The Information Content of Annual Earnings Announcements for Companies Quoted at the Nairobi Stock Exchange

Abstract

The objective of the study was to examine the information content for annual earnings announcement for firms listed at the Nairobi Stock Exchange (NSE). A sample of 20 firms that had been consistently listed at the bourse for the five year period beginning 2005 to the 31st December 2009 was used in the analysis. The study employed the event study methodology to ascertain whether investors relying on the information release could make any abnormal returns by using the new information released by firms. The normal returns and the market returns were calculated and the residual returns determined. These were cumulated and standardized to come out with the Cumulative Abnormal Returns (CAR) for the firms. After the determination of the significance of the CARs, it was necessary to explain abnormal returns by showing that the cross sectional variation in returns across firms is consistent with the theoretical framework. The results indicated that the in all the weeks of the five year period, the mean return on the report period was less than both the pre and post announcement weeks. The explanatory power or the earnings response coefficient (R2) obtained from these observations was also quite low ranging between 0.019 to 0.171 which meant that only 1.9 % to 17.1 % of returns variability were explained by the earnings announcement within the week with regard to market wide events. The beta coefficients were also less that 1 suggesting that the sample firms’ stock were less sensitive to earnings announcements. The researcher concluded that the earnings announcement for the sample firm had no information content and if there was, the market model did capture them hence not an appropriate model for measuring information content.