The Low Share Price Effect on the Nairobi Securities Exchange
Abstract
The low price effect is a phenomenon where low priced stocks significantly
outperform the high priced stocks on a risk-adjusted basis. The objective of this study
was to test the existence of the low share price effect at the Nairobi Securities
Exchange with a view of examining all firms listed for the period 2010-2014 using the
methodology by Zaremba and Zdmuzinski (2014). The study adopted a descriptive
survey research design and used secondary data (monthly share price and market
capitalization data) from the NSE database. All stocks were first sorted based on the
price (P) at the start of each year to arrive at a low priced portfolio, mid-priced
portfolio and high priced portfolio. Portfolio returns were then calculated using equal
and market capitalization schemes and tested against market returns using the Capital
Asset Pricing Model (CAPM). The equation parameters were determined using
Ordinary Least Squares and tested in the parametric way at 5% significant level. The
findings indicated that all portfolios were sensitive to the returns from the market
portfolio. A 1% change in risk-adjusted market returns resulted to approximately 1%
change in risk-adjusted excess portfolio returns. The mid-priced portfolios however
performed slightly better than the low and high priced portfolios. The Jensen Alpha
was zero in all portfolios at p > 0.05, an indication that managers earned zero-risk
adjusted returns. The study concluded that the Low Share Price effect does not exist at
the NSE, an implication of increased market efficiency.