The relationship between size, book to market Value and returns of Nairobi stock exchange Common stocks

Abstract

The objective of this study was to establish the relationship between the size of a company, the ratio of book to market equity value and the returns of common stock of all companies quoted on the Nairobi Stock Exchange from 1996 to 2000. The hypothesis that the study had come up with, based on similar study carried by Fama and French (1992) on shares listed on the NYSE, AMEX and NASDAQ, was that there exist a negative relationship between size and return and positive relationship between the ratio of book to market equity and returns. Data was collected from financial statements of the companies and Nairobi Stock Exchange. Size was determined by market capitalisation, the average return included both capital gain and dividend gain and book value was the amount of stockholders' equity less any preferred equity. This data was analysed using regression analysis and cross tabulation. The F ratio and T ratio were used to test the significance of the model with a confidence level of 95%. The results could not conclusively confirm the results as achieved by Fama and French in 1993. The findings of this research are that the size of the companies quoted on the NSE have no relationship with the returns of those companies and the ratio of book to market value has no relationship to returns of the companies. The low levels of significance achieved in the study could be attributed to the small number of shares quoted on the NSE as compared to previous studies. The study gives insight into the various factors that determine the level of return on shares quoted on NSE. It shows that returns of companies quoted on NSE are determined by other factors other than size and ratio of book to market value.