Stock Price Response to Earnings Announcements at the Nairobi Securities Exchange

Abstract

The Efficient market hypothesis EMH concept states that a market is efficient if security prices immediately and fully adjust to reflect all available information. Therefore, no excess returns can be made from buying and holding a given stock based on new information in the market, since that information is already reflected in current prices. However, perfect market conditions seems not to exist in the real world and thus efficiency can only be achieved in certain efficiency can only be achieved in certain measures. Emerging Security markets, Kenya included, tend to exhibit high price volatility, and may therefore offer opportunities for investors to obtain abnormal returns based on market speculations which are inconsistent with the efficient markets hypothesis. The Nairobi Securities Exchange has witnessed certain cases of extreme price volatility, which point to the possibility of underlying inefficiencies which impacts on the shareholder values. This study examined the stock market response earnings information releases using daily price data from the Nairobi Securities exchange for a two year period (2012 to 2013). The event window was set to be 90 days; 45 days before and 45 days after the event date and the event date represented by 0. The researcher used event study methodology to test the responsiveness of prices to earnings information releases for a sample of five companies in the 20-share index. There was evidence of significant abnormal price reaction around the earnings announcement periods suggesting that earnings announcements do contain relevant information. It was found that abnormal returns seems to dominate 25 days before the date of earnings release suggesting that there is no general reactions witnessed in the market. The changes evident only are attributed to a few individuals who might be having private and insider information. There is however a drift in the cumulative abnormal returns, 25 days after the announcement, which contradicts the efficient markets hypothesis suggesting that Nairobi securities market, does not efficiently adjust prices to earnings information based on the sampled firms within the two year period of study.