Earnings announcement and stock prices in a recessionary economy: A test of the signalling theory hypothesis Faloye B. A.1, Obamuyi T. M2 1Lecturer, Department of Banking and Finance, Faculty of Social & Management Sciences, Adekunle Ajasin University, Akungba Akoko, Ondo State, Nigeria 2Professor, Department of Economics, School of Management Technology, Federal University of Technology, Akure, Ondo State, Nigeria Online published on 5 August, 2019. Abstract The paper examined the efficacy of the signalling theory hypothesis by investigating the relationship between earnings announcement and stock prices in a recessionary economy. The study employed secondary data of daily closing stock prices of 14 selected banks and the All Share Index between 2015 and 2016, sourced from the Nigerian Stock Exchange. The market model was used to estimate the expected returns and abnormal returns during the event window. The results showed that abnormal returns around announcement days were not statistically significant as abnormal returns of banks that made announcement of an increase or decrease in earnings were 0.0674 (−0.0244) with t-stat values of-1.374 (0.318) respectively. The findings also demonstrated that investors could not earn cumulative abnormal returns during the event window and the abnormal returns of most of the banks had an inverse relationship with earnings announcement. It was therefore concluded that information signalling theory does not hold in the Nigerian capital market during a recessionary period, and that investors could not earn abnormal profits by making use of fundamental analysis. The study therefore, recommended that investors should avoid mispriced stocks and invest in index funds in order to earn market average returns. Furthermore, regulatory authorities should monitor banks listed on the Nigerian stock exchange to guard against abuse of insider information to the detriment of investors. Top Keywords Signalling Theory, Recessionary Period, Event-Study, Nigerian Economy. Top |