Market differential reaction to profit warning announcements and dividend decrease : an empirical analysis of the Nairobi Securities Exchange

Abstract

The main aim of the study was to investigate the market differential reaction to profit warning announcements and dividend decreases by carrying out an empirical analysis of the Nairobi Securities Exchange. To achieve this objective, an event study was employed over a window of 11 days consisting of 5 days before and 5 days after the announcement of both events. The sample consisted of 11 companies that had issued profit warning announcements and had dividend decreases over the period 2002 to 2012. There were 25 observations of companies that issued profit warnings and 55 observations of companies that had a decline in their final dividend between the periods 2002 to 2012. Abnormal returns were calculated using the market adjusted model and tests of significance conducted on them. The study found that the average abnormal returns on the day before the profit warning announcement and the day of the announcement were statistically significant at the 5% level while those on the first day after announcement were significant at the 10% level. On the other hand, the average abnormal returns the day before the dividend decrease, the third day and were statistically significant at the 5% level while the rest were significant at the 10% level. The results showed that at the Nairobi Securities Exchange, profit warning announcements and dividend decreases are generally associated with negative average abnormal returns. The Mann- Whitney Rank Sum test was run so as to determine whether there is a statistical significant difference between the average abnormal returns elicited by the two events. The test concluded that there is no statistical significant difference in median average abnormal returns between profit warnings and dividend decreases.