Relationship Between Earnings Announcement and Stock Returns at the Nairobi Securities Exchange

Abstract

The efficient market hypothesis (EMH) concept states that a market is efficient when security prices of stocks reflects and adjust to all available information in the market. This implies that no individual person can make excess returns from buying or holding a given stock with knowledge of new information in the market, this is because that information is never really new and would have been reflected in the prices that are in place. EMH assumes a perfect market condition which does not seem to exist in our real world. On the contrary efficiency of the market can only be achieved to some extend and measure. Kenyan market is ranked in the emerging markets, which is believed to experience high price volatility of stocks thus there is a chance that some investors can make abnormal returns basing their investment on speculation. The abnormal returns made are not in line with efficient market hypothesis. The study examined stock returns of firms listed at the Nairobi Securities exchange and went ahead to examine whether there exist a relationship between earnings announcement and stock returns. Studies done on Nairobi Securities Exchange over the years, shows that it has undergone a high volatility in prices eluding that there is possible inefficiencies that could affect the shareholders‟ value. An empirical evidence to allude to the anomalies in the NSE was drawn from 33 firms listed at the Nairobi securities exchange. Firms selected must have traded and announced their earnings in the period of 2014 and 2015. The secondary data was collected using data collection sheet and on market indices, daily closing stock prices and traded volumes for an 11 day event window period 5 days before and 5 days after the earnings announcement. Daily market adjusted abnormal returns and cumulative abnormal returns were computed and a further t-test was performed at 5%significance level to find out the relationship between earnings announcement and stock returns thereafter results interpreted for the study. Results showed significant relationship between earnings announcements and stock returns. Cumulative abnormal returns evaluated indicated a positive relationship between earnings and returns while abnormal returns showed little significance for individual companies where each companies abnormal results was observed. Overall findings from the study concluded that firms listed at the Nairobi securities exchange exhibit semi-strong form of market efficiency thus a positive relationship between earnings announcements and stock returns. Though, the study is not conclusive enough as to the cause of this positive relationship it is evident that these results could be caused by few individuals having private and inside information. Therefore, cumulatively investors can gain from abnormal returns due to earnings announcements based on their portfolio choices.