11-day cycle of stock prices in Kenya around profit warnings
Date
2020
Authors
Kagiri, Jonathan Njenga
Journal Title
Journal ISSN
Volume Title
Publisher
Strathmore University
Abstract
A profit warning is a statement issued by a company in order to inform the public that the
profits for a specified period will be significantly different from the expected profit levels. The
Capital Markets Authority, which is responsible for the regulation of the stock exchange, in a
bid to reduce the levels of information asymnetry and conflicts of interest between managers
and shareholders, made it a requirement for all companies listed on the Nairobi Stock Exchange
to issue profit warnings if their profit will be 25% less than what was expected. This study aims
to view the abnormal returns surrounding a profit warning on the returns within a 1 0-day scope
of the release of a profit warning. The theories and hypotheses this study relies on are the
agency theory, the efficient market hypothesis and the signalling theory. An event study
methodology was used, with abnormal returns being derived as a regression analysis result of
the stock versus the market returns. The result being that the abnormal return is significantly
different on the trading day after the profit warning and two days after the profit warning.
Description
Submitted in partial fulfilment of the requirements for the Degree of Actuarial Science at Strathmore University