Predictability of stock returns at Nairobi Securities Exchange

Abstract

Stock market is regarded as a leading indicator of all possible changes in the economy as it reflects investors' expectations of future economic conditions. In this regard, stock investors are always concerned about the direction of stock price movement because this directly determines their future wealth through capital gains and losses. They constantly study and review the market to understand the emerging trends which can affect firm performance. While extensive literature provides evidence that firm characteristics are essential in forecasting stock returns hence play pivotal role in determining the profitability of listed firms, this study sought to assess the role of key valuation ratios i.e., book to market ratio, price to earnings ratio and dividend per share in predicting stock returns of selected firms at the Nairobi Securities Exchange (NSE). Using seven listed firms and daily data spanning 1st January 2015 to 31st December 2019 and a static pooled panel data model, and controlling for firm size, leverage and beta, the study established that the selected valuation ratios do not depict significant effects on stock returns and recommends that these ratios can be ignored when predicting future stock returns of the selected firms.