from the effects of the profit warning because by day +25, the cumulative abnormal returns were still negative meaning that investors continued to make losses. Based on this study, the conclusions is that profit warnings negatively affect stock returns for those firms listed at NSE.