The small size effect in the Kenyan stock market: An empirical study

Abstract

The objective of this research project was to determine whether the small size effect is experienced in the local stock market, The Nairobi Stock Exchange (NSE). The small size effect, also called the size anomaly, is a phenomenon whereby small cap firms have been shown to generate higher returns than the market on average. This study set out to investigate the existence of the size anomaly and its prevalence at the NSE. In effect, the study set out to answer two major questions: does the size anomaly exist at the NSE? If SOl how prevalent is it? The study utilized the firms quoted at the equity section of the Nairobi Stock Market. Analysis procedure involves categorizing the firms into three distinctive size groups. Accordingly, using OLS regression analysis, the study failed to detect any existence or prevalence of the anomaly at the market, although descriptive mean statistics indicate that small firms have higher mean returns than the medium sized firms, the large firms, and the market on average. The findings could be attributed to a number of factors including the stock market and overall Kenyan economic fundamentals. These include absence of calendar anomalies, ,abolition of the capital gains tax and the erratic performance ofthe risk free rate (proxied by the 91-day treasury Bill Rate). -. This research project has been organized into five chapters, chapter one through chapter five. Chapter one covers the introduction part, which gives a background to the study while highlighting its objectives, problem statement, and importance of the study. Then follows chapter two and three where literature review and research methodology are covered respectively. The findings and their analysis thereof are presented in the chapters four and five respectively.