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Modern corporate organizations are characterized by separation of ownership and management.  At the end of the financial period, the  management has  a  duty to communicate to the owners on the financial performance of the firm. This is usually done through earnings announcements.  It is upon the shareholders and other stakeholders  to analyze the earnings  to determine the  firms’  profitability and wealth.  An efficient market immediately absorbs  new  information  in the share  prices.  On the other hand, an inefficient market would be characterized by leakage of information to few individuals before the announcement giving unfair advantage to some investors.  The participants in an inefficient market also may over or under react to new information causing the post announcement drift.  This  study  sought  to investigate the market reaction to  annual earnings announcement  at the Nairobi Securities  Exchange  (NSE) by analyzing  the changes in  share  prices,  trading volumes  as well as the efficiency with which the information contained in the annual earnings announcement is absorbed in  the security prices.  The underlying  theory of the  study  was the Efficient Market Theory (EMT).  The event study methodology  was  used to determine the effect of annual  earnings announcement.  Purposive sampling technique was used to  arrive at a sample of  5 companies  listed at the NSE that  had  been trading from 2006  to  2010. The daily closing stock prices, trading volumes and the NSE 20 share index data during the event period of 91 days for the sample were  analyzed so as to determine the nature of market response to annual  earnings  announcements.  Average abnormal returns (AAR) and Cumulative average abnormal returns (CAAR) around the event day were calculated using the market model.  The trading activity ratio  (TAR)  was  used to determine the market reaction in terms of volumes for the same period.  Data was analyzed  descriptively using  mean and standard deviation while inferences were made using  correlation  analysis  and  t-test. To assist in the analysis, the  Statistical Packages  for Social Sciences (SPSS)  version 17.0 was used.  The results obtained  indicate that the  abnormal returns  and TAR  around the earnings announcement date  were not significant  at  5%  level.  Hence the information contained in annual earnings announcements is instantaneously absorbed and reflected in the share prices which indicates that the NSE is semi-strong efficient

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