Effect of Earnings Announcement on Share Price among Firms Listed at the Nairobi Securities Exchange

Abstract

The objective of this study is to determine whether an effect exists on share prices due to the announcement of earnings by individual companies listed on the Nairobi Stock. An event study research design was used. The data used incorporated daily share price data from 65 listed companies in the Nairobi Securities Exchange. The scope of the data was 2 years (2014 and 2015). For data analysis, the market model was used. The response variable was the actual return on stock and this return was compared to the general return in the market. The abnormal return (AR) was thus a difference between the actual return and the market return. To model the actual return, a regression model was used, with the market return as the main explanatory variable. For model testing, the t-model was used. This had been selected since it is the standard test used to analyze expected return based on a sample of stocks (the 65 listed companies in the NSE). This is opposed to the z-test, which requires data on the entire population. For additional model testing, the Chi-Square test was used and it had been selected due to its ease of implementation, especially for categorical data such as the ones used in this study (returns for stocks in different sectors). This investigation showed that earnings announcements are a significant factor that influence share prices. This was shown through t-tests and chi square tests. In addition, it showed that the market is more sensitive to announcements of a negative nature (earnings decline or loss) as compared to positive announcements (earnings increase). This investigation also led to the discovery that effects of earnings announcements are observed even before the announcement date and they continue to be felt even after the announcement.

Keywords: Earnings Announcement, Share Price, Nairobi Securities Exchange