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.