The relationship between earnings and share prices of firms listed at the Nairobi Securities Exchange

Abstract

The study was undertaken to examine the empirical relationship between earnings and equity share prices of companies listed at the Nairobi Securities Exchange (NSE). A sample of 42 companies listed continuously from 2007 to 2012 at the Nairobi Securities Exchange. Companies from all the segments of the market were considered. Multiple linear regression analysis was used to establish the relationship. Share price was the dependent variable while earnings per share (EPS) was the explanatory variable. Dividend per share (DPS), price/earnings (P/E) ratio, payout ratio (POR) and price to book value ratio (PBV) were used as control variables. The findings showed that there was a positive significant relationship between earnings and share prices of firms quoted at the Nairobi Securities Exchange (NSE). It was also found that there were other variables significantly correlated with share price. These included DPS and PBV which were used as control variables in the study. DPS was found to have a stronger, positive and significant relationship with share price than EPS had. The other variables used, P/E and POR, were found to have no significant relationship with share price.