Stock Price Response to Earning Announcements: Evidence from the Tanzanian Stock Market.

Kalanje, James Charles (2024) Stock Price Response to Earning Announcements: Evidence from the Tanzanian Stock Market. Doctoral thesis, The Open University of Tanzania.

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Abstract

The purpose of this study was to examine the extent to which stock prices respond to public earnings information by companies listed on the Dar es Salaam Stock Exchange, Tanzania. Specifically, the study assessed the abnormal returns around companies’ public earnings announcements the purpose of which was to determine whether the stock market was efficient in the semi-strong for. Moreover, the study determined whether such abnormal returns can be explained by firm characteristics (firm age, size and industry) and earning characteristics (positive change in earnings). Guided by the positivism philosophy with a deductive research approach, the study employed a quantitative method with an explanatory research design. Data were collected from the Dar es Salam Stock Exchange. A total of 167 events were obtained, 88 of which had sufficient trading data for the analysis. An event study methodology was applied to estimate the abnormal returns around the event days using the DSE-All Share Index and Tanzania All Share Index prices as measures of expected returns. A standard linear multiple regression analysis technique was used along with a stepwise multiple regression analysis technique to test for the effect of the four explanatory variables. Wild bootstrapping with a thousand samples was also used for robustness analysis to control for sample size but also the non-normality and heteroscedasticity problems in the regression residuals. The results show that significant abnormal return exists on post-event days. The firm’s age and the financial sector significantly negatively explained the variance in the cumulative average abnormal return over the 5-day and 11-day event windows. Firm size significantly and negatively explained the variance in the cumulative average abnormal returns over the 21-day window. These results are consistent irrespective of whether DSEI- or TSI-based price data are used. It can be concluded that DSE is inefficient in the semi-strong form and that the size of this inefficiency is mainly explained by the firm’s age and firm’s operating sector in the shorter event windows (5- and 11-day) and firm size in the longer window (21-day). It is therefore recommended that regulators and policymakers in frontier markets take necessary reforms to improve information flows, institutional frameworks, and market transparency to improve their efficiency. Keywords: Frontier markets, Annual Earnings announcement, stock price reaction, Abnormal returns, semi-strong market efficiency, Event study, Tanzanian Mmarket.

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