The extent to which interim earnings can be used to forecast year end earnings: a study of companies quoted at the Nairobi stock exchange for the period 1996 to 2000

Abstract

This study is aimed at determining the extent to which there is a relationship between the two numbers of earnings that quoted companies on the Nairobi Stock exchange are required to submit. If indeed there is a relationship, can interim earnings be used to predict final earnings? The data used in this study was collected mainly from companies that consistently submitted interim and year-end earnings, to the Nairobi Stock Exchange, between the years 1996-2000. The data was then analysed using regression analysis applying such tests as coefficient of determination, t-value and f-test for overall significance. The results of the tests generally indicate that there is no relationship between interim earnings and eventual year-end earnings. There were exceptions however, in the commercial and services as well as the industrial and allied sectors. Th is conclusion agrees with what other researchers, for instance Edwards and Bell (1961), have observed, that the value of accounting numbers like earnings figures, do not lie in their predictive ability. They simply are a measure of what has already occurred. In view of these conclusions, I have recommended the following research questions: a] Why are interim earnings submitted? b] Would other methods of analysis indicate that there is a relationship between interim and year-end earnings? c] Would the relationship found between interim and year-end earnings in companies of the commercial and services as well as the industrial and allied sectors hold over a longer period of study?