Stock return synchronicity, earnings informativeness, and institutional development : evidence from African markets
Abstract
This thesis contains the outcome of three separate but interrelated empirical analyses
on stock return synchronicity, earnings informativeness and institutional development
in a sample of African markets.
The first analysis investigates the level and determinants of stock return
synchronicity. Some recent studies have provided a theoretical argument that contrary
to conventional wisdom, stock return synchronicity can be high in a strong information
environment as market participants are less surprised about the occurrence of future
events arising out of having more available information. This may therefore imply that
stock return synchronicity can be conversely low in a relatively weaker information
environment. The first empirical analysis of the thesis tests this conjecture using a total
of 616 firms across five African countries (Botswana, Ghana, Kenya, Nigeria and
South Africa) over the 2005-2015 period. The main measure of stock return
synchronicity used is the R2
from a market model regression of individual stock returns
on the returns of a corresponding market index. The findings show that on average,
firms in African markets do not exhibit high levels of stock return synchronicity,
providing support for the view that stock return synchronicity can be low in markets
with relatively weak transparency and conversely high in strong information
environments. In regression analysis, the main driver of stock return synchronicity,
however, is firm size, whilst contrary to some previous studies, ownership structure
has no impact. These results are robust to different measures of stock return
synchronicity that include both a lagged market index and a world market index. They
are also robust to different estimation techniques including Fama-Macbeth regressions
and ordered probit regressions.
The second empirical analysis of this thesis investigates the informativeness of
earnings announcements in African stock markets and examines whether conditional
on the level of stock return synchronicity, market reactions to earnings announcements
are influenced by firm fundamentals or trading frequency. This chapter uses a set of
1762 annual earnings announcements across 369 firms from three countries (Kenya,
Nigeria and South Africa) over the 2005-2015 period. In univariate analysis, the main
measure of earnings informativeness is Normalised Volatility, which divides volatility
during a 21-day event window by volatility in a period of 120 days outside of the event
window. Normalised volatility indicates that earnings announcements are informative across the sample. The results are driven by less frequently-traded stocks (stocks which
experience price changes of between 50% to 74% of trading days in the previous year),
although informativeness is also present for highly traded stocks (stocks which
experience price changes in at least 75% of trading days in the previous year).
Informativeness manifests more clearly at announcement and in the postannouncement window, and there is little evidence of leakage. Cross-sectional tests,
using regression analysis, provide evidence of an effect of both earnings fundamentals
and investor behaviour on stock returns around earnings announcements.
The third and final empirical analysis examines the impact of two institutional
factors— the mandatory adoption of IFRS and the perceptions of corruption, on the
market reactions earnings informativeness within the same period of 2005-2015. The
first part of the analysis tests whether earnings became more informative following the
mandatory adoption of IFRS. This analysis is restricted to only Nigeria and South
Africa as Kenya adopted the use of IFRS prior to the start of the sample period of this
study. The second part of this analysis tests the impact of the perception of corruption
on earnings informativeness in a sample made of firms from Kenya, Nigeria and South
Africa. Both univariate and regression results show that the mandatory adoption of
IFRS did not lead to significant improvement in earnings informativeness. This finding
is consistent with the view that the improvement in accounting standards must be
accompanied by effective mechanisms of enforcement in order to realise their capital
market benefits. However, with respect to corruption, there is a significant negative
impact on earnings informativeness in terms of abnormal trading volume. Overall the
findings in this chapter point to the growing importance of how the institutional
environment can have capital market implications for firms. Therefore, more work
needs to be done to strengthen the institutional framework in order to further enhance
the price-discovery process in these markets.