Effect of profit warnings on stock returns at the Nairobi securities exchange

Abstract

The main purpose of the study was to establish the effects of profits warnings on stock returns at the Nairobi Stock Exchange. The study adopted the use of descriptive design. For the research purpose, the population constituted of all the listed companies at the NSE that issued profit warnings announcement between the years 2003 to 2013. The population of study included fifteen companies as shown in appendix one. A census was done for all the fifteen companies. The study relied on secondary data from the NSE daily market reports, press websites such as nation media and standard media and stock brokers research departments. The data collected included corporate announcements in form of profit warnings, company details, the date of the warning, the industry in which the company belonged and the primary reason given for the warning as well as daily observed average prices for the periods between 2003 to 2013. This data was collected from the published financial statements of listed companies, NSE website, Capital market authority website as well as libraries and libraries of the Kenyan media houses. Secondary data available at the NSE database on daily prices and corporate announcements as well as published data in the internet and print media was used. Stratified and convenient sampling was used to determine size and nature of the sample included in the study. Data was analysed using event study methodology. The study findings established that the significance of returns reaction to the profit warning announcements at the NSE is dependent on the company issuing the announcement. Generally, the actual returns, abnormal returns, market returns, expected returns, cumulative returns and cumulative abnormal returns generally have the same trend on profit warning announcements except for instances where cumulative actual return deviates. The standardized cumulative abnormal returns swing around the trend with sharp declines on the profit warning announcement day and an increase thereafter. Since 6.7 percent and 13.3 percent of issuing companies abnormal returns and cumulative abnormal returns respectively deviate as a result of the profit warning announcement, it is understood that there may be instances of prior market expectations of the profit warnings announcements with does not affect investor expectations and sentiments in the stock market. This prior information to the market should be avoided to make the markets effective.