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.