Accounting determined measures of systematic risk at Nairobi stock exchange: an empirical study

Abstract

The study contained in this report investigated whether the accounting numbers call be employed to determine the "market risk" measure where the stock market risk measure is not easily obtainable. The data used was obtained from Nairobi Stock Exchange for period between 1991 to 1998. The general objective was to use accounting numbers to determine the "market risk". To achieve the objective, the Secondary data was collected from Nairobi Stock Exchange and Registrar of Companies for the eight years. The data was divided into two classes. The first class was based on Return on asset for each company for the Eight years. The Second data was based on Return on Equ ity for each company for the eight years. The data was analysed usmg regression analysis. The F-ratio was used to test (he significance of the overall model with confidence level of 95 %. The data analysis related to the beta factor was analyzed by one of the summary statistics -f value. We summarised all those companies where F-values were considered significant under (he Asset Return. The same was done "to those cornparues whose F-values were considered significant under the Equity Return. A further summary was done for those companies whose significant values overlapped. The findings of this study were as follows:(I) That results from the study suggested that accounting beta had some information content which could be useful for a study in the market risk. (2) Test based on Return on Asset showed that 46 companies had positive beta factor coefficient whereas on 38 companies with Return on Equity had positive beta factor coefficient. (3) There was theoretical relationship between" market based" measure of systematic risk and accounting numbers. (4) The companies whose Asset Return and Equity Return were considered significant were less than 24 % of the sample. The findings obtained led us to the following conclussion:- (I) That there is no direct link between accounting numbers of individual companies and the market risk. We therefore recommend further research on the following areas:- 1. A study on companies which are operating in the same Sector. 2. A Study on comapnies which have, similar gearing. 3. The period under study should be longer than the period we took. 4. Use disaggregated data like breaking Assets and Profits on monthly basis then computing return on Asset and Equity based on monthly figures.