Testing for the existence of noise in financial statement based measures of performance for companies listed at the Nairobi stock exchange.

Abstract

In Kenya, firms listed at the Nairobi stock exchange are required to publish their annual results to keep shareholders informed on their performance. The firms performance is also captured through trading at the Nairobi Stock Exchange where firms perceived performance is indicated on the share prices, among other factors, which results from the forces of demand and supply for the stock. Financial statement and financial market forms of reporting for listed firms is anticipated to have a positive correlation. Whereas market based variables reflect future expectations of earnings, accounting data reflect past performance. Positive correlation is expected on the variables Efficient markets assume that security prices at any time reflect all available information on a company. This means that the information contained in financial statements is already incorporated in the stock prices hence no room for abnormal returns. This study tested the existence of noise in financial statement based reporting for firms listed at the Nairobi Stock Exchange. It sought to test the reporting efficiency of these listed firms, given the efficiency levels that stem from numerous independent market operators to obtain an efficient market performance indicator. The study used a sample of 20 firms out of a total of 52 listed firms as at 30th December 2006. The study period was years 2001 to 2005. Market Return, computed from beginning and end of year share prices adjusted for annual dividend was gauged independently against Return on Assets, Return on Equity and Earnings Per Share. A positive correlation was found to exist between Market Return and all the other three financial statement based variables. The relationship between Market Return and Return on Assets was found to be more significant than with Return on Equity and Earnings Per Share. This relationship signifies a good level of performance reporting for firms listed at the NSE. The financial statement based reporting is in tandem, to a large extent with market based performance reporting.