Changes in share prices as a predictor of accounting earnings for financial firms listed in Nairobi Securities Exchange

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1 Available online at: http//: MKU Journals, April 2012 Full Length Research Paper Changes in share prices as a predictor of accounting earnings for financial firms listed in Nairobi Securities Ex Corresponding Author: Danson Musyoki Danson Musyoki 1 1 Catholic University of Eastern Africa, P.O Box Nairobi Recieved: September 9, 2011 Accepted: October 8, 2011 Abstract This study examines the predictability of accounting earnings using s in share prices of companies listed at the Nairobi Stock Ex in the finance and investment sector. The study covered the period between the year 2001 and The data was obtained from the Nairobi Stock Ex, where the information selected were Earnings per share, Dividend yield, Price to earnings ratio and the share price. These information was using logarithm and analyzed using the SPSS program. The OLS was used to come up with an equation. Eleven companies were analyzed and all of them had positive towards the accounting earnings in relation to the share price. Additionally, the relationship between accounting variables and the Nairobi Stock Ex information indicated mixed results, with some companies showing a strong positive correlation and others weak correlation. Keywords: Share price, accounting earnings JEL Classification: C20, C12 INTRODUCTION Share price is the value of the firm divided by the number of shares outstanding, (Weston 1989). It can also be defined as the price that buyers and sellers establish when they trade in the shares, (Nairobi Stock Ex Hand Book 2005). Additionally another definition is the par value that is merely a stated figure in the corporate charter and has little economic significance. Accounting earnings are the gains in wealth from business that is the amounts which can be spend without encroaching upon the initial wealth of the firm (Elgers 1998). It is also the summary of revenues expenses and net income or loss of a firm for a period of time. Finally another definition is the monetary measure of a firms performance for a period and to the extent feasible excluding items that are extraneous to the period, (Weston 1989). The prediction of earnings has preoccupied accountants and market analysts for a long time. Its accurate prediction cannot be certain due to the profound effects on share prices and the subsequent allocation of financial resources. According to the conventional theory of share pricing any condition or situation that indicates a in earnings of a particular company or of a specific industry, or of many companies or of the entire economy will affect share prices, which will move in advance of actual s in earnings and dividends. While the confidence theory states that the basic factors in the movement of share prices is the rise and fall of trader and investor confidence in the future of stock prices, earnings and dividends (Farwell & Leffler 1963). Shares prices are highly affected by the business fundamentals, which are either economic or political. These are factors that affect the share prices but are outside the share market itself. The many traders and investors in the market are at all times seeking to know the trend of the share prices, and this trend is mainly based on the fundamental conditions, (Farwell & Leffler 1963). Investors are mainly interested in the returns they get from their investment; therefore they will always select their investment well so as to fulfill their expections. Investments are about sacrifice of current gains for future gains and this involves time (waiting) and risk. Whereas the current gains are certain the future gains are uncertain and also the investors have different preferences thereby presenting various kinds of risks (Nairobi Stock Ex Hand Book 2005). A common finding in the literature is that systematic postannouncement in share prices is associated with the sign or magnitude of accounting earnings (Forester 1984). The argument has been that fundamental factors that affect in security prices also affect accounting earnings. Therefore we need better evidence than has been available about the usefulness of share prices in predicting accounting earnings. The situation is whether share prices can be affected by anything else other than the business fundamentals. The 1

2 business fundaments include earnings, interest rates, stock slits, and economic and political factors. There is also the confidence theory, where s in the stock prices occur due to the faith investors have in a company. There is also the issue of accountants reporting incorrectly and investors relying on the reports. The government regulations can also have effects on the share prices and hence the earnings made by a company. Also insider trading can affect the share prices either adversely or positively depending on the information being released to the public. The different polices of accounting for thinks like depreciation and valuation of inventory makes different earnings to be reported for the same company. The study covered companies listed in the Nairobi Stock Ex (NSE) under the financial and investment sector. The period covered was between 2005 and 2010 being the time when the ex market has seen a lot of activities, with listed companies raising additional capital and / or simply restructuring their shareholding structures as a means of becoming more efficient and effective. Earlier study, (Asiemwa, 1992) used time series in predicting accounting earning. This lead to establish how effective s in share prices can be used to predict future s in earnings. It is a fundamental assumption in this study that investors choose only those stocks that promote more improved earnings. Therefore we set to determine whether by examining, s over time in stock prices, insight can be gained about s in the future profitability. The study also seek to determine whether there is evidence on the association between the stock price s and the accounting earnings in the period up to and including the earnings on the announcement date. The concern is whether s in accounting earnings are correlated with the information used in capital markets while revising security prices. This is because any meaningful share price is built on expectation of company s future performance, (Reiley 1994). The objectives of the research were: to establish the relationship between the stock price and the accounting earnings, and; to establish the relationship if any, between the accounting earnings. LITERATURE REVIEW Accounting is the art of measuring, describing and interpreting economic activity. When one is preparing a household budget, balancing your cheque book, preparing your income. Tax returns or running general motors, he or she will be working with accounting information. It is often called the language of business. Accounting earnings are calculated using different methods of treatment using various items in the profit and loss. Some of those items are the inventory and the depreciation that have various ways of calculating them or valuation. This makes the same organization to have different accountancy earning (Meigs and Meigs 1989). The earnings that are distributed to the shareholders are called dividends and are the agreed amount passed by the board of directors of the organization. There are two types of dividends namely the; cash dividend and the stock dividend or the bonus dividend. Stock dividend is the term used to describe distribution of additional shares to a company s shareholder is proportion to their present holdings. This increases the number of shares held by the shareholders thereby reducing the earning per share and hence the market price of the shares (Mieges and Meigs 1989). Earning forecasting has traditionally been approached in two ways. Firstly the accounting or technical approach that is largely time series based. These s assume that future earnings are a function of current earnings. Secondly, there is earnings prediction based on analysis by financial analyst. These do not use any specific well defined s. Empirical evidence does not seem to show the superiority of one over the other (Brown 1993). Accounting earnings can be measured in terms of improved cash flow. Ultimately any investor must generate a positive cash flow to be worthwhile. Cash flows help to explain the s in accounting cash which is a way can be deemed to be what the organization had earned during the period. Cash flow is basically the in cash movement from prior year. One ratio that is very helpful in financial analysis is the sustainable growth ratio. This financial analysis is the maximum rate of growth a firm can maintain without increasing its financial leverage and using internal equity only. Ball et. al (1998) present evidence that earnings growth may be ed in terms of price s, such a relationship is important because it tells us how efficient a stock market is. In the last three years there has been an increase in the business in the Nairobi stock ex and this has made prices of various stocks to increase substantially. The assumption this that earnings will also increase as investors rely on share prices to buy or sell shares and therefore the prices must be right. Welcox (1984), Rapport (1986), Downs (1991) attribute current share price s to anticipated s in earnings. Event based studies established direct relation between share prices and earning (Ball and Brown 1968), (Baskin 1989). The assumption in this studies is that s in share prices is as a result of s in fundamental variables such as anticipated earnings, dividends and capital structure through stock splits (Arif and Khaw 2000). Beaver et al, (1980) found that earnings growth is useful in explaining share prices and price to earnings based forecast are better predictors that a random walk. Elgers and Murray (1992) used a regression of future earnings growth ed by current abnormal returns and price to earnings ratio, both variables are controlled for size and found that their forecast out performed a random walk in predicting accounting earnings.benstorn (1966) and Ball and Brown (1968) explored the relationship between security prices s and earnings s. Ball and Brown found a significant association between the sign of the price s and the sign of the earnings s. For the years in which a firm experiences positive residual earnings there tends to be positive residual price and conversely, for the years in which there is negative residual. Berver, Clarks and Wright (1979) subsequently extended the Ball and Brown study by incorporating the magnitude of the earnings as well as its sign. There is a significant, positive correlation between the residual percentage in earnings and the residual percentage in price. Moreover, not only is the relationship positive and significant but the magnitude of the difference in security s is sizeable. The magnitude of the difference in price s indicated that not only is the relationship statistically significant but it is also large enough to be economically important. The implication of these findings is that a 2

3 correlation exists between the events that affect accounting earnings s and s in security prices. The evidence is also consistent with the contention that prices behave as if investors perceive that correct earnings and statistically dependent with future earnings and the future dividend paying ability of the firm. Hence, prices act as if current earnings s posses a permanent component (Foster 1984) in other words a portion of the in earnings is associated with a permanent alteration in the level of expected future earnings in a manner that implies altered expected dividend pay ability. In this context, the evidence is also consistent with the contention that prices behave as if investors perceive that earnings convey information (i.e. altering their beliefs) about future earnings and future dividend paying ability. What is not known is whether the same results can be replicated in the developing markets like the Nairobi Stock Ex. Prices at any point in time can be viewed as if they are a function of future expected earnings. Prices reflect investor s expectations regarding future earnings. The potential richness of price with respect to expectations is described in (Muth 1961) seminal essay on rational expectations. If the prices are based upon an information system with many signals other than earnings that is not reflected in current and past. For example prices may respond before earnings to certain events or information. If prices are viewed as reflecting other information, then prices can be used as a surrogate or proxy for that information. Recent work by Beaver, Lambert and Morse (1980) indicates that price based forecasting s of earning can predict future earnings better (i.e. with a lower mean error) than forecasting based upon a statistical extrapolation of past and current earnings. In particular, previous evidence by Ball (1972), Albercht, Lookabill and Mckeown (1977) and indicates that the best statistical for forecasting earnings using current and past earnings data is called the random walk with a drift. Under this, next year s earnings are forecasted to be equal to this years earnings plus a drift term equal to average in earnings over some past period. This has been extremely robust against challenges since its se by Ball and Brown (1968). Beaver Lumbert and Morse (1980) used a price based forecasting which resulted in lower error in 55% of the cases. In higher price earnings portfolios the margin of superiority tends to be pronounced. This superiority is possible because the information upon which earnings forecast are based in expanded to indicate price in addition to past earnings. Price is used as a surrogate for other data that convey information about future earnings. An example of the use of hind sight information is the classification of firms into portfolios based on information not available at the time of trading strategy is implemented. For example, a trading strategy based on the rank of each firms earnings gas to wait until the last firm in the sample has announced its earnings. A related problem is when observations are placed into portfolios each quarter and the mean aggregated results based on the individual quarter s (mean) results; this implicitly assume that the trader knows the distribution of forecast error at the time of the first earning announcement in each calendar quarter (Holthausen, Jones and Latane (1982) suffer from this experimental defect. He reports that use of a ranking scheme based on publicity released information results in the association between post earnings announcements, abnormal performance and the size of forecast error being much weaker than those reported by Rendlemen, Jones and Latane (1982). In conclusion the larger and the more visible company, the more perfect its market is likely to be perfect meaning that most of the likely factors affecting the price of its securities are presumably known to market. Conversely the smaller a company is the less visible it is to the investor public and the more. Imperfect the market price for its shares is likely to be. Mwangi (1997) did a study to analyze the price movement for selected stocks in Nairobi Stock Ex. He developed a using a PC (version) software package and using this, he computed and compared the prices from the month of Jan, 1992 to April, 1997 with the actual ones. He did t test to determine whether the two prices were significantly different from one another. He concluded that it is not always possible to develop s that are only as good as being proxy for the investor s decision process and are limited by the inaccuracies in estimating future earnings of the company. At best they are only a framework for analyses which is useful for structuring the way an investor can conceptualize share valuation. Asiemwa (1992) did an empirical study to identify the relationship between investments ratios and share performance of companies quoted on the NSE. She did multiple regression analysis of establish the relationship between investment ratios and share price and concluded that earnings per share, dividend per share, price earnings and dividend yield have a significant effect on share prices. She concluded that a significant association between share prices and investment ratios exists. Kiweu (1991) did a study to determine the behaviour of share prices in the Nairobi Stock Ex. He did examine the behavior of ordinary share price of ten selected blue chip companies in the Nairobi Stock Ex. He investigated the behaviour of bid price over five years from Jan, 1986 to Dec; He concluded that weekly returns of shares traded in the Nairobi Stock Ex are serially independent (random). The evidence presented suggested that no important dependencies could be identified in the stock market. Asiemwa (1992) in his empirical study to investigate the behaviour of annual corporate earnings among Kenyan publicly quoted companies selected a sample of thirty four companies quoted in the Nairobi Stock Ex. He found that successive s in reported annual corporate earnings for Kenyan publicly quoted companies are essentially independent and can be well approximated by a random walk. Gathoni (2002) did a study on forecasting ability of valuation ratios (Nairobi Stock Ex). She did predictive regression on a small sample of fourteen organizations with a financial year end of 31 st Dec, over a period of five years (1996 to 2000). The ratios were then lagged for one quarter in order to see what impact this had on the predictive ability of the valuation. She concluded that price earnings ratio explains future stock returns. She also concluded that price earnings ratio have predictive ability in majority of samples observed and are again determinant of future stock returns. All the above studies were done in the period between 1991 and 2000, which does not include the period of our study. This gives us as better chance to establish if there are any s that would have arisen after their studies. Also our study is intended to move further and try to see whether share prices have forecasting ability on accounting earnings. 3

4 Another study done by Ball and Brown in 1968 analyzed share prices s against earnings s the study was done in USA. This study was done many years ago and as such there is bound to be a lot of s that might have happened. This is one of the reasons why another study needs to be done. Secondly the study was done in USA and in our case it is being done in Kenya, which is a developing country while USA is a developed country. This brings in the second reason for the study to be done. At the same time the stock markets were not known in Kenya by the Africans as it was a dormant for Europeans. As for today it is every ones interest to deal with shares either for capital gains or to own a part of the company and earn dividends. Also miller did a study on how different investors behavior towards investing in various types of companies. This study was done between leveraged and nonleveraged companies and also the investors were from different tax brackets. He found out that the investors in low tax bracket will seek stocks from leveraged companies while those in high tax brackets will buy in low or no leveraged companies. The study was done many years ago since it is a theory and to proof this theory a study should be done. This why we have decided to carry out this study. Models used in stock valuation and returns estimation While the same principal applies to the valuation of common stocks as to bonds or preferred stocks, two features make their analysis more difficult. First is the degree of certainty with which receipts can be forecast. In common stocks, forecasting future earnings, dividends and stock prices can be difficult the second complicating feature is that, unlike interest and preferred dividends commons stock earnings and dividends are generally expected to grow, not remain constant. Hence while standard annuity formula can be applied, more difficult conceptual schemes must also be used. While estimating the value of a single period it depends on the returns investors except to receive if they buy the stock and the riskness of these expected cash flow. These expected returns consist of two element namely the dividend expected in each year and the price investors expect to receive when they sale stocks at the end of the year (n). The price includes the return of the original investment plus a capital gain or loss. If the investors expect to hold the stock for one year and if the stock price is expected to grow certain rate then the valuation equation is: P o =d 1 /k s -g Where; P o is the market price D 1 is divided after one year K s is expected return in the market g is the rate of growth Another is the Capital Asset Pricing Model. Any practitioner who wishes to employ on the CAPM for managerial decision making naturally wants to know whether or not the CAPM theory is empirically valid, but the evidence on CAMP is mixed. It fits the data fairly well, but there are some anomalies that is, phenomena which are not by the CAPM. The empirical analog of the CAPM is: R jt = a j +b mt + E jt Where, â, b = the estimated intercept and slope terms E = the random error term around the regression jt line mt = market return R jt = expected return. The other is arbitrage pricing formulated by Ross (1976) which is more general approach to asset pricing because it allows for the possibility that many factors may be used to explain assets returns. Also it makes fewer than the CAPM. The Arbitrage Pricing Theory (APT) begins by assuming that the rate of return o any security is a linear function of K factors as shown below: R i =E(R i )+b i f i +...b ik +E i Where; R i = the stochastic rate of return on the i th assets E(R) = the expected rate of return on the i th asset B ik = the sensitivity of the i th assets returns all assets under consideration F k = the mean zero k th factors common to the all assets under consideration E i = a random zero mean noise term for the i th assets The APT is derived under the usual assumptions of perfectly competitive and frictionless capital markets. Individuals are assumed to have homogeneous belief that the random returns for the assets being considered are governed by the linear K- factor Model. The theory requires that the number of assets under consideration be much larger than the number of the factors and the noise under consideration be the unsystematic risk components for the particular asset. It must be independent of all factors and all error terms for other assets. The important feature of the APT is reasonable and straight forward. Where I th K th can be economic growth rate, inflation rate, interest rate or ex rate. Accounting earnings as a performance measure Earnings per share: This the monetary value of profit after tax on each ordinary share held.it is given by diving net profit after tax by the total ordinary shares outstanding. Dividend yield: This is the return on every shilling invested in securities expressed as a percentage. It is given by dividing dividend per share with the market price per share, then multiply by a hundred. Price-to-earning ratio: This is the number of times it takes a shareholder to recoup his investment in a share. It is given by dividing the market price by the earnings per share. Share price: This is the ruling price of shares on the trading floor of the ex at a given time. It is normally an indicator of the level of demand of that security. METHODOLOGY The population of interest consisted of companies quoted in the Nairobi Stock Ex under the category finance and investment sectors. This is the sector that deals each other sector and therefore can portray well the behaviors of share prices against earnings at a given time. All the twelve (12), publicity quoted companies a the Nairobi stock ex (NSE). Under the finance and investments sector was selected. Yearly data as pertains to share prices and annual data regarding accounting earnings as well as the ratio used from 2005 to 2010 December for all individuals companies was obtained and analyzed. The research relied upon secondary data obtained from Nairobi Stock Ex or other financial intermediaries where data was not available from Nairobi Stock Ex we referred to 4

5 financial statements published by companies being studied. Such data included movement in share prices, accounting earnings and ratio used in the Nairobi Stock Ex. We got yearly data from 2005 to 2010 for individual companies.then from the data we picked out the share price, earnings per share earning ratio and the dividends yield. The share price earnings per share, price earning ratio, and the dividend yield were d into logarithm so as standardise this data. The data was then analysed using the SPSS program, specifically OLS. The result was interpreted so as to make a conclusion. The following were the variable used in the analysis table: Y = Share price X I = Earnings per share. X 2 = Price earnings ratio X 3 = Dividend Yield. FINDINGS This study analyzed all the eleven companies for a period of five years. on each company a regression equation will be formed. The equation was be subjected to a one percent on each and every independent variable. The percentage s for earnings per share, price to earning ratio and dividend yield was averaged and the results shown in the form of tables. This result were used to conclude whether s in share prices can be used to predict accounting earnings. The insurance company results on Table 1 & 2 showed a positive correlation between the accounting variables. It is having a constant of that is the minimum positive that can happen, all the other factors held constant. this will mean that if there is a1% in earnings the price will have positive of 72.7%. it also follows that a 1% in price to earning ratio share will result to a 46.7% positive and the dividend yield will make the share price to have a negative of 10% while the coefficient of determination is 68.5% meaning that the three accounting variables (earnings per share, price earning ratio and dividend yield), while other variables not in the determine share price upto an extend of 31.5%. All the independent variable were tested and found significant at 1%, 5% and even 10% confidence level including the constant. All the independent variables combined, as per the F-Statistics indicated they were significant. In table 3, for KCB Bank, the bank had a positive correlation between the variables used the bank had a constant of that is the minimum positive that can happen, all the other factors held constant. The interpretation for the coefficient indicate that a 1% in earnings will result to 11.59% positive in share price. While price to earnings will result to 18.9% negative to the share price and 3.1% negative will be as a result of dividend yield. The coefficient of determination (R2 adjusted) is 98.5% meaning that there is 1.5% of other factors that were not considered in the and which can also cause a to the share price. Price earning ratio and constant were found to be significant tested at 1%, 5% and even 10% confidence level. The price earning ratio was tested to be significance at 10% but failed at 1 and 5%. The dividend yield was insignificant at all levels. The bank (NBK) had a positive correlation between the accounting variables used. it had a constant of that is the minimum positive that can happen (the regulatory environment provided by NSE) all the other factors held constant. This can be interpreted mean that a 1% in earnings will result to a 40% positive in share price. The price to earnings ratio will cause 68.3% positive in share price. The bank did not have dividend yield. While the coefficient of determination was 80.7% meaning that the factors used in the study combined can influence the share price to that extend, while other factors not investigated can influence share price upto 19.3% as per the. The two combined independent variables were found to be significant as per the F-test. The bank (NICB) had a positive correlation among the independent variables used. It had a constant of that is the minimum positive that can happen (the regulatory environment provided by NSE), all the other factors held constant. The coefficient can be interpreted to mean that a 1% in earnings per share can cause a 12.2% positive to the share, a 1% in price earning ratio causes 95% in share price and 1% dividend yield causes a 1% negative in share price. The coefficient of determination was 71.2% meaning that all the factors combined could influence share price upto that extend. Other factors not investigated and accounted for could influence share price upto 28.8%. Earnings per share was tested to be significant while price earning ratio and dividend yield were not significant at 5% including the constant The insurance company (Pan African Insurance) has a negative perfect correlation with respect to the variables used. It has a constant of that is the minimum positive that can happen, all the other factors held constant. The constant was interpreted to mean the condusive regulatory and operational environment provided by the Nairobi Stock Ex, for the companies to trade in the market. This can be interpreted to mean that a 1% in earnings will result to a 41.29% positive to the share price, while 1% in price running ratio will result to a negative 7.06% in share price. A 1% in dividend yield will result to 50.02% positive in share price. While the coefficient of determination (R 2 -adjusted) indicated a 57% meaning that three independent variable could influence share price to that extend where else other factors not in the could influence share price upto the tune of 42.5%. other than the constant variable, all the independent variables were tested and found to be insignificance. All the variables combine were found to be significant as per the F-test. The company (HFCK) had a positive correlation with the variables used. It had a constant of that is the minimum positive that can happen (the regulatory environment provided by NSE), all the other factors held constant. This coefficient could be interpreted to mean that a 1% earnings could result to a 23.0% positive in the share price. While the same subjected to price to earning will result to a 28.9% positive. Dividend yield was not computed for lack of data. The coefficient of determination was 80.8% meaning that there are other factors to the tune of 19.2% that affect the share price and which were not investigated in the. All the variables including the constant were tested and found significance at all levels 1%, 5% and 10%. All the variables combined were tested to be significant. 5

6 The bank (DTB) had a positive correlation with the variables used. It had a constant of that is the minimum positive that can happen (the regulatory environment provided by NSE), all the other factors held constant. The coefficient could be interpreted that a1% in earning will result to 92.4% in share price, while a 1% of earnings per share will result to 39.7% in share price. The dividend yield resulted to a negative of 1.6% to the share price. While the coefficient of determination was 81.0% meaning that the combined factors used in the study could influence share price that extent. Other factors not investigated by the account for 19% of in share price for the bank. All the variables including the constant were tested to be significant at all levels, 1%, 5% and 10%. All the combined variables were tested and found to be significant for the F- statistics. The bank (CFC) has a weak positive correlation among the variable used. It had a constant of that is the minimum negative that can happen (the regulatory environment provided by NSE), all the other factors held constant. The coefficient were interpreted to mean a 1% in earnings could result 44.8% positive to the share price. In relation to the price to earning ratio a 1% could result to 61.1% in share price while a 1% in dividend yield could result to a 4% in share price. While the coefficient of determination was 79.7% meaning that the factors used in the study could influence share price to that extent while other factors not in the accounted for share price upto 21.3%. The constant and the dividend yield were tested to be significant at all levels. While earnings and price were insignificant at 5%. All the variables combined were tested to be significant. The bank (BBK) had a weak positive correlation with the variables used. It had a constant of that is the minimum positive that can happen (the regulatory environment provided by NSE), all the other factors held constant. The coefficient could be interpreted that a 1% to the earnings could result to 44.1% positive to the share price. The price to earning ratio could result to 84% positive, while dividend yield result to -.07% negative to the share price. The coefficient of determination was 89.7% meaning that the combined factors could influence the share price to that extent. Other factors not accounted could influence share price upto 21.3%. price earning was tested to be significant at all level. While the constant, earnings and dividend yield were tested to be significant. The combined variables were found to be significant under the F-test. The bank (ICDC) had a positive correlation with the variables used. It had a constant of is the minimum positive that can happen (the regulatory environment provided by NSE), all the other factors held constant. This could be interpreted to mean that a 1% in the earnings could result to 47.7%. While the price to earning could result 11% and a 2% as a result of the dividend yield. The coefficient of determination was 77.8% meaning that the factors used in the study could influence the share price upto that extent. Other factors not in the could influence share price upto 22.2%. The earnings and price earnings were tested to be significant at all levels, 1%, 5% and 10%. The constant and the dividend yield were insignificant. The combined variables were significant. The bank (SCB) had a poor positive correlation with the variables used. It has a constant of that is the minimum negative that can happen (the regulatory environment provided by NSE), all the other factors held constant. The coefficient could be interpreted that a 1% in earnings will result to 32.7% positive to the share price. While the price to earning ratio will have 10.76% and positive and the dividend yield will have 9.1% positive. The coefficient of determination was 72.3% meaning that the combined factors used in the study could influence share price upto that extent. Other factors not in the could influence share price upto 27.7%. All the variables including the constant were tested to be significant at all levels 1%, 5% and 10%. Equally, all the combined variables were tested to be significant under the F-test RECOMMENDATIONS AND CONCLUSION The main research objective of the study was to establish the extent to which s in share prices can predict accounting earning. The study analyzed results from eleven companies for a period of five years between 2005 and All he eleven companies had earnings depending on the share price since they all had positive s. This is a good indication that as the earnings of each company represented there is an expected increase in the share price. It can also be supported by the fact that when a company reflects good earnings in its financial statement investors tend to be interested to buy their shares. This intends to follows the expectation theory. Some companies indicated a strong positive relationship, while others indicate a weak relationship. Either way this is an indication that there is a relationship between the accounting earnings and the information used in the stock ex. This so because the information used in the stock ex were the variables used in the study. The study was using Earnings per Share, Dividend Yield and the price Earning Ratio as comparing to the share price. In essence these are not the only variables that affect the share price. There are other factors like the interest rates, inflation rate, government regulation and the investor s behaviours that could have been considered. The study recommends further research on these factors to see how sector yet affect the share price. Also the study did only cover the finance and investment sector yet there are other sectors that are listed in the Nairobi Stock Ex. These sectors include the Agricultural, Commercial and Industrial sector. The study also recommends a study to be conducted on these areas to see the results that could come out. The findings showed that there is a relationship between share price and accounting earnings. Then it means that whenever there is a in accounting earnings then it would be expected that the share price will also in the same direction. This is so because share price is the present value of the expected cash flows. The findings also showed that there is a relationship between the accounting earnings and the information used the stock ex. This is so because the information used is past trend that are used to predict the future. Therefore it is true to conclude that the investors follow the trend of the earnings in order for them to make a decision on what stock to invest in. Also the factors that affect the share price also affect the earnings and they tend to follow the same direction. 6

7 REFERENCE Albrecht.W.S,L.L Look bill and J.C McKeowm(1977), The Time Series properties of Annual Earnings Journal of Accounting Research Vol. 15: pp Ariff, and Khan, W (2000), Key fundamental Factors and Long stock prices Changes Working Paper (APFA 2000 meeting), April Asiemwa T.K Jemimmah (1992), The relationship between investment ratios and share performance of companies quoted on the Nairobi Stock Ex Unpublished MBA project, University of Nairobi. Ball, R and P Brown (1968), Am empirical Evaluation of Accounting income Numbers Journal of Financial economics (June, September 1978), pp Ball, R and p Brown (1968), Am empirical Evaluation of Accounting Income Journal of Accounting Research 6(2): Ball, R, AND R Watts(1972), Some Time Series Properties of Accounting income Journal of Finance 27: Beaver W. Lambart R and D Morse,(1980), The informational concept security prices Journal of Accounting and Economics, Vol 2,3-38 Beaver W. R Clarke and W.Wright, The Association between Unsystematic security Returns and the magnitude of the earning forecast error Journal of accounting research (Autumn,1979) Benston. G. (1996), Published corporate accounting data and stock prices, Empirical Research in accounting: selected studies supplement to the Journal of accounting research (1996), Brown L.D., (1993), Earning forecasting Research; Its implications for Capital Market Research; International Journal of Forecasting, Vol.9, pp Downs, T.W (1910), An Alternative Approach to fundamental Analysis. The Assets side of the Equation Journal of portfolio management,(17(no.20:6-17 Elger P. and. Murray (1992), The Relative and Complimentary performance of Analyst and security price-based measures of expected earning Journal of Accounting and Economics, Vol.15, Forster, G., (1977), Quarterly accounting data series properties and predictive ability results The Accounting Review pp-21 Forster, G., c. Olsen and Shevalin T. Shevalin (1984), Earning releases, Anomalities, and behavior of security returns The Accounting review, 49 No4 Holthusen,R., Jones and Latene (1976), The effect of informedness and consensus on price volume behavior The Accounting review 65: Kiweu J.M., (1991), The behavior of share prices in the Nairobi stock Ex; An empirical Investigation Un published MBA project, University of Nairobi Macharia Gathoni (2002), Fore casting ability of valuation ratio s (Nairobi Stock Ex. Unpublished MBA project, University of Nairobi Meigs and Meigs (1989), Advanced financial Accounting Basic Book Inc. New York Muth, john (1961), Rational Expectations and the theory of movement Econometrical 29,1-23 Mwangi N Moses (1997), An analysis Unpublished MBA project, university of Nairobi Rapport (1986), The Affordable Dividend Approach to Equity Valuation Financial analysis Journal, 42(4: Reily at el,(1994), Investment analysis and portfolio management The Dryden press: New York Rendleman, R.J., C.P Jones and H.A Latane (1982), Empirical anomalies based on unexpected earning and the importance of risk Adjustment Journal or financial economics pp Weston J. Fred (John Fred) (1989), Managed Finance. Basic Book Inc. New York Wilcox, J.W., (1984), The P/B-ROE Valuation Model Financial Analysis Journal January-February, APPENDICES Jubilee Insurance Company Table 1 : Model summary (b) R adjusted R statistics F df1 df2 sig. f a Predictors: ( constant),,, Table 2 : Coefficients (a) Model Un Standardized t sig. Colinearity statistics Beta Torelance vif

8 Kenya Commercial Bank Table 3 : Model summary (b) R adjusted R statistics F df1 df 2 sig. f a Predictors: ( constant),,, Table 4 : Coefficients (a) Dependent Variable; Y Beta Torelance vif National Bank of Kenya Table 5 : Model summary (b) R adjusted R statistics F df1 df2 sig. f a predictors: ( constant),, Table 6 : Coefficients (a) Beta zero - order Torelance 1(constant) vif Dependent Variable; Y National Industrial Credit Bank Table 7: Model summary (b) R adjusted R statistics F df1 df2 sig. f a Predictors: ( constant),,, Table 8 :Coefficients (a) 8

9 B std Beta Torelance VIF Dependent Variable; Y Pan African Insurance Company Table 9 : Model summary (b) R adjusted R statistics F df1 df2 sig. f a Predictors: ( constant),,, Table 10 :Coefficients (a) B std. Dependent Variable; Y Housing Finance Company of Kenya Table 11: Model summary (b) R R adjusted R statistics F df1 df2 sig. f 1.951(a) a Predictors: ( constant),, Table 12 : Coefficients(a) Diamond Trust Bank Table 13 : Model summary (b) R adjusted R statistics 9

10 F df1 df2 sig. f a Predictors: ( constant),,, Table 14 : Coefficient (a) CFC Bank Table 15 : Model summary (b) R adjusted R statistics F df1 df2 sig. f a Predictors: ( constant),,, Table 16 : Coefficient (a) Barclays Bank Table 17 : Model summary R adjusted R statistics F df1 df2 sig. f a Predictors: ( constant),,, Table 18 : Coefficient (a)

11 ICDC Bank Table 19 : Model summary (b) R adjusted R statistics F df1 df2 sig. f a Predictors: ( constant),,, b Dependent variable: Y Table 20 : Coefficient (a) Standard Chartered Bank Table 21: Model summary (b) R adjusted R statistics F df1 df2 sig. f a Predictors: ( constant),,, b Dependent variable: Y Table 22 : Coefficient (a) Beta Toleranc e VIF