An empirical investigation of the correlation between accounting based and market based performance measures for companies quoted at the Nairobi stock exchange (NSE).

Abstract

This study analyzed the extent of correlation between accounting ratios and market based performance measures (stock return and risk) of selectedcompanies quoted at the Nairobi Stock Exchange. The paper is divided in several chapters. The first chapter introduced the topic of study. The second chapter gave a description of the accounting ratios and market based variables as well as empirical studies on risk, return and accounting ratios as well as gaps in the work already done. Finally the study tested empirically the hypothesis established. Although the basic methodology was the one used in Timo etal (1997), located on the USA, in addition to the analysis, I considered the individual and incremental information content of short and long-term adjustments. Due to the probable bias that the combination of accounting and stock-market information" in the variables would produce, it used several accounting variables (Net asset value per share, return on equity, current ratio, earnings per share, dividend yield and payout ratio) As an extension of the basic methodology, it gave an all market summary and another per sector analysis of descriptive statistics. The empirical study was located at Nairobi Stock Exchange, and focused on a sample of fifty firms quoted at Nairobi Stock Exchange from 1996 to 2001 as representative of Nairobi Stock Exchange (NSE). From data analysis, the findings of this study did indicate that there exists a general association between the firm's accounting ratios and its stock return and risk, but the association is structurally unstable and that the accounting variables making up the relationship vary along time. The magnitude of a cross-sectional variation that accounting ratios did not explain indicate that accounting ratios do not contain sufficient information about investors' opinions to effectively measure the risk of equities with extreme exposure to non-accounting determinants.