Testing the Existence of Low Price Effect on Stock Returns at the Nairobi Securities Exchange

Abstract

The low price effect simply purports that low priced shares significantly outperform high priced shares on a risk-adjusted return basis. The objective of the study was to test the existence of low price effect on stock returns at the N SE. This study used descriptive survey. The study used a census survey of all the comp anies listed at the NSE for a period of five years from 1/1/2009 to 31/12/2013. An annual review was done at the beginning of each period for companies that satisfied a s certain selection criteria. The data included closing monthly value weighted average p rices and corporate actions. The firms were ranked according to their previous clos ing prices before the review period and divided into three equally weighted price portfolios. The monthly portfolio value was computed using share and cash investments in each share for the three portfolios. The portfolio returns were adjusted for risk using the Sharpe measure and tested using a nonparametric Wilcoxon signed rank test. T he Wilcoxon signed rank test results ranked low priced portfolio risk adjusted returns higher than both the moderate and high priced portfolio. However, high priced portfoli o outperformed the moderate priced portfolio. The test statistic from Wilcoxon signed rank test reported a significant difference between low and moderate priced portfolio, p<0.05 (p=0.043). The study concluded that the low price effect exist s on stock returns at the Nairobi Securities Exchange in the Kenyan Market.