The Effect of Profit Warnings Announcement on Share Returns of Listed Companies in East Africa
Abstract
Profit warning denotes an unforeseen corporate statement that current earnings expectations will
fall short for a specified future period. The objective of the study was to find out the effects of
profit warning announcements on share returns of companies listed in East Africa. For the purpose
of analysis, the study used a population of 35 companies that issued profit warnings between the
year 2011 and 2015. The study depended on secondary data that was obtained from the various
East African Securities Exchange and Capital Market Authority reports. The data collected
included particulars of profit warning announcements namely; the issuing company, the date
of the warning, and the daily average share prices within a timeline of 15 days before the
warning and 15 days after the warning. Event study methodology was used to analyse the data.
The findings of the study established that profit warning announcements generally result in
decrease in actual returns and expected returns of the companies making profit warning
announcements. 73.5% of the companies studied had their returns decrease around the
announcement date while 23.5% of the companies had their returns increase around the
announcement date. Returns of 3% of the companies did not change with respect to profit warning
announcements. The behaviour of abnormal returns, cumulative abnormal returns and
standardized cumulative abnormal returns in relation to profit warning announcements was found
to depict irregular patterns throughout the event window leading to a conclusion that the reaction
of these returns to profit warning announcements may be dependent on a multiplicity of factors
specific to the company issuing the profit warning. T-test analysis on these returns showed that the
information content of profit warning announcements is not statistically significant. Since profit
warning announcement should have negative effects on share returns under efficient market
conditions, the study concludes that the (23.5%) where profit warning announcements had positive
effects on stock returns could be explained by a situation where information on profit warning
announcements is not freely available to all market players thus leading to inadequate action on
the information. The research put emphasis on the effects of profit warning on the stock returns of
listed companies at the NSE alone as it’s not a legal requirement in Uganda, Tanzania and Rwanda
Capital Markets Act for companies to issue profit warning. For such countries, disclosure is on
voluntary basis. This limited the scope of the project as only British American Tobacco Uganda
issued a profit warning in the other East African countries compared to the 34 companies in Kenya.
Publisher
University of Nairobi
Rights
Attribution-NonCommercial-NoDerivs 3.0 United StatesUsage Rights
http://creativecommons.org/licenses/by-nc-nd/3.0/us/Collections
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