Evaluation of risk in the price to book value ratio of firms at the Nairobi stock exchange.
Abstract
This study examines the relationship between price to book value ratio and
risk of stocks listed at the Nairobi Stock Exchange at single asset level. The
price to book value (PBV)ratio belongs to a family of relative valuation ratios
that is widely discussed in finance and investment literature. This research
seeks an answer to the question, Do shares with high price to book ratio
show high risk?
The study sample is all the securities listed in the NSE from 1996 to 2003.
Secondary data sources from the NSE and annual reports of listed
companies will form the database. Annual share prices are used to calculate
price to book ratio and security returns. Security returns are calculated after
adjusting the security prices for dividends, seasonal equity offerings and
stock splits. The resulting security returns are then used in estimating risk
inherent in the sampled shares listed at the NSE. Two rankings are
extracted, one based on price to book ratio and another on risk. Each
extracted ranking is then classified by assigning values, 1 and 0 depending
on whether it is above or below the market average ratio or risk. The
correspondence in the two rankings is then measured using cross
tabulations.
The findings indicate that risk as derived from the variability in return on
equity is related to price to book ratio. This suggest that earnings variability
is a major factor in the changes in price to book ratio. However, the surprise
result is the absence in the relationship between variability in return per
share and price to book ratio given that return per share is derived from the
market price per share.
The conclusion is that investors interested in analyzing risk need not
entirely rely on price to book ratio for that purpose and that largely, the
differences in price to book ratio could be explained by other factors and not
necessarily risk.
Citation
A Management Research Project Report Submitted in Partial Fulfillment for the Requirements of the Degree of Masters of Business Administration (MBA), School Of Business, University Of NairobiPublisher
Business Administration