Testing the small firm effect on stock market returns at the Nairobi securities exchange

Abstract

The small firm effect in the cross-section of stock returns is a known asset pricing anomalies that indicates that stocks returns are a decreasing function of firm size. The small firm effect is realized when there are persistent abnormal stock returns obtained by small capitalization firms. The objective of the study was to test the existence of small firm effect on stock market returns at the Nairobi Securities Exchange. This study adopted a descriptive research design. The study used quartile portfolios that were arranged in ascending order according to market value and then divided into four portfolios, portfolio one containing the smallest firms and the fourth portfolio containing largest firms. The study used secondary data from the Nairobi Securities Exchange collected using data collection sheet which were edited, coded and cleaned. F-test, a nonparametric test of differences developed by Sir Williams Gosset was used in this study as a test of significance. From the analysis, it can be noted that Monthly returns had varying degrees but Small Sized Firms displayed a more positive influence on the monthly returns for the six year period at the NSE.The study concluded that Small Sized Firms have a significant positive influence on the Monthly Returns of companies at the NSE thus showing existence of small firm effect. The study recommends that Securities’ management develop a policy so as to reduce the effects of firm size on the monthly returns.