The Relationship Between Market Capitalization and Profitability of Commercial Banks Listed on the Nairobi Securities Exchange

Abstract

Market capitalization is an important measure for investors in the determination of the returns on their investment. Day-to-day stock price fluctuations provide freely available information on the health of a publicly traded company. Market capitalization represents the public consensus on the value of a company's equity. Efficient stock market theory states that stock price can reflect all relevant information about a company’s historical or present and public or private. Market capitalization can denote the amount of a company's future cash flows to its shareholders, primarily the dividends, and the riskiness of receiving the cash flows, effectively the expected rate of return. The objective of this study was to establish the relationship between market capitalization and profitability of commercial banks listed at the NSE. The study used cause and effect research design. The population of this study comprised of 10 commercial Banks quoted at the NSE as at 31st December 2011 because of the readily available data on share prices. The data was collected from the NSE handbooks for the period ranging from 2007 to 2011 due to limited availability of data and high level of changes in the number of commercial banks listed. The study established that there was a weak positive relationship between market capitalization and the profitability of commercial banks. The study concludes based on the data presentations in chapter four and the summary of the findings above that market capitalization affects the profitability of commercial banks in Kenya and at the same time, the profitability also affects the market capitalization. The study also indicates that although there is a relationship, it is weak and may not be the sole determinant of the changes witnessed in each variable from time to time. Each variable is influenced by other variables beyond those discussed in this study