The Effect of Earnings Announcement on Stock Market Return at the Nairobi Securities Exchange

75 Pages·2016·0.82 MB·English

by  Khaemba Lucia, Wesonga

THE EFFECT OF EARNINGS ANNOUNCEMENT ON STOCK MARKET
RETURN AT THE NAIROBI SECURITIES EXCHANGE

BY
LUCIA WESONGA KHAEMBA

A RESEARCH PROJECT SUBMITTED IN PARTIAL FULFILMENT OF
THE REQUIREMENT FOR THE AWARD OF THE DEGREE OF MASTERS
OF BUSINESS ADMINISTRATION, SCHOOL OF BUSINESS,
UNIVERSITY OF NAIROBI

NOVEMBER 2016
DECLARATION
I declare that this is my original work. This work has not been presented for award of a
degree in this university or any other university, neither has part of this work been
reproduced, reprinted or made available to others in any form.

Signed …………………………... Date………………………………
Lucia Wesonga Khaemba
D61/72601/2014

This Research Project has been submitted for examination with my approval as the
University Supervisor.

Signed …………………………... Date………………………………
Mr. D. Chirchir
Lecturer,
Department of Accounting and Finance

This Research Project has been submitted for examination with my approval as the
University Supervisor.
Signed …………………………... Date………………………………
Dr. L. Lishenga
Snr. Lecturer,
Department of Accounting and Finance
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ACKNOWLEDGEMENTS
Special thank you to my supervisor Mr. Dan Chirchir and Dr. Lishenga, whose resolute
guidance has been crucial to the completion of this project. I also wish to acknowledge
the contribution of the University of Nairobi fraternity especially the library and MBA
staff. My sincere gratitude to Dad Mr. Peter Khaemba for his financial and moral
support throughout my studies. Lastly I wish to extend my special thanks to family and
all my friends who have been a source of support during the MBA course and project
completion.

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DEDICATION
This project is dedicated to my parents for their continued support in more ways than
one and my brother and sisters who have been a source of encouragement and
aspiration.

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Table of Contents
DECLARATION.......................................................................................................... ii
ACKNOWLEDGEMENTS ...................................................................................... iii
DEDICATION............................................................................................................. iv
TABLE OF CONTENTS ............................................................................................ v
ABBREVIATIONS .................................................................................................... vii
ABSTRACT .............................................................................................................. viii
CHAPTER ONE .......................................................................................................... 1
INTRODUCTION........................................................................................................ 1
1.1 Background of the study ...................................................................................... 1
1.1.1 Earnings Announcement ........................................................................... 1
1.1.2 Stock market return ................................................................................... 2
1.1.3 Relationship between earnings announcement and Stock market return. . 4
1.1.4 Nairobi Securities Exchange ..................................................................... 7
1.2 Research problem ................................................................................................. 8
1.3 Research objective.............................................................................................. 10
1.4 Value of the study .............................................................................................. 10
CHAPTER TWO ....................................................................................................... 12
LITERATURE REVIEW ......................................................................................... 12
2.1 Introduction ........................................................................................................ 12
2.2 Theoretical framework ....................................................................................... 12
2.2.1 Efficient market hypothesis (EMH) ............................................................ 12
2.2.1.1Weak-form .............................................................................................. 13
2.2.1.2 Semi- Strong form .................................................................................. 13
2.2.1.3 Strong form efficiency ........................................................................... 14
2.2.2 Random Walk Model ................................................................................... 14
2.3 Determinants of stock market return .................................................................. 15
2.3.1 Company performance ................................................................................. 15
2.3.2 Inflation ........................................................................................................ 16
2.3.3 Interest rates ................................................................................................. 16
2.3.4 Exchange rates ............................................................................................. 17
2.3.5 Other Macro-economic variables ................................................................. 17
2.4 Empirical framework.......................................................................................... 19
2.4.1 International studies on earnings announcement .................................... 19
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2.4.2 Local studies on earnings announcement ................................................ 22
2.5 Conceptual framework ....................................................................................... 23
2.6 Summary of Literature Review .......................................................................... 24
CHAPTER THREE ................................................................................................... 26
RESEARCH METHODOLOGY ............................................................................. 26
3.1 Introduction ........................................................................................................ 26
3.2 Research design .................................................................................................. 26
3.3 Population and Sample ....................................................................................... 26
3.4 Data collection.................................................................................................... 27
3.5 Data analysis ...................................................................................................... 27
CHAPTER FOUR ...................................................................................................... 32
DATA ANALYSIS, PRESENTATION AND DISCUSSION ................................ 32
4.1 Introduction ........................................................................................................ 32
4.2 Summary Statistics ............................................................................................. 32
4.3 Descriptive data .................................................................................................. 32
4.4 Abnormal Returns and Cumulative Abnormal Returns ..................................... 34
4.5 Summary and Interpretation of the Findings...................................................... 53
CHAPTER FIVE ....................................................................................................... 54
SUMMARY, CONCLUSION AND RECOMMENDATION ................................ 54
5.1 Introduction ........................................................................................................ 54
5.2 Summary of the findings .................................................................................... 54
5.3 Conclusion .......................................................................................................... 55
5.4 Limitations of the study...................................................................................... 56
REFERENCES ........................................................................................................... 58
APPENDIX I: COMPANIES LISTED AT THE NSE ........................................... 64

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ABBREVIATIONS
AIMS - Alternative Investment Market segment
APT - Asset Pricing Model
AR - Abnormal return
AAR - Cumulative abnormal return
CAR - Cumulative abnormal return
CDSC - Central Depository and Settlement Corporation
CMA - Capital Markets Authority
CPM - Capital Asset Pricing Model
EMH - Efficient Market Hypothesis
ER - Excess returns
FISMS - Fixed Income Securities Market Segment
GEMS - Growth Enterprise Market Segment
MIMS - Main Investment Market Segment
NSE - Nairobi Securities Exchange

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ABSTRACT
Markets with prices of stock that mirror the entire information which is publicly
available, are called efficient markets. This means that investors will not gain abnormal
returns from the market. This further implies that announcements of earnings will not
affect stock returns in an efficient market. There are varied results on the studies done
on stock returns and earnings announcement at the NSE. This study’s main objective is
examine the effects of earnings announcement on stock market returns of listed
companies at the NSE. The study employed the event study methodology. A 14 day
event window was used, 7 days before the announcement, 7 days after the
announcement and the event day being day 0. Out of a population of 61 companies
quoted at the NSE a sample of 10 companies were selected that have actively trading
stocks. The study period was for the financial year 2014. Data was collected from the
stock exchange listing services. Abnormal returns were first determined by using the
market model whereby daily stock returns was regressed with the corresponding market
return on the estimation period then deducting expected returns from the daily returns.
The AR and the CAR were computed and graphs plotted for each company. Data was
analyzed using MS Excel. The empirical results showed varied results with the overall
results suggesting that stock returns were affected by earnings announcement.

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CHAPTER ONE
INTRODUCTION
1.1 Background of the study
This study’s purpose is to investigate if abnormal returns can be realized in the period
around public announcement of earnings at the Securities Exchange (NSE). The EMH
theory has been under analysis for several years. Stock market efficiency is a very
important aspect for both private and institutional investors. In recent years, both
professional and academic focus has shifted to the behavioral finance theory, this has
however not entirely eliminated the importance and usefulness of the EMH.
EMH is very important in modern finance. A stock market that is efficient is where
share prices reflect important information about the companies. A market is defined as
efficient when it is impossible to earn a higher return than market return (Allen, Brealey
and Myers 2011).
Companies, shareholders and potential Investors view earnings announcement as a very
important aspect. Listed companies in the public securities exchange are required to
disclose their earnings to their stakeholders. Stakeholders and shareholders use this
information to make their investment decision which will be basically based on the
belief that there is efficiency in the stock market and it represents the true value of the
company and their investment (Yakubu Awudu and Elijah Akuoko 2013).

1.1.1 Earnings Announcement
Official statements made publicly about a company’s profitability for a specific period
that can either be for a quarter of a year or a full year is called an earnings
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announcement. Earnings are used as indicative elements by company managers in
relaying the aspirations of a company (Ahorany & Swary, 1980). Similar to dividends,
earnings relay important information, which will be incorporated in the share price
changes immediately following announcement. Usually financial statements users
require earnings to be a measure of value and not a change in value (Black 1980).
Listed companies are expected to make known to their stakeholders their earnings
making announcement of such earnings a crucial policy decision for companies.
Investors always focus on value maximization because they associate good earnings
announcement with good positive expectation and negative earnings announcement
with bad and negative expectation. Normal announcement are expected not to have any
influence on investors that are perceived to be value maximizing (Wafubwa, 2012).
In view of the above, earnings are critical components of testing market efficiency.
They are also viewed as a way to show management’s ability to run a business
profitably and give shareholders the value they expect. Therefore, any response to
earnings announcement is seen as a major subject of analysis.

1.1.2 Stock market return
These are returns received by investors from the securities market. Stock market return
could be profit from buying and selling activity or dividends received by shareholders
from time-to-time.
Every year end, companies that are profit generating offer part of it to shareholders
putting it as a sources of stock market return expected by an investor. Trading in
secondary market is one of the most common way of realizing a stock market return.
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