Do Earnings Announcement Have an Effect on the Level of Efficiency of The Nairobi Securities Exchange?

Grace Kakiya, Robert Mugo, Samuel Onyuma, George Owuor, Mary Bosire


Capital markets are normally considered to be efficient when prices reflect all the available information. However, there are instances when this information takes several weeks to be incorporated into share prices. This leads to investors’ making uninformed investment strategies on whether to hold or dispose shares thus unable to maximize returns. The study determined stock returns of firms listed in NSE and further determined the level of efficiency of NSE. An empirical evidence of anomalies for the study was obtained from 31 companies listed at the Nairobi Securities Exchange, which traded and announced their earnings in 2007. A data collection sheet was used to collect secondary data on market indices, daily closing share prices and traded volumes for a period of 15 days before and after earnings announcement. Daily market adjusted abnormal and cumulative abnormal returns were computed and a further t-test at 5% level of significance done to determine the effect of earnings announcement on stock returns and results interpreted. Earnings announcement had a significant effect on stock returns when CAR was evaluated indicating market inefficiency but AR was not significant for individual companies. From the findings of the study, it was concluded that the Nairobi Securities Exchange is not semi-strong form efficient. Therefore, the Capital Markets Authority should eliminate the factors causing market inefficiencies, in order to boost-to-boost investors’ confidence.

Key words: Efficient Market Hypothesis, Abnormal Returns, Cumulative Abnormal Returns, and Nairobi Securities Exchange

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