Relationship between price earning ratio and share prices of companies listed on the Nairobi Stock Exchange

Abstract

Value strategies are largely based on selecting stocks that are cheap relative to some fundamental variable. The jury is still out as to whether low PIE ratio as an investment metric works better than a high PIE ratio. This study sought to determine the relationship between PIE ratio and share prices of companies quoted at the NSE and to establish the relationship between adjusted PE ratios and share prices of companies listed on the NSF.

This study adopted a descriptive survey design. The population of interest comprised all the firms listed on the Nairobi Stock Exchange. A sample of 50 firms wasfinally used in the study. Secondary data was collected on PIE ratios for the selected firms as well as share prices for a four year period beginning 2007-2010. Descriptive analysis correlation analysis and regression analysis were carried out.

The study found that both PE and PEG ratios accounted for between 1.4% and 0.6% of the variance. None of the independent variables was significant at 5% level meaning that neither PE nor PEG ratios significantly influenced share price performance. The study concludes that both PE and PEG ratios do not significantly influence stock performance of firms listed on the Nairobi Stock Exchange. The study recommends that investors should use a combination of methods to value stocks in which to invest. One of the limitations is that the explanatory power of the models used in this study was very low.