Effect of Size on Stock Returns of Firms Listed at the Nairobi Securities Exchange

Abstract

The Nairobi Securities Exchange (NSE) is a critical component of Kenya's financial landscape, serving as a platform for capital mobilization and investment. The primary motivation for this research lies in the significance of stock market performance for economic growth and investment attractiveness, prompting a closer examination of the factors driving stock returns in this particular market. The study aimed to explore the impact of firm size on stock returns among companies listed on the Nairobi Securities Exchange (NSE). To achieve this objective, the researchers employed a causal research design, which involved a sample of 65 firms listed at the NSE in Kenya. The study population was drawn from 54 firms that provided complete data for a 5-year period from 2018 to 2022, resulting in a total of 270 observations. Secondary data extracted from the annual published financial statements of these firms served as the basis for the investigation. The research incorporated three theoretical perspectives: the growth of the firm theory, agency theory, and resource-based view theory. Various statistical analyses, including correlation and regression, were conducted to examine the relationships between the independent variable (firm size), the control variables (liquidity, and managerial efficiency) and stock returns. The regression results of the study revealed several significant findings. Firstly, firm size exhibited a statistically significant and positive relationship with stock returns (Coefficient = 0.082, p = 0.001). This implies that larger firms tend to experience higher stock returns, reflecting investor confidence in established companies. Secondly, managerial efficiency also showed a statistically significant and positive association with stock returns (Coefficient = 0.103, p = 0.027), highlighting the importance of effective management practices in influencing stock performance. In contrast, liquidity did not demonstrate a statistically significant impact on stock returns (Coefficient = 0.118, p = 0.232). The study concludes that firm size and managerial efficiency are significant determinants of stock returns on the NSE. Larger firms and those with efficient management practices tend to deliver better returns to investors, while liquidity does not exert a substantial influence on stock returns in this market. Policymakers should consider policies that promote the growth of companies, support small and medium-sized enterprises, and incentivize effective managerial practices to enhance stock market performance. Investors and market participants should focus on firm size and managerial efficiency when making investment decisions. Future research should extend the timeframe to capture long-term trends, integrate multifactor models to include macroeconomic and behavioral factors, and delve into the behavioral and psychological aspects influencing stock returns