Effects of Profit Warnings Announcement on Perfomance of Stocks in the Nairobi Securities Exchange

Abstract

This study examined share returns following unexpected corporate announcements that are described as profit warnings. The study tested whether there are abnormal returns on share prices after the announcement of profit warnings. The report is based on the 56 companies quoted on the Nairobi Securities Exchange (NSE) and samples drawn from companies that have issued profit warnings. The research design used was the event study which assessed the impact of an event on the value of a firm. In the event study, the calendar date of the profit warning announcement became time zero in the event time and all remaining periods were presented in the event time in relation to the event date. This research used the one hundred and fifty days event window where twenty days are prior and twenty days are after the profit warning announcement. The sampling method used was the census survey on the companies that are listed in the NSE and made profit warning announcements. The study relied entirely on secondary data available at NSE database. Event study methodology, student T-test before event date and Average Abnormal Return (AAR) significance from zero are used to analyze data collected on daily stock prices. The method used for calculating the expected returns is the Capital Asset Pricing Model (CAPM). The result of this research indicates that profit warning has impact on the stock return in the NSE and the impact is negative and significant for the period of pre-warning and post-warning and on the day of actual announcement. There are also indications of information leakages where there were negative abnormal returns days before the profit warning announcements. The study therefore concludes that profit warning impacted significantly on the share return in the NSE by creating negative abnormal return during the announcement period. Based on this research, the recommendation to the investors or practitioners in the NSE is that profit warning announcements are information events that influence the investment decision and should thus expect negative abnormal responses of share prices following such announcements.