SIGNALING EFFECT OF FINANCING DECISIONS ON CORPORATE EARNINGS: A SURVEY OF NON FINANCIAL FIRMS LISTED IN KENYA

Abstract

The economic importance of corporate earnings cannot be overemphasized, especially for the stakeholders of public-held companies. Consequently, prediction of corporate earnings is clearly a matter of considerable interest to investors. Prior to generating corporate earnings, a firm undergoes a set of managerial decisions and activities. The assumption in this study is that management decisions emit signals about managers’ knowledge of the corporations’ future prospects. The management signals studied were debt financing decisions, equity financing decisions and financial leverage decisions. The general objective of this study was to assess the effectiveness of fundamental analysis in assessing corporate earnings signals emitted from financing decisions. The study adopted panel survey research design with data being gathered from annual reports of non-financial companies listed at the NSE. A census sample was obtained from the 41 non-financial companies listed at the NSE for an eight years period 2008 to 2015. Panel data regression analysis and correlation analysis was used to examine the relationship between fundamental signals and a year ahead corporate earnings. Data collected from annual reports obtained from companies’ websites and CMA’s library amounted to 255 observations which were 77.74 percent of the target 328 observations.