Market Efficiency at the Nairobi Stock Exchange: a Test of Price Earnings Ratio Effect

Abstract

This study was conducted to find out whether price earnings ratio effect is existent in the Nairobi Stock Exchange. Various studies have been conducted on the existence of price earning ratio effect in different stock markets in the world, but no such study has been carried out in the Nairobi Stock Exchange. Hence, there was need for an empirical study to find out the situation in our market. (NSE) The share returns and risk of all the companies in the NSE were computed and then matched to their PIE portfolio, either low or high PIE portfolio. I used three evaluative measures developed by Jensen, Sharpe and Treynor to test the existence of the effect. The findings showed that the low PIE portfolio outperformed the High PIE portfolio and the market as from 1994-2003.This indicates that the PIE ratios are information content. Thus, I drew the conclusion that the effect is existent and investors should pay attention to the PIE ratios when forming or revising portfolios.